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THE MOTLEY FOOL
Ask the Fool

Published: November 19, 2019

Q: My brokerage has just announced that online stock trades will now cost $0. Is that sustainable? -- H.R., Pawtucket, Rhode Island
A: It certainly can be. Once a brokerage has its trading technology set up, it doesn't cost a lot to execute trades.
Keep in mind, too, that trading commissions are not the brokerage's only source of income. Like banks, brokerages get a lot of money from "net interest" -- the difference in the interest rate they pay customers for cash deposits and the interest rate they earn when they invest customers' cash. They also collect interest when investors borrow funds with which to buy stocks ("on margin"). Many brokerages these days are also generating income via asset management -- offering research and advice to customers.
Then there are fees: These include fees for "account maintenance," paper statements, inactivity or when you buy or sell mutual funds. There's also income to be collected from the difference, or "spread," between a stock's "bid" price (what an investor is willing to buy the stock for) and "ask" price (what a seller is willing to sell it for).
Q: Are Social Security benefits going up much in 2020? -- C.L., Portland, Oregon
A: The cost of living adjustment (COLA) for Social Security in 2020 is 1.6%, considerably lower than 2019's 2.8% increase. With the average monthly retirement benefits check recently at $1,475, a 1.6% increase will mean $23.60 more per month, or about $283 more annually. It's not a lot, but in retirement, every little bit can help.
You can learn more about Social Security and how you may be able to increase your benefits by searching for the terms "Social Security" and "Motley Fool" in Google.
Fool's School
Don't Borrow From Your 401(k)
If you need to get your hands on some money, it can be tempting to borrow from your 401(k) account. Resist that urge, though, because doing so means shortchanging your future financial security.
First, understand how 401(k) loans work. Typically, you're allowed to borrow up to 50% of the vested funds in your account, or up to $50,000 -- whichever is less. You'll generally be expected to make payments on the loan (plus interest, which goes into your account) at least every three months, and you'll have to pay the loan back entirely within five years. (If you borrow the money to buy a home, the term of the loan can be longer.)
If you don't pay back the loan on time, any remaining balance will be considered withdrawn, and it will be taxable income. Plus, if you're withdrawing before age 59 1/2, you'll face a 10% early withdrawal penalty. Note that if you leave your job for any reason, the loan will be due for full repayment. All that might sound doable to you, but many borrowers find that it's harder than they expected to repay the funds on time, perhaps because other financial emergencies come up.
Any money you remove from your account for a few years -- or forever -- won't be able to grow for you during that period. So before borrowing from your 401(k), ask yourself whether you really need the money. If it's for a kitchen remodel or a big-screen TV, just forget it. If you do need it -- perhaps for a major car repair or because you're suddenly out of work, see if you can get the money elsewhere, such as by taking on a part-time job.
Try not to cash out your 401(k) when you change jobs, either. Even if you have saved only a modest sum there, leaving it to grow can make a big difference in the future. A $25,000 account that grows for 20 years, averaging 8% growth annually, will end up worth about $116,500.
My Dumbest Investment
Pumped and Dumped
My dumbest investment was buying a pump-and-dump pharmaceutical stock when it was in full "pump" mode. Seemed like a good idea at the time -- ha! -- T.N., online
The Fool responds: You fell for a classic kind of stock market con. It's typically penny stocks (those trading for less than about $5 per share) that are involved in pump-and-dump schemes, because they have relatively few shares available for trading, and they're easy to manipulate.
Here's how the schemes work: A con artist buys a bunch of shares of a certain stock and then starts hyping it -- online or via email, phone or some other way. (For example, the messages might suggest that the company is on the verge of curing cancer, or striking oil or gold, and that buying shares immediately will result in big profits.) This increases demand for the stock, as gullible investors snap up shares, and that drives the price up, benefiting the scammer. The scammer then quickly unloads all of his or her shares for a hefty profit; that selling activity sends the shares plunging, wiping out the trusting investors who fell for the hype.
You can avoid this danger in the future by ignoring any communications you receive about low-priced stocks that are supposedly about to skyrocket. If it's already skyrocketing, there's a good chance it's about to plunge, once the fraudster starts selling. Stick to larger companies, ideally those with proven track records.
Foolish Trivia
Name That Company
I trace my history back to 1941, when an orthopedic surgeon founded me in order to produce devices to better help his patients. In the 1940s, I introduced turning frames to help safely turn patients with back injuries, and patented an oscillating saw that could remove casts without harming skin. I bought a robotic surgical equipment company in 2013. Today, based in Kalamazoo, Michigan, with a market value recently near $80 billion and more than 36,000 employees, I'm a global medical technology giant. I hold close to 8,000 patents, and I rake in more than $14 billion annually. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1866, when Cadwallader Washburn started building a flour mill by a waterfall in Minneapolis. During World War II, I made military equipment. Today I'm a global food giant, with familiar brands such as Annie's, Cascadian Farm, Totino's, Chex, Progresso and Larabar. (I sold off Green Giant in 2015.) Eight of my brands generate more than $1 billion in revenue annually: Pillsbury, Betty Crocker, Nature Valley, Yoplait, Cheerios, Old El Paso, Haagen-Dazs and Blue Buffalo. I've paid dividends to shareholders regularly since 1928, and rake in almost $17 billion annually. Who am I? (Answer: General Mills)
The Motley Fool Take
Southwest Should Take Off
The airline industry has historically been a lousy one to invest in. It's sensitive to the economy, capital-intensive, highly regulated and hypercompetitive. Poor management decisions have led to numerous airline bankruptcies over the years. But Southwest Airlines (NYSE: LUV) has remained profitable for 46 consecutive years -- even now, despite the grounding of its 737 Max planes.
This isn't as bad as it seems: Southwest should eventually receive substantial compensation from Boeing to offset its lost profits -- most likely in the form of discounts on future aircraft deliveries. And the aircraft shortage has forced Southwest to make tough choices about which markets are working and which ones aren't.
Meanwhile, Southwest recently posted some record results in its third-quarter earnings report, with net income up 7% over year-ago levels. There's a lot more to like about this airline. Start with its business model of simplifying by primarily using a single kind of plane -- the Boeing 737 -- and favoring direct point-to-point flights instead of using industry-standard hub airports for connections.
Southwest's dividend recently yielded 1.2%. It's growing rapidly, too, having tripled over the last five years. If you can handle some volatility from the industry, give Southwest some consideration as a long-term investment. (The Motley Fool owns shares of and has recommended Southwest Airlines.)
COPYRIGHT 2019 THE MOTLEY FOOL, DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION, 1130 Walnut, Kansas City, MO 64106; 816-581-7500.


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