2012-03-08 / The Motley Fool

Ask the Fool

Considering Highs and Lows

QIs it good to buy stocks trading near their 52-week lows and to sell ones trading near their highs?

— G. J., Mobile, Ala. ANever focus on just a stock’s price. If a company’s stock is trading near its all-year low, it might indeed be a bargain that’s facing a temporary problem — but it might also be headed even lower, facing long-lasting troubles. Further research can help you decide whether it’s a good candidate for your portfolio.

Selling a stock at its all-year high isn’t always smart, either. Many wonderful companies have rewarded shareholders for decades, setting new highs frequently, despite occasional bumps in the road. By selling, you miss out on future gains.

Try to determine what a stock is really worth. Buy when it’s significantly underpriced and sell when it’s overpriced.

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QWhat’s the “Rule of 72”?

— E. W., Jackson, Mich. AIt’s a quick and easy way to check how long it will take money to double at various rates of growth.

Imagine that your investment is earning 4 percent in interest annually. Take 72 and divide it by 4, and you’ll get 18. The rule tells you that it will take roughly 18 years for you to double your money.

If you expect to earn 10 percent annually, you’ll double your money in about 7.2 years.

The rule’s results aren’t precise, but they’re pretty close for growth rates up to about 15 percent and aren’t too far off even at 25 percent.

The rule works in reverse, too. If you want to double your moolah in six years, just divide 72 by six and you’ll see that you’ll need an average growth rate of roughly 12 percent.

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