MONEY

4 Reasons Why Bill Gross Leaving Pimco Is Such Big News

Bill Gross, co-founder and chief investment officer of Pacific Investment Management Company (PIMCO).
Bill Gross, co-founder and former co-chief investment officer of Pacific Investment Management Company (Pimco). Jim Young—Reuters

'Bond King' Bill Gross has resigned from the firm he founded. Here's why his move matters.

It many not be LeBron leaving Miami, but on Wall Street, at least, it was arguably an even bigger deal. Bill Gross, long one of the biggest stars in money management, has resigned from the Newport Beach, Calif., asset management giant Pimco and will be heading to Janus Capital in Denver.

Why Gross is such big news

Gross’s $221 billion Pimco Total Return fund (PTTCX) is one of the largest mutual funds on the market—in fact, it has more assets than any bond fund in the world. And it’s a mainstay in many 401(k) plans. So there is a good chance at least some of your retirement savings are at stake. Because it invests largely in a diversified mix of government and corporate bonds, for many people Pimco Total Return is the primary holding for money they don’t put in the stock market.

And since Gross’s fund and Pimco, the firm he founded in 1971, are major players in the market for U.S. Treasuries, he also has been an important public figure, with financial journalists closely following his comments on interest rates, Federal Reserve policy, the U.S. debt and other economic issues. Similar to famous stock investors like Warren Buffett, news that Gross was buying something could move markets.

But Gross has been in the spotlight for less flattering reasons lately. We don’t know all the details; the first news of his departure came from a press releases issued by Janus this morning. Both the Wall Street Journal and CNBC are reporting that Pimco was ready to push him, if he hadn’t jumped.

Maybe it shouldn’t have been a surprise

Gross has a famously quirky personality that helped to build Pimco’s brand. He writes colorful shareholder letters and started practicing yoga before it was cool among money managers. According to one report, Gross didn’t like people to look him in the eye on the trading floor. None of this mattered when Pimco was delivering outsize investment returns. But lately performance has lagged — in the past year Pimco Total Return finished in the bottom tenth of its Morningstar category — in part because of missed calls on the direction the Treasury market. And that may have made his quirks harder for some to take.

After the high profile departure of Gross’ protege and presumed successor Mohamed El-Erian earlier this year, Bloomberg Businessweek put Gross on the cover with the headline “Am I Really Such a Jerk?” Gross didn’t tone it down. In June, he gave what many regarded as an odd speech at a large investment conference, wearing sunglasses and comparing himself to Justin Beiber.

To top it all off, the Wall Street Journal broke news earlier this week that Pimco was being investigated by the SEC. It’s too early to tell where, if anywhere, that could lead. (More here.)

For Pimco, and its investors, it’s a time to wait and see.

While Bill Gross has always been the public face of Pimco, the Newport Beach, Calif., money manager which oversees a total of $2 trillion, is a lot more than Gross.

Businessweek ran a story in May 2013 called “Pimco Prepares for Life After Bill Gross,” noting Gross was 69 at the time. Pimco is known for its deep bench. According to it’s Web site it has more than 700 investment professionals. Another Pimco star, Chief Economist Paul McCulley, who had retired from Pimco in 2010, returned in May.

The big question is whether the investment magic will remain with Pimco or go with Gross. There is one recent precedent worth looking at. In 2009, another high-profile, equally flamboyant bond manager, Jeffrey Gundlach, left his long-time employer, TCW, in acrimonious circumstances and founded a new firm known as DoubleLine. The DoubleLine Total Return (DBLTX) fund has proved a success, beating the market over the past three years and attracting more than $30 billion. But controversy has followed Gundlach too. He made headlines earlier this year after getting embroiled with fund researcher Morningstar.

This may give Janus new life.

If you’re old enough to remember the first Internet bubble — the one that popped in the early 2000s — there’s a good chance you know Janus. For a time, the Denver fund company, which bet and won big on the era’s tech names, seemed like middle America’ gateway to Internet riches. At the peak of the bubble, according the New York Times, half the money flowing into mutual funds went to Janus. That all changed later in the decade when investors departed in droves. Janus has been trying to recapture its former glory ever since.

Since 2002 the company has had five different chief executives. The latest one — a Pimco alum named Dick Weil who arrived in 2010 — has been trying to broaden the company’s focus beyond stock funds. That’s where Gross appears to fit in. According to the Janus release, he’ll be running an “unconstrained bond fund.” Those investments, called unconstrained because they can invest in a wider array of securities than traditional bond funds, have proved popular at a time when ultra-low interest rates have hurt traditional fixed income returns. But as you might guess, there are risks too. Janus is probably betting that Gross’s popularity will reassure investors otherwise reluctant to take another chance with it.

MONEY pimco

What You Need to Know About SEC’s Investigation of Pimco

The Securities and Exchange Commission is investigating one of Wall Street's best known money managers. Here is what you need to know.

On Tuesday, the Wall Street Journal reported that the SEC has been questioning whether Pacific Investment Management Company, more commonly known as Pimco, has been improperly valuing bonds in one of its portfolios to boost the fund’s returns.

While it’s too early to tell whether the SEC will ultimately allege Pimco did anything improper, here are three key takeaways:

This is another black eye for Bill Gross.

Bill Gross, often referred to as “the bond king,” is one of Wall Street’s highest-profile investors. His flagship fund, Pimco Total Return, is a mainstay in many 401(k) retirement plans. And with $220 billion in assets, the fund is one of the largest investment portfolios in the world.

Recently, however, Gross’s star has waned. Misplaced bets on Treasury bonds have hurt Total Return’s performance. Over the past year the fund has finished in the bottom tenth of its category, according to Morningstar.

Gross also recently endured a public split with protege and presumptive successor, Mohamed El-Erian, who left Pimco in March. Since then Gross, long a media darling, has even started to get bad press. This includes a much-talked about Wall Street Journal story making him seem like a difficult boss. Then there was a Bloomberg Businessweek cover story about Gross that asked, “Am I Really Such a Jerk?”

An SEC investigation only adds to his troubles.

The investigation highlights a long-running dispute about bond ETFs.

The SEC investigation appears to be targeting not Pimco’s flagship Total Return mutual fund but a smaller $3.6 billion exchange-traded fund version of Total Return created in 2012. The ETF version has won some fans, in part by outperforming its older sibling. You can read MONEY’s take on the pros and cons of the ETF version here.

Bond ETFs in general are wildly popular. Investors have poured in more than $180 billion since the financial crisis. But they’ve had their share of problems, and the latest controversy won’t help. To understand why, you have to grasp a bit of the nitty-gritty:

Exchange-traded funds are baskets of securities that trade on an exchange like a stock. Their original appeal to investors had a lot to do with their transparency. Investors can look up at any moment precisely what all of the securities in the ETF are worth. By contrast, traditional mutual funds only value their holdings once a day.

This extra transparency is pretty easy to accomplish when ETFs hold stocks, since most stocks trade every day and the prices are published by exchanges. With a little computing power, stock prices can be tallied up and the total published right away.

That’s not necessarily true of the bond market, where many individual bonds rarely change hands daily.

As a result bond ETF values, while still published continually, are really estimates based on trades of similar (but not necessarily precisely matching) bonds. The upshot is that while stock ETFs almost always trade at prices that are within a few pennies of their putative value, bond ETFs aren’t as reliable.

When traders who are buying bond ETFs disagree with official price estimates about the value of the bonds in the ETF’s portfolio, the ETFs can appear to trade at odd-looking prices.

The industry has endlessly debated what should be regarded as the “true” price. The Pimco controversy, as you see below, appears to have a lot to do with whether actual trades or some other estimate of a bond’s value should be regarded as the “true” price.

The investigation shows how complicated bond investing can be.

Pimco’s actions may have actually helped, not hurt, investors, based on the Wall Street Journal’s description. Still, this doesn’t mean the SEC is wrong to explore its actions.

Here’s what seems to be at issue: Bonds are typically traded in large blocks. When bonds aren’t part of these blocks they can be difficult — read expensive — to trade. Apparently, Pimco went around buying up small blocks of bonds, known as “odd lots,” at discounts. Pimco then marked their prices upwards using estimates of their values derived from larger blocks of bonds.

Is there anything wrong with this? It’s hard to tell because we can only speculate about how Pimco felt justified in doing it.

If Pimco really couldn’t resell the bonds at the new, higher prices it seems off base. But it also seems plausible the bonds might genuinely be worth more in Pimco’s hands than they were in the hands of whoever sold them.

Perhaps with Pimco’s enormous size it’s able to combine these small odd lots of bonds into a larger “round” lot, making the sum worth more than the parts. Or perhaps like a broker in any market, Pimco’s contacts and influence mean it can count on reselling the bonds at a higher price than the original owner could. The devil is in the details, which we don’t yet know.

One other thing to keep in mind. Even if this strategy was a smart one, the SEC may still be right to pursue the case. Allowing bond managers to think they have too much leeway with bond valuations is asking for trouble. Pimco’s investors may have benefited in this particular instance.

But regulators are probably right to be sticklers even if they did. Don’t forget that during the financial crisis big banks effectively hid billions in losses by using questionable methods to value bonds.

 

MONEY

IPO Frenzy: Alibaba vs. Facebook

Chinese Internet sensation Alibaba Group Holding Ltd. is set to sell its first shares on Friday, making it the highest profile IPO since Facebook in 2012. Here's how these two online giants compare.

MONEY hedge funds

Giant Pension Manager Rejects Hedge Funds—Maybe You Should Too

The influential California Public Employees' Retirement System, or Calpers, is turning its back on hedge funds just as hedge fund-like "alternative" mutual funds gain popularity with small investors.

Critics have long argued that hedge funds — unregulated, often opaque, and high-priced investment vehicles for the very wealthy — don’t live up their mystique.

Now the nation’s largest and most closely watched pension fund agrees.

On Monday, the $298 billion California Public Employees’ Retirement System would be liquidating its $4 billion investment in hedge funds, which it called overly complex and costly, Bloomberg reported.

Many Wall Street critics, perhaps feeling vindicated, let out a big cheer. With his characteristic bluster, Barry Ritholtz, blogger and founder of Ritholtz Wealth Management, called the event an “earthquake.”

Exaggeration or not, Calpers is closely watched because of its size and because it has been an innovator before. It was one of the earliest big public pension funds to bet on hedge funds in the first place. Meanwhile, hedge funds have long relied on an image of sophistication and exclusivity to win customers, despite their steep investment fees. So losing a customer of Calpers stature could be a big blow.

Dropping hedge funds isn’t the only thing Calpers has done recently to simplify its investment portfolio. Last month it also said it was considering cutting back it’s holdings in actively managed stock strategies and emphasizing low-cost index funds instead. That move was similarly cheered.

What does the latest Calpers decision mean for individual investors? Most of us aren’t wealthy enough to have hedge fund holdings, which typically have high investment minimums.

But the mutual fund industry has been leaning on hedge fund’s cache to market a new investment product typically called “alternative funds.”

Alternatives have turned out to be one of the fastest growing mutual fund categories, with assets reaching nearly $150 billion, up from less than $25 billion a decade ago, according to Investment News and Morningstar.

Like the original hedge funds these often involve hard-to-parse investment fees. If your financial advisers pitches them, be sure to ask why he or she thinks they will work out better for you than they did for Calpers.

MONEY 401(k)s

Why Your 401(k) Is Missing $273,000

Egg with hole in it
Mats Silvan—Getty Images/Flickr Open

If the 401(k) system worked as advertised, the typical retiree would have $373,000, one study finds. The reality: $100,000.

It’s no secret that America’s 401(k) system has a few flaws. But a new paper from the Boston College Center for Retirement Research shows just how far the system may be falling short.

The research, based on triennial survey data collected by Federal Reserve economists, found that the typical 401(k) balance for middle-income Americans preretirees—those between 55 and 65—was just $100,000. Based on current annuity prices, that amount would give you a retirement income of only $500 a month, a sum that would be eroded each year by inflation. Since “the typical household holds virtually no financial assets outside of its 401(k),” as the study notes, the average 401(k) plan isn’t likely to provide much of a supplement to Social Security.

That’s not what was supposed to happen. If the 401(k) system had worked as well in reality as it did in theory, those same workers would have $373,000 saved, or $273,000 more, according the study.

To reach that figure, researchers assumed a middle-income worker who turned 60 in 2013 began saving in 1982, at age 29. The worker contributed 6% to his or her 401(k) while receiving a 3% company match and invested in a portfolio split evenly between stocks and bonds—all seemingly reasonable assumptions.

So what happened to that missing $273,000?

The answer is that 401(k) balances have been eroded by a combination of unnecessary fees, poor plan design, and bad—or perhaps just desperate—decisions by savers.

Here’s where the money went:

Screen Shot 2014-09-15 at 1.55.26 PM

Fees: As the Center’s illustration shows, a big chunk of that missing money, some $59,000, went to Wall Street. The study’s analysis was based on the average fee paid to portfolio managers who oversee 401(k) mutual funds. Clearly, fund managers need to be paid something. But 401(k) investors are almost certainly being charged too much. Across the 401(k) universe, the average stock fund investor hands over fees amounting to 0.74% a year to fund managers, largely because they’re invested in actively managed funds. By contrast, the average stock index fund costs just 0.12%. The upshot: Most of that $59,000 is unnecessary cost.

Withdrawals: Another $78,000 is lost to so-called leakage—essentially, investors yanking money out of the plan. The Center for Retirement Research cited another study by Vanguard Group, which found that on average Vanguard plans leaked about 1.2% of assets a year, although that figure may be low, since Vanguard tends to work with large plans with wealthier employees who are less likely to cash out. It’s difficult to tell why investors aren’t sticking with the program. But it appears that roughly half the time investors simply cash the money out, while about a quarter of the time they qualified for a “hardship withdrawal,” such as a medical or housing expense.

Inadequate saving: Finally, there’s the problem of investor behavior. Most workers don’t save enough, or make “intermittent” contributions. Others failed to sign up or lacked the opportunity to do so, especially earlier in their careers—the “immature” system problem. Congress attempted to boost savings rates with the 2006 Pension Protection Act, which made it easier for employers to default new workers into 401(k) plans. As a result, many young people entering the workforce today are enrolled automatically. But there is still room for improvement. Many plans start workers saving at just 3%, not the 6% or higher rate that would lead to a larger balance—perhaps as much as $373,000.

What to make of all this? It looks like Wall Street, workers themselves and the design of the 401(k) all share part of the blame. “Surely, the system could function more efficiently,” the Center’s study says. Hard to argue with that.

More on 401(k)s from MONEY’s Ultimate Retirement Guide:
Why Is a 401(k) Such a Good Deal?
How Much Should I Put in My 401(k)?
How Should I Invest My 401(k)?

MONEY financial crisis

6 Years Later, 7 Lessons from Lehman’s Collapse

Lehman Brothers world headquarters is shown Monday, Sept. 15, 2008 in New York.
Lehman Brothers world headquarters is shown Monday, Sept. 15, 2008 in New York. Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed. Mark Lennihan—Reuters

The venerable investment bank Lehman Brothers went under six years ago today. While Wall Street has recovered from the financial crisis that resulted, lessons endure for Main Street investors.

Exactly six years ago today, Wall Street came closer to imploding than at any other time since the Great Depression.

That was when the venerable investment bank Lehman Brothers filed for bankruptcy on Sept. 15, 2008, amid the global mortgage meltdown, triggering a cascade effect across Wall Street. Within days, the insurer AIG had to be bailed out by the federal government while other investment banks, including Morgan Stanley and Merrill Lynch, were pushed to the brink. Merrill, in fact, was eventually sold amid panic to Bank of America.

Six years later, the nation’s financial system seems to have largely healed. Banks are back to posting record profits. Over the past several years, financial stocks have been among the hottest areas of the market.

^DWCB Chart

^DWCB data by YCharts

And with the housing market recovering, even the dreaded mortgage-backed security — the type of bond that triggered the financial panic in the first place starting in 2007 — are back in fashion.

But even if it seems like it’s business as usual on Wall Street, for Main Street investors key lessons endure. Here are 7 of them.

Lesson #1: The price you pay for stocks matters. Really.

The media’s narrative is that the stock market plummeted into an historic bear market because of the global financial panic. That may be true, but equities may not have fallen that far — and for that long — if the circumstances weren’t ripe for a correction.

Remember that in October 2007, the price/earnings ratio for the stock market — based on 10 years of average profits — rose above 25, marking one of only a handful of times that market valuations rose so high. Not surprisingly, the stock market went on to lose 57% of its value from October 9, 2007, through March 9, 2009. (As an aside, the stock market’s so-called normalized P/E ratio is back above 25 again today.)

By March 2009, the P/E ratio for the S&P 500 had sunk to an historically low 13 (the historic average is closer to 16), which has been a signal of buying opportunities. Had you invested at that moment — listening to the Warren Buffett rule that says “be greedy when others are fearful and fearful when others are greedy” — you would have enjoyed total returns of 230% ever since.

Lesson #2: Don’t bank on any one group of stocks — even financials.

The turmoil after Lehman’s collapse was different and more frightening than the bursting of the Internet bubble in 2000. Why? This time the stocks that took the biggest hits weren’t shares of profitless startups that no one had ever heard of. In this crisis, the biggest losers were financial titans — some more than a century old — that produced a third of the market’s profits and dividends. No wonder these blue chips were fixtures in many retirement portfolios.

The love affair is clearly over … or is it? Financials have been among the market’s best performers since September 2011, having doubled in value in three short years. As a result, bank stocks, which made up less than 9% of the S&P 500 in 2009, based on total stock market value, now represent more than 16% of the broad market. That means they’re probably among the biggest holdings in your stock mutual funds and ETFs.

Lesson #3: Buy and hold works — eventually.

When the Dow fell to 6547 on March 9, 2009, stocks had already lost more than half their value. And equities wouldn’t fully recover until 2013. So it may seem that investors who pulled $25 billion out of stock funds in March and $240 billion over the next three years — plowing that money into bonds — were on the right track.

They weren’t. March 2009 marked the start of a bull market that saw stocks return 230% so far. Had you simply hung on to a basic 70% equity/30% bond strategy from Sept. 1, 2008, when things started to get scary, you’d have earned nearly the 9% historical annual return for this mix over five-year stretches since 1926. Of course, you’d have earned that only by staying the course.

Lesson #4: There is no such thing as a “conservative” or stable stock.

In past crashes, pundits always pointed out that the “safe” place to be is among giant, blue chip stocks that pay dividends and that are industry leaders. Well, Lehman Brothers, Citigroup, Merrill Lynch, and AIG all fell under those descriptions. Yet all of those stocks plunged more than the broad market.

This taught investors a huge lesson: Treat all stocks as the volatile, unpredictable creatures that they are. Even dividends, which are synonymous with financially stable, conservatively run companies, can’t be trusted, because during the crisis, the financial sector began slashing dividend payments to safeguard their finances.

Lesson #5: Reaching for yield can lead to a fall.

When stocks fall, the stability of cash can cushion the blow. Yet things don’t necessarily work out that way.

Just ask shareholders of Schwab YieldPlus. This so-called ultrashort bond fund — which was marketed as a cash alternative, though it really wasn’t one — fell 35% in 2008 when the mortgage securities that provided the “plus” in the fund’s name turned out to be riskier than thought. (In January 2011 Schwab settled the charges that it misled investors but did not admit wrongdoing.)

Before that, there was the Reserve Fund, the first money fund in 14 years to lose value in part because it tried to boost payouts by holding some Lehman debt.

It makes no sense to take risks with your rainy-day savings, a lesson that’s worth remembering today. Since early 2009, investors have poured billions of dollars into floating-rate bond funds, which buy short bank loans that offer higher payouts than basic cash, as well as ultrashort bond funds.

Lesson #6: Diversification works — but in diverse ways.

In 2008, only one type of diversification seemed to pan out: your basic mix of stocks and bonds. Among equities, everything pretty much fell in lockstep.

Fast-forward more than three years, when the financial crisis unfolded in a different guise — this time with the debt crisis in Europe. Fear of government defaults peaked in early 2012, with rates on Greek debt reaching 29%. Diversification worked here, too, but also in a different guise.

While conventional wisdom said investors should flee the continent, European shares wound up beating the world in 2012, returning 20.3%. The year before that, it was U.S. stocks that performed the best (despite Uncle Sam’s fiscal woes). And in 2013, Japan led the way, despite having experienced another recession.

Spreading your bets globally eventually pays off, especially given how mercurial equities can be. For investors who are hearing that the U.S. looks like the only promising market these days, this is a clear lesson to heed.

Lesson #7: Stocks always recover; people don’t.

The Dow closes at an all-time high, but that’s cold comfort to those who retired in the past five years. Big upfront losses can crack a nest egg, even if the market later improves. That’s because your portfolio has the most potential earning power in the first few years after you get the gold watch.

Historically, investors have been able to tap anywhere from 4% all the way up to 10% of their savings annually based on how markets fared in this all-important first decade of retirement.

Over the next 10 years, return expectations are extremely modest, so even a 4% withdrawal rate may seem optimistic. For boomers nearing retirement, the trick is not to make matters worse, as two out of five older workers did in 2008 by keeping 70% or more of their 401(k)s in equities.

It’s time to dial down the risks in your portfolio — before the next downturn.

MONEY

Facebook Hits $200 Billion in Record Time

Two years after its IPO, Facebook's value just hit a new milestone. Here's how the stock's remarkable performance compares to some big-name rivals.

Investors, who can’t seem to get enough of Facebook, have sent the shares up more than 40% so far this year. Earlier this week, the company’s value hit $200 billion for the first time. While, as TIME points out, Facebook is still only worth about one-third of rival Apple, its upward trajectory has been pretty remarkable, even by the dizzying standards of tech companies.

Facebook’s initial public offering — the first time it sold shares to the public — took place in May 2012. That means Facebook has raced to $200 billion in a little over two years. And that’s despite some well-publicized problems that sent the company’s value tumbling below $40 billion at one point. Just how remarkable has Facebook’s sprint been? Check how long it took some of its biggest rivals to reach the same market value.

200M

There is one caveat. Facebook, founded in 2004, was already something of a juggernaut by 2012. The stock market initially pegged the company at roughly $100 billion, which the Wall Street Journal called “the biggest-ever valuation by an American company at the time of its offering.” By contrast Microsoft, founded in 1975, went public with a value well below $1 billion in 1986. So it also makes some sense to handicap the results. Here’s how long it took each of those stocks to double from their IPO value. By that measure Facebook’s performance is not quite as remarkable, if still pretty impressive.

 

Source: Morningstar/YCharts
MONEY Kids and Money

The Cost of Raising a Second Baby (Who’s Not a Prince)

Britain's Prince William and Kate Duchess of Cambridge and the Prince
John Stillwell—AP

No plush royal cushion to fall back on? Here's what costs the rest should expect when expecting kid number two.

The British monarchy announced via Twitter today that that the Duke and Duchess of Cambridge are expecting their second baby, a little more than a year after Prince George was born.

It’s not unusual, once you’ve gotten the hang of one, to start thinking about number two. After all, the typical American woman has 2.01 children, according to the U.S. government.

But with their posh life at Kensington Palace, Will and Kate will have have had a bit of an easier time making the decision to go for a second than the rest of us, who will face a fairly consequential question: How can I possibly afford this?

The Department of Agriculture estimates the annual cost of a single child under age two at $16,180 for a two-parent, middle-income household. Sharing things like toys and perhaps a bedroom means you get something of a discount on the second one, so parents’ outlays go up about 80% rather than doubling. Not that an extra $12,940 is pocket change for most of us, especially when added up over a lifetime.

A couple with a combined income of more than $107,000 would spend an average of $510,000 to raise a child to his 18th birthday. For a pair, the number is just short of seven figures, at $826,000. And those averages do not include college, which can add another $328,000 to the tab if both kids go to private schools and graduate in four years. Gulp.

There can be additional hidden costs. Mothers with two kids are more likely to step out of the workforce than mothers with one, which results in lost income, lost retirement savings, halted career progress, and difficulty finding a new job when they desire to lean back in. Those who do return to work face what some have called a “motherhood penalty:” A recent study by research group Third Way found that while fatherhood tended to raise men’s earnings, women’s wages declining about 4% per child, controlling for other factors.

Family resources get spread thin in other ways, too. The cliche about the parents fretting over every the eldest’s every milestone while letting number two fend for him- or herself seems to have some truth to it. One recent Brigham Young study found that second children got roughly half an hour less “quality time” each day from parents than first-borns. (Fortunately, baby royal #2 will still get plenty of attention from the world, if not from mom and dad.)

Anxious yet, moms and dads? Let’s come back to the fact that the typical American family has two and makes it work—and hey, the Duggars do it with 19. And if you really want a big family you can find ways to expand your clan within your budget.

“Having a child is an exciting but scary step, and money can be a big part of that worry,” financial planner Matt Becker, father of two and founder of the blog Mom and Dad Money told MONEY for a recent article on how to afford a baby. “I wouldn’t dive in without considering the financial consequences, but I also wouldn’t let them scare you off.”

Related:
How to tell if you can afford a baby

MONEY Apple

The Real Reason Apple Lost $31 Billion in 2 Days

Apple stock took it's biggest hit in months -- and it's got nothing to do with stolen pictures of starlets.

Apple’s (AAPL) stock has taken a big spill over the past two days, falling 4.2% on Wednesday — it’s sharpest drop since January — and almost another 1% on Thursday. All told, that’s a market value loss of $31 billion.

Your first instinct may be to blame the company’s recent privacy problems. But Wall Street, with its eye ever on the bottom line, is likely more interested in whether Apple’s new gadgets — a new iPhone and an “iWatch,” which are expected to be unveiled next week — will be hits. And two new reasons to doubt emerged on Wednesday: Samsung, whose popular over-sized Galaxy phones have rivaled the iPhone, announced two new versions; and Pacific Crest Securities, one of the Wall Street firms whose analysts follow Apple, recommended “taking profits” — cashing out, in other words.

That said, any attempt to assess the damage should start by looking at this (admittedly dramatic) decline in context. As the first chart below shows, Apple stock has been on a tear recently, making headlines for hitting all time highs. Even after Thursday’s drop it’s still up more than 22% this year, compared to about 8% for the S&P 500.

AAPLYTD

From that perspective, investors weren’t exactly losing confidence. It’s more like they’ve started to wonder if they’ve been too giddy recently.

Indeed, it’s something of a testament to investors’ faith in Apple that the stock hasn’t suffered a gut-check even sooner. While products like the iPhone and iPad remain popular, Apple hasn’t had a major new hit in several years. The iPad appeared in 2010. That means while the company generated a whopping $178 billion in revenue over the past 12 months, the pace of growth has slowed — as the leveling slope of the next chart shows.

AAPLREV

In short, as the Pacific Crest note pointed out, Apple’s new gadgets will need to be “massively profitable” to maintain growth anywhere near what it has enjoyed in the recent past.

The launch of new iPhones later this month, expected to include a larger “phablet” version (i.e. something in between a phone and a tablet), certainly could generate a hit. But it may also demonstrate the extent to which Apple has fallen behind the new-product curve. As the final chart shows, phablets have been the fast-growing category of late. And as you’ve probably noticed, it was Samsung — not Apple — that’s been riding that wave so far.

PhabletGrowth
IDC

There’s also been much talk of an iWatch. But there are questions about whether such a product will have mass appeal or remain a niche item for geeks — the calculator watch of the 21st century. There’s also the fact that rival Google already has a similar product, meaning this time Apple won’t have the field to itself.

In short, it’s not hard to see how matching the success of the iPad or iPhone seems like a tall order — and why Apple stock took a $31 billion hit in just two days.

MONEY S&P 500

3 Lessons From S&P 2000

140826_LEDE_2
Getty

It has taken 16 years for the S&P 500 to climb to 2000 from 1000. Here are three takeaways for investors about the journey to the 2000 mark.

Updated: 5:45pm

On Tuesday, the index of 500 of the largest U.S. companies dashed across the 2000 level for the first time—16 years after crossing the 1000 milestone and a week after the Dow regained 17,000.

The market’s march from 1000 to 2000 will be remembered as tumultuous chapter in market history. The first S&P crossed the four-digit mark way back in February 1998, according to data from S&P Dow Jones Indices, before the bursting of the Internet bubble and the financial crisis. Between then and now, in fact, the market tumbled back to below 700 in 2009.

Here are three takeaways for investors about the journey to the 2000 mark.

1. It started in a tech rally, and it ended in a tech rally. But overall, technology has been a pretty average investment.

If you’ve been reading market news lately, you’d be forgiven for thinking the bull market is all about Apple, Google and other hot tech stocks. There’s no doubt these have been big winners: Apple APPLE INC. AAPL -0.1462% , which trades for more than $100 today, traded at a split-adjusted price of just 63 cents in February 1998, more than three years before the launch of the first iPod, according to S&P Dow Jones. But picking the next tech winner is no easy feat. On average, tech companies have delivered a total return of 6.1% a year since 1998. That’s actually slightly below the S&P’s 6.2% total return, suggesting plenty of losers and mediocrities offset a few fabulous winners.

2. The real boom was in energy.

If tech stocks are lagging the field, what’s led it? Energy stocks have been easily the best performing sector of the S&P 500, returning nearly 11% a year, on average, over the past 16 years, says S&P Dow Jones. While oil prices are is notoriously volatile, for the past 16 years they’ve made a steady climb, aside from a brief plunge during the late recession. Around $22 in early 1998, a barrel of oil is more than $90 today. Because if there’s one thing that’s arguably bigger than the Internet revolution, it’s been the the rise of developing nations like China, India and Brazil. Their growing number of factories and middle-class automobile owners have continually ratcheted up demand for energy commodities.

3. For buy-and-hold investors, dividends can be powerful over time.

While the S&P 500’s milestone is certainly worth noting, it’s also a reminder that paying too close attention to stock market swings isn’t the best strategy. While it’s taken 16 years for stock price levels to double, investors who simply bought and held stocks in a low-cost index fund could have gotten there sooner. (Somewhere around early 2013.) That’s because stock-market gauges like the S&P 500 don’t account for dividends. But if you hold a mutual fund that automatically reinvests dividends, your portfolio does. Dividends accounted for about a third of the S&P 500s average annual total return over the time it took for the index to rise from 1000 to 2000, according to S&P Dow Jones.

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Since early 1998, including dividends, the S&P 500 is up 170% as of yesterday (see the chart above), compared to almost 100% for the raw index. We’ll see if the S&P 500 can top 2000 mark today and make that a triple-digit percentage rise.

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