MONEY

Most Financial Research Is Probably Wrong, Say Financial Researchers

Throwing crumpled paper in wastebasket
Southern Stock—Getty Images

And if that's right, the problem isn't just academic. It means you are probably paying too much for your mutual funds.

In the 1990s, when I first stated writing about investing, the stars of the show on Wall Street were mutual fund managers. Now more investors know fund managers add costs without consistently beating the market. So humans picking stocks by hand are out, and quantitative systems are in.

The hot new mutual funds and exchange-traded funds are scientific—or at least, science-y. Sales materials come with dense footnotes, reference mysterious four- and five-factor models and Greek-letter statistical measures like “beta,” and name-drop professors at Yale, MIT and Chicago. The funds are often built on academic research showing that if you consistently favor a particular kind of stock—say, small companies, or less volatile ones—you can expect better long-run performance.

As I wrote earlier this year, some academic quants even think they’ve found stock-return patterns that can help explain why Warren Buffett has done so spectacularly well.

But there’s also new research that bluntly argues that most such studies are probably wrong. If you invest in anything other than a plain-vanilla index fund, this should rattle you a bit.

Financial economists Campbell Harvey, Yan Liu, and Heqing Zhu, in a working paper posted this week by the National Bureau of Economic Research, count up the economic studies claiming to have discovered a clue that could have helped predict the asset returns. Given how hard it is supposed to be to get an edge on the market, the sheer number is astounding: The economists list over 300 discoveries, over 200 of which came out in the past decade alone. And this is an incomplete list, focused on publications appearing in top journals or written by respected academics. Harvey, Liu, and Zhu weren’t going after a bunch of junk studies.

So how can they say so many of these findings are likely to be false?

To be clear, the paper doesn’t go through 300 articles and find mistakes. Instead, it argues that, statistically speaking, the high number of studies is itself a good reason to be more suspicious of any one them. This is a little mind-bending—more research is good, right?—but it helps to start with a simple fact: There’s always some randomness in the world. Whether you are running a scientific lab study or looking at reams of data about past market returns, some of the correlations and patterns you’ll see are just going to be the result of luck, not a real effect. Here’s a very simple example of a spurious pattern from my Buffett story: You could have beaten the market since 1993 just by buying stocks with tickers beginning with the letters W, A, R, R, E, and N.

Winning with Warren NEW

Researchers try to clean this up by setting a high bar for the statistical significance of their findings. So, for example, they may decide only to accept as true a result that’s so strong there’s only a 5% or smaller chance it could happen randomly.

As Harvey and Liu explain in another paper (and one that’s easier for a layperson to follow), that’s fine if you are just asking one question about one set of data. But if you keep going back again and again with new tests, you increase your chances of turning up a random result. So maybe first you look to see if stocks of a given size outperform, then at stocks with a certain price relative to earnings, or price to asset value, or price compared to the previous month’s price… and so on, and so on. The more you look, the more likely you are to find something, whether or not there’s anything there.

There are huge financial and career incentives to find an edge in the stock market, and cheap computing and bigger databases have made it easy to go hunting, so people are running a lot of tests now. Given that, Harvery, Liu, and Zhu argue we have to set a higher statistical bar to believe that a pattern that pops up in stock returns is evidence of something real. Do that, and the evidence for some popular research-based strategies—including investing in small-cap stocks—doesn’t look as strong anymore. Some others, like one form of value investing, still pass the stricter standard. But the problem is likely worse than it looks. The long list of experiments the economists are looking at here is just what’s seen the light of day. Who knows how many tests were done that didn’t get published, because they didn’t show interesting results?

These “multiple-testing” and “publication-bias” problems aren’t just in finance. They’re worrying people who look at medical research. And those TED-talk-ready psychology studies. And the way government and businesses are trying to harness insights from “Big Data.”

If you’re an investor, the first takeaway is obviously to be more skeptical of fund companies bearing academic studies. But it also bolsters the case against the old-fashioned, non-quant fund managers. Think of each person running a mutual fund as performing a test of one rough hypothesis about how to predict stock returns. Now consider that there are about 10,000 mutual funds. Given those numbers, write Campbell and Liu, “if managers were randomly choosing strategies, you would expect at least 300 of them to have five consecutive years of outperformance.” So even when you see a fund manager with an impressively consistent record, you may be seeing luck, not skill or insight.

And if you buy funds that have already had lucky strategies, you’ll likely find that you got in just in time for luck to run out.

MONEY Apple

Here’s What Happened When We Tried Apple Pay

Sure, the new payment system looks all shiny in Apple's demos, but does it really work on the streets of New York? We set off to find out.

Updated at 9:30 pm

We gave Apple Pay a real-world test run on Monday, the day the new payment system launched. And as you can see in the video, it worked pretty well. At least where we already expected it to work.

There are a few wrinkles you don’t see on camera. Setting it up wasn’t quite seamless. I deliberately tried to set it up on my new iPhone without reading in advance about how to do it—after all, that’s how most people use their iPhones in real life. I found myself roadblocked pretty quickly. The Passbook app where credit card info is supposed to be stored… didn’t seem to have any way to enter my credit card info. It turned out I had to update my phone to the latest version of iOS 8. I got the phone just last week, and have already upgraded once, so that was a bit of surprise.

Day two (Tuesday) of trying to use Apple Pay in everyday life, with no camera crew around, was less successful. At Starbucks, I watched other customers paying with smartphone apps, but learned that they were using the coffee company’s own system. Starbucks doesn’t do Apple Pay. At a Duane Reade drugstore—a New York brand of Walgreens—the reader didn’t work. But the cashier told me most of the other readers in the store did. Later on, I successfully paid for a couple of Lightning cables at a Walgreens in Brooklyn. “Wait, that thing actually works?” said the woman behind the register.

Apple Pay doesn’t feel revolutionary. You take out your phone instead of your credit card to pay for things—it just means reaching into a different pocket. But that probably counts as a success for Apple in the long run. Using Apple Pay is similar enough to what I already do that I can see it easily creeping into my everyday routine.

MONEY Millennials

The Conventional Money Wisdom That Millennials Should Ignore

millennials looking at map on road
John Burcham—Getty Images/National Geographic

Maybe a 401(k) loaded with stocks isn't the best savings tool for some young people.

If you are in your 20s or early 30s, and you ask around for retirement advice, you will hear two things:

1. Put as much as you possibly can, as soon as you can, into a 401(k) or Individual Retirement Account.

2. Put nearly all of it into equities.

There’s a lot of common sense to this. Saving early means you can take maximum advantage of the compounding of interest. And your youth makes it easier for you to bear the added risk of equities.

But life is more complicated than these simple intuitions suggest. Here’s a troubling data point: According to a Fidelity survey of 401(k) plan participants, 44% of job changers in their 20s cashed out all or part of their money, despite being hit with taxes and penalties. Switchers in their 30s were only a bit more conservative, with 38% cashing out.

You really don’t want to do this. But let’s get beyond the usual scolding. The reality that so many people are cashing out is also telling us something. Maybe a 401(k) loaded with stocks isn’t the best savings tool for some young people.

The conventional 401(k) advice—which is enshrined in the popular “target-date” mutual funds that put 90% of young savers’ portfolios in stocks—imagines twentysomethings as the ideal buy-and-hold investors, as close as individuals can get to something like the famous, swashbuckling Yale University endowment fund. Young people have very long time horizons and no need to sell holdings for current income, the thinking goes, so why not accept the possibility of some (violently) bad years in order to stretch for higher return? But on a moment’s reflection on what life is actually like in your 20s, you see that many young people are already navigating a fair amount of economic risk.

Take career risk. On the plus side, when you’re young you have more years of earnings ahead of you than behind you, and that’s a valuable asset to have. Then again, you also face a lot of uncertainty about how big those earnings will be. If you are just gaining a foothold in your career, getting laid off or fired from your current job might be a short-term paycheck interruption—or it could be the reversal that sets you on a permanently lower-earning track. You may also be financially vulnerable if you still have high-interest debts to settle, a new mortgage that hasn’t had time to build up equity, or low cash reserves to get your through a bad spell.

This is why Micheal Kitces, a financial planner at Pinnacle Advisory Group in Columbia, Md., tells me he doesn’t encourage people in their 20s to focus on building their investment portfolio. You almost never hear that kind of thing from a planner, so let me clarify that he’s not saying you should spend to your heart’s content. (Kitces is in fact a bit stern on one point: He thinks many young professionals spend too much on housing.) He’s talking about priorities. For one thing, you need to build up that boring cash cushion. Without it, you are more likely to be one of those people who has to cash out the 401(k) after a job change.

Even before that’s done, you’ll still want to aim to put enough in a 401(k) to max out the matching contributions from your employer, if that’s on the table. (Typically, that’s 6% of salary.) So maybe all or most of that goes in stocks? An attention-getting new brief from the investment strategists Research Affiliates argues “no”—that instead of putting new savers into a 90%-equities target date fund, 401(k) plans should get people going with lower-risk “starter portfolios.”

I’m not sold on all of RA’s argument, which drives toward a proposal that 401(k)s should include unusual funds like the ones RA happens to help manage. But CEO Rob Arnott and his coauthor Lilian Wu offer a lot to chew on. They make two big points about young people and risk. One’s just intuitive: If you have little experience as an investor and quickly get your hat handed to you in a bear market, you could be so scarred from the experience that you get out of stocks and never come back. At least until the next bull market makes it irresistible.

The other is that 401(k) plan designers should accept the fact—all the advice and penalties notwithstanding—that many young people do cash them out like rainy-day funds when they lose their jobs. And so the starter funds should have a bigger cushion of lower-risk assets. That’s especially important given that recessions and layoffs often come after big market drops, so the people cashing out may well be selling stocks at exactly the wrong moment, and from severely depleted portfolios.

RA thinks a portfolio for new savers should be made up of just one third “mainstream” stocks, with another third in traditional bonds and the last third in what it calls “diversifying inflation hedges.” That last bit could include inflation protected Treasuries (or TIPS), but also junk bonds, emerging markets investments, real estate, and low-volatility stocks. Whatever the virtues of those investments, it seems to me that a starter portfolio should be easy to explain to a starting investor. “Diversifying inflation hedges” doesn’t sound like that.

But the insight that new investors might not be immediately prepared for full-tilt equity-market risk is valuable. Many 401(k) plans automatically default young savers into stock-heavy target date funds, but they could just as easily start with a more-traditional balanced fund, which holds a steady 60% in stocks and 40% in bonds. Perhaps higher risk strategies should be left as a conscious choice, for people who not only have a lot of time, but also a bit more market knowledge and a stable financial picture outside of their 401(k).

The trouble is, most 401(k) plans don’t know much about an individual saver besides their age. The 401(k) is a blunt, flawed tool, and just putting different kinds of mutual funds inside of it isn’t going to solve all of the difficulties people run into when trying to save for the future. Arnott and Wu’s proposal doesn’t do anything about the fact that using a 401(k) for rainy days means paying steep penalties. And it doesn’t help people build up the cash reserves outside their retirement plans that they’d need to avoid that.

As boomers head into retirement, we’ve all become very aware of the importance of getting people to prepare for life after 65. But millennials also need better ideas to help get them safely (financially speaking) to 35.

TIME Retirement

Millennials Actually Have an Edge on Retirement

The surprising advantage of the younger generation

Every generation likes to think it’s nothing like the one that came before it. As for retirement, millennials might actually be right. Twenty- and 30-year-olds make up the first postwar generation with almost no shot at getting a traditional pension from a private company. Today fewer than 7% of Fortune 500 companies offer such plans to new hires, according to the consulting firm Towers Watson. In 1998, when members of Generation X entered the workforce, 50% of Fortune 500 companies offered such plans.

It’s not all long odds. Here are some things to remember as you prepare for your sunset years.

Relax, you’ve got time. According to the Center for Retirement Research at Boston College, if you can start setting aside money at age 25, you’ll need to save only about 10% of your annual income to retire at 65. Start at age 35 and your target is a manageable 15%. But wait until age 45 and you’ll be stuck socking away 27% of your annual income.

You can also spend money to improve your chances of a happy retirement. In your 20s it can make sense to forgo some saving to invest in your future earnings potential, says financial planner Michael Kitces of Pinnacle Advisory Group in Columbia, Md. Think education–not only degree programs but also short courses that teach marketable skills. You should also pay off high-interest credit-card debt and build a cash reserve. That can cover emergencies, Kitces says. It can also provide greater flexibility, like the ability to finance a move to another city for a better job.

Even so, if you have a 401(k) plan, try to save enough (typically 6%) to get your maximum employer match. That’s like free money, says Anthony Webb, an economist at the Center for Retirement Research. If you save 6% and your company matches 50¢ on the dollar, you’ll save 9% of your income, nearly what a millennial should be doing.

You have the best tools ever. One advantage today’s savers have over previous generations is that investing can now be simple and cheap. An index fund that holds a representative slice of the U.S. stock market–like the giant Vanguard 500 or newer cut-rate competitors like Schwab Total Stock Market Index–charges investors 0.17% of assets or less per year. Compare that with the 1% or so charged by typical fund managers, who tend to perform worse than index funds after fees. Index funds are now common in 401(k)s. Why stress about a measly 1% charge? William Sharpe, the Nobel Prize–winning economist, recently projected the returns of indexers vs. expensive funds over a lifetime and found that the low-cost funds could deliver over 20% more wealth in retirement.

You can handle some risk. At your age, a big market loss represents a tolerable drop in your true lifetime wealth, says investment adviser William Bernstein. Consider investing much of your 401(k) in a stock fund, which should earn a higher return than bonds or cash over time, though with greater risk.

But be ready for large swings. “A 30-year-old who sees a $19,000 portfolio cut in half is going to feel devastated,” Bernstein says. If you don’t know how much risk you can handle, consider a 60-40 split. Sixty percent can be divided between a U.S. stock-market index fund and, for diversification, a similar fund holding foreign stocks, such as Fidelity Spartan International or Vanguard Total International Stock. The rest can go into a bond fund, like Vanguard Total Bond Market. If your 401(k) doesn’t offer index funds in all three areas, look for options with low costs and a broad mix of assets.

After you set up a simple portfolio, try to leave it alone. You are unlikely to correctly time the twists and turns of the market. And at your age, you have better things to think about.

MONEY

Yes, Stocks Are Tanking — But Here’s What We Should Really Worry About

The stock market gets all the headlines at times like this -- but it's bond and oil prices we should really keep an eye on.

The U.S. stock market opened Wednesday morning with a big sell-off. The Dow Jones Industrial Average plummeted about 350 points before partially recovering.

The Dow and other stock indexes like the S&P 500 always get the headlines when a market frenzy kicks in. But right now a more telling number may be the yield on 10-year Treasury bonds, which fell to 1.9% this morning, the first time in 16 months that it’s dipped below 2%. (Bond’s yields fall when demand for them goes up and their prices rise.)

A few minutes later it climbed back to around 2%. But only a month ago it was 2.6%.

The fact that investors are currently so eager to own Treasuries that they will accept a yield of 2% or less should worry us. After all, it’s widely believed that inflation will run at about 2% over the next decade—that’s the Federal Reserve’s target rate. This means investors are now ready to earn basically nothing in exchange for lending their money to the U.S. government.

They are willing to do so because Treasuries offer as close to a guaranteed pay-out as a long-term investor can get: Assuming you hold one until maturity — and that armageddon doesn’t strike — you basically know you’ll get your money back plus the yield. You’ve heard of “flight to safety?” This is it.

Take this market behavior as evidence that, even after the market plunge, plenty of pessimism about the prospects for growth is still sloshing around. Yes, the U.S. has been (slowly) recovering from the 2008-2009 financial crisis, but Europe now seems dangerously close to another recession, which would put a drag on the whole global economy.

You can see the same dynamic in the oil markets. Crude oil futures are getting close to $80 a barrel, from above $90 just last week. That may come a relief for drivers, but it means that global investors are collectively anticipating the kind of drop in demand that comes with a weakening world economy.

Bottom line: If you want to understand what the markets are saying about the future, keep an eye on bond yields and oil prices, not only the stock market.

Related:
Money 101: What Is a Bond?
Money 101: Should I Invest in Bonds or a Bond Mutual Fund?
Money 101: What Is the Right Mix of Stocks and Bonds for Me?

MONEY Markets

A Financial Pundit’s Guide to Financial Pundits

201411_TBQ_BROWN
Joe Pugliese

Joshua Brown, a.k.a. the Reformed Broker, explains when to pay attention to the investing media and when to tune them out.

Joshua Brown, 37, is an author and investment adviser who writes the Reformed Broker blog. The CEO of Ritholtz Wealth management, Brown is also the co-author with Jeff Macke of Clash of the Financial Pundits, about how the media influence investors, and the author of Backstage on Wall Street, which recounts his experiences in the hard-sell retail brokerage business. MONEY Assistant Managing Editor Pat Regnier interviewed him for the October 2014 issue, from which this Q&A is adapted.

Am I better off just ignoring financial news?
Good luck with that. Most likely, you have to converse with people you do business with, people you work with, people who work for you, or people you report to. You have to be fluent in what’s going on in the economy. It isn’t a feasible solution to say, “Okay, I own the Vanguard 500 index fund. I’m going to go to a South Pacific island, so to speak, and my performance will be fine.”

My take instead is to be exposed to financial news all the time, so you can wink at it. Then when you hear a prediction that scares people, you can say, “Yeah, I hear stuff like that every day, and it never matters.” That’s how you deal with the noise.

What should I just wink at?
Predictions. Forecasts. Also, don’t necessarily act on information that’s maybe more valuable just as context. One thing financial media does that it shouldn’t is to make everything “actionable” for everyone.

What’s context good for?
[At my firm] our default is to do less—to have a high hurdle before ­doing something. What enables that, without a lot of stomach-churning and consternation, is paying attention to what’s going on. The more I do that, the more I realize, “Hey, most of this stuff does not demand a reaction.” It’s just the news of the day.

Some would say, “Brown’s a pundit himself—of course he sees value in what he does.”
Most of what I’m doing on my ­website is not saying, “Here’s why I know everything about this topic.” I’m linking to other sources of opinion or information I think are valuable.

What about when you appear on a CNBC panel? It’s a noisier medium.
I’m on a specific show [Halftime Report], and I’m biased, but I think it’s the best show on the network. And the reason why is the guests—people I respect, whose stuff I read—not necessarily because of us on the panel. We try to have a fast-paced, exciting discussion around the food for thought those guests feed us.

Do the media create bubbles?
The media are the delivery mechanism of the excitement that draws people in. In my book I talk about how the media were used to blow up the South Sea bubble in the 1700s. Daniel Defoe and Jonathan Swift, famous writers, were writing in newspapers, the Internet or CNBC of their day, bringing in people who had never heard of a stock before in their life.

Are the media doing any bubble-blowing now?
I actually think the media are working too hard at skepticism now. They’re playing catch-up because they were blamed for missing the crisis.

It’s not abnormal for the stock market to be going up. It’s normal. Here’s a fun fact. Fifty years of history, pick any day of any month of any year going back, and it turns out you have a 75% chance of the market being higher one year later.

Some investors worry about stocks’ high price/earnings ratios.
It’s good to be aware of valuations. But no one has been successful trying to time the market based on the P/E ratio. It’s not like physics, where if you run the same experiment in a lab, every time you’ll get the same result.

That said, I don’t get the sense from reading your blog that you are a pure buy-and-hold investor.
We don’t look at ourselves as market timers. But if we see something and we know it’s stupid, we’re just not going to do it.

We don’t think that U.S. Trea­suries are a great buy. [Ten-year securities are yielding only 2.2%.] We recognize the value of Treasuries to a portfolio in terms of stabilizing it. But we think we can do that better with other kinds of fixed-income investments, even including money-market funds—or anything outside of just saying, “The model says hold long-term Treasuries, so we have to buy them.”

You write about how financial pundits tend to fall back on simplistic rules of thumb.
In real life, rules of thumb are helpful. They’re a shortcut way to impart a bit of wisdom or to remind someone of something that he already knows. But in investing, rules of thumb tend to contradict each other. So you get “Let your winners run,” but also “Pigs get slaughtered.” Those kinds of aphorisms are cool. They’re like nursery rhymes. But they’re not particularly helpful.

Your blog is called the Reformed Broker. Why “reformed”?
I began my career as a retail broker [selling investments for commission]. I thought I was helping people, and the markets were going up, so I guess I was. Then when the markets started not to go up, the conflicts that had been masked became apparent to me. When you sell financial products and get paid on a trans­actional basis, your bias is toward selling the products that pay the most and pushing more transactions.

The name was tongue-in-cheek, but within two years of starting the blog, I quit being a broker.

What should consumers know about the conflicts of people they read and see in the financial media?
Assume everyone has a bias. That bias may be driven by their politics or the way they get paid or the firm they work for. It’s that simple. People probably believe what they are saying most of the time. But why do they believe it?

MONEY

What To Expect From This Crazy Market

Sharp one-day drops in the market can be unnerving, but they haven't changed the basic math of investing.

You know the advice: Ignore stock market swings. They don’t mean anything. Just buy and hold.

Of course, that’s easy counsel to live by when the swinging is mostly upwards. It’s even possible to follow such advice after a long market decline, once you’ve gotten used to the bad news. And near the bottom, when even the pessimists start to express some optimism, well, then it’s fairly easy to stay the course.

Times like now, however, are a true test of a long-term investor’s resolve. After a bull-market run so smooth that pundits were complaining about “complacency,” the Dow has delivered a string of triple-digit daily drops, confusingly interrupted by a 274-point rally last Wednesday. At such times, your head is saying no one can reliably predict the market’s next flush of fear or greed. But your gut worries that maybe something’s about to break.

The reality, though, is that if you look at the factors that really drive the long-run returns you care about, the market doesn’t look much different than it did a week ago. Which is to say: It’s priced to deliver kind of meh returns. But those returns still look better than your easiest alternative, bonds.

There’s a very simple Finance 101 way to think about what you’ll make on equities. In essence, a stock is just a claim on the flow of cash from a company. You can think of that as the company’s earnings, or—if you want to keep things tangible—as the dividend checks it pays to investors. (No, not all companies pay dividends, but in theory that’s the eventual purpose of all profits.) Right now, investors who own an S&P 500 index fund get paid a dividend yield of about 2% per year.

The nice thing about a dividend yield is that it’s not just a measure of how much income your investment is delivering to you. It can also tell you whether stocks are generally cheap or expensive. Imagine that a stock paying out $2 in dividends per share is trading at $100—that’s a 2% yield. Now say it falls in price by $35. Terrible news for current holders, but potential buyers can now get the same $2 payout for just $65 a share—a 3% yield. In that light, the stock looks like a better bargain.

So: Low dividend yields suggest pricey stocks, and higher dividend yields cheaper. Right now, even after the recent declines, dividend yields look okay but not fat, just as they have for a while:

ycharts_chart-14

Note that the almost 4% dividends came in 2009, when stocks were at the bottom of the post-crisis crash. Around 2000, at the peak of the tech bubble, yields were about 1%.

Wait, does all this mean I’m only getting a 2% return on stocks? No, it doesn’t, because you also buy stocks expecting their earnings or dividends to grow over time. Using a somewhat simplified, classic rule of thumb — I’m relying on Bill Bernstein‘s book The Investor’s Manifesto plus this useful paper (PDF) from the money managers Research Affiliates — the expected return on stocks right now is the 2% dividend yield plus the historic rate of growth in dividends or earnings-per-share of about 1.5%. So think 3.5%, maybe 4%.

That’s a real return above inflation, but still a disappointment compared to the 7% historic rate for equities since 1926. Then again, it’s much better than the fixed-income alternatives: The real yield on inflation-adjusted Treasury bonds, or TIPS, is 0.35%.

A 4% return is just a baseline. If investors collectively decide they want to value stocks higher in the future, and can live with lower yield payouts, you’ll get a bump on your investment today. If they lose their taste for the risk of stocks, you’ll do worse. But that’s driven by whatever goes on deep inside the wet, gray stuff under millions of investors’ skulls, not the profitability of the companies you buy today.

The past six market days have hardly nudged this math, except to move it slightly toward stocks being a better bargain. Before the start of last week, the S&P had a one-year total return of more than 18%. Now it’s one-year return has tumbled to 12%. That’s disappointing and, yes, anxiety provoking. But if you see 4% annual return as your basic expectation, reversals from years of high gains should come as no great surprise.

MONEY

Why Does a Hedge Fund Care About Breadsticks? This Video Explains

An "activist" fund just took over the board of the company that runs Olive Garden and wants to change the menu. Another investor is telling Apple what do with its cash. Who are these guys?

MONEY stocks

Millennials Should Love it When Stocks Dive

Skateboarding down a ramp
Jeff R. Clow—Getty Images/Flickr

With retirement still far off, you should be pleased whenever stocks get cheaper to buy.

On Thursday, the Dow dropped more than 330 points.

This is almost always covered as bad news. And for a lot of people, it is. Say you’ve just retired. If it turns out there’s a bear market in stocks over the next few years, you could have a serious problem.

But if you’re in your 20s or early 30s, you should “pray for a long, awful [bear] market,” says financial adviser William Bernstein, author of If You Can, a short ebook about investing for Millennials.

Because the math of a market drop moves in your favor. As long as you are making regular contributions to stock fund in a 401(k) or IRA, you are a buyer, not a seller, of equities. A market drop means you pay less for more shares.

And since you haven’t had time to invest much yet, your losses on the stocks you already own are only a small part of your lifetime wealth. If a market drop was in the cards, better to get it out of the way early.

Now, it’s not quite as simple as “the market drops, high returns follow.” Sometimes stocks fall, fall some more, and stay down for a long time; the American experience (so far) of the market inevitably recovering old highs isn’t some natural law, as an investor in Japan would tell you. If the long term prospects of the American economy over your lifetime are deteriorating, and it turns out a market drop accurately reflected that, then a crash is not especially great news.

But a lot of the ups and downs in the market are really about changes in investors’ appetite for stocks, and how much they’re willing to pay for a dollar of company profits. Right now, according a measure popularized by Yale economist Robert Shiller, investors are paying 25 times earnings for U.S. stocks, considerably more than the long run average of 16. (But also way less than the record of 44 hit before the great dotcom crash.) Logically, if you pay more for earnings now, you should expect a lower return in the future. Just flip the Shiller PE over (divide the earnings by the price) and you see that stocks are priced to deliver an “earnings yield” of 4% per year, vs. a historic rate of over 6%. (For more on the math, Morningstar’s Sam Lee has a good explainer here.) Want that extra 2% back? All else being equal, stocks would have to fall 36%.

Millennials might not wish that fate on their headed-to-retirement parents. But it would boost the return they could expect on their own savings.

MONEY Apple

A Billionaire Explains Why You’ll Be Giving Apple Your Money Forever

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Bobby Yip—Reuters

Billionaire Investor Carl Icahn bets you'll never stop upgrading your iPhone

Investor Carl Icahn’s open letter to Apple APPLE INC. AAPL -0.0588% CEO Tim Cook is mostly getting attention for Icahn’s request for share buybacks. But he also writes a long analysis of the company’s business.

Here’s a line you might want to think about if you are about to buy an iPhone 6.

Given historically high retention rates, we assume existing iPhone users will continue to act like an annuity, choosing to stay with the iPhone each time they upgrade.

Ever since the introduction of the iPod, it’s been well-known that a part of Apple’s competitive advantage is its “eco-system.” Once you have a Mac, its easiest to buy your music through iTunes, which syncs up to your iPhone, which by the way can control Apple TV and can send all your photos to the iCloud… and so on. Buying one Apple product has a way of hooking you in.

But that word “annuity” is interesting too. An annuity is an investment that locks in a regular stream of income over a lifetime. What the iPhone does so well, that laptops and even iPods can’t, is put you on a fairly reliable treadmill of regular upgrades — and thus regular payments to Apple.

At the end of every two-year wireless contract, or one of the increasingly popular buy-on-installment plans, the easiest thing you think you can do is rollover to the next new iPhone. After all, your monthly costs won’t change if you do. Icahn calculates that the average iPhone owner pays $20 a month for the phone.

What could change this scenario? Basically, Google, which Tim Cook has called Apple’s only competitor. The more that your pictures, music and contacts live on Google’s cloud instead of Apple’s ecosystem, the more likely it is that you’ll consider a different phone at some point.

Still, the bet Apple investors are making is that you’ll be shelling out that regular $20 for a long, long time.

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