MONEY Greece

How Investors Should React to the Greek Crisis

Louisa Gouliamaki—AFP/Getty Images The Greek economic crisis isn't ending anytime soon.

Step one: Don't panic.

Even from afar, it’s hard for U.S. investors to ignore the Greek economic crisis, which continues to roil global markets.

After Greece saw its bailout funds expire Tuesday—and became the first developed country to fail to pay back a loan from the International Monetary Fund—Greek prime minister Alexis Tsipras sent a letter offering concessions to European creditors in hopes that a new agreement might help the country remain afloat.

The fate of the Greek economy depends in large part on whether its government can quickly make a deal with European leaders.

One point of tension: Leaders in Germany, Greece’s biggest creditor, are insisting that the country accept additional austerity measures like pension cuts before it can get more emergency funds. Though a compromise could be reached this week, the worst case scenario is that Greece would continue to miss debt payments and, eventually, be forced out of the euro currency. Doing so would allow Greece to pursue its own fiscal and monetary policies in pursuit of economic recovery.

But what would that mean for investors around the world? The short answer, assuming you have a fairly diversified portfolio of stocks and bonds, is that it probably wouldn’t have a dramatic long-term effect.

Here’s why: If you look at the kind of target-date mutual funds that are popular compenents of many American retirement accounts, like 401(k)s—the Vanguard Target Retirement 2035, for example—about a third of their holdings are in foreign stocks. And of those foreign stocks, only a small fraction tend to be Greek companies. The Vanguard Total International Stock (which the 2035 fund holds), for example, has only about 0.07% of assets in Greek companies. So not a lot of direct impact.

The indirect impact is also likely to be muted. More than 45% of the holdings in Vanguard Total International Stock are in European countries—and if Greece leaves the Eurozone, that could affect companies and markets throughout the Continent. But some analysts are arguing that the market has already reacted, and perhaps even over-reacted, to the possibility of a so-called Grexit. “You have to assume that a substantial amount of the correction is priced in,” Lawrence McDonald, head of U.S. macro strategy at Societe Generale, recently told MarketWatch.

That being said, a note of caution ought to be sounded about the dollar. If the Greek crisis isn’t resolved quickly, it could lead to a flight to safety away from the euro and toward the U.S. dollar. The dollar’s strength has already led to sluggish profit growth in the U.S. In the past few months, the euro has rebounded a bit. But the euro could weaken again if crisis persists in Greece, putting U.S. companies that sell their goods abroad in a tough spot.

Still, even if you believe things in Greece will get worse before they get better, history suggests you’d be unwise to pull much of your money from the market right now. Though we could be in for more bad news and some painful market gyrations in the near term, keeping your money invested and sticking to your long-term strategy will likely pay off in the end—no matter what happens in Greece. Plus, there’s potentially good news for bond investors: If fear of European instability drives investors to seek out safe assets like U.S. Treasuries, then many bond funds will do well.

MONEY stocks

How to Prepare for the Next Market Meltdown

A trader works on the floor of the New York Stock Exchange shortly before the closing bell, June 29, 2015. U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.
Lucas Jackson—Reuters A trader works on the floor of the New York Stock Exchange shortly before the closing bell, June 29, 2015. U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.

You don't need a crystal ball.

What will ignite the fuse that sets off the next big market crash? Greece, as it tries to cling to—or exit—the European currency union? China, whose economy and stock market are already showing signs of stress? Or will it be something closer to home, say, a snafu by the Federal Reserve as it attempts to unwind years of loose monetary policy?

The answer, of course, is that nobody knows. While anyone can come up with a long list of candidates that could cause the next downturn, it’s impossible to know in advance what the actual trigger will be. I’ve learned this from personal experience. Not long before the 2008 financial crisis I interviewed Richard Bookstaber, a risk expert who had just published A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, a book in which he explains how our increasingly complex financial system is evolving beyond regulators’ ability to control—and our ability to predict its behavior.

During that interview, he ticked off a litany of problems that had the potential to topple the economy and the financial markets, including arcane financial instruments like credit swaps, emerging market funds, risky hedge funds, even overheated housing and mortgage markets. I remember thinking at the time, credit swaps, sure; emerging markets, yeah, I could see that; hedge funds, definitely. But inflated housing prices and problematic mortgages bringing the U.S. and global markets to their knees? It seems obvious today with the benefit of 20/20 hindsight. But before the financial crisis, it seemed rather far-fetched.

Fortunately, positioning your portfolio to weather the next big downturn doesn’t require that you be able to foresee when the setback will occur or what will instigate it. Rather, all you have to do is assure you have your savings invested in a mix of stocks and bonds you would be equally comfortable sticking with if the market continues to make it to higher ground—or gets whacked for a sizable loss from a development everyone anticipates or from a shock that comes completely out of the blue. In other words, it’s not as important that you be able to predict the timing or the cause of a rout as it is that you are prepared to handle the consequences.

How to Disaster-Proof Your Portfolio

The first step is to review your current holdings. Over the course of a long bull market, it’s easy to end up with a portfolio that’s more aggressive than you think. Which is why it’s important to do a quick inventory of what you own. Basically, you want to divide your investments into three broad categories—stocks, bonds, and cash—so you know what percentage each represents of your overall holdings. If you have funds that own a mix of those asset categories, such as a balanced fund or target-date retirement fund, you can plug its name or ticker symbol into Morningstar’s Instant X-Ray tool to see how it divvies up its assets.

Once you know your portfolio’s stocks-bonds mix, you want to make sure you’ll be comfortable with that mix should stock prices head south. The simplest way to do that: complete a risk tolerance-asset allocation questionnaire like the free one Vanguard offers online. After you answer 11 questions about how long you plan to keep your money invested, how you react after losses, and what kind of volatility you think you can handle, the tool will recommend a mix of stocks and bonds consistent with your answers. The tool also provides performance stats showing how the recommended mix, as well as others more conservative and more aggressive, have performed in past markets good and bad.

You can then see how that recommended mix compares with how your portfolio is actually divvied up between stocks and bonds. If there’s a significant difference—say, your portfolio consists of 80% stocks and 20% bonds and the tool suggests a 50-50 blend—you need to decide whether it makes sense to stick with your current mix or ratchet back your stock holdings. One way to do that is to calculate how both mixes would have fared during the 2008 financial crisis, when stocks lost nearly 60% of their value from the market’s 2007 high to its 2009 low and bonds gained roughly 8%. By comparing their performance, you can decide which portfolio you’d be more comfortable holding if the next downturn generates comparable losses.

Keep in mind, though, that limiting short-term setbacks isn’t your only investment objective. If it were, you could simply plow all your dough into federally insured savings accounts and CDs. If you’re investing for a retirement that’s decades away, you also need capital growth to boost the size of your nest egg. And even if you’re retired, you likely still want to have at least some of your nest egg in stocks to assure that your savings can generate income that will stand up to inflation throughout retirement. To get a sense of whether the mix you’ve decided will give you a decent shot at meeting such goals, you can plug your investments, along with information such as how much you have saved and how many years you expect to live in retirement, into a good retirement income calculator.

So let the pundits engage in their endless guessing game of when the next meltdown will occur and what incident or set of factors will precipitate it. But don’t take it too seriously. It’s ultimately a fruitless exercise, and one that could end up wreaking havoc on your portfolio if you make the mistake of actually acting on their speculation and conjecture.

Walter Updegrave is the editor of If you have a question on retirement or investing that you would like Walter to answer online, send it to him at

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MONEY Ask the Expert

What’s the Difference Between an Index Fund, an ETF, and a Mutual Fund?

Investing illustration
Robert A. Di Ieso, Jr.

Q: What is the difference between index funds, ETFs, and mutual funds? — Gary

A: An easy way to think about it is this: Exchange-traded funds, or ETFs, are a subset of index funds; and index funds are a subset of mutual funds.

“It’s like a funnel,” says Christine Benz, director of personal finance at fund tracker Morningstar.

Let’s start with the broadest of the three categories: mutual funds.

What is a mutual fund

A mutual fund is a basket of stocks, bonds, or other types of assets. This basket is professionally managed by an investment company on behalf of investors who don’t have the time, know-how, or resources to buy a diversified collection of individual securities on their own.

In exchange, the fund charges investors a fee, which may run around 1% of assets annually or more. That means $100 for every $10,000 you invest.

In the case of most stock funds, holdings are selected by a portfolio manager, whose job it is to pick the stocks that he or she thinks are poised to perform the best while avoiding the clunkers. This process is referred to as “active management.”

But “active management” isn’t the only way to run a mutual fund.

What is an index fund

An index fund adheres to an entirely different strategy.

Instead of picking and choosing just those stocks that the portfolio manager thinks will outperform, an index fund buys all the shares that make up a particular index, like the Standard & Poor’s 500 index of blue chip stocks or the Russell 2000 index of small-company shares. The aim is to replicate the performance of that entire market.

But because index funds buy and hold rather than trade frequently — and require no analysts to research companies — they are much cheaper to operate. The Schwab S&P 500 Index fund, for example, charges just 0.09%, or $9 for every $10,000 you invest.

By definition, when you own all the stocks that make up a market, you’ll earn just “average” returns of all the stocks in that market. This raises the question: Who would want to settle for just “average” performance?

As it turns out, plenty of investors around the world. While it’s counter-intuitive, academic research has shown that the higher expenses associated with active management and the inherent difficulty of picking winning stocks consistently over long periods of time means that most funds that aim to beat the market actually end up behind in the long run.

“In general, active funds have not delivered impressive performance,” Benz says. Indeed, S&P Dow Jones Indices has studied the performance of actively managed funds. Over the past 10 years, less than 20% of actively managed blue chip stock funds have outperformed the S&P 500 index of blue chip stocks while fewer than 15% of small-company stock funds have beaten the Russell 2000 index of small-cap shares.

What are ETFs

Okay, index funds sound like a good bet. But what type of index fund should you go with?

Broadly speaking, there are two types. On the one hand, there are traditional index mutual funds like the Vanguard 500 Index. Then there are so-called exchange-traded funds, such as the SPDR S&P 500 ETF SPDR S&P 500 ETF SPY -0.09% .

Both will give you similar results, but they are structured somewhat differently.

For starters, with a mutual fund, you often buy and sell shares directly with the fund company. The fund company will let you trade those shares once a day, based on that day’s closing price.

ETFs, on the other hand, aren’t sold directly by fund companies. Instead, they are listed on an exchange, and you must have a brokerage account to buy and sell those shares. That convenience typically comes at a price: Just like with stocks, investors pay a brokerage commission whenever they buy and sell.

That means for small investors, traditional index mutual funds are often more cost effective. “If you are on the hook for trading costs, that can really eat into your returns,” says Benz.

On the other hand, because they are exchange traded, ETF shares can be traded throughout the day. Being able to trade in and out of funds during the day is a convenience that has proved popular for many investors. For the past decade exchange-traded funds have been one of the fastest growing corners of the fund business.

Read next: 5 Things You Didn’t Know About the World’s Biggest Bond Fund

MONEY Opinion

Innovation Isn’t Dead

Dave Reede—Getty Images A farmer looks out over his field of canola being grown for biofuel while the encroachment of his farmland by housing development is in the background, Winnipeg, Manitoba, Canada

Most important innovations are only obvious in hindsight.

Wilbur and Orville Wright’s airplane flew for the first time in December 1903. It was one of the most important innovations of human history, changing the world in every imaginable way.

To celebrate their accomplishment, the press offered a yawn and a shoulder shrug.

Only a few newspapers reported the Wright’s first flight at Kitty Hawk, N.C. All of them butchered the facts. Later flights in Dayton, Ohio, the brothers’ home, still drew little attention.

David McCullough explains in his book The Wright Brothers:

“Have you heard what they’re up to out there?” people in town would say. “Oh, yes,” would be the usual answer, and the conversation would move on. Few took any interest in the matter or in the two brothers who were to become Dayton’s greatest heroes ever.

An exception was Luther Beard, managing editor of the Dayton Journal … “I used to chat with them in a friendly way and was always polite to them,” Beard would recall, “because I sort of felt sorry for them. They seemed like well-meaning, decent enough young men. Yet there they were, neglecting their business to waste their time day after day on that ridiculous flying machine.”

It wasn’t until 1908 — five years after the first flight and two years after the brothers patented their flying machine — that the press paid serious attention and the world realized how amazing the Wrights’ invention was. Not until World War II, three decades later, did the significance of the airplane become appreciated.

It’s a good lesson to remember today, because there’s a growing gripe about our economy. Take these headlines:

  • “Innovation in America is somewhere between dire straits and dead.”
  • “Innovation Is Dead.”
  • “We were promised flying cars. Instead we got 140 characters.”

The story goes like this: American innovation has declined, and what innovation we have left isn’t meaningful.

Cancer? Not cured. Biofuel? An expensive niche. Smartphones? Just small computers. Tablets? Just big smartphones.

I think the pessimists are wrong. It might take 20 years, but we’ll look back in awe of how innovative we are today.

Just like with the Wright brothers, most important innovations are only obvious in hindsight. There is a long history of world-changing technologies being written off as irrelevant toys even years after they were developed.

Take the car. It was one of the most important inventions of the 20th century. Yet it was initially disregarded as something rich people bought just to show how deep their pockets were. Frederick Lewis Allen wrote in his book The Big Change:

The automobile had been a high-hung, noisy vehicle which couldn’t quite make up its mind that it was not an obstreperous variety of carriage.

In the year 1906 Woodrow Wilson, who was then president of Princeton University, said, “Nothing has spread socialistic feeling in this country more than the automobile,” and added that it offered “a picture of the arrogance of wealth.”

Or consider medicine. Alexander Fleming discovered the antibiotic effects of the mold penicillium in 1928. It was one of the most important discoveries of all time. But a decade later, penicillin was still a laboratory toy. John Mailer and Barbara Mason of Northern Illinois University wrote:

Ten years after Fleming’s discovery, penicillin’s chemical structure was still unknown, and the substance was not available in sufficient amounts for medical research. In fact, few scientists thought it had much of a future.

It wasn’t until World War II, almost 20 years later, that penicillin was used in mass scale.

Or take this amazing 1985 New York Times article dismissing the laptop computer:

People don’t want to lug a computer with them to the beach or on a train to while away hours they would rather spend reading the sports or business section of the newspaper. Somehow, the microcomputer industry has assumed that everyone would love to have a keyboard grafted on as an extension of their fingers. It just is not so …

Yes, there are a lot of people who would like to be able to work on a computer at home. But would they really want to carry one back from the office with them? It would be much simpler to take home a few floppy disks tucked into an attache case.

Or the laser. Matt Ridley wrote in the book The Rational Optimist:

When Charles Townes invented the laser in the 1950s, it was dismissed as ‘an invention looking for a job’. Well, it has now found an astonishing range of jobs nobody could have imagined, from sending telephone messages down fiberglass wires to reading music off discs to printing documents, to curing short sight.

Here’s Newsweek dismissing the Internet as a fad in 1995:

The truth [is] no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.

How about electronic publishing? Try reading a book on a computer. At best, it’s an unpleasant chore: the myopic glow of a clunky computer replaces the friendly pages of a book. And you can’t tote that laptop to the beach.

Yet Nicholas Negroponte, director of the MIT Media Lab, predicts that we’ll soon buy books and newspapers straight over the Internet.

Uh, sure.

You can go on and on. Rare is the innovation that is instantly recognized for its potential. Some of the most meaningful inventions took decades for people to notice.

The typical path of how people respond to life-changing inventions is something like this:

  1. I’ve never heard of it.
  2. I’ve heard of it but don’t understand it.
  3. I understand it, but I don’t see how it’s useful.
  4. I see how it could be fun for rich people, but not me.
  5. I use it, but it’s just a toy.
  6. It’s becoming more useful for me.
  7. I use it all the time.
  8. I could not imagine life without it.
  9. Seriously, people lived without it?

This process can take years, or decades. It always looks like we haven’t innovated in 10 or 20 years because it takes 10 or 20 years to notice an innovation.

Part of the problem is that we never look for innovation in the right spot.

Big corporations get the most media attention, but innovation doesn’t come from big corporations. It comes from the 19-year-old MIT kid tinkering in his parents’ basement. If you look at big companies and ask, “What have you done for the world lately?” you’re looking in the wrong spot. Of course they haven’t done anything for the world lately. Their sole mission is to repurchase stock and keep management consultants employed.

Someone, somewhere, right now is inventing or discovering something that will utterly change the future. But you’re probably not going to know about it for years. That’s always how it works. Just like Wilbur and Orville.

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MONEY stocks

This Could Be Microsoft’s Next Billion-Dollar Business

Amos Morgan—AMPHOTO 2014

The software giant wants to dominate the conference room with this new technology.

Three years ago, Microsoft MICROSOFT CORP. MSFT -0.1% acquired Perceptive Pixel, a company that specializes in multitouch interfaces. Perceptive Pixel’s giant multitouch screens first found success during the 2008 presidential campaign, when newscasters used them to display information about the election. These early screens were priced in the hundreds of thousands of dollars, greatly limiting their appeal.

Earlier this year, we learned what had become of Perceptive Pixel’s efforts. Microsoft in January announced the Surface Hub, a giant screen aimed at the corporate conference room, allowing multiple users to interact with the screen at the same time. The Surface Hub is Microsoft’s ambitious gambit at taking over the conference room, replacing projectors, whiteboards, and videoconferencing equipment with an all-in-one solution. If the device lives up to its potential, the Surface Hub could be Microsoft’s next billion-dollar business.

A big opportunity
At first glance, the Surface Hub might seem like nothing more than a glorified whiteboard, and an expensive one at that. Microsoft will sell two versions of the Surface Hub, a 55-inch version priced at $6,999 and an 84-inch unit that costs a whopping $19,999. At these prices, the Surface Hub is clearly aimed at companies that have no trouble spending thousands of dollars on conference room equipment.

Because the Surface Hub runs Windows 10, it can run any Windows 10 application, as well as specialized large-screen apps designed specifically for the device. Built-in cameras and sensors, along with Skype for Business, make the Surface Hub a potentially potent videoconferencing solution, allowing for collaborative meetings in a way that is not possible with legacy videoconferencing systems.

The potential to replace videoconferencing systems from vendors such as Cisco and Polycomcould be the Surface Hub’s biggest draw. While the Surface Hub might seem expensive, videoconferencing equipment can easily cost tens of thousands of dollars, making the Surface Hub a veritable steal if it fits a company’s needs.

Global enterprise videoconferencing equipment sales totaled $484 million during the first quarter of this year, with Cisco claiming a 42.6% share of the market, followed by Polycom with a 25.4% share. However, sales are already being pressuring by software-based solutions and cloud services, which don’t require any specialized hardware, leading to sluggish growth.

There are plenty of inexpensive software-based videoconferencing solutions available, but Surface Hub offers a compelling level of collaboration and integration. Users with laptops, tablets, or phones can fling their screen onto the Surface Hub using Miracast, for example, and any changes made to a document are then synced back to those devices. And since the Surface Hub runs Windows 10, it supports the device management tools used by information-technology departments to manage PCs and mobile devices.

Microsoft’s next billion-dollar business
The Surface Hub has the potential to be an incredible productivity tool for enterprise users. The Microsoft that has emerged from the transition to a new CEO and a new strategy is one in which all of the company’s products and services work together seamlessly, and the Surface Hub seems to be the culmination of these efforts.

Having said that, Microsoft’s history as a hardware maker is mixed. The Xbox has largely been a success, although it remains a distant second in the game console market. The Surface tablet started out as a disaster, particularly the ARM-based versions, but the high-end Surface Pro 3 proved to be much more popular. And the company’s phone business, acquired from Nokia, has yet to gain much traction at all, with Windows Phone stuck at a minuscule market share.

It’s clear that Microsoft has made mistakes in the hardware business in the past few years, and the company could very well find a way to mess up what looks like a very promising idea. But with a $2 billion per year videoconferencing equipment market ripe for disruption, the Surface Hub looks like a compelling product that could be Microsoft’s next billion-dollar business.

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MONEY mutual funds

A New Take on the Indexing Versus Actively Managed Funds Debate

And the winner is...

It’s another win for index funds.

If you’re a regular MONEY reader you’ll know the mutual fund world has been split by a long-running debate between two fundamentally different investment strategies: Active investing, where funds employ portfolio managers to attempt to select stocks that beat the market benchmarks like the Standard & Poor’s 500, and indexing, where funds aim merely to match the performance of the benchmarks.

While it may be counter-intuitive, academic research has shown that because of a) the inherent difficulty of consistently picking stocks that outperform the market averages and b) the extra costs incurred by these funds for things like research, brokerage fees, and manager salaries, only the most skillful stock pickers actually end up beating the benchmarks over long periods of time. Plus, determining who those managers are in advance is a fool’s game.

Not surprisingly, given the livelihoods at stake, this is a controversial conclusion. Now fund researcher Morningstar has offered up a new approach to the debate. While index funds are known for keeping investment fees as low as possible, costs can put a drag on their returns, too. So Morningstar set out to compare active funds not just to the returns of market indexes, but to the actual index funds that attempt to track them. The method could arguably yield a fairer comparison, more in line with what investors actually experience.

Unfortunately for the partisans of active management, the results were as clear-cut as those of any previous study, if not more so. Among the twelve types of funds Morningstar examined—from large blend stock funds to intermediate bond funds—the majority of active funds beat their passive counterparts in just one category over the past decade: U.S. mid-cap value.

Morningstar did find that investors could improve their odds by focusing on active funds that had lower costs. The majority of low-cost active funds, those in the least expensive quartile of their peers, beat low cost index funds in five of twelve categories, including U.S. large and mid-cap value funds.

Of course, since cost is still the key factor, that’s likely to be cold comfort to many active investors.


MONEY stocks

What Netflix’s 7-For-1 Stock Split Really Means

from the cast of the hit Netflix original series ORANGE IS THE NEW BLACK keep the faith at giant 14 foot tall candle-shaped photo booths in New York's Times Square on June 10, 2015. The interactive photo booths project users' photos onto enormous displays in Times Square. ORANGE IS THE NEW BLACK Season 3 premieres Friday, June 12.
Cindy Ord&mdash Getty Images When Netflix's hit series, Orange Is the New Black, returned for its third season on June 12, 2015, the streaming service promoted the show in New York City's Times Square with these 14-foot tall candle-shaped photo booths.

Stock splits don't really create market value.

Netflix NETFLIX INC. NFLX 0.43% has done it. Two weeks ago, the digital video veteran asked shareholders to approve a 30-fold increase in the number of authorized shares. The proposal was approved by 60% of shareholders, and here’s the result: a seven-for-one stock split.

On July 14, each Netflix share will pay a one-time dividend consisting of six additional shares. Technically, you should hold shares at the close of July 2 in order to qualify for this event, but shares traded between those dates will automatically come with a due bill. That’s an IOU that requires the seller to hand over the new split-based shares to the buyer as soon as they are created. All of this is handled by the brokers behind the scenes, so there’s no way to sell your shares and hang on to the stock dividend.

Netflix shares rose nearly 3% on the news, setting the stock up for another all-time record price, and adding more than $1 billion to the stock’s total market value.

Investors clearly love stock splits, and welcomed this one with open arms. But what’s the big deal? Let me give you the lowdown on what stock splits actually do for investors — and what they don’t do.

Nope. Nuh-uh. No way.
First of all, stock splits don’t really create market value. You might think that a sevenfold increase in Netflix’s number of shares might also increase the stock’s total market value. That’s just mathematics, right?

Well, no. Netflix isn’t printing dollar bills here. Instead, it’s dividing the same $41 billion asset into seven times more slices. It’s like splitting a $100 bill into five $20 greenbacks. More paper in your wallet, but the same total value.

You could also imagine that a lower-priced stock can rise faster and easier than a high-priced one. This is certainly true when you’re looking at market caps and enterprise values: A small company can move faster up (or down!) than a large one.

But as we already established, stock splits don’t enter into that equation. Share prices drop drastically overnight, balanced by an equally sharp increase in the number of shares. Net effect on market caps: zero.

It’s also true for valuation metrics. Netflix shares currently trade at 180 times trailing earnings, which is enough to give value investors a heart attack. Once again, the stock split reduces both share prices and earnings-per-share figures sevenfold. After the split, Netflix will still trade in the same nosebleed territory.

And there’s no evidence that low-priced stocks with large market caps would behave any differently on Wall Street’s trading floors than an equally large company with a higher share price. Penny stocks jump and dive like (un-)synchronized swimmers, but not because of the low dollar value assigned to each stock stub. They make wild swings because the whole enterprise is vanishingly small and difficult to analyze. Netflix doesn’t play in that league at all.

This seven-for-one stock split will not, cannot, and shall not change the value of your Netflix holdings. There’s no mathematical miracle taking place here, and whatever value we Netflix investors might gain from this event must depend on other effects.

What will this stock split do in the real world? Here are some of the actual effects that may or may not make a difference to Netflix investors.

For the most part, it’s not about increasing share price. Instead, this move lets investors manage their holdings with a lighter touch.

All per-share figures will forevermore be divided by seven. This will shrink the range of analyst estimates and reported results, diminishing the headline impact of earnings reports.

For example, in last year’s second-quarter report, Netflix presented earnings of $1.15 per share while analysts had expected $1.16 per share. That’s a $0.01 miss.

If Netflix had split its shares seven-for-one before that report, you’d be dealing with both estimates and reported earnings at $0.16 per share. Or the earnings surprise of $0.31 per share in the recently reported first quarter would have been a $0.04 outperformance. Rounding errors would move that 45% surprise to 55%. So the earnings beat looks smaller on the dollar-value surface, but bigger in percentage terms.

All of these transformations are full of sound and fury, signifying nothing. This exercise only underscores the loose mathematics investors have to deal with all the time. Everyone is shooting from the hip, and more decimal points just leave more room for speculation and errors. That’s especially true for forecasts, and will remain so until a flawless crystal ball hits the market.

Where was I? Right: Real results from this stock split. There are a few more.

Investors with very small budgets can soon afford to grab a slice of Netflix. At nearly $700 per share, Netflix may have priced itself out of reach for really tight investing budgets. A new $100 share price should allow very restricted portfolios to join the market action.

Moreover, some brokers charge higher fees for very small transactions. Some prefer so-called “whole lots” — or batches of 100 shares per trade. Standard stock options also represent either 10 or 100 shares per contract. On that scale, the minimum Netflix investment just dropped from $70,000 to $10,000. That’s the difference between a fully loaded German luxury sedan and a rusty second-hand clunker. High share prices can indeed keep some investors out of the market, and stock splits work around that problem.

But do watch out for commission fees if you’re playing on that level. Most online brokers charge between $5 and $10 per trade. Buying one $700 share of Netflix works out to between 0.7% and 1.4% of the total trade, which isn’t horrible.

But buying a single $100 share comes with between 5% and 10% in trading fees. That’s a steep cut, taken right out of your overall returns. So if you really want to buy a single $100 Netflix share per month, it’s still a good idea to save up for a while, and then grab several low-priced shares for a single commission fee. In terms of making the most of your investing assets, this seven-for-one split doesn’t really help much.

You do get more fine-grained control over your Netflix holdings. Buying $1,000 worth of Netflix currently amounts to a share and a half. You won’t find many brokers willing to handle that trade. Soon, it will be a simple 10-share lot. I can’t think of a case where this subtle modification really matters to your long-term results, but I’m sure they exist.

Finally, a lower share price may actually help Netflix in some very specialized situations.

Remember how Apple performed its own seven-for-one split, and then joined the prestigious Dow Jones Industrial Average? The Dow move would never have happened without the stock split. We’re talking about a price-weighted index, which means that high-priced stocks move the Dow further and faster than low-priced ones. Without that split, the Dow would have been dominated by a bulky Apple stock.

I’m not saying that Netflix belongs on the Dow yet. Today, it would be the second-smallest Dow member counting by market cap. Splitting the stock is not a guaranteed ticket to Dowsville.

Do come back in a few years, however, when Netflix’s international expansion plans have played out. The media industry is under represented on this popular index, and Netflix may one day earn a space there. It might take another split at that point, but the 30-fold share authorization leaves room for that.

Read next: Why Netflix Is Splitting Its Stock

The fine-grained nature of a higher share count also makes a difference to share-based buyouts. For example, Berkshire Hathaway split its Class B shares 50-fold when it bought national rail carrier Burlington Northern Santa Fe. That split shielded many Burlington shareholders from a forced, taxable sale if their holdings didn’t add up to a full Berkshire B stub.

Netflix isn’t known for its large buyout appetite; but you never know. This effect might come into play one fine day. Just don’t hold your breath.

Perception is reality
At the end of the day, Netflix’s stock split is a show for the gallery. There’s psychological value in having a low share price. Small investors don’t get intimidated, and larger investors might even see an illusory discount. Hey, we’re all human (except for the robo-traders).

If nothing else, it’s a vote of confidence from Netflix, its management, the board of directors, and the shareholders who approved the share increase. It’s the opposite of a reverse split, which is a move invoked only when stocks are in deep trouble, and may fall below the market’s listing thresholds.

A company would also look silly to push through a stock split, followed by an organic price drop. Netflix is telling the world that the future looks solid, with agreement from all the stakeholders I just listed. And that’s worth something, right?

Anders Bylund owns shares of Netflix.

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MONEY mutual funds

Everything You Need to Know About The Fidelity Contrafund Mutual Fund

William Danoff, vice president of Fidelity Management & Research
Scott Eells—Bloomberg via Getty Images William Danoff has been managing Fidelity's Contrafund for nearly a quarter century.

How this gigantic fund has consistently beaten its peers over the last 5 years.

Fidelity Contrafund isn’t contrarian in the way that you might think. Contrarians are fearless and independent, buying stocks the herd hates. But who on Wall Street dislikes Berkshire Hathaway, Contrafund’s largest holding? Or Apple, its second-largest position?

Yet there’s one counterintuitive thing Will Danoff, the fund’s skipper for 24 years, has accomplished. While big funds often lag, this $110.7 billion portfolio—now larger than Fidelity Magellan was at its peak—has still beaten two-thirds of its peers over the past five years. How much longer can Danoff keep it up?


How It’s Different

Morningstar classifies this portfolio as a large growth stock fund. But Contrafund has some latitude, as exemplified by its big stake (4.7% of assets) in Berkshire Hathaway. The insurance-heavy conglomerate run by Warren Buffett isn’t exactly a high-flying growth stock. Neither is another holding, Wells Fargo, the conservatively run megabank.

Fear not. While Contrafund has an outsize stake in value-oriented financials, it doesn’t stray too far afield. Among its other top holdings are growth stalwarts Facebook and Biogen, and the fund bought Alibaba on its initial public offering. Tech, which is the biggest sector for growth portfolios, represents about 24% of the fund, just a tad below the 25% average for large growth funds.



Danoff’s Defensive Moves

What distinguishes Danoff as a manager? He does well when the market doesn’t, and that’s helped the fund over time. Contrafund outperformed large growth funds in the two major bear markets of this century, which has allowed the fund to clobber its peers by 1.6 percentage points a year over the past decade.

Still, “for a contrarian, the most difficult moment is investing in a market that has gone well,” says Jim Lowell, editor of Fidelity Investor. Sure enough, Contrafund has been about average over the past three years. The fund has made some good defensive moves, downshifting from an 8.6% stake in energy in 2011 to 2% now. But don’t expect to see Contrafund among the top gainers when the market soars, Lowell says.


A Question of Size

One big elephant in the room is Contrafund’s elephantine size: It is the second-largest actively managed stock portfolio, behind only American Funds Growth Fund of America. Plus, Danoff has led this fund for nearly a quarter-century, when the average manager tenure is 5½ years.

Fidelity does have a massive staff of analysts. And Danoff “doesn’t exhibit any signs of weariness or burnout,” says Lowell. But there’s no denying this fund is enormous, which means buying small, fast-growing companies won’t do it much good. If you’re okay with just blue-chip names, this is “a fund with a well-proven manager, strong risk-adjusted returns, and low expenses,” says Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

(Note: Losses are from March 24, 2000, to Oct. 9, 2002, and Oct. 9, 2007, to March 9, 2009. Source: Morningstar)

MONEY retirement planning

Answer These 3 Questions to See If You’re Taking Too Much Risk

standing on edge of cliff
Tom Nevesely—Getty Images/All Canada Photos

If you haven't checked your portfolio lately, you may be taking big chances with your retirement security.

With the bull market now into its sixth year and stock prices at or near record highs, many investors may be investing more aggressively than they realize—and unwittingly jeopardizing their financial security. Answer these three questions to see if you may be taking on more risk than you should.

1. Have you rebalanced your portfolio over the past five to six years? Since the market’s trough in early 2009, stocks have racked up a total return of more than 250%, nearly eight times the 33% gain for bonds. Which means if you haven’t rebalanced your holdings or taken other steps to restore your portfolio to its target asset allocation (such as investing new money in lagging holdings), you could be sitting on a higher-octane mix than you realize.

For example, someone who had a portfolio that was invested 60% in stocks and 40% in bonds in March, 2009 and simply let it ride without rebalancing over the next six or so years would be sitting on a portfolio of roughly 80% stocks and 20% bonds today. For a sense of just how more volatile an 80-20 mix is than a 60-40 portfolio, consider: From the stock market’s high in 2007 to its 2009 low, an 80-20 portfolio would have suffered a loss of more than 40% vs. a loss of just under 30% for the 60-40 mix (assuming no rebalancing).

Of course, if you failed to rebalance but added or pulled money from your portfolio over the past six-plus years, you could end up with a more, or less, stock-intensive portfolio than the example above, depending on what investments you added or which parts of your portfolio you drew from. But without a conscious effort to maintain your target asset allocation, it’s easy for a portfolio to become much more aggressive over the course of a long upswing in stock prices.

2. Have you been funneling more of your savings into stocks as the market has climbed in recent years or found yourself more eager to make volatile investments? When the market is on a long surge, many investors are willing, if not eager, to invest more aggressively than they otherwise might. Some researchers believe that’s because we’re simply more comfortable accepting more risk when stocks are risking. Others say that’s nonsense. Our appetite for risk hasn’t changed; we just underestimate the level of risk we’re taking when things are going swimmingly.

Regardless of which side is right (I tend to side with the latter group), the point is that during bull markets you may be tempted to load up more on stocks and/or jump more readily than you would in less ebullient times into high-flying sectors that are leading the market, like health care and technology this year. But this tendency has two downsides: It can leave you with a portfolio that’s more “di-worse-ified” than diversified as you add more and more investments to your roster; and it can lead to greater losses if the market’s sizzle turns to fizzle.

3. Have you assessed your risk tolerance lately? The only way to really know whether the risk level of your portfolio jibes with your true tolerance for risk is to take a risk tolerance test. For example, answer the 11 questions in Vanguard’s free risk tolerance-asset allocation questionnaire and you’ll get a recommended blend of stocks and bonds based on, among other things, what size loss you feel you could handle without jettisoning stocks and how long you intend to invest your money. An Australian firm that measures investing risk, FinaMetrica, offers a more rigorous 25-question risk profile questionnaire that grades you on a scale of 0 to 100, comes with a detailed report and also suggests a portfolio mix. The cost: $45.

The best way to evaluate how much risk you can take on is to complete a risk tolerance questionnaire. Vanguard has a free one that asks 11 questions designed to gauge, among other things, what size loss you feel you could stand without bailing on stocks and how long you intend to invest your money. Based on your answers, you’ll get a recommended blend of stocks and bonds. FinaMetrica, an Australian firm that specializes in measuring risk, offers a more comprehensive 25-question risk profile questionnaire that’s used by many financial planners and costs $45. It grades you on a scale of 0 to 100 and comes with a detailed report. To translate that score into an appropriate asset allocation, you can go to the asset allocation guide in the Resources and FAQs tab at the company’s site for advisers. – See more at:

After completing such a test, you can then compare the suggested portfolio with how your savings are actually invested—and, if necessary, take steps to bring your holdings in line with your investment goals and tolerance for risk. While you’re at it, you may also want to do a quick portfolio check-up to make sure you know exactly how your portfolio is divvied up among your various holdings and what you’re paying each year in management and other fees. And if you want to get really ambitious, consider subjecting your overall retirement plan to a stress test so you’ll have a sense of how a severe market setback might affect your retirement prospects.

Or you can do what many investors do and put off dealing with these issues until a major downturn is underway. In which case, your options for stemming the damage to your portfolio—and your retirement security—will be limited.

Walter Updegrave is the editor of If you have a question on retirement or investing that you would like Walter to answer online, send it to him at

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Why the Apple Watch Isn’t a Huge Threat to Fitbit

Fitness Tracker Company Fitbit Debuts As Public Company On NYSE
Eric Thayer—Getty Images The line of Fitbit products are displayed during a lunchtime workout event outside the New York Stock Exchange during the IPO debut of the company on June 18, 2015 in New York City.

Fitbit has an 85% share of the fitness tracker market.

Generally speaking, most companies don’t like it when Apple APPLE INC. AAPL -0.16% steps into their competitive ring, since the Mac maker has a propensity to disrupt the status quo and dominate new industries. The fitness-tracker market is extremely young, but it already faces some potential threats from the even younger smartwatch market, since smartwatches also include health and fitness tracking capabilities.

As Fitbit FITBIT INC FIT -0.33% leads the fitness-tracker pack with an estimated 85% market share, it stands to reason that it theoretically has a lot to lose if Apple Watch takes off. That may not be exactly the case.

There’s very little customer overlap
The fact is that there will be very little overlap — not only between the markets but also between the prospective customer bases.

Fitbit is targeting mainstream users who want to have greater access to their health and fitness data and hope that a small, wearable device will help get them motivated. It’s true that Apple is also appealing to users with the Apple Watch, but with one important distinction: The Apple Watch requires an iPhone. For that reason, Fitbit’s broad cross-platform support is a good defense, since the company plays nicely with Android, Windows Phone, desktop platforms, and iOS. The Apple Watch may appeal more to iPhone users, but the majority of the world’s smartphones now run Android. That’s allowed the company to grow its active user base to over 9.5 million as of the first quarter.

That’s not the only way in which there’s little overlap. Not including Fitbit’s WiFi-connected smart scale, the pricing spectrum of its fitness trackers ranges from just $60 for the clip-on Zip to $250 for the Surge smartwatch. Apple Watch, on the other hand, ranges from $350 for the Sport to $17,000 for the Edition. Apple has talked about avoiding price umbrellas in the past, but it’s extremely unlikely that the Mac maker will ever move downmarket enough to put that much direct pressure on Fitbit, especially since the Apple Watch is a multi-function device, while most of Fitbit’s devices are single-purpose.

Even in terms of brand, Fitbit is a health-centric brand, while Apple is a premium lifestyle brand. Little overlap there.

What about Google Fit?
Google GOOGLE INC. GOOG 0.22% has responded to Apple’s Health app with Google Fit, its own version of a health-tracking app. That also means the coming onslaught of Android Wear smartwatches will plug into Google’s platform directly. Fitbit has been working hard to broaden its platform into an expansive ecosystem, allowing third-party developers to use application programming interfaces and more.

In fact, Fitbit should technically be more concerned about Android Wear smartwatches than it should be about Apple, particularly since Android Wear devices will inevitably see rapid commoditization and pricing pressure as OEMs compete with each other, which will probably push the prices down closer to Fitbit territory.

The Apple Watch is undoubtedly a threat to Fitbit, but the risk isn’t as great as you might think.

Read next: 4 Health Moves That Can Make You Richer

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