MONEY Ask the Expert

When It Pays to Pay for Advice—and When It Doesn’t

Investing illustration
Robert A. Di Ieso, Jr.

Q: I’m 42 and have $210,000 in my retirement account, invested in the Vanguard Target Retirement 2025 fund. Vanguard offers an advisory service that costs 0.30% of assets annually. Is it worth it? – Name withheld

A: Based on your age and current strategy, you probably could use some help planning for retirement, notes Daniel P. Wiener, editor of The Independent Adviser for Vanguard Investors. But don’t expect to get a whole lot of extra hand-holding from Vanguard’s low-cost advisory offering.

First, let’s talk about your current approach.

Target-date funds are a great solution for people who want an all-in-one retirement portfolio that automatically grows more conservative over time as the target date (a.k.a. retirement date) approaches.

While they’re not a perfect strategy, target date funds beat the alternative — investing too aggressively or too conservatively on your own because you’re not sure which approach to take.

Plus they’re cheap. Vanguard’s target date funds charge less than 0.20% of assets a year for managing your money.

You don’t have to pick a target date that matches perfectly with the year in which you plan on retiring. Investors who want to play it more conservative, for example, can opt for a closer target date fund, while those who want to be a little more aggressive might pick a target date fund that is a few years past their actual retirement date.

In your case, however, the Vanguard Target Retirement 2025 fund VANGUARD TARGET RETIREMT 2025 FD VTTVX -0.55% is probably too conservative for you. It is, after all, designed for someone who will be retiring in just 10 years. “Someone who is 42 should probably be looking at a 2040 target date,” says Wiener.

In addition to rethinking your target date, Wiener says you may want to look at adding one or two complementary funds to the basic offerings in the Vanguard target retirement series.

For instance, you might look at adding a dividend-growth fund “focused on large, battleship, balance sheet companies,” says Wiener. If you want to stay in the Vanguard family of funds, take a look at the Vanguard Dividend Growth fund VANGUARD DIVIDEND GROWTH FD VDIGX -0.82% .

Need a little more handholding?

That’s where advisory services come in. Vanguard’s advisory service is an inexpensive alternative to the typical 1% management fee charged by financial advisors.

The catch? “The advice is pretty cookie cutter,” says Wiener. What’s more, “the ‘planners’ are not independent and follow a strict Vanguard model.” In fact, the end product may look a lot like the allocation for a target-date fund pegged to your age and risk profile.

“If you don’t want to think about this stuff you could do a lot worse than pay 0.30% for a little extra help,” says Wiener.

That said, for many individuals it’s worth it to pay an advisor who can offer soup-to-nuts advice about retirement planning and more.

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Don’t Ditch Emerging Markets Just Because They’re Down

A Chinese day trader watches a stock ticker at a local brokerage house on August 27, 2015 in Beijing, China. A dramatic sell-off in Chinese stocks caused turmoil in markets around the world, driving indexes lower and erasing trillions of dollars in value.
Kevin Frayer—Getty Images A Chinese day trader watches a stock ticker at a local brokerage house on August 27, 2015 in Beijing, China. A dramatic sell-off in Chinese stocks caused turmoil in markets around the world, driving indexes lower and erasing trillions of dollars in value.

Remember why you own these stocks in the first place

When the markets took a nosedive last week in reaction to China’s bubble continuing to deflate, emerging markets dove hardest of all. The MSCI Emerging Markets Index tumbled twice as much as the S&P 500 index before recovering.

We don’t have last week’s mutual fund outflow data quite yet, but if the typical pattern plays out, I would guess that some investors freaked out and sold funds invested in emerging markets, especially in Asia. Only the previous week, worries about China triggered the largest withdrawals from emerging markets in more than seven years, according to EPFR Global.

I was both heartened and saddened by these developments—heartened because I had recently reallocated a larger portion of my 401(k) contributions to a developing markets fund that has been down -14.54% in the last year, and saddened because I knew some people would likely be doing the opposite and reducing their emerging markets exposure, likely at a loss. Selling when things turn bad is the corollary to buying a fund when it is flying high and part of an overall pattern of chasing returns that economist Yili Chien of the Federal Reserve Bank of St. Louis charted last year using data from the Investment Company Institute for the period 2000-2012:


As you can see, when returns are high, flows into equity mutual funds rise, and when returns decline, flows follow suit. Wall Street types usually attribute chasing returns to the old “greed and fear” problem, but I think something else is going on cognitively whereby we misconceptualize equity funds in terms of winners and losers instead of whether the underlying investments are cheap or overpriced. We buy “winners” and we sell “losers”—which is of course the opposite of buying low and selling high. And when a fund performs poorly we all of a sudden perceive it as risky and want to get rid of it when in fact the underlying equities were a lot riskier when they were more expensive. The tendency to act on these misconceptions can be quite damaging to your investments—and your retirement planning.

Yes, emerging markets could go lower from here. Volatility will always be a part of investing in countries that grow not in a nice upward slope as we might wish but in fits and starts and reversals. As such, most advisers recommend they remain a minority portion of your portfolio.

But volatility in and of itself does not present a risk if you have a reasonably long time horizon (say, at least 3 to 5 years) and if you don’t sell in a panic. When performance is down, it’s important to remember the reason an emerging market fund was in your portfolio in the first place—the opportunity for growth over the long term as well as geographic diversification. I have no idea where emerging markets are going to go in the next week, month, or year, but I still believe that the economies of developing countries, whether through infrastructure or consumer consumption, have enormous potential for growth. Nothing that has happened in the last couple of weeks changes that story.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

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How an Unpredictable Stock Market Affects IPOs

Fitness Tracker Company Fitbit Debuts As Public Company On NYSE
Eric Thayer—Getty Images Celebrity fitness trainer Harley Pasternak and actress Jordana Brewster lead a Fitbit lunchtime workout event outside the New York Stock Exchange during the IPO debut of the company on June 18, 2015 in New York City.

Through July, a third fewer companies had filed their intention to go public compared to last year.

The stock market turmoil of the last five days, following weeks of broader declines that have left half of this year’s newly listed stocks below their offering prices, could slow the already cooling U.S. market for initial public offerings.

Wall Street bankers, who reap rich fees from guiding companies into the public market, say it is too early to tell whether the ups and downs of this week will cause more companies to delay or cancel offering plans, especially as the end of summer is always a dead time for IPOs.

But analysts and industry watchers expect an already slowing pipeline to experience some blockages.

“The market will be slower to get going once it opens up right after Labor Day,” said Kathleen Smith, manager of IPO-focused exchange-traded funds at Renaissance Capital, referring to the Sept. 7 U.S. holiday.

“Ones that will get done will have to be done at lower valuations for two reasons, because their peers are at lower valuations, and because there is going to be a higher risk premium because of volatility we’ve seen.”

U.S. stock indexes ended slightly up for the week on Friday after five days of hectic trading, kicked off by steep plunges on Monday sparked by China’s tumbling stock market.

That followed five weeks of broader market declines, which have left some high-profile listings of the past two years such as Twitter Inc, Box Inc and Etsy Inc trading below their initial offering prices. Half of all companies which debuted in 2015 are now trading below their IPO price, according to Thomson Reuters data.

There are notable exceptions, such as gourmet burger chain Shake Shack, which has more than doubled since its IPO in January.

But the figures make somber reading for the dwindling number of companies looking to go public. Through July of this year, about 174 companies had filed their intention to go public, a 33% decline from the 260 companies that had filed at the same point last year.

Even before the current market turmoil, 39 companies had withdrawn their IPO plans, compared with 32 at the same point last year. More may join them.

Some appear to be delaying going public so they can take advantage of a strong private capital market. Or they may consider repricing their offering if they don’t want to pull out of an IPO, said Francis Gaskins, president of research firm IPO Desktop Premium.

The outcome for IPOs will ultimately depend on how markets behave over the coming weeks.

“Volatility is the enemy of IPOs,” said Daniel Klausner, who leads the capital market advisory practice at PwC. “When you’ve got that much volatility it’s hard to get a handle on valuation.”

–Additional reporting by Lance Tupper

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5 Figures That Put the Stock Market Correction in Context

Andrew Burton—Getty Images A trader works on the floor of the New York Stock Exchange during the morning of August 27, 2015 in New York City.

The Dow's historic plunge last Monday wasn't really that historic.

Forget going to Disneyland — if you want a wild ride, all you need to do is hop aboard the stock market, which has shown more volatility over the last two weeks than we’ve witnessed since the Great Recession.

Even following the Dow Jones Industrial Average’s voracious 600-plus-point rally on Wednesday, the historic index is still down by more than 2,000 points since its recent all-time highs. The same can be said of the broader-based S&P 500, which is still in correction territory (meaning a drop of 10% or more from its recent highs).

Stock market corrections have a tendency to follow investors’ emotions rather than common sense, and the result tends to be that investors wind up running for the hills. But a stock market correction doesn’t have to be the boogeyman that some traders and investors would have you believe it is — ifyou look at it from a different angle. With that in mind, here are five figures that should help you understand what this correction means.

1. Since 1950, the S&P 500 has had 33 corrections of 10% or more
The first thing investors should note is that corrections are really common. We’ve had 33 S&P 500 corrections totaling 10% or more since 1950, according to Standard & Poor’s. Corrections are a healthy part of the stock market, as they keep investors’ emotions in check and provide an opportunity to buy high-quality stocks at a discount to where they were trading just days, weeks, or months prior.

2. The S&P 500 has spent 6,587 days in correction territory since 1950 (and more than 17,000 days rallying)
If you add up the 33 corrections and bear markets (defined as a drop of 20% or greater) in the S&P 500 since 1950, you’ll wind up with 6,587 cumulative days spent going from peak to trough. Running the math, we’re talking about 18 years where the stock market has been trending lower.

On the flipside, that means that for the remaining 47.5 years, or for more than 17,300 days, the stock market has been heading higher. In other words, we’re much more likely to see the stock market rally, historically, than fall. It also suggests that the average stock market correction lasts a mere 200 days.

3. The Dow’s historic plunge on Monday wasn’t really that historic
On Monday the Dow Jones fell by 588.4 points — which was actually something of a recovery after an early-morning drop of 1,089 points, the largest one-day point move in either direction on record.

Yet the Dow’s shellacking on Monday doesn’t even come close to registering among the biggest moves of all time. Despite representing its eighth-largest point loss in history, the 3.6% move lower would have needed to practically double just to sneak in as the 20th-worst day in the Dow’s rich history (which was a loss of 6.98%, if you’re curious).

4. The market has surpassed its previous highs 100% of the time
Not only have stock market corrections tended to last for just 200 days on average since 1950, but the magnitude of the correction is often quickly erased by optimistic investors.

For example, between 1975 and 2000, regardless of the magnitude and length of the correction or bear market, investors pushed the S&P 500 past the original peak of the prior correction or bear market in two years or less in every instance (for reference, we’re talking about 12 corrections/bear markets). Even the Great Recession saw its previous highs surpassed in recent years. In short, the stock market has historically had a 100% success rate at erasing corrections and bear markets, which bodes well if you remain steadfast in your approach to long-term investing.

5. Long-term holding is always vindicated (at least if you buy index funds)
Lastly, a study put out by J.P. Morgan Asset Management last year examining the S&P 500’s largest moves higher over a 20-year span (Dec. 31, 1993-Dec. 31, 2013) determined that the best course of action is to hold stocks over the long term, regardless of market volatility.

Per J.P. Morgan’s research, $10,000 invested at the end of 1993 and left untouched through 2013 would have returned 483%. If you missed so much as the 10 best trading days over the aforementioned 20-year span, your gains dropped to just 191%. Miss the 30 biggest point gains on the S&P 500 in a 20-year span? Then you wound up making less than 20% overall and losing handily to inflation. Even if you avoided some of the largest downswings, you’d have no way of knowing with any consistency what days would end in rallies of 3% or more.

The point here is simple: Timing the market with any consistency is impossible over the long run, so your best course of action is to look past this recent volatility and stick to your investment plan.

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3 Things That Could Slow Apple’s Growth

A Sprint Corp. Store Ahead Of Earnings Figures
Bloomberg via Getty Images Signage advertising an Apple iPhone 6 subscription plan is displayed at a Sprint Corp. store in Palo Alto, California, U.S., on Friday, May 1, 2015.

With revenue and earnings soaring, it's easy to ignore potential problems that could crop up for the iPhone maker.

There’s no question that the iPhone has been an incredible success for Apple APPLE INC. AAPL -1.66% . In just the third quarter, Apple sold more than 47 million iPhones, bringing in more than $31 billion in revenue. The iPhone is by far the largest source of revenue and profits for Apple, and no new product that Apple has launched since has come close to matching its success.

There are plenty of reasons to believe that iPhone sales will continue to grow going forward. Apple’s brand is second-to-none, with customers routinely lining up at its stores for hours, or even days, to score the latest iPhone. The quality of Apple’s products is top-notch, and its ecosystem of products and services has proven to be extremely sticky. And China, with its growing middle class, represents a potentially enormous opportunity.

With revenue and earnings soaring, it can be easy for investors to ignore potential problems that could crop up for Apple. While there are plenty of things working in Apple’s favor, there are also a few long-term threats that could act as obstacles to growth. Here are three things that could go wrong for Apple.

The end of subsidies
The two-year phone contract is dying. T-Mobile dumped contracts a couple of years ago, and now both Sprint and Verizon have joined the club. AT&T still offers contracts, but only through the company itself, and it seems inevitable that AT&T will eventually kill off contracts completely. Consumers now must pay the full price for their phones, either upfront or through an installment plan, instead of having the price subsidized as part of their monthly payment.

On the surface, this may not seem like that big of a change. Previously, a new iPhone would cost $200 upfront, with a high monthly payment allowing the carrier to recoup the difference between the actual cost of the phone, about $650, and the subsidized price. Now, consumers can pay the $650 spread out over time, and the monthly payment for the plan itself is less expensive. The total cost of ownership in the two cases is likely very similar.

What this shift away from subsidies accomplishes, though, is to make high-end phones more expensive relative to low-end and mid-range phones. Previously, the entry-level iPhone was, at most, $200 more than a lower-end alternative. Now, the real difference in price between the two options, which could be $500 or more, is actually paid by the customer.

The Moto G, for example, a mid-range device from Motorola, costs just $179 off-contract, a difference of nearly $500 in price compared to the iPhone. Under the two-year contract system, the Moto G would likely be free, while the iPhone would cost $200, with an identical monthly payment. The difference in price more than doubles without contracts.

There are plenty of iPhone users who wouldn’t dream of switching to Android regardless of the price. But for any iPhone user who is sensitive to price, the iPhone just got much more expensive relative to lower-priced alternatives.

Smartphone innovation is getting harder
In the early days of smartphones, each new generation brought massive gains in performance. Screen resolutions increased, processors got significantly faster, and the software became more responsive and easier to use.

Today, while there’s still room for improvement, the relative changes are getting smaller. High-end smartphones are very fast, have screen resolutions approaching, or even surpassing, the human eye’s ability to discern individual pixels, and have operating systems and apps that are becoming more difficult to vastly improve upon. Gimmicks like the quasi-3D technology in Amazon’s Fire Phone and the curved screen in Samsung’s Galaxy S6 Edge have started to pass for genuine innovation.

There has to be something pushing consumers to upgrade their phones. In the past, big improvements each year, along with the refresh cycle built into the two-year contract system, created strong incentives for consumers to upgrade. Now, with year-to-year advances less noticeable, and with contracts on their way out, people could begin holding onto their phones for longer periods of time. If this scenario were to play out, it could be a disaster for Apple.

A smartphone slowdown
Apple’s global smartphone market share has been declining, albeit slowly, during the past few years. During the first quarter of 2015, Apple sold 18.3% of smartphones worldwide, down from 22.9% during the first quarter of 2012, according to IDC.

The iPhone’s growth, then, has been driven solely by growth in the smartphone market. The number of smartphones shipped globally has grown from about 700 million in 2012 to more than 1.3 billion in 2014, more than making up for Apple’s lower market share.

But smartphone growth is slowing as mature markets become saturated. IDC expects smartphone shipments to grow by 10.4% in 2015, with China’s growth expected to slow down dramatically to just 1.2%. During the second quarter, the Chinese smartphone market contracted for the first time, with Gartner suggesting that the market is now saturated.

Apple can still do well without much growth in the smartphone market, but big increases in revenue and earnings will become harder to come by. Apple will need to grow its share of the high-end smartphone market, which I suspect will shrink in the U.S. following the end of subsidies, all while far less expensive mid-range Android phones improve dramatically, tempting price-sensitive consumers.

Don’t just focus on the positives
Investors should always be aware of what can go wrong with a company, even if they’re extremely bullish on the stock. Apple has a lot going for it, but there are a few issues that could hurt its iPhone business over the long run. Whether any of these scenarios play out is anyone’s guess, but Apple investors certainly shouldn’t ignore the possibility.

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3 Reasons Why This Stock Sell-Off Could Keep Going

A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York August 27, 2015.
Lucas Jackson—Reuters A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York August 27, 2015.

For now, as China goes, so goes the U.S. stock market.

Investors who’ve held out hope that the market’s slide might be over are getting a rude awakening.

After falling 115 points on Monday, the Dow Jones industrial average opened Tuesday to another triple-digit loss, tumbling more than 300 points. The benchmark index is now down more than more than 9% year to date.

Are these the final throes of the summer sell-off? Or is this a sign that the bears not only roam Wall Street, but rule it for now?

Certainly, Tuesday’s early action hasn’t been comforting for those fearful of the bears: Global markets tumbled on reports of weak manufacturing data from China, as new data showed that factory activity in the world’s second biggest economy hit a new three-year low.

Here are three reasons why the bears may be sticking around for a while:

* The China Syndrome

Late last week, the market showed real signs of life, with the Dow rebounding nearly 1,000 points. But that came after several stimulative moves made by policymakers in China. Among them: interest rate cuts to spur economic growth, relaxed banking regulations to promote lending, and ongoing government efforts to prop up that country’s stock market by purchasing equities.

Yet over the weekend, reports out of Beijing indicated that government officials will no longer push to make big stock purchases.

And this morning came yet more economic news confirming that the developing world’s economic engine is clearly slowing down.

Not surprisingly, stock markets throughout the emerging world sank on the news. So did Wall Street on Tuesday morning. That’s because ever since China triggered this sell off, the global markets have pretty much moved in lock step with the Shanghai exchange.

* The Hangover Effect

Conventional wisdom now says the stock market’s slide was not a harbinger of a recession to come. But even if this sell off isn’t signaling an economic calamity, it still takes time for investors to get over major pullbacks such as this.

“Historically, non-recessionary downturns tend to be sharp and brief, but they still require time to stabilize,” noted Ari Wald, technical analyst with Oppenheimer, in a report released this morning. He noted that it can take the market anywhere from two to six months to reset and break out again.

If this downturn — which from peak to trough so far has declined as much as 14% — becomes a bear market (traditionally defined as a 20% or greater decline in stock prices), then it could take even longer. The average bear market that did not precede a recession has lasted an average of 7 months, according to Oppenheimer.

“We therefore think it’s too soon to give the ‘all-clear’ to buy without a similar multi-week period of stabilization,” Wald noted.

* The September Effect

Sam Stovall, U.S. equity strategist for S&P Capital IQ, points out that despite the market’s tremendous rebound last week, the S&P 500 index of blue chip U.S. stocks is still down 5.5% month to date.

Why is that significant?

“In the 11 times that the S&P 500 fell by more than 5% in August, it declined in 80% of the subsequent Septembers, and fell an average of nearly 4%,” Stovall says.

Plus there’s the fact that the Septembers, like August, are one of the spookiest months for stocks. Over the past quarter century, August has been the worst month for the Dow and S&P 500. Yet over the past half century, September actually holds that title, according to the Stock Trader’s Almanac.

So, “Is the worst behind us?” Stovall asks. “Possibly not.”


14 Ways to Fail at Investing and 5 Ways to Succeed

PM Images—Getty Images

Fear, greed and an inability to admit past mistakes could be holding you back.

There are many reasons why people don’t succeed in investing. Whether it’s information overload, impatience, a lack of necessary tools or simple bad luck, plenty of things can derail a good plan.

In most cases, though, it’s the investor who’s responsible for his or her own failure. We make decisions based on emotions and character traits that steer us in the wrong direction. The field of behavioral finance tries to make sense of the thoughts and feelings that compel us to make financial decisions that are not in our best interests.

The Academy of Behavioral Finance & Economics identifies more than 100 traits and tendencies that can lead to poor investment decisions. Among the most prevalent:

  1. Greed, or a desire to get rich.
  2. Fear of change.
  3. Failure to admit past mistakes.
  4. Preference for avoiding losses rather than making money.
  5. Fear of making the wrong decision.
  6. Overconfidence, or believing we know more than we actually do.
  7. Herd mentality — the tendency to mimic others in order to conform, coupled with the belief that a large group could not possibly be wrong.
  8. Failure to focus on relevant data while concentrating on minutiae.
  9. Belief that past experiences or outcomes, positive or negative, will occur again.
  10. Unwillingness to wait for a bigger payoff later, preferring to settle for whatever we can get now.
  11. Overreliance on the most recent information.
  12. Assumption that previous success was due to our own knowledge rather than simply a rising market.
  13. Looking only for information that validates our decisions or choices.
  14. Confusing familiarity with knowledge.

Since we as investors may not be aware of our own tendencies, how can you avoid these pitfalls?

One way is to put a structure in place for investment decisions — clearly defining what you’ll do and when you’ll do it. With a solid framework, the mind games that impair decision-making won’t sabotage your investing. Here are five steps to build such a structure:

  1. Know your investing goals.
  2. Create a written plan that spells out exactly how your investments will be managed. This plan is also called an investment policy statement.
  3. Design a portfolio that uses prudent methodology.
  4. Regularly monitor that portfolio.
  5. Rebalance the portfolio (as needed) based on the investment policy statement.

Having a structure like this to rely on when making decisions — even when tempted by irrational tendencies — can help improve the outcome for many investors.

So, have you been sabotaging your own investing success? If you’re not sure — or if you’re sure that you have been — a professional advisor can help you put a stop to unproductive behavior. If you choose to get help, look for a fiduciary investment advisor who always puts your interests first.

But even if you don’t work with an advisor, make sure you have a clear structure in place to help you make investing decisions and avoid the behavioral pitfalls that plague many investors.

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What’s in Store for Stocks in the Coming Week

A trader looks at stock prices on a screen while working on the floor of the New York Stock Exchange shortly before the closing bell in New York August 26, 2015.
Lucas Jackson—Reuters A trader looks at stock prices on a screen while working on the floor of the New York Stock Exchange shortly before the closing bell in New York August 26, 2015.

Is the worst of the sell-off over, or is this just the quiet before the next storm?

After a quiet end to a frenetic week on Wall Street—in which the Dow fell as much as 1,000 points only to rebound by about as many—the question on everyone’s mind is the same…

What’s in store for stocks in the coming week?

Will the market get off to a another frenzied start like it did on Aug. 24, when news about China’s market crash and economic woes sent the Dow plunging? Or is the worst of the storm behind us, and will equities begin to grind out gains from here on out?

To answer that, you have to pay attention to the following:

* The Chinese stock market

Wall Street usually dances to the beat of its own drum, but in jittery times, global markets tend to move in unison.

That’s what happened in the global financial crisis in 2008. And that’s what’s been happening since Aug. 17, when China’s stock market slide began to spread around the world.
^SSEC Chart

^SSEC data by YCharts

So Sunday night, when the Asian markets begin trading, you’ll have a sense of whether Wall Street will be in a good or bad mood come Monday morning.

Fed Chatter

Toward the end of the week, remarks by Federal Reserve officials did as much to move the market as real economic data. When New York Fed president William Dudley on Wednesday said the case for raising interest rates in September was “less compelling” in light of the recent market shocks, Wall Street soared.

But in subsequent days, several officials including Cleveland Fed president Loretta Mester, Kansas City Fed president Esther George, and St. Louis Fed president James Bullard have all said the economy remains strong enough for a rate hike.

So will the Fed increase rates in September or not?

At a meeting Saturday in Jackson Hole, Wyo., Fed vice chairman Stanley Fischer said that there was a “pretty strong case” for raising rates at the next policy-making session on September 16 and 17, though there was time to “wait and see” before making a decision. Expect investors to react immediately Monday morning.

* The Real Economy

The big debate last week was whether the stock market plunge was foreshadowing a potential recession. By Friday, the bulls had made a convincing argument that a recession was not in the cards, which allowed the market to recover.

This week, investors will be looking for confirmation.

On Tuesday, they’ll be looking at the ISM Manufacturing index, which gauges factory activity throughout the country. Any reading above 50 is considered a sign of growth, and for 31 straight months, the industrial economy has been expanding.

The bulls will be looking for another reading above, or at least on par, with July’s reading of 52.7.

The Job Market

No matter what happens in China, the U.S. economy won’t go into recession if U.S. companies are seeing sufficient demand to step up hiring. This week, there will be two key reports that speak to jobs.

The first is indirect. On Tuesday, investors will get an update on auto sales. Thus far in 2015, auto sales are trending toward their best year in more than a decade.

If motor vehicle sales continue on this pace, it would speak to the underlying strength of the labor market. After all, only consumers who are confident about their job security and wages will hit the showrooms.

Then on Friday comes the Labor Department’s actual jobs report. Wall Street believes the U.S. economy produced around 220,000 nonfarm jobs in August. If the economy hits this mark, it should put a rest to recession talk and fears over a rate hike, says Kate Warne, investment strategist for Edward Jones.

After all, we’ve seen “job creation at more than 200,000 a month for a while,” Warne says. “That’s not an economy that could be snuffed out by a mere quarter-point rise in short-term interest rates.”

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Why McDonald’s May Start Skimping on Dividends

PAUL J. RICHARDS—AFP/Getty Images A McDonald's Big Mac, their signature sandwich is held up near the golden arches at a McDonalds's August 10, 2015, in Centreville, Virginia.

If it doesn't find a way to grow business, dividend increases could come to a halt.

McDonalds MCDONALD'S CORP. MCD -1.27% wasn’t immune to the market sell-off earlier this month. Sure, it wasn’t hammered as hard as high-flying growth stocks, but a 4% pullback on a stalwart like McDonalds is worth looking into. One of the great things about dividend paying cash cows like McDonald’s after share prices decline is the their dividend yields go up, making them more enticing for income-seeking investors. Trading around $95, and with a dividend yield of 3.4%, is it a good time for income investors to buy McDonalds stock?

McDonald’s dividend history
McDonald’s is a familiar name in the income-investing world. And it should be. Since the company first paid a dividend in 1976, the company has raised its dividend every single year. Even recently, McDonald’s dividend hikes have been meaningful. In 2012, 2013, and 2014, McDonald’s increased its dividend by 10%, 5%, and 5% again, respectively.

But as can be seen by reviewing the McDonald’s dividend increases in the past three years, the company has been less aggressive in these increases lately. There’s a good reason for this. Its free cash flow, or operating cash flow less capital expenditures, has leveled off in recent years. Indeed, McDonald’s free cash flow in the trailing 12 months of $4.3 billion is still below it’s $4.4 billion in the free cash flow in 2011, when its free cash flow peaked. With free cash flow growth coming to a halt in recent years, it’s no longer is easy for management to justify 10% annual increases in its dividend.

McDonald’s dividend potential
But by how much is McDonald’s dividend growth limited, going forward?

Income investors can get some insight into whether or not McDonald’s dividend growth is constrained or not by looking at the company’s dividend payout as a portion of free cash flow. Of McDonald’s $4.3 billion in free cash flow in trailing 12 months, the company paid out $3.2 billion in dividends, or about 75% of its free cash flow. So, there is some wiggle room for McDonald’s dividend — and some room for dividend increases even if McDonald’s free cash flow doesn’t grow. But investors should take note that historically McDonald’s has usually paid out a much smaller portion of free cash flow in dividends than its paying out today. For instance, in the years leading up to the 2007 and 2008 recession, McDonald’s was paying out less than half of its free cash flow in dividends. It stands to reason, therefore, that in the future it won’t be as easy for McDonald’s to increase its dividend as it has been in the past.

Longer term, the fact that McDonald’s hasn’t given investors any evidence it is on a path to turn its free cash flow around back toward growth is a real concern. If the company doesn’t find a way to begin growing its business again, dividend increases could come to a halt. After all, McDonalds can’t increase its dividends beyond annual free cash flow without eating into its cash position.

A similar theme in McDonald’s dividend payouts can be seen by analyzing its payout ratio, or its dividends as a percentage of earnings. During the last five years, McDonald’s payout ratio has been climbing.

MCD Payout Ratio (TTM) Chart


McDonald’s dividend increases, therefore, are certainly facing some headwinds. Going forward, investors shouldn’t expect meaningful dividend hikes.

It may be wise for income investors interested in McDonald’s stock to wait for sure signs of a return to free cash flow growth. Without it, dividend increases aren’t as certain as they have been in the past.

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MONEY Opinion

Amazon Is Right to Give Up on the Fire Phone

The Fire Phone was too late to market and didn't have any compelling features to set it apart from entrenched competitors.

Amazon’s AMAZON.COM INC. AMZN -1.61% foray into smartphones was always destined to fail. The e-commerce giant was simply way too late to the market. The Fire Phone didn’t have any compelling differentiating features (Dynamic Perspective was little more than a novelty gimmick) while it stuck with conventional pricing, putting it in direct competition with entrenched rivals.

It’s tempting to pin the blame on Jeff Bezos since he was reportedly “obsessed” with the Dynamic Perspective feature, which required incredible development resources and delayed the device for years, according to a former executive. It was hardly a surprise when Amazon took a $170 million inventory charge mere months later because the Fire Phone just wasn’t selling.

The Wall Street Journal is now reporting that Amazon is giving up on Fire Phone. Despite the fact that it’s only been a year, it’s about time.

Fire Phone crashes and burns
Amazon has reportedly laid off dozens of engineers at its hardware division, Lab126. The company has also restructured Lab126, consolidating two hardware development departments into one. A large-screen tablet may also be shelved as well as a few other odd devices like an image projector. Amazon is still hard at work on other hardware projects, though, like a computer that can take orders via voice commands or a different spin on a 3D interface meant for a tablet.

The layoffs run counter to a Reuters report last year that Amazon was actually planning to dramatically expand its Lab126 head count over the next five years, even after it took the Fire Phone writedown and realized the product was a flop. For once in its life, Amazon seems averse to plunging an endless amount of money into a new initiative. Cost cutting is largely how Amazon crushed analyst estimates last quarter, posting a $92 million profit and sending shares soaring.

What about tablets?
Once upon a time, the Kindle Fire tablet was the best-selling Android tablet. Amazon was one of the first companies to launch a smaller tablet, but once it enjoyed demonstrable demand, the traditional players all jumped in. These days, Amazon’s position in the tablet market has weakened significantly. IDC estimated that unit volumes in Q4 2014 fell by a whopping 70% to 1.7 million. Amazon disputed those figures, but naturally declined to provide any hard data to substantiate its claims. Amazon is not included in the top five vendors for IDC’s Q2 2015 figures. Technically, Huawei and LG tied for fourth and fifth with 1.6 million units each.

The WSJ also says that Amazon’s product mix is heavily skewed toward the lower-end versions of its e-readers and tablets, which also makes plenty of sense. But competition at the low end is particularly intense, while the iPad has a 76% share of the premium tablet market in the U.S. (priced at $200 or above). Amazon will likely shift development resources toward these lower-end tablets, while focusing on new product categories like Echo.

Why that’s the right call
Strategically, Amazon’s hardware has always served as a form of shopping portal, a gateway into Amazon Prime, if you will. For the longest time, Amazon’s strategy was to sell hardware at cost and profit later when people purchased digital content or physical products. That’s why Fire Phone’s pricing was so Un-Amazon because the company was hoping to profit up front (and later on).

If the value in Amazon’s hardware lies in its ability to sell more stuff, then first-party smartphones and tablets are decidedly not the best use of developmental resources. People already have smartphones and tablets with Amazon’s app loaded on them, so third-party devices are already shopping portals. Instead, new categories and form factors are where the real opportunity lies, such as the $5 Dash buttons or Echo or any other type of centralized order-taking machine.

These types of hardware products are true differentiators that also support the core e-commerce business, and we all know how much Bezos hates “me-too” devices.

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