MONEY funds

George Soros Bets $500 Million On Bill Gross

George Soros
Billionaire George Soros, 84, is giving Bill Gross $500 million to invest for him. Rex Features via AP Images

Hedge fund titan George Soros is wagering half a billion dollars that bond king Bill Gross will excel in his new role at Janus.

Things are looking rosy for star bond fund manager Bill Gross, whose September departure from PIMCO—the fund company he founded—was accompanied by reports of tensions between Gross and other executives at the firm.

Now that Gross has moved to Janus Capital, where he manages the $440 million Global Unconstrained Bond Fund, it seems he’s getting a fresh start—plus some.

Not only did Janus see more than a billion dollars of new investments flow in last month, following Gross’s arrival, but the company also announced Thursday that hedge fund titan George Soros would be investing $500 million with Gross.

Quantum Partners, a vehicle for Soros’s investment, will see its money managed in an account that’s run parallel to but separate from the Unconstrained Bond Fund. That’s so Soros will be protected from sudden inflows or outflows caused by other investors, S&P Capital IQ mutual-fund research director Todd Rosenbluth told the Wall Street Journal.

Gross tweeted: “I & my team will manage your new unconstrained strategic acct. 24h/day. An honor to be chosen & an honor to be earned as well.”

Watch this video to learn more about what bond fund managers do:

MONEY interest rates

China Cuts Interest Rates, Sending Stock, Commodity Markets Higher

A man rides his electric bicycle passing the People's Bank of China (PBoC).
A man rides his electric bicycle passing the People's Bank of China (PBoC). Zhang Peng—LightRocket via Getty Images

Beijing moves to support an economy growing at its slowest rate in five years

China’s central bank cut its official interest rates for the first time in two years Friday, in a surprise move that sent international stock and commodity markets sharply higher.

The action by the People’s Bank of China, which comes in response to a string of disappointing economic data and increasing signs of tension in local money markets, is the authorities’ strongest show of support in months.

The economy is currently growing at its slowest rate since 2009, and while Beijing has tried to appear relaxed about that, surveys are now showing output stagnating and jobs being shed across the key manufacturing sector.

The PBoC’s action also adds to the trend of central banks across the world easing monetary policy to fight off a growing threat of deflation–a trend that goes in the opposite direction to the U.S., where the Federal Reserve is preparing to tighten policy as the economic recovery gains traction after six years of emergency measures.

The PBoC cut its one-year deposit rate by 0.25 percentage points to 2.75% and the one-year lending rate by 0.40 percentage points to 5.6%.

It timed its announcement to come after the close of financial markets in China, but European stock markets surged on the news, as did prices for commodities such as crude oil. The benchmark contract on the New York Mercantile Exchange rose by $1.50 a barrel, or 2.5%, to its highest level in two weeks, while in Europe, the German DAX index soared 2% and the U.K.’s FTSE 100 rose 1.0%.

European markets were also buoyed by a strongly-worded speech by European Central Bank President Mario Draghi promising aggressive action to ensure the Eurozone doesn’t fall into deflation.

Official interest rates don’t have quite the same function in China’s economy as they do in western ones, due to their interplay with other tools, such as caps on deposit rates and statutory reserve requirements. And the market for money is in any case effectively sealed off from the rest of the world by China’s capital controls. As such, they may not have the same kind of stimulating effect that a similar move by, for example, the Federal Reserve (in the days before the 2008 crisis).

Interestingly, the PBoC also relaxed its control of the amount that banks can offer for deposits. They can now offer 1.2 times the benchmark rate, rather than 1.1 times. These range from 0.35% to 4% depending on maturity. The PBoC enforces a strict cap of 75% on loan-to-deposit ratios in the banking system.

Taken together, the measures look designed to support liquidity into a banking system that is facing challenges on a number of fronts. The sector is seeing a sharp rise in bad loans, especially to real estate developers and construction companies, which is hitting revenue. In addition, banks are also looking to raise capital themselves and amass cash to service clients’ demands for other stock offerings that are due next week in China.

Earlier Friday, the PBoC had felt the need to issue a statement via its account on the Chinese Twitter-equivalent Weibo reassuring market participants that liquidity was “ample”. Benchmark one-week interbank rates had risen by an alarming 0.2o percentage point to 3.48% earlier, according to the Wall Street Journal.

This article originally appeared on Fortune.com

MONEY portfolio

If You Only Have One Investment, This Is the One You Need

Investing illustration
Robert A. Di Ieso, Jr.

Q: Which is a better long-term investment — a Nasdaq index fund or an index fund that tracks the Standard & Poor’s 500? — James

A: A Nasdaq fund could “play a supporting role in a diversified portfolio,” says Leslie Thompson, a financial adviser and principal at Spectrum Management Group in Indianapolis. But if you’re going to pick just one index fund for the core part of your portfolio, you’re better off buying a mutual fund or exchange-traded fund that tracks the Standard & Poor’s 500,” she says.

Why?

Before getting into the details, let’s start with the basics.

Rather than picking and choosing “the best” securities to own, index fund simply buy and hold all the securities in a given market. By avoiding the stock selection process, index funds give you broad-based market exposure while being able to charge low expenses, which is a good thing.

The downside of this approach, of course, is that you won’t ever “beat the market” or finish at the top using this strategy. In fact, by owning all the stocks in a market, you will by definition get average market returns. However, this also means you will never badly lag the market either.

If you opt for this strategy, the market you choose to index is a critical decision.

The S&P 500 is considered the broadest of the best-known U.S. stock indexes.

The S&P 500 tracks the 500 largest, most liquid stocks listed on the New York Stock Exchange and the Nasdaq — and across a spectrum of industries. “For a long-term core holding, the S&P 500 better represents the economic environment providing more diversified exposures to all sectors of the U.S.,” Thompson says.

By contrast, the most popular Nasdaq index, the Nasdaq 100, tracks about 100 of the largest non-financial companies that are listed on the Nasdaq. It’s considerably less diverse, with technology companies accounting for about 60% of its weighting, says Thompson. It’s also extremely top heavy. “Just two companies, Apple and Microsoft, make up 23% of the index,” says Thompson. The top 10 stocks, meanwhile, account for about half of the entire index versus less than 20% for the S&P 500.

This tech focus hasn’t been such a bad thing over the last decade, when it comes to performance. The USAA Nasdaq Index 100 mutual fund is up an average of 10.6% a year over the last 10 years, nearly three percentage points a year more than the Vanguard 500 Index fund.

The tradeoff: potentially more volatility.

You’ll recall that when the dot.com bubble burst in 2000, Nasdaq stocks took a much bigger hit than the S&P 500. The downside for the Nasdaq 100 hasn’t been as extreme over the last decade, says Thompson, but this isn’t the norm. Keep in mind too that the Nasdaq composite index has yet to surpass its all-time peak of more than 5,000 which it reached in 2000.

The index’s strong performance of late, moreover, has been the result of outsize results from just a handful of companies. (You can probably guess which ones.) If and when these stocks tumble, so too will the index.

 

MONEY Airlines

How Virgin America Plans to Take the U.S. Airline Industry by Storm

Virgin America Inc. President and Chief Executive Officer David Cush (C) celebrates the company's initial public offering after ringing the opening bell of the trading session with NASDAQ President and Chief Executive Officer Robert Greifeld (2nd R) at the NASDAQ Market Site in New York, November 14, 2014.
Mike Segar—Reuters

Keep unit revenues high and unit costs low—even if that means no flat-bed seats.

Virgin America VIRGIN AMERICA INC VA 1.7378% made its public trading debut last Friday. Its first few days as a public company have been incredibly successful — at least from the perspective of early investors. The Virgin America IPO priced at $23 (above the midpoint of the projected $21-$24 range). In its first three days of trading, the stock soared more than 60% to close at $37.05 on Tuesday.

cdcbee2ca8ab354964f4869c7a58cc38

On the day of Virgin America’s IPO, I spoke with CEO David Cush and CFO Peter Hunt about the company’s strategy for growth and margin expansion. Here’s how Virgin America plans to take the U.S. airline industry by storm.

High unit revenue and low costs

To hear Cush talk about it, Virgin America’s formula for long-term success is extremely simple: keep unit revenues high and unit costs low.

Well, I think the key thing is understanding our model. Our model is we do have a premium product, we do generate a revenue premium to most of the industry, but we do it with a low-cost model.

So we have a very pure low-cost model. We are single fleet type; we are point-to-point. That was really the original playbook for the low-cost model. So: high revenue, low cost, and I think we’re seeing it on the bottom line now that the network has matured.

–Virgin America CEO David Cush

Of course, having high revenues and low costs is what every CEO wants. Virgin America is making progress toward this goal. In the 2 years leading up to Virgin America’s IPO, the company dramatically boosted its profitability.

Through the first 9 months of 2014, the company reported operating income of $86.3 million, representing an operating margin of 7.7%. By contrast, in the first 9 months of 2012, Virgin America posted an operating loss of $36.8 million for a -3.7% operating margin.

That said, among the top 10 U.S. airlines, Virgin America had the second lowest operating margin (excluding special items) for the 12-month period ending in September. Virgin America has solid margin growth momentum, but it still has plenty of work to do.

Plans to earn a revenue premium

Let’s take a look at the revenue side first. Virgin America plans to boost its unit revenue by continuing to offer a superior on-board product, including leather seats, a first-class section on every flight, Wi-Fi on every plane, mood lighting, etc.

In addition, Virgin America will focus its growth on high traffic routes in its top markets. “We’re not a big connect-the-dot carrier,” says Cush. “We like to focus on where we’re strong.” This really means San Francisco and Los Angeles: more than 95% of its capacity touches one of these two cities.

In other words, the seasonal routes from New York to Fort Lauderdale and from Boston to Las Vegas that Virgin America announced last month will be the exception, not the rule.

Virgin America has strong roots in San Francisco and Los Angeles. Moreover, these are two of the top business markets in the U.S. Both factors make it easier to attract corporate travel accounts there. On average, corporate travelers pay 50% more than other customers for Virgin America tickets. Thus, the carrier has a strong incentive to expand in those two cities.

The one promising market that Virgin America sees aside from San Francisco and Los Angeles is Dallas. Earlier this year, Virgin America snagged two gates at Love Field, a small airport that is much closer to downtown Dallas than the significantly larger Dallas-Fort Worth International Airport.

Love Field is a unique expansion opportunity. Nearly all of its gates are controlled by Southwest Airlines, a carrier that doesn’t offer many of Virgin America’s amenities (like first-class seats and personal TVs). As a result, Virgin America thinks it can attract corporate travelers who want those amenities but also value Love Field’s convenience.

Virgin America began flying from Love Field a month before the IPO. According to Cush, financial results for its flights to San Francisco and Los Angeles (which had previously used DFW) have been better at Love Field from day one.

Virgin America’s has also seen plenty of demand in its new markets from Dallas: New York City and Washington, D.C. This should lead to excellent financial results once these routes have a few years to mature, due to the capacity-constrained nature of all 3 airports.

Cost containment plans

Virgin America also has to keep its costs in line to produce outsize profits. Like most young carriers, Virgin America currently benefits from comparatively low labor costs. Its young fleet is also easy to maintain. However, as the company’s workforce and fleet age, both will be sources of cost pressure. (Unionization of its workers is another potential cost driver.)

Another challenge Virgin America faces is its refusal to mimic competitors by cramming rows closer together to fit more passengers on each plane. How can Virgin America mitigate or offset these cost headwinds?

One thing that both CEO David Cush and CFO Peter Hunt emphasized in our conversation was Virgin America’s “simple production model.” By maintaining a single fleet type and outsourcing more tasks than other airlines, Virgin America avoids complexity and keeps costs down.

Virgin America’s IPO will improve the company’s access to capital, according to CFO Peter Hunt. This will allow it to reduce its aircraft financing costs. For example, rather than leasing planes, it could take advantage of the low interest rate environment to issue cheap debt and buy the planes outright.

Virgin America also keeps costs down by not using flat-bed seats in first class on the lucrative transcontinental routes from JFK Airport in New York City to San Francisco and Los Angeles, where it deploys a lot of its capacity. This puts it at odds with the other 4 carriers serving those routes.

Flat-bed seats are an “overrated feature unless you’re on a red-eye,” David Cush recently told Bloomberg. Most transcontinental flights are not red-eyes. Virgin America doesn’t operate any red-eye flights going westbound, and it operates one daily red-eye on each of the San Francisco-JFK and Los Angeles-JFK routes.

Flat-bed seats take up lots of space, increasing unit costs. Most of Virgin America’s planes are A320s configured with 146 or 149 seats. By contrast, American Airlines recently began flying the A321 on its transcontinental routes. The A321 is a bigger airplane, yet American Airlines has configured these planes with just 102 seats (of which 30 are flat-bed seats).

Thus, for transcontinental flights, Virgin America operates with a denser configuration than its competitors (which is the reverse of the situation on most of its routes). If Cush is right and very few people care about having a flat-bed seat for their transcontinental flights, Virgin America will be able to generate plenty of revenue on those flights while having the lowest unit costs.

Time to get to work

Virgin America has plenty of work to do if it is to earn a revenue premium to the U.S. airline industry while maintaining low unit costs. In some areas, it has clear plans. Its recent buildup at Dallas Love Field should boost unit revenue. Virgin America’s IPO should reduce aircraft financing costs.

However, there are some big open questions. Is Virgin America right that flat-bed first-class seats aren’t necessary on transcontinental flights? Can Virgin America avoid the cost creep that has hurt various other low-cost carriers as they have aged? Only time will tell.

(Read the full interview with Virgin America CEO David Cush at The Motley Fool.)

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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MONEY Tech

Why the iPhone 6 Plus Was a Missed Opportunity

Apple CEO Tim Cook wears the Apple Watch and shows the iPhone 6 Plus during an Apple event at the Flint Center in Cupertino, California, September 9, 2014.
Stephen Lam—Reuters

If the large iPhones included meaningfully faster processors than their smaller counterparts, this would be yet another selling point used to help drive a richer product mix for Apple.

Back in September, Apple APPLE INC. AAPL 0.1376% launched not one, but two new smartphones. The first was the 4.7-inch iPhone 6, which is the direct successor to the iPhone 5s. The second, and for this discussion the more important one, is the iPhone 6 Plus. This is a 5.5-inch “phablet” that includes a higher resolution display and optical image stabilization. The operating system, too, takes good advantage of the larger screen.

One thing that Apple didn’t do, though, is give the iPhone 6 Plus a beefed up set of internals. It still sports the same one gigabyte of memory that the iPhone 6 features, as well as the same A8 system-on-chip. I believe that, in the future, Apple would be wise to develop, much in the same vein as the “AX” chips for the iPads, a separate processor for the iPhone “Plus” family.

More processing power would be welcome

The iPhone 6 Plus features a 1920-by-1080 pixel display, which means that the on-board graphics processor needs to render a far larger number of pixels than the 1334-by-750 pixel display. For most tasks, the A8 seems to have no issues driving both the iPhone 6 and the iPhone 6 Plus.

However, for sophisticated 3D games, using the same graphics processor for both a lower-resolution display and a higher-resolution one doesn’t make sense. This need for more graphics horsepower for rendering complex 3D scenes on a high resolution display is likely why Apple provisioned the A8X chip found inside of the iPad Air 2 with a substantially faster graphics processor than it did the A8. It follows that future iPhone “Plus” phones would benefit from more powerful graphics processors.

Yet another selling point, and reason to buy up the stock

If the large iPhones included meaningfully faster processors than their smaller counterparts, this would be yet another selling point used to help drive a richer product mix for Apple.

Given the kinds of volumes that Apple ships of its iPhones — and given how unexpectedly popular the iPhone 6 Plus seems to be — the development costs of a specialized chip for future large iPhones would essentially be lost in the noise. On the other hand, the benefits of the higher performance, particularly in convincing users to go for the iPhone “Plus” rather than the standard iPhone, could be substantial.

It can go beyond chips

Given that Apple sells the “Plus” line of iPhones for a $100 premium to the standard iPhones, the company likely has quite a bit of room to pack more features in while still maintaining a good cost structure. In addition to an improved processor, Apple could also start including higher resolution cameras, as well as more memory, more sensors, and so on.

In other words, while Apple needs to be careful to preserve its margins on the mainstream iPhone, it likely has the freedom to tastefully pack in more device-level features into the “Plus” variant of the iPhone.

On top of that, Apple showed that it is willing to add iPhone 6 Plus-specific software features, such as the “dual pane” mode in apps like Mail. At some point, I wouldn’t be surprised if Apple introduced its own take on the multi-windowing support found on a number of Android tablets and smartphones as an exclusive to the “Plus” line of iPhones.

This is all good for Apple

I have a lot of faith in Apple’s engineering teams to make sound technical decisions. Given the higher price point that the company can command with its larger iPhones, there seems to be a lot of room for Apple to make the “Plus” line of phone even more premium than it is today. I think investors and consumers alike will begin to see Apple take full advantage of this opportunity in future phone iterations, which should help drive an even richer product mix and market share gains against the Android camp.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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MONEY Tech

Why “Facebook at Work” Might Not Work

Facebook at work on tablet
Alamy

Enterprise software is indeed a very lucrative space, but the time, energy, and development resources that it would require for Facebook to meaningfully challenge are simply too high.

This isn’t the first time, and it might not be the last. Dominant social network Facebook FACEBOOK INC. FB 0.2038% is reportedly looking to challenge LinkedIn LINKEDIN CORP. LNKD -0.5493% in the enterprise segment, among others. The Financial Times reported that the social kingpin is developing a new “Facebook at Work” site geared toward corporate settings.

The service is said to feature ways to communicate with colleagues, connect with other professionals, and collaborate on documents. Personal profiles and professional profiles would be segregated for the sake of privacy, and would be free initially. Beyond LinkedIn, this service means Facebook would compete with other large enterprise software makers like Google GOOGLE INC. GOOG 0.4992% and Microsoft , as well as start-ups such as Slack.

Does Facebook have a chance? Let’s look at all of these areas where Facebook wants to make a dent.

Connecting people

Helping people make professional connections is LinkedIn’s claim to fame, and the company has established an incredibly strong business in connecting recruiters with job candidates. Before even considering monetization methods, Facebook is a much larger overall network, which means it has a shot at growing its position here.

At last count, Facebook boasted 1.35 billion monthly active users, or MAUs, worldwide. That’s over four times LinkedIn’s count of 331 million registered members. Of that total, 89.7 million members log in on a monthly basis. LinkedIn reports these as unique visiting members, but in practice they are the same as MAUs for the sake of comparison.

“Facebook at Work” is unlikely to tap into Facebook’s entire network, since its rollout is still speculative and would likely be on a small scale. Still, there’s definitely some long-term potential here if Facebook builds out the rumored service, and eventually integrates it with its broader network.

Communicating with colleagues

Microsoft Exchange is the dominant player in enterprise email, but a slew of popular chat applications are also used in the workplace. Slack has been skyrocketing in popularity recently, and is now one of the fastest-growing enterprise software applications ever.

The key to Slack’s success is the ability to integrate with a plethora of third-party services that are already popular within the enterprise segment, creating a platform out of the enterprise messaging service. Slack also has powerful search features to help workers find what they’re looking for. The start-up’s blistering growth has already attracted the attention of high-profile venture capitalists. Slack recently raised $120 million at a $1.1 billion valuation.

In general, messaging is becoming an increasingly competitive arena. Facebook has both Messenger and WhatsApp under its blue belt, so the company undoubtedly has plenty of experience with developing messaging products and services. Facebook might have some strength in consumer-oriented messaging, but it seemingly lacks the deep integrations that rival services like Slack can offer.

Playing well with others

On the collaboration front, Microsoft acquired Yammer in 2012 for $1.2 billion. Yammer is a private social network that integrates with collaboration software and business applications, and is now part of Office 365. Yammer is a big part of Microsoft’s strategy with collaboration software as it transitions away from SharePoint.

Microsoft also recently partnered with Dropbox. By integrating the other’s services, Microsoft and Dropbox will bolster the collaborative features that are critical to each company’s enterprise customers. Google Apps for Business has also been winning customers from Microsoft for years, becoming a notable player in the collaboration space in the process.

This is easily the most important area of enterprise software, since employee collaboration is so critical to productivity. This is also where Facebook likely brings the least to the table. Current providers of collaborative tools offer comprehensive feature sets and have become very entrenched in the enterprise. Facebook will face a steep uphill battle in this area.

We don’t know what we don’t know

To be fair, not much is known about “Facebook at Work.” The company reportedly uses the product internally, and only began testing it at other companies within the past year or so.

Facebook’s current portfolio of consumer offerings might not be representative of what it hopes to offer the enterprise space. However, it’s hard to imagine the company could develop a full-featured offering that spans all of these areas in under a year when incumbents have spent many more years specializing and catering to these precise needs.

On top of that, Facebook is predominantly associated with personal social networking. The ability to separate personal and professional activity might be an attempt to blur the line, but consumer connotations aren’t easily shifted. Besides, aren’t Facebook’s privacy settings cumbersome enough already?

Shares of LinkedIn fell 5% of the news that Facebook could be developing a competing service, so it seems there is indeed some investor concern. However, history doesn’t inspire much confidence in Facebook’s professional abilities, which should downplay these fears.

Facebook acqui-hired job-search site Pursuit in 2011, but hasn’t done much in the job listing space that LinkedIn is disrupting. Third-party professional networking service BranchOut attempted to carve out a niche within Facebook as a free application (casually known as the “LinkedIn within Facebook”), but failed spectacularly and is now trying to sell itself.

The risk is that Facebook could become distracted by its pursuit of the enterprise segment, rather than focus on key business developments, notably building out the infrastructure for video ads or determining some type of monetization strategy for WhatsApp.

As an investor, I do like when Facebook takes calculated risks, such as Paper or Home, even if they fail. But those were inherently low risks with high potential rewards. Enterprise software is indeed a very lucrative space, but the time, energy, and development resources that it would require for Facebook to meaningfully challenge are simply too high.

MONEY stocks

Virtual Reality Makes Investing — Yes, Investing — Dangerously Fun

StockCity
StockCity from FidelityLabs

A new virtual reality tool from Fidelity makes navigating the stock market feel like a game—for better or worse.

There’s no question: Strapping on an Oculus Rift virtual reality headset and exploring StockCity, Fidelity’s new tool for investors, is oddly thrilling.

Admittedly, the fun may have more to do with the immersive experience of this 3D technology—with goggles that seamlessly shift your perspective as you tilt your head—than with the subject matter.

But I found it surprisingly easy to buy into the metaphor: As you glide through the virtual city that you’ve designed, buildings represent the stocks or ETFs in your portfolio, the weather represents the day’s market performance, and red and green rooftops tell you whether a stock is down or up for the day. Who wants to be a measly portfolio owner when you can instead be the ruler of a dynamic metropolis—a living, breathing personal economy?

Of course, there are serious limits to the tool in its current form. The height of a building represents its closing price on the previous day and the width the trading volume, which tell you nothing about, say, the stock’s historical performance or valuation—let alone whether it’s actually a good investment.

And, unless you’re a reporter like me or one of the 50,000 developers currently in possession of an Oculus Rift, you’re limited to playing with the less exciting 2D version of the program on your monitor (see a video preview below)—at least until a consumer version of the headset comes out in a few months, priced between $200 and $400.

Those flaws notwithstanding, if this technology makes the “gamification” of investing genuinely fun and appealing, that could be big deal. It could be used to better educate the public about the stock market and investing in general.

But it also raises a big question: Should investing be turned into a game, like fantasy sports?

There are dangers inherent in ostensibly educational games like Fidelity’s existing Beat the Benchmark tool, which teaches investing terms and demonstrates how different asset allocations have performed over various time periods. If you beat your benchmark, after all, what have you learned? A lot of research suggests that winning at investing tends to teach people the wrong lesson.

“Investors think that good returns originate from their investment skills, while for bad returns they blame the market,” writes Thomas Post, a finance professor at Maastricht University in the Netherlands and author of one recent study on the subject.

In reality, great performance in the stock market tends to depend more on luck than skill, even for the most expert investors. That’s why most people are best off putting their money into passive index funds and seldom trading. It also means there’s not a lot of value in watching the real-time performance of your stocks—in any number of dimensions.

MONEY 401(k)s

Are You Smart Enough to Boost Your 401(k)’s Return? Take This Simple Quiz

141119_RET_SmartEnough
Pete Ark/Getty Images

If you can answer these 5 basic questions, you'll likely earn bigger gains in your retirement plan.

Can knowing more about investing and finances boost your 401(k)’s returns? A recent study suggests that may be the case. But you don’t have to be a savant to improve performance. Even if you don’t know a qualified dividend from a capital gain, lessons from this research can help you fatten your investment accounts.

The more you know about finances and investing, the higher the returns you’re likely to earn in your 401(k). That, at least, is the conclusion researchers came to after giving thousands of participants of a large 401(k) plan a five-question test to gauge how much they know about basic financial concepts and then comparing the results with investment performance over 10 years.

You’ll get your turn to answer those questions in a minute. But first, let’s take a look at what the study found.

Savvier Investors Hold More Stocks

Basically, the 401(k) participants who answered more questions correctly earned substantially higher returns in their 401(k). And I mean substantially. Those who got four or five of the five questions right had annualized risk-adjusted returns of 9.5% on average compared with 8.2% for those who answered only one or none of the questions correctly. That 1.3-percent-a-year margin, the researchers note, would translate to a 25% larger nest egg over the course of a 25-year career. That could be the difference between scraping by in retirement versus living a secure and comfortable lifestyle.

But while the 401(k)s of participants with greater knowledge didn’t outperform the accounts of their less knowledgeable peers because of some arcane or sophisticated investing strategy. The secret of their success was actually pretty simple (and easily duplicated): They invested more of their savings in stock funds than their financially challenged counterparts. And even when less-informed participants did venture into stocks, they were less apt to invest in international stocks, small-cap funds and, most important to my mind, less likely to own index funds, the option that has the potential to lower investment costs and dramatically boost the value of your nest egg.

The better-informed investors’ results come with a caveat. Even though more financially savvy participants earned higher returns after accounting for risk, their portfolios tended to be somewhat somewhat more volatile (which isn’t surprising given the higher stock stake). So they had to be willing to endure a somewhat bumpier ride en route to their loftier returns.

I’d also add that while more exposure to stocks does generally equate to higher long-term returns, no one should take that as an invitation to just load up on equities. When investing your retirement savings, you’ve also got to take your risk tolerance into account as well as the effect larger stock holdings have when the market heads south. That’s especially true if you’re nearing retirement or already retired, as portfolio heavily invested in stocks could suffer a setback large enough to force you to seriously scale back or even abandon your retirement plans.

Mastering the Basics

Ready to see how you’ll fare on the study’s Financial Knowledge test? The five questions and correct answers are below, followed by my take on the lessons you should from this exercise, regardless of how you score.

Question #1. Suppose you had $100 in a savings account that paid 2% interest per year. After five years, how much would you have in the account if you left the money to grow?
a. More than $110
b. Exactly $110
c. Less than $110

Question #2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today

Question #3. Is this statement true or false? Buying a single company’s stock usually provides a safer return than a stock mutual fund.
a. True
b. False

Question #4. Assume you were in the 25% tax bracket (you pay $0.25 in tax for each dollar earned) and you contributed $100 pretax to an employer’s 401(k) plan. Your take-home pay (what’s in your paycheck after all taxes and other payments are taken out) will then:
a. Decline by $100
b. Decline by $75
c. Decline by $50
d. Remain the same

Question #5. Assume that an employer matched employee contributions dollar for dollar. If the employee contributed $100 to the 401(k) plan, his account balance in the plan including his contribution would:
a. Increase by $50
b. Increase by $100
c. Increase by $200
d. Remain the same

The answers:

1. a, More than $110. This question was designed to test people’s ability to do a simple interest calculation. To answer “more than” instead of “exactly” $100, you also had to understand the concept of compound interest. (Percentage of people who answered this question correctly: 76%.)

2. c, Less than today. This question gets at the relationship between investment returns and inflation and the concept of “real” return. To answer it correctly, you must understand that if your money grows at less than the inflation rate, its purchasing power declines. (92%)

3. b, False. Here, the idea was to test whether people understood that a stock mutual fund contains many stocks and that investing in a large group of stocks is generally less risky than putting all one’s money into a the stock of a single company. (88%)

4. b, Decline by $75. This question gauges people’s understanding of the tax benefit of a pretax contribution to a 401(k) and its effect on the paycheck of someone in the 25% tax bracket. (45%)

5. c, Increase by $200. This was simply a test of whether people understood the concept of matching funds and the effect of a dollar-for-dollar match. (78%)

Average score: 3.8 All 5 correct: 33% All 5 wrong: 2%

Okay, so now you know how you stack up compared with the 401(k) participants in the study. But whether you did well or not, remember that your performance on this or any other test isn’t necessarily a prediction of how your retirement portfolio will fare. Very financially astute people sometimes make dumb investment moves. Sometimes they try to get too fancy (think of the Nobel Laureates whose hedge fund lost billions in the late ’90s). Other times there may be a disconnect between what people know intellectually and how they react emotionally.

Nor does a lack of financial smarts inevitably doom you to subpar performance. You don’t need a PhD in finance to understand the few basic concepts that lead to financial success: spreading your money among a variety of investments instead of going all-in on one or two things, keeping costs down and paying attention to both risk and return when investing your savings.

So by all means take the time to educate yourself about investing. But don’t feel you have to go beyond a few simple but effective investing techniques to earn competitive returns and improve your chances of a secure retirement.

More from RealDealRetirement.com:

Can I Double My Nest Egg In the Final Years of My Career?

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How To Build A $1 Million IRA

MONEY financial advice

Tony Robbins Wants To Teach You To Be a Better Investor

Tony Robbins vists at SiriusXM Studios on November 18, 2014 in New York City.
Tony Robbins with his new book, Money: Master the Game. Robin Marchant—Getty Images

With his new book, the motivational guru is on a new mission: educate the average investor about the many pitfalls in the financial system.

It might seem odd taking serious financial advice from someone long associated with infomercials and fire walks.

Which perhaps is why Tony Robbins, one of America’s foremost motivational gurus and performance coaches, has loaded his new book Money: Master The Game with interviews from people like Berkshire Hathaway’s Warren Buffett, investor Carl Icahn, Yale University endowment guru David Swensen, Vanguard Group founder Jack Bogle, and hedge-fund manager Ray Dalio of Bridgewater Associates.

Robbins has a particularly close relationship with hedge-fund manager Paul Tudor Jones of Tudor Investment Corporation.

“I really wanted to blow up some financial myths. What you don’t know will hurt you, and this book will arm you so you don’t get taken advantage of,” Robbins says.

One key takeaway from Robbins’ first book in 20 years: the “All-Weather” asset allocation he has needled out of Dalio, who is somewhat of a recluse. When back-tested, the investment mix lost money only six times over the past 40 years, with a maximum loss of 3.93% in a single year.

That “secret sauce,” by the way: 40% long-term U.S. bonds, 30% stocks, 15% intermediate U.S. bonds, 7.5% gold, and 7.5% commodities.

Tony’s Takes

For someone whose net worth is estimated in the hundreds of millions of dollars and who reigned on TV for years as a near-constant infomercial presence, Robbins—whose personality is so big it seemingly transcends his 6’7″ frame—obviously knows a thing or two about making money himself.

Here’s what you might not expect: The book is a surprisingly aggressive indictment of today’s financial system, which often acts as a machine devoted to enriching itself rather than enriching investors.

To wit, Robbins relishes in trashing the fictions that average investors have been sold over the years. For instance, the implicit promise of every active fund manager: “We’ll beat the market!”

The reality, of course, is that the vast majority of active fund managers lag their benchmarks over extended periods—and it’s costing investors big time.

“Active managers might beat the market for a year or two, but not over the long-term, and long-term is what matters,” he says. “So you’re underperforming, and they look you in the eye and say they have your best interests in mind, and then charge you all these fees.

“The system is based on corporations trying to maximize profit, not maximizing benefit to the investor.”

Hold tight—there’s more: Fund fees are much higher than you likely realize, and are taking a heavy axe to your retirement prospects. The stated returns of your fund might not be what you’re actually seeing in your investment account, because of clever accounting.

Your broker might not have your best interests at heart. The 401(k) has fallen far short as the nation’s premier retirement vehicle. As for target-date funds, they aren’t the magic bullets they claim to be, with their own fees and questionable investment mixes.

Another of the book’s contrarian takes: Don’t dismiss annuities. They have acquired a bad rap in recent years, either for being stodgy investment vehicles that appeal to grandmothers, or for being products that sometimes put gigantic fees in brokers’ pockets.

But there’s no denying that one of investors’ primary fears in life is outlasting their money. With a well-chosen annuity, you can help allay that fear by creating a guaranteed lifetime income. When combined with Social Security, you then have two income streams to help prevent a penniless future.

Robbins’ core message: As a mom-and-pop investor, you’re being played. But at least you can recognize that fact, and use that knowledge to redirect your resources toward a more secure retirement.

“I don’t want people to be pawns in someone else’s game anymore,” he says. “I want them to be the chess players.”

MONEY Health Care

The 7 Biggest Health Problems Americans Face—And Who is Profiting

Bottles of prescription medicine in cabinet
Kim Karpeles—Getty Images/age fotostock

Here are the most-prescribed drugs in America.

Americans include two health-related issues among the 10 most important problems facing the U.S., according to a recent Gallup survey. Healthcare in general ranked fourth on the list, with Ebola coming in at no. 8. But is Ebola really among the biggest health problems for Americans? Not when we look at the chances of actually being infected.

So, what are the actual biggest health problems that Americans face? One way to answer this question is to look at what drugs are prescribed the most. Here are the seven top health problems based on the most-prescribed drugs in the U.S., according to Medscape’s analysis of data provided by IMS Health.

1. Hypothyroidism

AbbVie’s ABBVIE INC. ABBV 3.3287% Synthroid ranks at the top of the list of most-prescribed drugs. Synthroid is used to treat hypothyroidism, a condition caused by an underactive thyroid gland.

The American Thyroid Association estimates that 2%-3% of Americans have pronounced hypothyroidism, while 10%-15% have a mild version of the disease. Hypothyroidism occurs more frequently in women, especially women over age 60. Around half of Americans with the condition don’t realize that they have hypothyroidism.

2. High cholesterol and high triglycerides

Coming in at a close second on the list is AstraZeneca’s ASTRAZENECA PLC AZN 0.4716% Crestor. The drug is used to help control high cholesterol and high triglyceride levels.

According to the American Heart Association, nearly 99 million Americans age 20 and over have high cholesterol. Elevated cholesterol levels are one of the major risk factors for heart attacks and strokes. The problem is that you won’t know if you have high cholesterol unless you get tested — and around one in three Americans haven’t had their cholesterol levels checked in the last five years.

3. Heartburn and gastroesophageal reflux disease

AstraZeneca also claims the third most prescribed drug in the nation — Nexium. The “purple pill” helps treat hearburn and gastroesophageal reflux disease, or GERD, also commonly referred to as acid reflux.

Around 20% of Americans have GERD, according to the American Society for Gastrointestinal Endoscopy. A lot of people take over-the-counter medications, but that’s not enough for many others. Medscape reported that over 18.6 million prescriptions of Nexium were filled between July 2013 and June 2014.

4. Breathing disorders

The next two highly prescribed drugs treat breathing disorders. GlaxoSmithKline’s GLAXOSMITHKLINE PLC GSK 0.0431% Ventolin HFA is used by asthma patients, while the company’s Advair Diskus treats asthma and chronic obstructive pulmonary disease, or COPD.

More than 25 million Americans have asthma. Around 7 million of these patients are children. Meanwhile, COPD, which includes chronic bronchitis and emphysema, ranks as the third-leading cause of death in the U.S.

5. High blood pressure

Novartis NOVARTIS AG NVS -0.3044% claims the next top-prescribed drug with Diovan. The drug treats high blood pressure by relaxing and widening blood vessels, thereby allowing blood to flow more readily.

Around one-third of American adults have high blood pressure. Many don’t know that they are affected, because the condition doesn’t usually manifest symptoms for a long time. However, high blood pressure can eventually lead to other serious health issues, including heart and kidney problems.

6. Diabetes

Several highly prescribed drugs combat diabetes, with Sanofi’s SANOFI S.A. SNY 1.2454% Lantus Solostar taking the top spot for the condition. Lantus Solostar is a long-acting basal insulin that is used for type 1 and type 2 diabetes mellitus.

According to the National Diabetes Statistics Report released in June 2014, 29.1 million Americans had diabetes in 2012. That’s a big jump from just two years earlier, when 25.8 million Americans had the disease. Diabetes ranks as the seventh leading cause of death in the U.S.

7. Depression and anxiety

Eli Lilly’s ELI LILLY & CO. LLY 0.8383% Cymbalta fell just below Lantus Solostar in number of prescriptions. Cymbalta is the leading treatment for depression and generalized anxiety disorder.

The Anxiety and Depression Association of America estimates that 14.8 million Americans ages 18 and older suffer from a major depressive disorder each year. Around 3.3 million have persistent depressive disorder, a form of depression that lasts for two or more years. Generalized anxiety disorder affects around 6.8 million adults in the U.S.

Common thread for common diseases

One thing that stands out about several of these common diseases affecting millions of Americans is that many people have one or more of these conditions — but don’t know it. This underscores the importance of getting a checkup on a regular basis.

Regardless of what the Gallup survey found, the odds of you getting Ebola are very low. On the other hand, the chances of you or someone in your family already having one of these seven conditions could be higher than you might think. Perhaps the truly biggest healthcare challenge facing Americans is knowing the status of their own health.

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