MONEY holiday shopping

13 Halloween Costumes for Finance Geeks

Actress Katie Seeley as a bear (left) and Sacha Baron Cohen as a bull (right)
Combine a bear costume (as worn by actress Katie Seeley, left,) and a bull suit (see Sacha Baron Cohen, right) for a punny stock market couples costume. Paul Archuleta/FilmMagic (left);Fotonoticias/WireImage (right)

Look like a million bucks—literally—with these creative costumes.

Still not sure what you’re dressing as for Halloween? Don’t despair. We’ve got a bunch of costume ideas that are right on the money. These finance-themed getups are accessible for a general audience (so you don’t have to spend your evening explaining, “No, the other kind of black swan…”), cheap, and quick to pull together.

For some tried-and-true ideas, you could go as Zombie Lehman Brothers, the London Whale, or characters from Dave Chappelle’s classic “Wu Tang Financial” sketch. Or you can try one of the more timeless 13 suggestions below. Then again, you could just dress up as prerecession government regulations and stay in for the night.

1. Money. Let’s be honest: Dressing as a giant bill or stack of bills is kind of boring. The concept is improved if your homemade costume is a reference to the “made-of-money man” in those Geico ads—or if you are an adorable baby swaddled in a sack of money. (Mom and Dad, throw on a mask and a badge, and voila! A cop-and-robber duo.)

2. A market crash. If Halloween season sneaked up on you like the October stock swoon did on traders, you can craft a “market crash” costume in five minutes by taping a fever line on a t-shirt with some masking or electrical tape. Use light-up accessories, and you’ve got a flash crash. This costume can be modified for a couple or group—just extend the fever line across your torsos—and it pairs nicely with a “broke broker.”

3. The Federal Reserve Chair. Mimic Janet Yellen’s signature white bob with a wig and her go-to outfit with a black blazer over a black dress or pant suit. Don’t forget a gold necklace. If people ask who you’re dressed as, throw fake money at them and yell, “Loose monetary policy!” To turn this into a group costume, grab yourself a Ben Bernanke and Alan Greenspan. Wear matching “chair” shirts for solidarity.

4. Bull & Bear (couples costume). Like salty-sweet snacks and Brangelina, this costume combination is greater than the sum of its parts. Relatively inexpensive store-bought costumes are easy to find, assuming you don’t want to spend hundreds of dollars, or you can always build a DIY ensemble with homemade horns and ears. Hang little signs with upward and downward trending fever lines around your necks for extra clarity. The only hard part will be deciding who gets to be which animal.

5. “Bond” girl. Personify this pun by dressing as your favorite 007 lady-friend and adding a hat, sign, or other accessory that reads “T-Bill” or features an image of a (now-technically-obsolete paper) Treasury bond. Jill Masterson’s “Goldfinger” look might be most recognizable: You can do it with gold spandex or body paint.

6. Wolf of Wall Street. See bull and bear, above. You just need a suit and tie, a wolf mask, and pockets brimming with fake money. And maybe some fake Quaaludes.

7. Cash cow. Unless your name is actually Cash (like this little guy), channel the Daily Show’s Samantha Bee and decorate a cow suit with dollar symbols.

8. A mortgage-backed security. This one might seem a little 2007, but there’s evidence these investment vehicles are coming back in vogue. Start with a shirt that says “security” in front. If you’re handy, you can then turn a small backpack into a “house” and wear that around. If not, just write “mortgage” on your back, and you’re done.

9. Gross domestic product. Just wear a “Made in America” t-shirt covered in dirt and fake blood.

10. Dogs of the Dow (group costume). Grab up to ten of your friends and dress as dogs. Wear tags with ticker symbols for each of the current Dogs of the Dow.

11. Distressed securities. Similar to #8, start with a shirt that reads “securities,” then layer on some dramatic makeup, to make yourself look, well, distressed.

12. Naked position & hedge (couples costume). This idea is pretty inside-baseball, but will be a fun challenge for your finance-savvy friends to guess at. The person dressed as the “naked position” can wear flesh-toned spandex, while his or her partner dresses like a hedge, as in shrubbery. Here are DIY instructions.

13. Spider / SPDR fund family (group costume). This one is pretty easy, since instructions for homemade spider costumes abound. You could go as a solo arachnid, with “ETF” painted across your chest, but dressing up is always more fun with friends. In a group you can each represent different funds; for example, the gold fund spider can wear a big gold chain and the ticker symbol GLD, and the high-yield bond spider can glue candy wrappers and bits of tinfoil all over himself and wear a sign that says JNK.

MONEY Markets

The Dow Moved Triple Digits Today. Here’s What You Should Do.

Arrow cut out of piece of paper
Gregor Schuster—Getty Images

Nothing. You should do absolutely nothing. Here's why.

[Update: The DOW went up 216 points on Oct. 23.]

The Dow Jones Industrial Average has long been held up as the stock market index to follow. Now that the Dow Jones is at such a high level, even moves that are small on a percentage basis allow for attention-grabbing headlines like “Dow Jones Today Skyrockets Over 200 points!” or “Dow Jones Plummets 150 points!”

While these headlines lure in readers, they do nothing to make us better investors. Read on to see why the best investors ignore the daily movements of the DJIA.

Dow Jones today

Do you remember when the Dow jumped 220 points after tensions with Ukraine moderated? How about the 200-point drop after Chinese industrial production slowed, or the 180-point jump following the release of minutes from the secret early-March meeting of the Federal Reserve?

I doubt it.

And don’t get me started on early October. The Dow Jones Industrial average dropped 272 points on a Tuesday — its biggest drop of the year to that point. The next day, the Dow jumped 274 points — the Dow’s biggest gain of the year. Then, on Thursday, the Dow fell 334 points.

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The headlines would have you think the world is ending or that you won’t be able to retire because of these market dips. The stock market is one of the few places where, whenever things go on sale, no one wants to buy.

However, these moves only amounted to a 2% drop from the end of the previous week. To put that in an even bigger-picture perspective, the Dow is basically flat year to date.

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What you should do now?

Nothing. You don’t have to do anything. If your investment strategy changes based on one day’s market movements, you’re doing it wrong. Your focus should be to stick to your plan, constantly educate yourself, and invest for the long term. And if you don’t have a clear strategy, this is your wake-up call.

Research has shown that process is one of the biggest determinants of success in the market over the long term. While your process can yield good or bad results in the short term, those with a proven process do better than the average investor over the long term.

For total beginners, I would first suggest learning about how the market works and how you can do at least as well as the market through index investing. I highly recommend The Little Book of Common Sense Investing by John Bogle as a great place to start.

If you understand the basics of the market as well as index investing, check out The Motley Fool’s 13 Steps to Investing Foolishly, which will teach you the process The Motley Fool has used to consistently beat the markets over the long term.

Everyone can learn from this

For every investor, focusing too much on daily market movements is a mistake. Things happen for no discernible reason. Rather than wasting time wondering why the market is up or down by a percent or two, we should focus on business fundamentals and continue to search for quality stocks trading at bargain prices.

We also must keep calm and not make rash decisions based on short-term market moves. Research has shown that it is far better to focus on minimizing mistakes, rather than overreaching for greatness. As economist Eric Falkenstein wrote: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

And as Warren Buffett’s longtime business partner Charlie Munger said: “We try to profit more from always remembering the obvious than grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

My Dow Jones Industrial Average prediction for today

The Dow Jones Industrial Average will continue to fluctuate. That’s a given, and we have no control over it. What you can control is your reactions to those fluctuations — and the best reaction is usually no reaction.

Dan Dzombak can be found on Twitter @DanDzombak, on his Facebook page DanDzombak, or on his blog where he writes about investing, happiness, life, and success in life. He 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 Investing

3 Steps Retirement Investors Must Take Now To Survive This Market

boats trying to ride out rough waves in ocean
Valentin Russanov—Getty Images/Vetta

No one knows if the recent stock market turmoil is over or just beginning. Either way, it's time to re-think your investing strategy.

Is the recent volatility a prelude to worse to come? Or just another scary bump in a near six-year bull market that still has legs? Neither I nor anyone else knows the answer. But I can tell you this: It would be foolish not to take the recent turmoil as an opportunity to re-evaluate your retirement investing strategy.

Stocks have given investors a wild ride lately: one-day swings in value up or down of 1% to 2% (or more) have become frighteningly common. And with both valuations and concerns about slowing global growth running high, we could easily be in for more of the same, if not worse. Or not.

And that’s the point. Since we just don’t know, the best you can do is take a step back, re-evaluate your investing goals and risk and make whatever changes, if any, you must to make sure you’d be comfortable with your portfolio whether the market nosedives from here, or recovers and moves to even higher ground. What follows are three steps that will help you make that assessment.

1. Assess your risk tolerance: If you’ve never completed a risk tolerance questionnaire to gauge your true appetite for risk, don’t put it off any longer. Do it now. If you don’t want to go through the process of completing a questionnaire, then at the very least tote up the value of your stock and bond holdings and estimate what size loss you might be facing if we see another downdraft like the 57% drop from October, 2007 to March, 2009. Should the market take a turn for the worse, you don’t to find that the mix of stocks vs. bonds in your portfolio is out of synch with the drop in the value of your portfolio that you can actually tolerate.

In fact, even if you have assessed your risk tolerance in the past, I recommend you do it again now. Why? Stocks have had a terrific run since it bottomed out during the financial crisis. Even after recent losses, the Standard & Poor’s 500 index was still up some 175% since March, 2009. It’s natural during such extended booms to become complacent. The fear and anxiety we felt during the last big market meltdown fades with time and we fall prey to overconfidence in two ways. First, we may begin to overestimate our real appetite for risk. Second, we begin to underestimate the actual risk we face in the market. Doing either of those alone isn’t good. The combination of both can wreak major havoc with your finances.

2. Bring your portfolio in line with that risk assessment: Once you have a sense of what size loss you can handle without selling in a panic, you can then start making any adjustments, if necessary, to make sure your mix of stocks and bonds reflects the level of loss you can comfortably absorb. For example, if you feel that you would begin to freak out if you had to watch your portfolio decline any more than 20% but five-plus years of stock gains have bulked up the equity portion of your portfolio so that it represents 90% of your holdings while bonds have dwindled to just 10%, then Houston, you have a problem. A 90-10 mix in 2008 would have left you staring at a 33% loss. And that doesn’t count the decline that occurred at the end of 2007 and in the early months of 2009.

If you find that for whatever reason your portfolio is much more aggressive than you are, you need to scale it back—that is, sell off some of your stock holdings and reinvest the proceeds in bonds and/or cash. This sort of adjustment is especially important if you’re nearing retirement or have already retired, as a severe setback can seriously disrupt your retirement plans.

I’m sure you can come up with dozens of reasons to put off doing this. You’ll wait for the market to come back and then rebalance your portfolio. (News flash: The market doesn’t know—or care—that you’re waiting for it rebound.) Or you don’t want to sell because you’ll realize taxable gains. (Oh, you’ll feel better selling later for a smaller gain or even a loss. Besides, to the extent you can shift assets in 401(k)s, IRAs and other tax-advantaged retirement accounts, taxes aren’t an issue.)

Or maybe you’re one of those people who has a “feel” for the market, so you’ll wait until you sense the right vibe before making any adjustments. Fine. But at least check to see how well your ESP worked back in early 2000 when the dot-com era imploded and in late 2007 when stocks went into their prolonged tailspin. Unless your timing was spot on (and you’re willing to risk that you’ll be as lucky again), I suggest you revamp your portfolio so you’ll be able to live its performance in the event of a severe downturn.

3. Take a Xanax: I’m speaking figuratively here. Once you’ve gauged your risk tolerance and assured that your portfolio’s composition is aligned with it, you’ve done pretty much all you can do from an investing standpoint. So try to relax. By all means you can follow the market’s progress (or lack of it). But try not to obsess about the market’s dips and dives (although much of the financial press will do its best to try to get you to do just that).

What you definitely do not want to do, is react emotionally to the latest news (be it good or bad) and undo the changes you made during your re-evaluation. That would be counterproductive and, far from following a well-thought-out strategy, you would be winging it. Which is never a good idea, and a particularly bad one during tumultuous markets. If watching market news on cable TV or reading about the financial markets online makes you so nervous that you feel the need to do something, then step…away…from…the…screen.

If all else fails, comfort yourself with these two thoughts: Market downturns are a natural part of the investing cycle—always have been, always will be. And investment moves driven by emotion and made in haste rarely work out for the best.

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MONEY Investing

Why I Won’t Own Bond Funds in My Retirement Portfolio

Trays of eggs
James Jackson—Alamy

Owning a mix of stocks and bonds is supposed to help protect your portfolio from losses. But bonds aren't the safe asset they once were.

When stocks took a tumble last week, financial pundits were quick to call it a “potent reminder” to investors of the importance of having some bonds in your portfolio for their perceived safety and yield. The classic mix is supposed to contain 60% stocks and 40% bonds, with bonds supposedly cushioning the risk of equities. In the eyes of most investment experts, I would be considered foolish to be 100% in stocks, as I have been ever since I started investing.

But I’m not sure what bonds they’re talking about. Yes, last week the yield on a 10-year U.S. Treasury note surprised everyone by falling sharply to 1.85%, as bond prices soared—when bond prices rise, bond yields fall, and vice versa. Treasury yields edged back up to 2% the next day, as stocks rebounded. Wall Street experts are still trying to determine the reasons behind the 10-year Treasury note’s plunge, which stunned investors and traders.

But that was a one-day event. When you look at the decline in bond yields over the last three decades, I don’t understand how it is mathematically possible for Treasuries—known as the safest bond possible—to protect a stock portfolio against major shocks over the next 20 years.

No question, falling interest rates have been a boon to fixed-income investors over the last three decades. The yield on a 10-year bond has fallen from 14% in 1984 to 8% in 1994 to 4% in 2004 to about 2% today. The decline hasn’t been non-stop—bonds have rallied along the way—but the overall downward trend has most certainly pushed up fixed-income returns. As a result, bond funds have both made money and helped lower risk in a portfolio. This chart created by Vanguard, based on market data between 1926 and 2011, shows the impact of adding bonds to dampen volatility (as measured by standard deviation), while not drastically reducing returns.

Screen Shot 2014-10-20 at 10.04.52 AM

But those conditions, and that steady decline in rates, no longer exist. Today we have an environment where rates have very little room to fall and at some point will go up (we just don’t know when). Once rates finally rise, bond prices will fall, which means investors will lose money. So when someone recommends diversifying one’s portfolio with bonds these days, I wonder: is there some kind of bond that’s immune to interest rate rises that I don’t know about?

Junk, or high-yield, bonds certainly don’t fit the bill as they are also vulnerable to rate hikes. Moreover, there have been warnings that the accumulation of high-risk corporate and emerging markets bonds by mutual fund companies such as Pimco and Franklin Templeton could create a liquidity crisis in the future. Investors have been pouring money into these funds, but shocks could turn into even larger debacles when investors look to liquidate and the large amounts held by fund companies become hard to sell.

Short-duration bond mutual funds might be less affected by rising interest rates. Fidelity has a whole suite of such funds, which the fund group says “can help investors in a low and/or rising rate period.”

There are also mutual funds that “ladder” bonds with staggered durations so that a portion of the portfolio will mature every year. The goal of these laddered bond funds is also to achieve a return with less risk over all interest rate cycles.

The problem for investors saving for retirement is that the returns on such funds are so low that it’s hard to justify allocating anything to them other than savings you will need in three to five years.

I won’t be retiring for another several decades, so at this point, a market crash isn’t really my greatest risk. My greatest risk is not growing my retirement account as much as humanly possible over the next ten to 15 years. To meet that goal, I think I should stick with equities and use any future crashes as buying opportunities. I’m not 100% comfortable with that decision, but I don’t feel I have much choice. I would love to find a bond fund that could be both a safe haven and could provide steady returns, but I just don’t think that exists anymore.

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.

More on investing:

Should I invest in bonds or bond mutual funds?

What is the right mix of stocks and bonds for me?

How often should I check my retirement investments?

Read next: Why Americans Can’t Answer the Most Basic Retirement Question

MONEY stocks

3 Things to Know About IBM’s Sinking Stock

141020_INV_IBM
Niall Carson—PA Wire/Press Association Images

IBM's shares plunged 7% Monday after a disappointing earnings report. Can tech's ultimate survivor transform itself one more time?

International Business Machines INTERNATIONAL BUSINESS MACHINES CORP. IBM -0.0617% has long enjoyed a unique status on Wall Street — a tech growth powerhouse that investors also see as a reliable blue chip, with steady profit growth and a hefty dividend. But with the rise of new technologies like cloud computing, Big Blue has struggled to maintain that balancing act.

Now investor confidence has suffered a big blow.

On Monday the company announced the results of a pretty lousy quarter. IBM’s third-quarter operating profit was down by nearly one fifth, and the company failed to generate year-over-year revenue growth for the 10th consecutive quarter.

Big Blue also revealed plans to sell-off its struggling semiconductor business, a move that involves taking $4.7 pre-tax billion charge against IBM’s bottom line. Actually, it is paying another company to take this unit off its hand.

While CEO Virginia Rometty acknowledged she was “disappointed” with IBM’s recent performance, she’s also pledged to turn the company around, led in part by IBM’s own foray into the cloud.

Now, you don’t get to be a 103-year-old tech company without learning to adapt. That’s what IBM famously did in the ’90s, when the computer giant started to shift away from profitable PC hardware in favor of consulting and service contracts for businesses.

But Monday’s dismal earnings show just how hard repeating that trick could turn out to be.

Here’s what else you need to know about the stock:

1) You can’t really call IBM a growth company anymore since its sales aren’t rising.

When it comes to revenues, IBM ranks behind only Apple APPLE INC. AAPL 0.372% and Hewlett-Packard HEWLETT-PACKARD CO. HPQ -0.0286% among U.S. tech companies. On a quarterly basis, though, sales have actually shrunk for 10 periods in a row, including a 4% slide in the third quarter. The big culprit is cloud computing, in which businesses can access computing services remotely via the Internet.

Since the 1990s, IBM’s model has been premised on selling powerful, expensive computers to large businesses, then earning added profits on contracts to help firms run those machines. But the cloud lets companies rent, not buy, this computing power. “You only pay for what you use,” says Janney Montgomery Scott analyst Joseph Foresi. The result: IBM’s hardware revenues sank 15% last quarter.

2) IBM is racing to be a leader in cloud computing, but with mixed results.

The company has identified four alternative areas of growth. One is the cloud, the very technology eating into IBM’s hardware sales. Big Blue has spent more than $7 billion on cloud-related acquisitions. It’s also going after mobile, IT security, and big data, the analysis of information sets that are too large for traditional computers. An example of that is Watson. IBM’s artificial-intelligence project, which won Jeopardy! in 2011, is being marketed to businesses in finance and health care.

These initiatives have promise, but IBM’s size is a curse. For instance, the company’s cloud revenues jumped 69% to $4.4 billion last year, but with nearly $100 billion in overall sales, “it’s hard to move the needle,” says S&P Capital IQ analyst Scott Kessler.

3) The stock is now much cheaper than its tech peers, but it may deserve to be.

Investors willing to wait and see if these moves will transform IBM may take comfort in the fact that the stock looks cheap. What’s more, the shares yield 2.4%, vs. 2% for the broad market. This could make the company look like a good value.

But investors should tread carefully, says Ivan Feinseth, chief investment officer at Tigress Financial Partners. He notes IBM has spent $90 billion on stock buybacks in the past decade, which has kept the P/E low by increasing earnings per share. Yet none of that money was invested for growth, as evidenced by IBM’s sluggish annual growth rate. It is hard to imagine IBM outmuscling Amazon AMAZON.COM INC. AMZN -8.3403% , Cisco CISCO SYSTEMS INC. CSCO 0.9124% , Microsoft MICROSOFT CORP. MSFT 2.4656% , HP HEWLETT-PACKARD CO. HPQ -0.0286% , and Google GOOGLE INC. GOOG -0.7721% in the cloud — and there are better values in tech.

MONEY Markets

The Word on Wall Street Is It’s Okay to Be Bullish Again

After the market's triple-digit rebound on Friday, the bulls came out in force — on TV and social media. Here's how the talking heads explain the state of the market after one scary week.

After dramatic drops on Monday and Wednesday, the market took a turn for the better at the end of the week.

And the bulls started coming out of the woodwork.

“…the mid-week storm in the market was really a passing sun shower — though we did not know it at the time,” — Jonathan Lewis, chief investment officer, Samson Capital Advisors.

“…we remain steadfast with our multi-year bull-market scenario, as corrections and periods of consolidation are necessary ingredients to any prolonged bull market.” — Brian Belski, chief investment strategist BMO Capital Markets

“Whether the complete correction is over I’m not positive yet, but there looks to be some relative calm. I think the next leg is going to be higher.” – Jim Iuorio of TJM Institutional Services via CNBC

“The time to rebalance [and buy stocks] is when doing so requires courage and when things look ugly. Right now, investors are worried and see things as being ugly.” – David Kotok, chairman of Cumberland Advisors

A common theme from the bulls is that for all the worries about the global recovery, the U.S. economy looks solid:

“Ironically, the pullback in stocks has occurred against a backdrop of a strengthening U.S. economy.” — Gregg Fisher, chief investment officer at Gerstein Fisher

“The question is whether it is actually the beginning of a bear market. I don’t think so because I don’t expect a recession in the U.S. anytime soon.” — Edward Yardeni, president of Yardeni Research

Of course, Yardeni goes on to add that:

“the Eurozone and Japan may be heading in that direction now. So is Brazil. China is slowing significantly.”

Shouldn’t investors be worried, then, that a recession in the European Union could reverberate in the U.S.?

Fear not, the bulls have an answer for that:

“The impact of an E.U. slowdown on U.S. growth would be minimal: U.S. exports to the E.U. are a small proportion of GDP (2.8% in 2013)…” notes UBS economist Maury Harris.

Many point out that economic factors have not really shifted since a month ago, when the stock market seemed just fine.

“You can go deep in the weeds in this if you like, but the fact is that nothing fundamental has changed in recent weeks or months or quarters,” writes Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities.

In fact, global economic worries, which have led to lower oil prices, may end up being a boon.

Screen Shot 2014-10-20 at 9.38.52 AM

Many experts are saying that this week’s wild market swings are actually just the result of “narrative fallacy,” which leads investors to come up with explanations for market moves where they don’t necessarily exist — in this case placing blame on external forces like Ebola and fears of rising interest rates.

But who’s to say that the bulls aren’t the ones who are now coming with plausible-sounding explanations for why the rally should keep going?

For the record, the bears have more entertaining explanations in their quiver. For instance, there’s the McDonald’s theory. As in, “as the Big Mac goes, so goes the global economy.”

Permabear Marc Faber, who edits the Gloom Doom Boom site, noted the following:

“Now, McDonald’s is a very good indicator of the global economy. If McDonald’s doesn’t increase its sales, it tells you that the monetary policies have largely failed in the sense that prices are going up more than disposable income, and so people have less purchasing power.”

And Mickey D’s sales have been slumping badly lately.

Then there’s the so-called dental indicator.

Bloomberg Businessweek reported a nifty theory that says that the rate at which Americans cancel scheduled follow-up visits offers a good clue about the real state of the consumer — and in turn the financial markets.

“This is a forward indicator signifying lack of consumer confidence.” — Vijay Sikka, president of Sikka Software, as told to Bloomberg Businessweek

And the follow-through rate on follow-up dental visits has sunk to about where it was in 2007, just before the last downturn/bear market.

At this stage, it’s impossible to tell whether this is the start of bear market or a buying opportunity. However, what’s absolutely clear is that big dips are just a normal part of being a stock investor.

Despite anxieties about the Dow’s sudden plunge this week, if you look at historical performance, the index typically turns negative for the year often enough that it’s not a good doomsday indicator, says author and investment adviser Josh Brown.

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And at the end of the day, who’s to say which wacky theories wind up being right or wrong?

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MONEY Markets

Four Reasons Not to Worry About the Stock Market

Waterfall
Roine Magnusson—Getty Images

Take a deep breath and consider some historical context.

The funniest thing about markets is that all past crashes are viewed as an opportunity, but all current and future crashes are viewed as a risk.

For months, investors have been saying a pullback is inevitable, healthy, and should be welcomed. Now, it’s here, with the S&P 500 down about 10% from last month’s highs.

Enter the maniacs.

“Carnage.”

“Slaughter.”

“Chaos.”

Those are words I read in finance blogs this morning.

By my count, this is the 90th 10% correction the market has experienced since 1928. That’s about once every 11 months, on average. It’s been three years since the last 10% correction, but you would think something so normal wouldn’t be so shocking.

But losing money hurts more than it should, and more than you think it will. In his book Where Are the Customers’ Yachts?, Fred Schwed wrote:

There are certain things that cannot be adequately explained to a virgin either by words or pictures. Not can any description I might offer here ever approximate what it feels like to lose a chunk of money that you used to own.

That’s fair. One lesson I learned after 2008 is that it’s much easier to say you’ll be greedy when others are fearful than it is to actually do it.

Regardless, this is a critical time to pay attention as an investor. One of my favorite quotes is Napoleon’s definition of a military genius: “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing. You don’t have to be a genius to do well in investing. You just have to not go crazy when everyone else is, like they are now.

Here are a few things to keep in mind to help you along.

Unless you’re impatient, innumerate, or an idiot, lower prices are your friend

You’re supposed to like market plunges because you can buy good companies at lower prices. Before long, those prices rise and you’ll be rewarded.

But you’ve heard that a thousand times.

There’s a more compelling reason to like market plunges even if stocks never recover.

The psuedoanonymous blogger Jesse Livermore asked a smart question this year: Would you rather stocks soared 200%, or fell 66% and stayed there forever? Literally, never recovering.

If you’re a long-term investor, the second option is actually more lucrative.

That’s because so much of the market’s long-term returns come from reinvesting dividends. When share prices fall, dividend yields rise, and the compounding effect of reinvesting dividends becomes more powerful. After 30 years, the plunge-and-no-recovery scenario beats out boom-and-normal-growth market by a quarter of a percentage point per year.

On that note, the S&P 500’s dividend yield rose from 1.71% in September to 1.82% this week. Whohoo!

Plunges are why stocks return more than other assets

Imagine if stocks weren’t volatile. Imagine they went up 8% a year, every year, with no volatility. Nice and stable.

What would happen in this world?

Nobody would own bonds or cash, which return about zero percent. Why would you if you could earn a steady, stable 8% return in stocks?

In this world, stock prices would surge until they offered a return closer to bonds and cash. If stocks really had no volatility, prices would rise until they yielded the same amount as FDIC-insured savings accounts.

But then — priced for perfection with no room for error — the first whiff of real-world realities like disappointing earnings, rising interest rates, recessions, terrorism, ebola, and political theater sends them plunging.

So, if stocks never crashed, prices would rise so high that a new crash was pretty much guaranteed. That’s why the whole history of the stock market is boom to bust, rinse, repeat. Volatility is the price you have to be willing to pay to earn higher returns than other assets.

They’re not indicative of the crowd

It’s easy to watch the market fall 500 points and think, “Wow, everyone is panicking. Everyone is selling. They know something I don’t.”

That’s not true at all.

Market prices reflect the last trade made. It shows the views of marginal buyers and marginal sellers — whoever was willing to buy at highest price and sell at the lowest price. The most recent price can represent one share traded, or 100,000 shares traded. Whatever it is, it doesn’t reflect the views of the vast majority of shareholders, who just sit there doing nothing.

Consider: The S&P fell almost 20% in the summer of 2011. That’s a big fall. But at Vanguard — one of the largest money managers, with more than $3 trillion — 98% of investors didn’t make a single change to their portfolios. “Ninety-eight percent took the long-term view,” wrote Vanguard’s Steve Utkus. “Those trading are a very small subset of investors.”

A lot of what moves day-to-day prices are computers playing pat-a-cake with themselves. You shouldn’t read into it for meaning.

They don’t tell you anything about the economy

It’s easy to look at plunging markets and think it’s foretelling something bad in the economy, like a recession.

But that’s not always the case.

As my friend Ben Carlson showed yesterday, there have been 13 corrections of 10% or more since World War II that were not followed by a recession. Stocks fell 35% in 1987 with no subsequent recession.

There is a huge disconnect between stocks and the economy. The correlation between GDP growth and subsequent five-year market returns is -0.06 — as in no correlation whatsoever, basically.

Vanguard once showed that rainfall — yes, rainfall — is a better predictor of future market returns than trend GDP growth, earnings growth, interest rates, or analyst forecasts. They all tell you effectively nothing about what stocks might do next.

So, breathe. Go to the beach. Hang out with your friends. Stop checking your portfolio. Life will go on.

For more on this topic:

Check back every Tuesday and Friday for Morgan Housel’s columns. Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

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MONEY Ask the Expert

How to Help Your Kid Get Started Investing

Investing illustration
Robert A. Di Ieso Jr.

Q: I want to invest $5,000 for my 35-year-old daughter, as I want to get her on the path to financial security. Should the money be placed into a guaranteed interest rate annuity? Or should the money go into a Roth IRA?

A: To make the most of this financial gift, don’t just focus on the best place to invest that $5,000. Rather, look at how this money can help your daughter develop saving and investing habits above and beyond your contribution.

Your first step should be to have a conversation with your daughter to express your intent and determine where this money will have the biggest impact. Planning for retirement should be a top priority. “But you don’t want to put the cart before the horse,” says Scott Whytock, a certified financial planner with August Wealth Management in Portland, Maine.

Before you jump ahead to thinking about long-term savings vehicles for your daughter, first make sure she has her bases covered right now. Does she have an emergency fund, for example? Ideally, she should have up to six months of typical monthly expenses set aside. Without one, says Whytock, she may be forced to pull money out of retirement — a costly choice on many counts — or accrue high-interest debt.

Assuming she has an adequate rainy day fund, the next place to look is an employer-sponsored retirement plan, such as a 401(k) or 403(b). If the plan offers matching benefits, make sure your daughter is taking full advantage of that free money. If her income and expenses are such that she isn’t able to do so, your gift may give her the wiggle room she needs to bump up her contributions.

Does she have student loans or a car loan? “Maybe paying off that car loan would free up some money each month that could be redirected to her retirement contributions through work,” Whytock adds. “She would remove potentially high interest debt, increase her contributions to her 401(k), and lower her tax base all at the same time.”

If your daughter doesn’t have a plan through work or is already taking full advantage of it, then a Roth IRA makes sense. Unlike with traditional IRAs, contributions to a Roth are made after taxes, but your daughter won’t owe taxes when she withdraws the money for retirement down the road. Since she’s on the younger side – and likely to be in a higher tax bracket later – this choice may also offer a small tax advantage over other vehicles.

Why not the annuity?

As you say, the goal is to help your daughter get on the path to financial security. For that reason alone, a simple, low-cost instrument is your best bet. Annuities can play a role in retirement planning, but their complexity, high fees and, typically, high minimums make them less ideal for this situation, says Whytock.

Here’s another idea: Don’t just open the account, pick the investments and make the contribution on your daughter’s behalf. Instead, use this gift as an opportunity to get her involved, from deciding where to open the account to choosing the best investments.

Better yet, take this a step further and set up your own matching plan. You could, for example, initially fund the account with $2,000 and set aside the remainder to match what she saves, dollar for dollar. By helping your daughter jump start her own saving and investing plans, your $5,000 gift will yield returns far beyond anything it would earn if you simply socked it away on her behalf.

Do you have a personal finance question for our experts? Write toAskTheExpert@moneymail.com.

MONEY stock market

3 Ways a Market Swoon Can Put Money in Your Pocket

Money in jeans pocket
Image Source—Getty Images

Though the stock market tumble has been scary, there are some upsides to all the bad news.

With the market down more than 7% in the last month, it’s easy to feel fearful for the parts of your life most immediately affected by a rocky financial world — like retirement savings and job security.

Certainly, there are plenty of good reasons to be cautious about the future, including high valuations and other signs the current bull market may be aging.

But a downtrodden market like this one can create pockets of opportunity for investors and consumers alike. Here are just a few ways you can benefit from the recent pullback.

1. Cheaper gas prices

Thanks to a supply glut and low demand, gasoline prices are hovering at less than $3 a gallon across the United States. And that’s despite international geopolitical unrest, which usually keeps oil expensive.

2. Low interest rates on mortgages

The Fed is keeping short-term rates low, and the sell-off has sent investors into Treasury bonds, driving down the yields that serve as a benchmark for borrowing costs throughout the economy. So mortgage rates have taken a big dip in the last month.

Interest on a 30-year fixed-rate mortgage is now 4.01%, which means that if you’re sitting on a much higher rate from buying a home a few years ago, now could be a very opportune moment to refinance. Though the paperwork might be intimidating, letting inertia get the best of you could mean leaving literally tens of thousands of dollars on the table.

3. Stock-buying opportunities

When the market takes a big dive, it can be a good moment to purchase stocks, especially if your goal is to buy and hold for the long term. This is particularly true for younger people who have time on their side, as they stand to lose very little in the short term (even if stocks continue to drop) and can gain much more when the market eventually recovers.

So if you are a millennial and have been putting off opening (or upping contributions to) that 401(k), now is your moment to choose a plan. And even Gen X-ers generally have enough years ahead to take on some risk in their retirement portfolios.

Finally, if you’re not a driver, homeowner, or investor, there’s always that trip to Paris you’ve been putting off: Thanks to economic uncertainty in Europe, the Euro is trading for less than $1.30—the cheapest it’s been since last summer.

MONEY Millennials

The Conventional Money Wisdom That Millennials Should Ignore

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

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

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

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

2. Put nearly all of it into equities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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