MONEY Investing

Ford Revs Up Sales

Ford's domestic auto sales accelerated last year. 2013 Getty Images

Ford has done well to improve its sales, but can it get into luxury market and broaden its reach overseas.

The nation’s second-biggest automaker has been cruising lately, thanks largely to a series of successful vehicle redesigns that are winning over fuel- and style-conscious young buyers.

But Ford Motor Co.’s dramatic face-lift and CEO Alan Mulally’s cost-cutting efforts are old news. Investors have grown accustomed to better-than-average performance from Ford FORD MOTOR CO. F -2.1178% , which ranked as the world’s sixth-largest carmaker last year.

Today Wall Street wants to see whether Mulally & Co. have enough in the tank to broaden Ford’s rebound to include luxury vehicles and key foreign markets.

Sales are surging

As U.S. auto sales have come roaring back, Ford has managed to stand out. How? The company “rolled out a strong field of products over the last few years,” says Kelley Blue Book senior analyst Karl Brauer. “The Fusion, Focus, and Fiesta — combined with a resurgence of the truck market thanks to the rebound in housing — have made Ford a fascinating company to watch.” Indeed, Fusion sales rose 22% last year to nearly 300,000, almost equaling the Toyota TOYOTA MOTOR CO TM 0.0085% Corolla’s popularity.

Nearly two dozen more upgrades are due out this year. The redesigns are taking place as Mulally is cutting costs by trimming the number of platforms on which vehicles are built from 27 in 2007 to nine by 2016.

But the stock is stuck

Despite the upbeat results, Ford’s stock has lagged. Execs warned that profit margins could fall in 2014 because of a record number of new product launches, such as the Lincoln MKC, a small luxury crossover.

There’s also the fact that investors have been betting on a rebound since 2009. They now want to see more. Ford’s resurgence, for instance, has yet to reach the luxury market: Its Lincoln line sold fewer cars last year than in 2012, and about 100,000 less than Cadillac.

Related: Road to Wealth

Says senior analyst Jessica Caldwell: “Lincoln is trying to have a brand renaissance, but that takes time.”

And Ford trails abroad

Overseas, Ford’s outlook is decidedly mixed. The carmaker has expanded its share in Europe, where auto sales remain weak. And in China, where sales growth is robust, Ford “is definitely playing catch-up to GM,” says Matthew Stover, an analyst with Guggenheim Securities.

Still, the company is making strides. Its 936,000 sales in China last year represented nearly a 50% jump from 2012. And Ford is now the fifth-largest foreign car seller in China, having leaped over Toyota. Mulally is investing heavily in the region, with plans to increase its number of production plants and dealerships.

Will they bear fruit? That will largely depend on whether Ford’s youthful, fuel-conscious designs translate to foreign audiences.


The Easiest Way to Juice Your Portfolio

Take best advantage of the tax code to increase your portfolio's real rate of return. Photo: Drazen/Shutterstock

There's one absolutely foolproof way to become a better investor: Don't leave free money on the table. Designing your portfolio so that it takes best advantage of the tax code is a risk-free way to boost your true, after-tax return.

The basics: Use tax-advantaged accounts first

Before you make any other investments, max out your 401(k) and Individual Retirement Account options first. Deductible traditional IRAs and 401(k)s allow you to invest pre-tax dollars now and have the money accumulate tax-free until you make withdrawals in retirement. The withdrawals are then taxed as ordinary income.

With a Roth IRA, you pay the taxes up front — that is, unlike with a traditional IRA, your contributions aren’t deductible. But withdrawals in retirement are tax free.

There are limits to how much you can contribute to either kind of IRA, and some high earners might not be able to contribute to a deductible IRA or directly to a Roth. There is, however, a “back door” into a Roth for those above the income limits. You can contribute to a non-deductible IRA and then immediately convert to a Roth. (Caution: If you hold other money in traditional IRAs, there are potential tax consequences to this move. So read “The other way to invest in a Roth IRA” before making this move.)

Roth or traditional IRA?

In general, a traditional IRA makes sense if you think you will face a lower tax rate in retirement than you do today. But of course you can’t be 100% certain what tax rates will be when you retire, so some advisers say it makes sense to hedge your bets by holding some money in both kinds of tax-advantaged accounts.

Investments that hold down the tax bill

Once you’ve exhausted your tax-advantaged options, look for investments that minimize what you’ll owe. If you are investing in stocks, an index fund is usually a good option. Because these funds tend to hang onto the stocks they buy, they are less likely than most actively managed funds to incur lots of taxable capital gains that must be distributed to shareholders.

Income-seeking investors can consider tax-exempt municipal bonds, either directly or via a fund. These bonds are generally issued by state or local governments, and the income they pay is free from federal taxes. They may also be free from state income taxes, depending on where you live and where the bond was issued.

Road to Wealth: The college savings cheat sheet

Because the tax break is valuable, these bonds don’t have to offer yields as high as comparable fixed-income investments. That means they make the most sense for high-income investors who face relatively high income-tax rates.

Currently, however, a number of factors have combined to make municipals look attractive to a broader range of investors. In particular, the rates on other types of bonds remain low, and municipal bonds appear to have been unfairly stigmatized by a few high-profile recent crises like those in Detroit and Puerto Rico; as a result, tax-exempt munis are worth a look even if you’re not in a high tax bracket.

Location, location, location

Investors with significant assets spread across both tax-advantaged and taxable accounts should think carefully about which investments go where. Investments that pay out ordinary income, such as bond funds, may be best suited to tax-advantaged accounts, since that income faces higher rates than long-term capital gains or qualified stock dividends.

TIME Investing

Warren Buffett Richer Than Ever

Exclusive Portraits Of Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett
Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., speaks during an interview in New York, Oct. 22, 2013. Scott Eells/Bloomberg via Getty Images Scott Eells—Bloomberg/Getty Images

Berkshire Hathaway, the investing conglomerate helmed by Warren Buffett for more than 50 years, reaped a record $19.5 billion in profits in 2013 -- far exceeding analysts' expectations of $18 billion

Warren Buffett’s investing conglomerate saw record profits in 2013 of $19.5 billion, riding a wave of economic improvement in the United States, the company said in its annual report released Saturday.

Buffett’s holding company Berkshire Hathaway exceeded analysts’ expectations of $18 billion and saw significant gains over 2012, when it posted net profits of $14.8 billion.

The company’s stellar performance depends on well-known consumer goods and services that do well in economic boom times, as Buffett chiefly invests in established, large companies like Walmart, General Motors, American Express, and Coca-Cola.

Buffett’s annual shareholder letter, known for its rustic tone, emphasized his commitment to supporting American companies for the long term.

“Who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic,” the so-called “Oracle of Omaha” said in the letter. “America’s best days lie ahead.”

Berkshire purchased major assets of NV Energy and H. J. Heinz Geico, which “will be prospering a century from now,” Buffett said. Berkshire’s insurance company reported a $394 million operating profit in the fourth quarter.

Buffet’s conglomerate didn’t edge out the S&P 500, which grew at a phenomenal rate of 32.4% last year, while Berkshire saw a gain in per-share book value of 18.2%. Since 1965, Berkshire has seen a compounded annual gain of 19.7%, while the S&P 500 has increased 9.8%.

Buffett, 83, has helmed Berkshire for more than half a century and overseen its growth into a $288 billion holding company.


Have Enough Money for the Retirement Life You Want

Choppy markets and rising health care costs needn't stop your from having the money you want. illustration: justin wood

Choppy markets and rising health care costs needn't stop you from reaching your retirement goals. Here, five of the brightest financial minds offer help for staying on an even keel.

Retirement planning is full of uncertainties: How long will you want to or be able to work? How many decades can you expect to live? What will happen in the markets in the meantime?

One way to fill the knowledge gap is with rules of thumb, nuggets of conventional wisdom, or one-size-fits-all retirement products. Do a quick Google search and you’ll find easy answers to how much you should save for retirement and how you can safely spend it. Meanwhile, mutual fund companies will happily sell you a single fund that offers a simple plan for investing your nest egg.

Too easy and too simple, says Michael Kitces, a financial planner and director of research at Pinnacle Advisory Group in Columbia, Md. “We rely too much on rough guidelines or underdeveloped knowledge instead of rigorous analysis,” he says. Kitces is one of a group of big thinkers you’ll meet in this story who say that you can do better.

New ideas about retirement are especially urgent now. Today’s markets may not be priced to deliver high returns to retirees or those in their peak savings years; at the same time, the cost of health care in retirement keeps rising.

The good news is that if you break away from the obvious answers, you’ll discover that you have options for the life you want after so many years at work.

On the pages that follow are five big ideas from some of the retirement-planning world’s sharpest minds:

Forget the 4% withdrawal rule: Wade Pfau, professor of retirement income, American College

You’ll spend less as you age: David Blanchett, director of research, Morningstar Investment Management

Plan to pay for future health costs: Carolyn McClanahan, president, Life Planning Partners

Plan for the critical first decade: Michael Kitces, partner and director of research, Pinnacle Advisory

Social Security is the best deal: Alicia Munnell, professor of management, Boston College


Top Stock Picks from Top Pros

These top fund managers and foreign-stock specialists thrived amid global upheaval. Find out how they did it — and where in the world they see opportunities.

  • Sarah Ketterer


    Royal Dutch Shell ROYAL DUTCH SHELL PLC RDS.A -0.6784% . The Hague-based energy conglomerate explores for, extracts, and refines oil, and Shell stations retail gasoline. That integration, and the steady income it generates, let RDS borrow relatively little to fund exploration. (Its debt-to-asset ratio is half that of its competitors, Ketterer says.) Shares took a hit recently after RDS missed earnings projections. But that’s a near-term issue, she says. Plus, RDS plans to sell assets to free up cash for shareholders.

    Technip TECHNIP S.A. TKPPY 1.5005% . As offshore energy exploration grows in complexity, Paris-based Technip is one of only a few companies with the expertise to extract the oil, says Ketterer. It also designs and builds plants that will take advantage of the U.S. natural-gas revolution. So why isn’t Technip trading at full value? Among other reasons, she says, the strong euro hurt the financial results of otherwise successful projects in Brazil, Nigeria, and Mexico.

    Vodafone VODAFONE GROUP PLC VOD -1.9964% . In a year when double-digit returns will be scarce and downside protection vital, every portfolio needs ballast. For Ketterer, that’s Vodafone. The U.K. telecom giant is a cash cow, she says, that consistently increases dividends, makes smart acquisitions, and reinvests profits. With modest projected earnings growth of 2%, the stock doesn’t have much upside, Ketterer acknowledges. But with rumors of an AT&T AT&T INC. T 0.0284% takeover bid undergirding the share price, it’s “play for preservation of capital.”

    HER STRATEGY: Looking for beauty where others see beasts

    Ketterer has a reputation as a hard-core contrarian. In early 2010, for example, she bought Toyota TOYOTA MOTOR CO TM 0.0085% before headlines about its recall crisis had even abated. The stock has since doubled.

    Ironically, though, it’s a focus on limiting risk that leads Ketterer to such bold calls. Her team assigns a risk score to every stock, projects earnings, and simply buys those that offer the highest risk-adjusted return. Call that a contrarian approach, if you will, but Ketterer describes it more prosaically: “Our screening drives us to neglected or unpopular companies.” Then she deploys another unglamorous weapon: patience — as the fading blemish slowly reveals a sound business.

    The problem is, Ketterer says, global equity markets are at or near record highs. “We have to work harder to find undervaluation,” she says. So Ketterer is focusing on energy and industrial companies. The market oversold those sectors in reaction to Asia’s slowing growth, she says. China may have overheated, but in the long run it will continue to consume voraciously.

  • Mark Yockey


    Unilever UNILEVER N.V. UN 0.5066% . The Anglo-Dutch giant behind Axe, Ben & Jerry’s, Dove, and dozens more aspirational brands was building supply chains into hard-to-access markets like Brazil and India long before most competitors. It’ll cost loads to chip away at that market power.

    Meanwhile, the company generates so much cash — $5.7 billion in 2012, up 28% from 2011 — that it can continue extending that reach and grow dividends. Still, Yockey says, investors undervalue Unilever by as much as 25% because economic growth in emerging markets — where Unilever does 55% of sales — has fallen off the torrid pace of the last decade. But long term, he says, that’s where the growth is.

    Linde LINDE AG LNEGY 0.0262% . As one of the world’s largest industrial gas companies, Linde is a veritable oligopolist. But Yockey thinks its potential in the emerging world is underappreciated. Growth there may have slowed a bit, but the urbanization boom has not — and Linde’s gas products and engineering arm will play major roles in the inevitable infrastructure build-out. Plus, its strength in medical gases (like oxygen) will let it profit from aging populations in the developed world and surging demand for health care in developing markets.

    Baidu BAIDU INC. BIDU -1.016% . Known as the Chinese Google, Baidu dominates the online search market in the People’s Republic. But only 44% of the citizenry have web access, vs. 79% in the U.S. And just a tiny slice of businesses buys search ads. That means room to grow, says Yockey.

    Some see a threat to Baidu in mobile advertising, where much of the industry’s growth will be. But users will stick with Baidu as it invests in the category, says Yockey, who predicts that mobile search, just 4% of sales in 2012, will hit 36% by 2016 and boost earnings by 25% annually for “years to come.”

    HIS STRATEGY: Seeking emerging-market heat without the burn

    Europe is not burning, insists Mark Yockey, lead manager of the Artisan International Fund. Speaking to MONEY from a Barcelona hotel room, Yockey offers eyewitness proof that the continent, if not the very picture of economic health, has emerged from the apocalyptic haze of its sovereign debt crisis: “Construction is going on, and the shops are full,” he says.

    That’s good news, of course, but not quite enough to bank on. Yockey, who favors steadily growing companies, doubts that Europe’s tepid recovery will fuel robust profits anytime soon. But he says emerging economies aren’t the answer either: Their faster growth often goes hand in hand with volatility, so he struggles to find enough companies that provide the consistency he likes.

    The upshot is a kind of hybrid strategy that emphasizes large, stable European companies with a solid foothold in the developing world — or, as Yockey puts it, “emerging-market exposure without the risk.”

    He is looking in particular to leverage two linked demographic shifts taking place in many emerging markets: the dramatic growth of the middle class and increased urbanization. Those themes draw him to consumer product makers — especially those with well-known brands that resonate among middle-class consumers — and companies with a big role in developing urban infrastructure.

  • Marcus L. Smith


    Nestlé NESTLE S.A. NSRGY 0.6424% . The Swiss food and beverage maker, says Smith, grows “even in difficult times.” The key ingredient? Pricing power. In regions where food safety is in question — emerging markets account for 43% of sales — the Nestlé logo is a “stamp of approval.” As a result, Nestlé can raise prices ahead of growing raw materials costs and thus maintain healthy margins.

    Hennes & Mauritz HENNES & MAURITZ AB HNNMY 0.6127% . Long known for cheap runway knockoffs, the Swedish fashion retailer (better known as H&M) recently began emphasizing quality. But Smith says the makeover ran headlong into Europe’s debt crisis. Those economic woes are receding, he feels, and new stores (350 in 2013) and the launch of a long-delayed U.S. website will boost sales.

    Samsung SAMSUNG ELECTRONICS CO. LTD. SSNLF -8.3647% . Samsung is best known for selling flat-screen TVs and smartphones to consumers. But Smith says the Korean manufacturer’s plan to target business users will yield substantial growth.

    HIS STRATEGY: Seeking steady growth from great global brands

    Smith likes to sleep at night — and the erratic behavior of the fastest-growing companies has a way of jangling the nerves. So he looks instead for giant companies with healthy cash flows (which protects them in down markets) and a “growth driver” that, in his view, investors don’t fully appreciate.

    Right now he likes a handful of technology companies — even if “underappreciated” isn’t a word associated with social media companies or the Internet these days. That’s not true across the tech sector, argues Smith. He says companies that produce things like servers and other business hardware and technology infrastructure have “lagged the market” and are likely to catch up soon amid the shift from PC to mobile.

    Like Artisan’s Yockey, Smith is also drawn to European consumer products companies for the exposure they offer the growing middle class in emerging markets. What’s more, he says, the strong performance of several such companies was understated by the relative strength of the euro in 2013, which made earnings from abroad look smaller when brought back to the continent.

  • David Herro


    Credit Suisse CREDIT SUISSE GROUP AG CS 0.3267% . Shares of all European banks have been shadowed by worries that post-crisis regulations will hurt profits. But the cloud hangs especially low over “too big to fail” institutions like Credit Suisse, Herro says, which are deemed most likely to be reined in. “People are overreacting.” The bank has gathered plenty of capital to satisfy regulators, he says. And its thriving private and investment banking operations will help grow earnings 5% to 10% for several years to come.

    Daimler DAIMLER AG DDAIF 0.3138% . To Herro, the German carmaker is a well-oiled machine with a full tank of gas — and investors are too focused on the scratched fender. “The market doesn’t like its Europe exposure, the fact that it was behind in China, and that its margins have been lower than BMW’s,” he says. But Europe is on the mend. The company’s once-struggling China operations are gaining traction. (Sales there are up 15% in the past year.) And a big push to streamline production has boosted margins.

    AMP. Australia’s largest standalone wealth management firm, says Herro, has a vast network of financial advisers poised to help folks navigate the country’s compulsory retirement-savings system. Demand for such advice has grown since 2011, when the Reserve Bank of Australia cut interest rates, sending retirees scrambling for higher yields. But even with rates down to 2.5%, he says, Australia’s central bankers have more ammunition to stimulate growth than their counterparts in the U.S., where rates are near zero.

    HIS STRATEGY: Still betting on Europe’s recovery

    At the height of 2012’s European debt crisis, amid panicked headlines about Greek defaults and soaring Spanish borrowing rates, Herro believed a full-on banking collapse was unlikely. So he bet heavily on European financials. The sector is up 50% since then.

    Indeed Herro, named Morningstar’s international manager of the decade in 2010, has built his extraordinary record by ignoring conventional wisdom. He seeks strong companies selling at a discount because of what he sees as short-term or superficial problems. As he puts it, “We want to own what’s cheap.”

    So why, despite the run-up, has Herro remained committed to European bank stocks, including his top four holdings? “There’s still an undeserved stigma surrounding them,” he says. His confidence extends to European carmakers, technology companies, and retailers as well. Virtually nothing, meanwhile, is invested directly in emerging markets. “It’s too tough to find value there,” he says. Likewise, Herro has unwound much of his fund’s position in Japan now that economic stimulus has driven equities up by almost 75% in 13 months. For value beyond Europe? Look to Australia, he says.

MONEY Investing

Winning at Investing Made Simple

Served on a silver platter: the right portfolio strategy and investing well for retirement. illustration: tavis coburn

Here are just a few of the ways Wall Street pros try to eke out an edge in the market. You can’t do any of them:

With a subscription to the Bloomberg online news service (price: about $20,000 a year), traders can instantly see anything from the location of oil tankers around the globe to supply-chain maps of a company’s vendors and customers.

Hedge fund managers who invest in drug and technology companies tap into “expert networks” of executives and scientists paid for their specialized knowledge. In some cases, it’s been charged, traders have also illegally gotten inside information through these contacts.

Half of stock trades are made by automated “high-frequency” programs; it takes 7/10,000ths of a second to buy or sell on the New York Stock Exchange, says the Tabb Group, down from a horse-and-buggy 10 seconds eight years ago.

You can’t get a jump on this crowd. You can’t even compete with them. Chances are, the professional managers you hire via a mutual fund, for 1% of assets or more per year, won’t be able to stay ahead either.

In October, Ray Dalio, one of the most successful hedge fund managers in the world, told a conference audience that “going forward, most investors are not going to be able to produce alpha.” “Alpha” is finance jargon for outperforming the market after accounting for risk. In truth, the search for alpha has always been something of a snipe hunt; the word was first used in a 1967 article that showed that most mutual funds didn’t deliver it, especially after subtracting fees.

Two things have changed since then: More pros admit the alpha game is over, and perhaps more important for you, investing has never been better for those willing to stop playing. In the words of Tadas Viskanta, editor of the finance blog Abnormal Returns, there’s wisdom in reaching for “investment mediocrity.”

Today, just as in 1967, most professionals can’t beat an index that tracks the stock market. “The paradox,” says Viskanta, “is that the less effort you put in, the better off you are.” And recently, he notes, perfect mediocrity has grown more attainable, as index-based investing has moved steadily closer to free.

For as little as 0.04% of assets per year — that’s $4 for every $10,000 you’ve invested — and often with no broker commission, you can buy an exchange-traded fund, or ETF, that follows most of the U.S. stock market and delivers its return.

This year’s Investor’s Guide starts from the idea that index funds and a buy-and-hold stance should be the default approach for long-term wealth builders. With that in mind, MONEY has rebuilt our basic investing tool set: Our list of recommended funds is now the MONEY 50, streamlined from 70. Not all the funds are index trackers, but the core choices are low-cost, highly diversified portfolios for the long run. For many investors, a portfolio balanced among one broad U.S. stock fund, an international fund, and one or two bond funds is all you need. The MONEY 50 makes building that portfolio easy.

Yet even if you decide to stick with a simplified strategy, that doesn’t mean every investment puzzle you’ll face has been solved. The stories in this guide will help you think through your approach to the three biggest questions you still face as you save for retirement.

Question No. 1: Buy and hold what exactly?

You can build a simple portfolio for any level of risk. Stretching for high returns? You could put all your money in the Schwab U.S. Broad Market SCHWAB STRATEGIC T US BROAD MKT ETF SCHB -0.398% , or crank up risk and return potential further by adding funds like Vanguard Small-Cap VANGUARD INDEX FDS VANGUARD SMALL-CAP ETF VB -1.2585% or Vanguard FTSE Emerging Markets VANGUARD INTL EQUI FTSE EMERGING MARKETS VWO 0.2162% . Need safety? Stash more in Vanguard Total Bond Market VANGUARD BD IDX FD TOTAL BOND MARKET BND -0.0244% or iShares Barclays TIPS Bond ISHARES BARCLAYS TIPS BOND FUND TIP -0.107% to add inflation protection.

These funds make security selection automatic, but they don’t help at all with the question of how much risk you want to take. The standard rule of thumb says you should start out with a high allocation to equities and gradually “glide” that down as you age. These days fund companies often focus less on their stock-picking prowess and more on designing all-in-one “target date” funds that do this asset allocating for you. Yet as you’ll see in “How much should you hold in stocks?,” the theory and practice of lifetime asset allocation are all over the map.

Question No. 2: What if high stock and bond returns are really over?

If you’re a just-own-the-market purist, you don’t ask if stocks are cheap or expensive. You assume it’s too hard to outwit the hive-mind intelligence of the crowd. Over the short run that’s almost certainly true. But there’s evidence that the price of stocks relative to measures of their value like earnings and assets can provide a clue about returns over the course of a decade.

Stocks are now priced at about 21 times the five-year average of their earnings. According to research from the Leuthold Group advisory firm, when the market’s price-to-earnings ratio is between 20 and 25, over the next 10 years stocks have delivered an annualized return of only 3% after accounting for inflation.

Combine that with a gloomy outlook for bonds. Current yields are an indicator of future returns, and with the 10-year Treasury at 2.8%, you may be lucky to carve out 1% after inflation. “Stocks, Bonds? In 2014, Think Cash,” will help you think through your strategy so that you can thrive in a world where today’s high-asset prices could repress tomorrow’s returns.

Question No. 3: Can I ever do better?

Maybe. Even some advocates of index investing say there may be ways to outperform. But the extra bump doesn’t come from tearing into company balance sheets or, as famed Fidelity manager Peter Lynch used to say, “buying what you know.” It comes from “tilting” a portfolio of hundreds of securities to take advantage of anomalies that have shown up in historical stock returns.

One is the value effect, the tendency of stocks with low prices relative to their earnings or asset value to outperform over time. Likewise, there seems to be a small-company premium. For a shot at earning these boosts, you don’t buy a portfolio of 40 or 50 small-caps or bargain stocks. Instead, you buy an index or index-like fund that gives more weight to such shares.

You’ll need nerve: Larry Swedroe of Buckingham Asset Management, who recommends tilting, says the strategy trailed the S&P 500 badly in the late 1990s; in the past decade, though, an index of small value stocks earned an extra 2% annualized. “You have to be able to live through it,” he says.

“The New Faces of Stock Picking” profiles a pioneer in low-cost, tilted portfolios as well as other quantitatively driven thinkers searching for ways investors can carve out advantages. Instead of hunting for the inside scoop, they crunch data and use insights into investors’ behavioral blind spots. A caution: Now that star fund managers have faded, Wall Street is cranking out lots of ETFs. For every robust new idea, there’s likely to be a dozen more that are nothing but savvy marketing tied to a hot short-term trend.

Investing may be simple now, but you’ll still need the discipline not to chase the latest market beater, plus the patience to stick to a long-term strategy even when it’s out of favor. Simple? Yes, but not always easy.


You can build a solid portfolio with just three investments. Here are examples using ETFs and index mutual funds:

The ETF route:

Schwab U.S. Aggregate Bond SCHWAB STRATEGIC T US AGGREGATE BD ETF SCHZ -0.0444% : 40%
Schwab U.S. Broad Market: SCHWAB STRATEGIC T US BROAD MKT ETF SCHB -0.398% 40%
Schwab International Equity: SCHWAB STRATEGIC T INTL EQUITY ETF SCHF -0.3213% 20%

The index fund route:

Vanguard Total Stock Market Index: VANGUARD INDEX FDS TOTAL STK MARKET PORTFOLIO VTSMX -0.4244% 40%
Vanguard Total Bond Market Index: VANGUARD BD IDX FD TOTAL BOND MARKET BND -0.0244% 40%
Vanguard Tax Managed International VANGUARD TAX MANAG DEVELOPED MKTS INDEX FD INV VDVIX -0.3024% : 20%

Either way you go, your costs will be far, far less than most active fund managers charge…

Annual fee:

ETF portfolio: 0.05%
Index fund portfolio: 0.08%
Three average active funds: 1.22%

… and you’ll be diversified across the globe.

Number of stocks:

ETF portfolio: 3,144
Index fund portfolio: 4,823
Three average active funds: 289

SOURCE: Morningstar


Help! My Wife’s Dad Puts Her Money at Risk

Did you ever want to be a personal-finance advice columnist? Well, here’s your chance.

In our “Readers to the Rescue” department, we publish questions from readers seeking help with sticky financial situations, along with advice from other readers on how to solve those problems. Here’s our latest reader question:

My father-in-law still manages my wife’s investments. She is very cautious and conservative. He is reckless, but has been able to make money. What should I do about this situation, if anything?

Got a good answer? Submit it to us in the form below. We’ll publish selected reader advice in an upcoming issue. (Your answer may be edited for length and clarity.)

Please include your contact information so we can get in touch; if we use your advice in the magazine, we’d like to check with you first, and possibly run your picture as well.


To submit your own question for “Readers to the Rescue,” send an email to

To be notified of future “Readers to the Rescue” questions and answers, find MONEY on Facebook or follow MONEY on Twitter.

MONEY College

Busting the 5 Myths of College Costs

Much of the playbook for taking on the $40,000 average stick price of a private school is out-of-date or just plain wrong. Learn the right moves now.

You’ve pored through financial aid forms, knocked the priciest schools off your list, reviewed borrowing options, and nudged your kid to think more about engineering and less about English lit.

So you figure you’ve got this college thing under control. Not quite. Those expensive schools you ruled out? They might actually cost you less in the long run than some cheaper private or public institutions.

The federal loans for parents you’re looking at so your kid doesn’t graduate with debt? They may not be a better choice after all. As for thinking a technical major will be more helpful to Junior than a liberal arts degree … sorry, it doesn’t always turn out that way.

Even among savvy parents, myths and misinformation abound. Yet with the average four-year tab ranging from $71,500 at in-state public colleges to $240,000 at elite private schools, the last thing you need is to pay more than necessary, borrow more than you can handle, or pass up a college that can provide a great education at an affordable price.

What follow are the straight facts you need to make smart college choices.


The myth: Saving for college will hurt your chances of getting financial aid.

The reality: Any money you’re able to save probably won’t appreciably affect your chances for aid. Here’s why: Under the federal financial aid formula, what matters most is your income, which is assessed up to 47%.

By contrast, a maximum of just 5.64% of savings in your name will be counted — after excluding retirement accounts, any small business you own, and your home equity. A savings allowance based on your age and marital status ($30,700 for a married parent age 45 for 2014-15) will also be deducted.

As a result, parental savings typically have little impact in the government calculation of expected family contribution, says financial aid expert Mark Kantrowitz of Those savings will come in handy, though, to help pay that high expected contribution from your income.

True, nearly 400 private schools additionally use their own aid formula, which may factor in home and business equity. A high earner with substantial assets might qualify for less or no need-based aid at those schools as a result. Chances are, though, any aid you’d get would be in the form of loans, not grants, so you’re still better off saving. Research from T. Rowe Price shows that each dollar you sock away could save you twice that amount in future borrowing costs.

What to do

Make friends with a 529. Only about one in four parents who save for college uses a 529 plan, says student lender Sallie Mae. Big mistake. You get more bang for your buck in a 529, since the money grows tax-free and withdrawals are tax-free, too, as long as the cash is used for school.

Look first to your state’s plan; more than half offer a tax break to residents. Other low-fee options include New York’s 529, Ohio College Advantage, and Wisconsin Edvest.

Shelter your shelter. “All schools will assess real estate that isn’t your primary residence,” says financial aid expert Kal Chany at Campus Consultants in New York City. If you own a second home or investment property, taking out a home-equity line of credit and using the money to pay down consumer debt (to avoid having loan proceeds count as assets) will temporarily reduce your equity — just make sure you can repay the loan.

Play the name game. Have assets in a taxable account in your kid’s name? Uh-oh. They’ll be assessed at a 20% rate. Fix: Use the account over time to buy stuff for your child that you’d get anyway, such as a new laptop or SAT tutoring. Then put an equivalent amount into a 529 in your name, where it will be counted at the lower parent rate, says Joe Hurley, head of


The myth: You can’t afford a private college.

The reality: Don’t confuse the eye-popping sticker prices at private schools — $39,500 a year on average vs. $18,000 for the typical public college — with the price you’d actually pay. Discounting by private colleges, especially for good students, has become the norm.

These discounts are typically awarded as merit aid and are given regardless of financial need. As the college-age population drops, schools are increasingly competing for students, sparking an awards arms race. In fact, today more students receive merit grants (44%) than get need-based aid (42%). Last year the average discount hit 45%, a record high, says the National Association of College and University Business Officers.

To be sure, Ivy League universities and some other top private schools still offer mainly need-based aid, but their definition of need often extends to higher-income families. And merit aid is available at many other high-quality colleges. For instance, Rice University offers academic grants averaging $15,000 to 22% of students; at Denison, about 46% of students get merit awards, which average $16,300.

What to do

Look for largesse. As your child begins to evaluate colleges, you’ll want to assess how generous each is with handouts. To find the percentage of students who get merit money, go to For details about a specific college’s grants, check

Run a price check. Get a sense of what a certain private college will cost your family in particular, factoring in aid, by using the school’s net price calculator. (Colleges are now required to offer this tool on their websites.)

Some schools load in merit awards based on your student’s academic profile, while others give only a rough estimate. Either way, the results will be a good starting point for a discussion with the school’s aid officer. Also compare the results with net prices at any state colleges your child is interested in; merit awards are on the rise at public schools too.

Improve your odds. Most private colleges are secretive about the formulas used to award merit aid. In general, your child has a better shot if her grades and SAT scores rank higher than the averages for a particular school, says Lynn O’Shaughnessy, head of

Other factors that may provide an edge: intended major (a less popular one can help), community service, and musical talent. Some colleges even rate your child’s interest in attending — has yours taken a campus tour?


The myth: A liberal arts degree won’t pay the bills.

The reality: Sure, grads with business or STEM (science, technology, engineering, and math) degrees tend to earn above-average salaries. But many liberal arts majors do as well or better.

Case in point: The top-earning 25% of history majors earned a median annual lifetime income of $85,000 vs. $82,000 for computer-programming majors, per a recent analysis by the Georgetown Center on Education and the Workforce.

And in some careers, lower salaries are offset by better job security. The typical education major earns $42,000, but only 4% are out of work. Biomedical engineers pull in $68,000, but 11% are unemployed.

Major isn’t the only determinant of pay, either, notes Anthony Carnevale, the Georgetown Center’s director: “Whether your child attends grad school, changes careers, gets promoted, or loses a job has a big impact on lifetime earnings.”

Besides, many people end up in fields unrelated to their major — an analysis of alumni by Williams College math professor Satyan Devadoss found that some arts majors went into banking, engineering, and tech, while some chem majors ended up in government and education. Also, a Chronicle of Higher Education survey of employers found that previous work experience was more important than one’s major in hiring recent grads.

What to do

Focus on practical help. When comparing colleges, see what each offers to assist your child in developing work skills, says Andy Chan, VP of career development at Wake Forest University. Find out if the career office reaches out to freshmen, offers courses in résumé building, and helps students land paid internships. Some 60% of 2012 grads who held a paid internship got a job offer, according to the National Association of Colleges and Employers.


The myth: Student loans will cripple your child financially.

The reality: You’ve heard the horror stories about college grads hobbled by debt, and the facts can indeed be scary: The typical student at schools such as American University and NYU leaves with over $35,000 in loans; 2% of all student borrowers owe more than $50,000.

Rising costs are one reason for those hefty debt loads, but a less obvious problem is the increasing time young people are taking to get their degrees. Just 32% of public college students and 52% who attend a typical private school get out in four years — taking six years is more common.

At more selective schools like Davidson and Lafayette, on the other hand, 85% or more of students finish in four years. Plus, such schools tend to offer strong alumni networks that can help with job leads.

“If you can attend a good school that helps you graduate on time with great skills and contacts, borrowing can be worth it,” says O’Shaughnessy. That’s especially true if taking on a manageable amount of debt will help your child attend a better school than your family could otherwise afford. “Manageable” is the operative word.

What to do

Get your kid’s stats. Check graduation rates for the schools your child is interested in at Find the likely salary of careers he might pursue and the typical income of students who graduate from schools on his list at

Use the right benchmark. To ensure payments will be bearable, your child should borrow less than what she can expect to make in her first job, says Kantrowitz. The average grad’s $27,000 in loans would total $33,000 with interest over 10 years, if the 3.9% rate recently worked out by Congress goes into effect. (That rate is tied to 10-year Treasuries and is likely to rise in coming years for future borrowers.) If your child earns a typical starting salary of $45,000, she could afford that debt.

Don’t fight the feds. For student borrowers, government Stafford loans, which limit debt to $31,000 over four years, are the best bet. Unlike private loans, the federal program offers income-based payment and public-service debt forgiveness, says Lauren Asher, head of the Project on Student Debt.

See PLUS as a minus. Parent borrowers should just say no to federal loans. PLUS loans let you borrow the full cost of college regardless of income, at expected rates of about 7.21% (plus fees of at least 4%), which can rise to 10.5% for future borrowers under the new rate formula. “You can borrow more than you can afford at a high rate — what can possibly go wrong?” says policy analyst Rachel Fishman at the New American Foundation. A lower-rate option that limits how much you can borrow: a home-equity line of credit (4.5% to 5%).


The myth: Starting at community college, then transferring, is a great way to cut the cost of a BA.

The reality: Sure, community college is a lot cheaper than a four-year school, but students who start there are less likely to earn their bachelor’s degree..

Part of the problem: Many four-year colleges make transferring credits tough. While two-thirds of states have articulation agreements to ensure that community-college courses are accepted at specific four-year schools, loopholes abound — some allow discretion about which credits to accept, or a certain GPA may be required. And articulation agreements shouldn’t be confused with a guarantee that your child will get an open slot at a four-year college, says Stephen Handel, a College Board specialist in community colleges.

For many teens, the lack of a strong peer group also makes it hard to stay focused, says Tatiana Melguizo, a USC associate education professor; community college students tend to be older and attend part-time.

What to do

Go for ironclad. See if any community colleges in your area offer a guaranteed transfer to a four-year school. In Virginia, 23 community colleges guarantee admission for students with high GPAs into certain programs at 20 state four-year schools. Others, such as Portland Community and Portland State University in Oregon, offer co-enrollment programs that allow students to shift seamlessly into the four-year program after earning a two-year degree.

Talk to the target. Ask the admissions office at the four-year school your child wants to attend about the transfer requirements and how many two-year college students it accepts. The good news: “If your child does transfer, her odds of getting a BA are as good as those for four-year college students,” Melguizo says. Savings and a degree? Maybe you can afford grad school after all.

This story has been updated to reflect an increase in the PLUS loan rate.

MONEY Investing

How Detroit’s Breakdown Will Hit You

Detroit’s July bankruptcy is the tragic culmination of 60 years of decline.

Indeed, among localities still coping with fallout from the recession and housing bust, the Motor City stands alone in awfulness: 78,000 blighted structures, 18% unemployment, a $327 million operating deficit last year. Yet with the city looking to cut pensions and restructure debt, Detroit’s comeback bid could have ramifications beyond Michigan’s borders.

Your town may feel freer to slice retiree benefits. With so many state and local pensions facing funding shortfalls, cutting back retirement benefits — or trying to — is nothing new. What worker advocates fear is that bankruptcy-court approval of pension changes for Detroit, where pension protection is part of the state constitution, would embolden government leaders elsewhere to seek deeper cuts.

Related: Just how generous are Detroit’s pensions?

In Detroit, pension changes are most likely to follow the national trend: eliminate cost-of-living adjustments and convert current workers to defined-contribution plans, says area financial planner Leon LaBrecque, rather than reduce payments.

The muni market could take a hit. Detroit has proposed treating certain general obligation bonds as “unsecured,” instead of backed by city taxing power, and offering investors just 10 cents on the dollar.

The odds are long, but if Detroit succeeds, the precedent would shake up the bond market.

Also at risk: retiree health care, which lacks the same protections as pensions. Detroit would shift retirees to new federal exchanges or Medicare, a move other governments are studying.

Related: Detroit’s stealth business boom

Still, for most of the country, “credit quality remains quite strong,” says John Bonnell, a fixed-income manager for USAA. The five-year default rate in the $3.7 trillion muni bond market is less than one-half of 1%, reports Moody’s; 93% of municipal issuers are rated single A or higher.

Michigan muni funds already have. Funds that specialize in the state’s bonds are down as much as 17% this year, but at this point you shouldn’t rush to sell, says Chris Ryon of Thornburg Funds. Even funds with big stakes in Detroit primarily hold the water and sewer bonds that Detroit is still fully backing, not the unsecured debt the city is defaulting on.

But the real story on bonds is … Munis are less liquid than the Treasury market, and thus have taken a bigger hit as interest rates have risen of late. But David Kotok, chairman of money manager Cumberland Advisors, thinks the fear has been overplayed.

“High-grade munis are remarkable bargains,” says Kotok. Still, stick with a short-term fund, such as Fidelity Short-Intermediate Muni Income FIDELITY MUNICIPAL LTD TERM MUN INCOME FD FSTFX -0.0931% (recent yield: 1.77%), to cushion any losses as rates rise.

MONEY Saving

Become a Millionaire by Thinking Differently

In this How to Reach $1 Million special report, you’ll see how following five cardinal rules of business management can pay off for you personally. You’ll discover how a sensible, businesslike approach to your personal finances can speed up the time it takes to get you into the millionaires’ club.

This story explains how thinking outside the box can take you to millionaire status.

Successful leaders know that the trick to turning around a moribund business isn’t just getting employees to work harder but also getting them to think differently. Sometimes that requires unconventional motivational tactics.

Case in point: To push his staff at Extended Stay America to take risks, CEO Jim Donald recently started handing out GET OUT OF JAIL FREE cards. The goal? To convince employees that they won’t get in trouble for proposing bold ideas that end up failing.

As you work on saving and investing your way to $1 million, there are some behavioral tricks that you have up your sleeve too.

To be a better saver…

Make a commitment. Write down your savings goals or share them with a trusted friend or relative. In her recent research on saving behavior, economist Jill Luoto of Rand Corp. discovered that the mere act of pledging to be a better saver makes people much better at saving.

“People like to be consistent in their words and actions,” Luoto says. “If you make a pledge in front of family and friends, that social pressure enforces your behavior more.”

In Luoto’s study, one group of savers was handed various sums of money and assigned a savings account in which to sock the dough away. Another group was assigned a similar savings account, but its members were also required to visualize their goals, announce how much they’d save, and type out a promise to be a good saver. After six months the group that was required to make a written commitment had put away far more than those who didn’t.

One simple move that can help you emulate their success: Use a motivational app or website such as, developed by Yale behavioral-finance experts.

You can create a contract, share it with others, and even devise a financial penalty if you fall short — say, authorizing a credit card payment to a charity. The site has found that users who share their goal with supporters and elect a penalty succeed nearly 80% of the time, vs. 40% for those who file a goal but keep it private.

Box yourself in. Luoto also studied a third group of savers — people who were assigned an account that barred withdrawals over the next six months. “We thought the scariness of illiquidity would drive people away,” she says. Instead, that group saved far more than the other two.

The lesson? Make some of your savings tough to access. Max out special-purpose accounts that penalize early withdrawals, such as 401(k)s and IRAs for retirement, and 529s for college.

For shorter-term savings, Connie Stone, a Chagrin Fall, Ohio, planner, suggests I bonds, which can’t be cashed in for a year and dun you three-months’ interest if you sell before five years. The bonds are guaranteed to pay at least as much as the inflation rate — more than comparable CDs.

To be a winning investor…

Don’t look back. When managing a portfolio, it pays to forget how much you invested. In a Caltech study, student investors who weren’t reminded of the price they paid for stocks were 31% less likely than folks who knew their cost basis to make trading errors, such as selling winners too soon or holding losers too long.

Other research finds that this common desire to recognize gains and hide from losses — known as the “disposition effect” — reduces investors’ returns by as much as 3.4 percentage points annually.

Study co-author Cary Frydman, an assistant professor at USC’s Marshall School of Business, suggests trying to drown out info about past costs with data about what lies ahead, such as analysts’ estimates of a stock’s true value. The key question to ask yourself, he says: “Will I be able to sell this stock at a higher price in the future?”

Look way ahead. A simple trick to help keep your future focus: Post a chart near your computer showing stock returns over the past 50-plus years, and highlight the periods when the market hit a rough patch. Such charts, says Harvard economist John Y. Campbell, help “remind you the best times to invest often follow periods when people lost a lot of money.”

Think back to the dark days following the October 1987 market crash, when stocks tumbled 30% in just five days. Had you put $100,000 into an S&P 500 index fund then, you’d have a cool $1.2 million today.

Don’t act like a shortsighted CEO by…

…making decisions while brimming with confidence. Research shows that cocksure bosses often make bad acquisitions.

And a 2012 study found that fund managers whose annual reports were full of optimism lagged the market. “If you have a weakness, better that you be underconfident and tentative than overconfident,” says NYU finance prof Aswath Damodaran.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser