MONEY stocks

Why Fidelity’s New App Won’t Make You a Better Investor

Personal familiarity with a company can backfire.

Fidelity has added a new GPS feature called “Stocks Nearby” to its flagship mobile app. Open it up and it shows your location on a map, plus all the businesses around you that are connected to a publicly traded company. So if you are standing next to a Starbucks, its ticker symbol (SBUX) will show up on the map with a link to info on the stock.

Fidelity’s press release says the tool helps people follow the maxim “buy what you know.” What that means is shopping in a packed Apple store or indulging in a delicious burger at Shake Shack might inspire you to invest in the underlying business.

150112_INV_TinderStockApp2
Fidelity Investments

The company doesn’t say so, but that idea was popularized back in the 1980s by legendary Fidelity Magellan fund manager Peter Lynch, who liked to tell a story about discovering his winning investment in Hanes when his wife brought home L’Eggs pantyhose from the supermarket. Great story. And it was also great marketing, because it made investing seem a lot less mysterious.

Not a great investing strategy, though. For example, one study shows that people who invest in industries they work in do worse than traders who don’t work in the business. “Investors confuse what is familiar with what is safe,” says Larry Swedroe of Buckingham Asset Management.

There are several other reasons not to base investment decisions on a stroll through your neighborhood. For one, the businesses you’re most familiar with are likely mostly consumer products—which means the approach would likely leave entire industries out of your portfolio.

Furthermore, says Swedroe, if buying individual companies you “know” tilts your portfolio toward companies with outposts in your home town or city, you may miss out on the protection that geographic diversification affords. Say you own real estate in your city, in addition to shares in nearby companies: Then you’re especially vulnerable to a downturn in the local economy.

Even if you were to invest in a global company like Walmart—a likely stop on your shopping routine if you are among the majority of Americans—being a consumer doesn’t make you an expert. “If you notice a brand is doing well, it’s naive to believe you have valuable information,” says Swedroe. “Mutual fund managers and other professionals have access to the same or better information about a company’s prospects, so it’s more likely that you are actually at a disadvantage.”

In other words, you are likely to ignore the riskier qualities of a company you think you know well as a customer or as a local and feel excited about. That confirmation bias, in addition to overconfidence in your own impressions, has been shown to lead to lower returns.

Fidelity public relations director Rob Beauregard says the company does not intend for users to trade stocks without doing research first—and that the new “Stocks Nearby” tool is “an investing idea generator, not a stock picker.”

No matter how it’s spun, a focus on buying what you know gets the thinking backwards. You have to really know what you are buying.

MONEY Kids & Money

What Investors Can Learn from the Famous Marshmallow Study

Plate of marshmallows
Elena Elisseeva—Alamy

You've probably heard what happened when a psychologist left 4-year-olds alone in a room with a marshmallow. But you've probably forgotten the study's most important insight.

I’m so sick of hearing about the marshmallow test.

You’ve probably heard of it. If not, here’s the short story.

In the 1960s, a psychologist named Walter Mischel studied a group of four-year olds. Mischel was fascinated with his own children’s cognitive development, and how — like most children — they seemed incredibly impulsive.

“I realized I didn’t have a clue what was going on in their heads,” he said recently.

He wanted to measure impulse control, so he came up with a game. A group of children could have one marshmallow right now. It sat on a plate in front of them. Or, if they waited a few minutes while he stepped out, they could have two when he returned.

Some impatiently took the first marshmallow. Others waited.

Mischel followed the kids for 50 years, measuring how impulse control correlated with future success in life.

It was huge.

Kids who delayed gratification in the marshmallow test went on to achieve higher standardized test scores, had higher educational attainment, even better BMI scores. (One girl ate the marshmallow before the game’s instructions were even explained. Bless her.)

The marshmallow test made its way into seemingly every book, article, and speech about behavioral psychology. I’ve seen it countless times. It’s way overused.

But the most important part of the study is often left out.

The original takeaway from Mischel’s research, and one still told today, was that people with more willpower are set up for more life success than their impulsive peers.

But after watching hundreds of kids take the marshmallow experiment, Mischel discovered something different.

The marshmallow test wasn’t necessarily about willpower. Almost every kid will take the first marshmallow if it’s put in front of them. If they’re looking at it, they’re nearly incapable of not eating it, even if a bigger reward awaits.

Instead, Mischel found that kids who successfully waited for a second marshmallow were often just better at distracting themselves, taking their minds off the treat.

They hid under a desk. Or sang a song. Or played with their shoes.

Impulse control isn’t really about a four year old’s ability to patiently wait for a second marshmallow. It’s more about that four year old’s propensity to say, “Hey, look, a soccer ball!”

Smokers trying to quit consistently overestimate their ability to turn down a cigarette. Dieters do the same. What Mischel’s research shows is if we want to be better at self-control, trying to have more willpower isn’t the solution. Instead, not putting yourself in a position where you’ll be tempted by cigarettes or junk food may be the best answer. Because if you’re around them, you’ll smoke, or eat. You can’t help it.

As Jonah Lehrer once put it: “Willpower is really about properly directing the spotlight of attention, learning how to control that short list of thoughts in working memory. It’s about realizing that if we’re thinking about the marshmallow, we’re going to eat it, which is why we need to look away.”

It is the same in finance.

Bad investing behavior is the greatest cause of investor misery (fees are a close second).

People get excited and buy high, then panic and sell low. They fall for bubbles. They trade. They rotate. They fidget. They worry. They get a new idea, and go all in. Then change their mind, sell it all, and go to something else.

It’s devastating. If you can find a way to be less emotional and feel less need for constant action in investing, you’ve figured this game out.

But how do you do that?

Just like the four year old who found a path to the second marshmallow. You distract yourself with something else.

If watching financial news constantly tempts you to tweak your portfolio, turn it off.

If reading market forecasts has caused you to make regrettable decisions, stop reading them.

Go do something else.

Maybe read more books and fewer articles.

Be more choosy about who you’re willing to listen to.

The amount of financial information available has exploded over the last decade, but the amount of financial information that you need to be informed has not.

You have to learn how to sift through the news, and filter out what you don’t need. “A wealth of information creates a poverty of attention,” Herbert Simon said. It also creates a dangerous tendency to lose self-control over your ability to be a patient long-term investor.

Just look the other way.

For more:

More from The Motley Fool: Where Are The Customers’ Yachts?

MONEY Markets

Why Investors Are So Bad at Predicting Market Crashes

NYSE New York Stock Exchange
Stephen Chernin—Getty Images

After the market does well, no one expects a crash. After it crashes, everyone expects it to crash.

Stocks have boomed for nearly six years now. Are we due for a crash?

Yeah, probably. It’ll happen some day. Crashes happen.

But anytime I see people touting metrics that supposedly predict when a cash will occur, I shake my head. None of them work.

Yale School of Management publishes a “Crash Confidence Index.” It measures the percentage of individual and professional investors who think we won’t have a market crash in the next six months. The lower the index, the more investors think a crash is coming.

Yesterday came the headline: “More And More Investors Are Convinced A Stock Market Crash Is Coming.”

The Crash Confidence Index plunged in December to its lowest level in two years. “Less than a quarter of institutional investors and less than a third of individual investors believed that stocks wouldn’t crash,” Business Insider wrote.

Before you panic and liquidate your account, the most important line in Business Insider’s article is this: “On the bright side, this indicator may be a contrarian indicator.”

Bingo.

Plot the Crash Confidence Index (in blue) next to what the S&P 500 did during the following 12 months (in red), and you get this:

Investors were increasingly confident that stocks wouldn’t crash in 2007, and then a crash came. Then they were sure a crash would occur in 2009, just as a monster rally began. Same thing to a lesser degree in 2011.

If you plot the Crash Confidence Index next to what stocks did in the previous two months, you kind of see what’s going on here.

After the market does well — like in 2007 — no one expects a crash. After it crashes — like in 2009 — everyone expects it to crash:

This is similar to the consumer confidence index, which consistently peaks just before the economy is about to get ugly and bottoms when things are about to turn. (Although we only know the timing in hindsight.)

Stocks have done poorly during the last few weeks, so it’s not too surprising that expectations of a crash are growing. People like to extrapolate returns into the future.

We’ll have a crash some day. But more money has probably been lost trying to predict and hedge against a looming crash than has been lost by just expecting and enduring one when it comes.

For more on on this stuff:

More from The Motley Fool: Where Are The Customers’ Yachts?

MONEY Jobs

Why Is Employment Picking Up? Thank Government

public construction workers
Reza Estakhrian—Getty Images

After hurting the employment picture for so long, local, state and federal governments are finally adding to payrolls.

The U.S. economy continued its winning streak by adding 252,000 jobs in December, the 11th consecutive month employers hired more than 200,000 workers. The unemployment rate fell to 5.6%, a post-recession low, as various sectors (from business services to health care to construction) added to payrolls.

Boosting hiring isn’t exactly new when it comes to private businesses, which have been bolstering their staffing for every month for almost five years.

What’s different about the recent pickup in employment is the positive effect of governments (state, local and federal). While jobs aren’t being added at rapid pace, they have grown steadily over the past year, and are no longer subtracting from the labor market like they were not too long ago.

Government employment increased by 12,000 in December, compared to a reduction of 2,000 employees in the last month of 2013. Compared to a year ago, state and local governments throughout the country have added a combined 108,000 jobs.

As recently as last January the government shed 22,000 positions. Sustained, incremental growth beats much of the sector’s post-recession record, which saw employment drop off thanks to lower tax revenue and austerity measures.

Government payrolls increased by about 0.5% over the last year — which doesn’t look terribly good compared to the private sector’s 2.1% gain. But when you look at the recent gains against the 0.05% decrease in the twelve months before January 2014, you start to appreciate the recent uptick.

Gov't jobs

What’s going on?

Well, state and local government finances have stabilized and marginally improved over the past couple of years, giving statehouses and municipalities a chance to improve its fiscal situation.

Take this note from a recent National Association of State Budget Officers report which says, “In contrast to the period immediately following the Great Recession, consistent year-over-year growth has helped states steadily increase spending, reduce taxes and fees, close budget gaps and minimize mid-year budget cuts.”

The nation’s economy grew at an annualized 5% rate in the third quarter, after jumping 4.6% in the three months before. The trade deficit fell in November to an 11-month low, thanks in part to lower energy costs, which will help fourth quarter growth.

NASBO expects states’s revenues to increase by 3.1% in the next fiscal year, compared to an estimated 1.3% gain in 2014, with much of that spending dedicated to education and Medicaid.

With a more solid financial position, governments across the country are able to spend more on basic items, like construction. Public construction, for instance, increased by 3.2% last November compared to the same time last year, according to the Census Bureau.

Overall government spending has stopped following dramatically and actually picked up in the third quarter on a year-over-year basis.

Expenditure

Of course, government employment still has a ways to go before returning to normal. In the five years after the dot-com inspired recession, public sector employment gained by 4.5%. (It’s fallen by 2.8% since the recession ended in June 2009.) And while state budgets have normalized, Governors aren’t exactly flush with cash.

Says NASBO: “More and more states are moving beyond recession induced declines, but spending growth is below average in fiscal 2015, as it has been throughout the economic recovery.”

Not to mention hourly earnings fell by five cents, to $24.57, a decline of 0.2%.

Still, some employment growth is better than none at all.

Updated with earnings data.

MONEY Millennials

How to Set Financial Priorities When You’re Young and Squeezed

man counting coins
MichaelDeLeon—Getty Images

You have a lot of demands on your money—and not a lot of it. Here's what to do first.

The most financially challenging state of life is not retirement, it is early career.

That’s the time when your salary is still probably low, but you have the longest list of expenses: career clothes, cell phone bills, your first home furnishings, cars, weddings, rent—need I go on? You probably don’t have enough money to pay for all of that at once, unless your parents have set you up very well or you are a junior investment banker.

The rest of us have to make choices with our limited “discretionary” income. Here is a rough priorities list for newbies who have shopping lists that are bigger than their bank accounts.

First, feed the 401(k) to the match, not the max. If your employer matches your contributions, make sure that your paycheck withdrawals are high enough to capture the entire company match. That is free money. If you have enough money to contribute more to your 401(k), that is a good thing to do, but only if you’re able to cover other key expenses.

Invest in items that will improve your lifetime earning power. A good interview suit. An advanced degree. The right electronic devices and services for the serious job hunt.

Pay off credit card balances. Chasing those “balance due” notices every month will kill just about any other financial goal you have. If you’re carrying significant credit card balances, abandon all other extra savings and spending until you’ve paid them off, in chunks as large as possible.

Put money into a Roth individual retirement account. The younger you are and the lower your tax bracket, the better this works out for you. Money goes in on an after-tax basis and comes out tax-free in retirement. You can withdraw your own contributions tax-free whenever you want. Once the account has been in existence for five years, you can pull an additional $10,000 out, tax-free, to buy a home. It’s nice to have a Roth, and the younger you start it the better.

Save for a home down payment. Homeownership is still a smart way to build equity over a lifetime. New guidelines will once again make mortgages available to people who make downpayments as low as 3%. Even though interest rates are still at unrewarding lows, it’s good to amass these earmarked funds in a savings or money market account.

Pay down high-interest student loans. If you had private loans with interest rates over 8%, find out whether you can refinance them at a lower rate. If not, consider paying extra principal to burn that costly debt more quickly. Don’t race to pay off lower-interest student loans; the interest on them may be tax deductible, and there are better places to put extra cash.

Buy experiences, not things. Still have some money left? Fly across the country to attend your college roommate’s wedding. Take road trips with friends. Spend money to join a sports team, theater group, or fantasy football league. Focus your finances on making memories, not acquiring things—academic research holds that you get more happiness for the dollar by doing that, and you’ll probably be moving soon anyway.

Buy a couch. For now, make this the bottom of your list. Sure, everyone needs a place to sit, but there’s nothing wrong with living like a student just a little bit longer. If you defer expensive things for a few years while you put money towards all the higher priorities on this list, you’ll be sitting pretty in the future.

UPDATE: This story has been updated to clarify that Roth IRA holders can withdraw their own contributions at any time and do not have to wait until the account is five years old.

MONEY Food & Drink

What You Should Know About the Shake Shack IPO

Shake Shack in Madison Square Park in New York City.
Andrew Burton—Getty Images

Should you get in on a hot new restaurant IPO that's almost guaranteed to generate double-digit revenue growth for years to come? It's tempting in theory, but no-brainer IPOs don't always pay off.

Last week, Shake Shack, a popular New York City-based burger joint, announced that it has decided to go public. If the reception to the news on Twitter and throughout the financial media is any indication, it will be a highly coveted affair.

Founded in 2001 as a hot-dog cart in New York’s Madison Square Park, the concept has expanded to 63 physical locations, 32 of which are licensed to domestic and international operators. Meanwhile, its systemwide sales have gone from $21 million in 2010 to $140 million in 2013.

It goes without saying that there is phenomenal potential for a company like this. Yet determining whether such potential will translate into outsized returns for early investors is far from obvious.

According to Benjamin Graham, the father of value investing and author of The Intelligent Investor, the answer is generally no:

Our one recommendation is that all investors should be wary of new issues — which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased.

The data on IPOs

While the data on the performance of IPOs isn’t conclusive, it tends to support Graham’s warning. Over the past five years, for instance, a composite of IPOs compiled by Renaissance Capital has returned a total of 124%, compared with the S&P 500’s 132%.

And data curated by Professor Jay Ritter at the University of Florida leads to the same conclusion. Between 1970 and 2012, Ritter found that IPOs underperformed similarly sized publicly traded companies in the first, second, third, and fifth years after listing. The only outlier, for reasons not immediately apparent, was the fourth year, in which the cumulative return of newly listed companies exceeded that of their similarly sized competitors by 1.8%.

This isn’t to say that the data speaks unanimously against IPOs, as there is conflicting evidence that suggests the opposite. Most notably, an IPO index designed by First Trust, a money management firm headquartered near Chicago, has returned a total of 150% since 2006 versus the S&P 500’s total return of 92%.

And, of course, it’s hard to ignore the companies that have gone public and seen their shares soar. Digital-camera maker GoPro, which listed in the middle of last year amid its own flurry of media attention and excitement, serves as a case in point. Since opening at $28.65 a share on June 26, its stock has more than doubled in price and currently trades for more than $65 a share.

The issue with IPOs, in turn, isn’t that none of them pay off. As GoPro and others have demonstrated, some do. The issue instead is that they aren’t designed to do so — or, at least, not for the individual investor.

IPOs and the lemon problem

In the first case, you have the so-called lemon problem. When a company goes public, the people selling their shares know a lot more about it than you do. It’s akin to buying a used car, where the seller has intimate knowledge about the vehicle’s infirmities while the buyer must decide after only a brief test drive and cursory inspection.

Fueling this situation is the fact that many companies going public nowadays were previously controlled by private equity firms. That matters, because the fundamental business model of such firms is to extract the value from a company before unloading its shares onto the public markets.

Caesars Entertainment CAESARS ENTERT CP COM USD0.01 CZR 0% is a textbook example. When the casino giant was taken public by its private equity handlers in 2012, it was laden down with $20 billion in debt. After subtracting intangible assets, Caesars was left with a tangible book value of negative $7 billion.

Fast-forward to today, and Caesars’ interest payments have become unsustainable. In the first nine months of last year, servicing its debt consumed nearly half of the casino’s total gambling revenues, leading to a $2.1 billion loss from continuing operations. Thus, it’s no coincidence that Caesars is on the verge of putting its largest operating unit into bankruptcy as soon as this month.

Stacking the deck against individual investors

But even if the lemon problem wasn’t an issue, individual investors would still be at a disadvantage when it comes to IPOs: Investment banks, which shepherd companies through the process, have a vested interest in maximizing the price of a company’s newly issued shares, regardless of value.

Taking companies public is a lucrative and competitive business on Wall Street. And while investment banks wouldn’t admit to it, one way they compete against each other for that business is by proffering the services of their research analysts — that is, the people who are tasked with educating investors about the value of publicly traded companies.

A recent enforcement action by the Financial Industry Regulatory Authority gave a rare insight into that process for investors. At the beginning of last month, FINRA fined 10 banks between $2.5 million and $5 million each for “allowing their equity research analysts to solicit investment banking business and for offering favorable research coverage in connection with the 2010 planned initial public offering of Toys “R” Us”.

In effect, the investment banks told Toys “R” Us and its private-equity owners that, if awarded the business, their research analysts would publish favorable reports about the retailer’s value to sway investors and, by doing so, potentially inflate its stock price. It was the same thing many of the same firms did around the turn of the century, when their analysts pumped degenerate Internet stocks such as Pets.com and Webvan.com.

The net result is that it’s difficult for an individual investor to get an objective assessment of the value of a newly listed company. And it’s for this reason that investing in them calls for, in Graham’s words, a “special degree of sales resistance.”

The unfavorable timing of IPOs

Finally, I would be remiss if I didn’t at least touch on the issue of timing. It’s common sense that companies prefer to go public when stock valuations are high, as opposed to when they’re low. By doing so, the sellers are more likely to get a price that’s favorable to them and, concomitantly, less favorable to individual investors.

The data bears out that reality. In the lofty market of 2005 to 2007, an average of 200 companies went public each year. The number fell to only 31 after stocks plunged in 2008. Since then, the annual IPO volume has steadily increased with the market, topping out for the moment in 2014 as stocks soared to unprecedented heights.

In sum, when you add timing to the lemon problem as well as the conflict-of-interest issue that leads investment banks to inflate the value of newly issued stocks, it should be obvious that investing in this area is, to put it mildly, fraught with peril for the individual investor.

Getting back to Shake Shack

Of course, none of this guarantees that Shake Shack’s IPO will yield substandard returns for the early investor — relative to the broader market, that is. I’ve read more than one compelling analysis of its prospects. It’s a great business. It’s run by a restaurateur with impeccable credentials. Customers love it. And all of these things come through in the burger joint’s growth trajectory.

But at the end of the day, prospective early investors in Shake Shack would be smart to go into it with their eyes wide open. While it could be, and hopefully is, an outright bonanza for anyone who buys in, such an outcome would be in spite of the IPO process and not because of it.

MONEY index funds

The Smart Money is Finally Embracing the Right Way to Invest. You Should Too.

Investors turned their backs on traditional mutual funds in 2014 and began relying more heavily on indexing.

Since launching the Vanguard 500 fund in 1975, Vanguard founder Jack Bogle has been preaching the gospel of indexing — a plain-vanilla, low-cost strategy that calls for buying and holding all the stocks in a market and “settling” for average returns. He’s so fervent that his nickname in the industry is St. Jack.

Forty years laters, investors have finally found religion.

In 2014, the Vanguard Group attracted a record $216 billion of new money, largely on the strength of its index offerings and exchange-traded funds. These are funds that can be traded like individual stocks and that almost always track a market index.

Vanguard wasn’t alone. Blackrock, which runs the well-known iShares brand ETFs, attracted more than $100 billion of new money in 2014, a year in which investors both small and large embraced indexing, also known as “passive” investing.

By comparison, actively managed mutual funds — those that are run by traditional stock and bond pickers — saw net redemptions of nearly $13 billion last year, according to the fund tracker Morningstar.

There’s are several simple reasons for this:

1) Fund inflows generally follow recent performance.
And in 2014, the S&P 500 index of stocks outperformed roughly 80% of actively managed funds, noted Michael Rawson, an analyst with Morningstar.

He added: “When the market rallies strong, a lot of active managers tend to lag, maybe because they’re being more conservative, holding more quality stocks, or maybe holding a little bit of a cash — it is common for an active manager to hold some cash. So it’s difficult to keep up with the rising market.”

2) 2014 was a year when many heavy hitters espoused their preference for indexing.
In August, MONEY’s Ian Salisbury reported how the influential pension fund known as Calpers — the California Public Employees’ Retirement System — was openly considering reducing its use of actively managed strategies for its clients.

This came on the heels of a provocative column written by a Morningstar insider questioning whether actively managed strategies had a future. “To cut to the chase,” wrote Morningstar’s John Rekenthaler, “apparently not much.”

And as MONEY’s Pat Regnier pointed out in a fascinating piece on Warren Buffett’s investing approach, the Oracle of Omaha noted in his most recent shareholder letter that his will “leaves instructions for his trustees to invest in an S&P 500 index fund.”

3) Plus, new research from Standard & Poor’s shows that even if active managers can beat the indexes, they can’t do that consistently over time.

The report, which was published in December, noted that “When it comes to the active versus passive debate, the true measurement of successful active management lies in the ability of a manager or a strategy to deliver above-average returns consistently over multiple periods. Demonstrating the ability to outperform repeatedly is the only proven way to differentiate a manager’s luck from skill.”

Yet according to Aye Soe, S&P’s senior director of global research and design, “relatively few funds can consistently stay at the top.”

Indeed, only 9.84% of U.S. stock funds managed to stay in the top quartile of performance over three consecutive years, according to S&P. This is presumably because over time, the higher fees and trading costs that actively managed funds trigger become too difficult for even the most seasoned managers to overcome.

Even worse, just 1.27% of domestic equity portfolios were able to stay in the top 25% of their peers for five straight years. For those funds that specialize in blue chip stocks, the numbers were even worse. Of the 257 large-cap funds that finished in the top quartile of their peers starting in September 2010, less than half of 1% remained in the top quartile for each of the subsequent 12-month periods through September 2014.

As Soe puts it, this “paints a negative picture regarding the lack of long-term persistence in mutual fund returns.”

MONEY retirement planning

3 Simple Steps to Crash-Proof Your Retirement Plan

piggy bank surrounded by styrofoam peanuts
Thomas J. Peterson—Getty Images

The recent stock market slide is timely reminder to protect your retirement portfolio from outsized risks. Here's how.

At this point it’s anyone’s guess whether the recent turmoil in the market is just another a speed bump on the road to further gains or the start of a serious setback. But either way, now is an ideal time to ask: Would your retirement plans survive a crash?

The three-step crash-test below can give you a sense of how your retirement plans might fare during a major market downturn, and help you take steps to avert disaster. I recommend you do this stress-test now, while you can still make meaningful adjustments, rather than waiting until a crisis actually hits—and wishing you’d taken action beforehand.

1. Confirm your asset allocation. The idea here is to divide your portfolio into two broad categories: stocks and bonds. (You can create a third category, cash equivalents, if you wish, or throw cash into the bond category. For the purposes of this kind of review, either way is fine.)

For most of your holdings this exercise should be fairly simple. Stocks as well as mutual funds and ETFs that invest in stocks (dividend stocks, preferred shares, REITs and the like) go into the stock category. All bonds, bond funds and bond ETFs go into the bond category. If you own funds or ETFs that include both stocks and bonds—target-date funds, balanced funds, equity-income funds, etc.—plug their name or ticker symbol into Morningstar’s Instant X-Ray tool and you’ll get a stocks-bonds breakdown. Once you’ve divvied up your holdings this way, you can easily calculate the percentage of your nest egg that’s invested in stocks and in bonds.

2. Estimate the downside. It’s impossible to know exactly how your investments will perform in a major meltdown. But you can at least estimate the potential hit based on how your portfolio would have fared in past severe setbacks.

In the financial crisis year of 2008, for example, the Standard & Poor’s 500 index lost 37% of its value, while the broad bond market gained just over 5%. So if you’ve got 70% of your retirement portfolio in stocks and 30% in bonds, you can figure that in a comparable downturn your nest egg would lose roughly 25% of its value (70% of -37% plus 30% of 5% equals 24.4%—we’ll call it 25%). If your portfolio consists of a 50-50 mix of stocks and bonds, its value would drop about 15%.

Remember, you’re not trying to predict precisely how the market will perform during the next crash. You just want to make a reasonable estimate of what kind of hit your retirement savings might take so you can get an idea of what size nest egg you may end up with when things get ugly.

3. Assess the impact on your retirement. Go to a retirement income calculator that uses Monte Carlo simulations and enter your nest egg’s current value as well as such information as your age, income, when you plan retire, how your savings are invested and how much you’re saving each year (or spending, if you’re already retired). You’ll come away with the percentage chance that you’ll be able to generate the income you’ll need throughout retirement based on things as they stand now. Consider this your “before crash” estimate. Then, get an “after crash” estimate by plugging in the same info, but substituting your nest egg’s projected value after a downturn from step 2 above.

You’ll now be able to gauge the potential impact of a market crash on your retirement prospects. For example, if you’re 45, earn $80,000 a year, contribute 10% of pay to a 401(k) 70% in stocks and 30% in bonds that has a current balance of $350,000, you have roughly a 70% chance of being able to retire on 75% of pre-retirement salary, according to T. Rowe Price’s Retirement Income Calculator. Were your portfolio’s value were to drop 25% to $262,500 in a crash, your probability of retirement success would fall to 55% or so.

Once you see how a major setback might affect your retirement prospects, you can consider ways to protect yourself. For someone like our fictional 45-year-old above, switching to a more conservative portfolio probably isn’t the answer since doing so would also lower long-term returns, perhaps reducing the odds of success even more. Rather, a better course would be to consider saving more. And, in fact, by boosting the savings rate from 10% to 15%, the level recommended by many pros as a reasonable target, the post-crash probability of success rises almost to where it was originally.

If you’re closer to or already in retirement, however, the proper response to a precipitous drop in the odds of retirement success could be to invest more cautiously, perhaps by devoting a portion of your nest egg to an annuity that can generate steady, assured income. Or you may want to maintain your current investing strategy and focus instead on ways you can cut spending, should it become necessary, so you can withdraw less from your portfolio until the markets recover.

Truth is, there’s a whole range of actions you might take—or at least consider—that could put you in a better position to weather a market crash (or, for that matter, provide a measure of protection against other setbacks, such as job loss or health problems). But unless you go through this sort of stress test, you can’t really know what effect a big market setback might have on your retirement plans, or what steps might be most effective.

So run a scenario or two (or three) now to see how you fare, assuming different magnitudes of losses and different responses. Or you can just wait until the you know what hits the fan, and then scramble as best you can.

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

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7 Super Simple Ways to Simplify Your Finances in 2015

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Tay Junior/Getty Images

Make this the year you finally take control of your money—instead of letting it control you.

With the New Year comes a new chance to get a handle on your finances, and though the task may feel daunting, it’s not impossible.

Today’s technology can make it a lot easier to manage your accounts efficiently. So vowing to simplify your finances in 2015 could end up being the most manageable resolution you make this year.

Before the year gets into full swing—and the rest of your life gets complicated!—take these steps to streamline your financial life.

1. Figure Out What’s Important to You

The more financial objectives you have on your plate, the more challenging it will be to accomplish any of them, given the limited resources of time and money.

For best results, concentrate on between three and five financial goals at a time.

And be very specific about what you want, says Ellen S. Rogin, a Northfield, Ill. financial planner and author of Picture Your Prosperity. Having a clear picture helps you figure out what actions you need to take to accomplish your objective.

There are many different ways to prioritize and clarify your goals. You could write each down on an index card in great detail, then sort based on your gut, for example. But Rogin warns about getting too wrapped up in the analytical approach.

She says it’s often more effective to spur your creative juices—journaling, meditating or drawing pictures of what you want out of life, now and in the future.

2. Make Good Habits Automatic

When people are left to their own devices, they are typically not very proactive about their finances, says Bob Wander, financial planner and founder of Wander Financial Services in New York.

“Thus, for saving money,” he adds, “it has to be automatic, whether 401(k) payroll deduction or direct deposit from a bank account.”

So if you really want to save for a goal, decide now how much you want to stash each month and have that money moved from your account on payday. If you never see it, you’ll never miss it.

With your 401(k), you may even have the option to automatically increase your contributions annually on a date of your choosing (the month you expect to get a raise is a good one, since you won’t feel any pinch).

To avoid getting hit with expensive late fees, Wander also suggests setting up automatic payment for your bills. This may take 30 minutes or so to set up, but then you’ll never have to worry about making timely payments again. (You will need to make sure you have enough money in your account, but steps 5 and 6 should help with that.)

3. Buy One Fund—and Be Done

Is the dizzying array of investment choices in your 401(k) paralyzing you from investing at all? Or do you own 20 funds in hopes of having picked at least some of the right ones?

Target-date mutual funds can be particularly useful for people who feel uncomfortable creating an investment strategy, says Kristi Sullivan, financial planner and owner of Sullivan Financial Planning in Denver.

You select one of these based on the year you want to retire, and with just one single fund in your portfolio, you’re automatically exposed to a variety of stocks and bonds. What’s more, your asset allocation is automatically rebalanced based on your time horizon until retirement, growing more conservative as time goes on to protect the money you’ve accumulated.

Two thirds of 401(k) plans offer target-date funds, according to the most recent survey from the Plan Sponsor Council of America.

4. Consolidate Investment Accounts

According to the Bureau of Labor Statistics, U.S. employees have a median job tenure of 4.6 years, and that number is even lower for millennials. Transitioning to a new job is exciting, but don’t forget about your old 401(k) during the move.

“It’s harder to understand your finances when you have 401(k) plans with three or four former employers,” says Andrew Tupler, a financial planner in Bridgewater, N.J.

You can rollover your 401(k)s into an IRA. And with all your old retirement funds in one place, it’s easier to divide your money into the most effective asset allocation, make changes to beneficiary designations or addresses, and to pull money out during retirement, he adds.

5. Get a Check and Balance for your Checks and Balances

It’s good financial practice to monitor your bank and credit card account activity on a regular basis, Wander says. That way, you can spot and report any fraudulent activity early (which helps limit your liability), make sure you’re not overdrawing your bank accounts, and prevent yourself from spending more than you can manage on credit cards.

But who remembers to check every day?

Fortunately, most banks and credit cards allow customers to set up online alerts that do much of the monitoring for you.

While you should still review transactions yourself periodically, these alerts can let you know when you’re approaching a certain balance and when any unusual purchases have been made. You may even be able to set the dollar amounts for balances or purchases.

Additionally, for credit cards, you can set payment reminders. That way, if you won’t get hit with a late fee (which averages $35, according to CreditCards.com).

6. Get the Bigger Picture

Online financial tool Mint.com allows you to see your bank accounts, investments, credit cards, loans, and credit scores in one place in real time. And you have the ability to access that information anywhere, whether you’re on your work computer, smartphone or home PC, says Jorge Padilla, a client advisor at Lubitz Financial Group in Miami.

This gives you a broader picture of your finances, and ensures that you have all your financial information at your fingertips if you need to make a decision at the spur of the moment, Padilla says. Plus, having your investments together will make it easier to match up gains and losses during tax season.

The tool also allows you to create a custom budget. But it makes the otherwise laborious task of tracking your expenses automatic, by categorizing your purchases for you and totaling up the amount you spend per category.

Additionally, you can print reports or export data into Excel or Quicken—which allows for easy collaboration with your tax preparer come April, Padilla notes.

7. Pool Your Plastic

Transferring credit card balances on high-interest rate cards to one with a lower rate may help you consolidate your monthly payments and save on interest—though keep in mind that some of these cards have upfront fees of around 3% of the balance that erode some of the benefits.

So, if you expect to be able to pay off your debt in 15 months, go for MONEY’s 2014 pick for best balance transfer card, Chase Slate. You get a rate of 0% for that long and no balance transfer fee if you move your debt within the first two months. But after the 15 months, the rate resets to an APR that starts between 13% and 23%.

Need longer than 15 months to zero out your debt? Lake Michigan Credit Union Prime Platinum Visa has no balance transfer fee and the ongoing APR starts at 6%—which is about the lowest out there.

If you do transfer the balance, you might be tempted to close the old account to ward off any future temptations—but this may do more harm than good, says John Ulzheimer, a credit expert for CreditSesame.com. Since you will still have the same amount of debt but less available credit, your debt-to-limit ratio will increase, and that’s a number credit agencies pay close attention to in calculating your credit score.

A better move, if you’re worried about using the cards again: Shred them rather than canceling them. You’ll still have the credit line in your name, but you won’t have the temptation in your wallet.

More on resolutions from Money.com:

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