MONEY Economy

Is Inflation Really Dead?

201409_TBQ_1
Joe Pugliese

We put the question to Pimco Chief Economist Paul McCulley, who explains why you don't have to worry about rising prices—and why Forrest Gump was a great economist.

Paul McCulley, 57, retired from Pimco in 2010 but returned as chief economist in May. Pimco runs almost $2 trillion, including Pimco Total Return, the world’s largest bond mutual fund. McCulley coined the term “shadow banks” in 2007 to explain how Wall Street could trigger a financial panic.

MONEY assistant managing editor Pat Regnier spoke to McCulley in late July; this edited interview appeared in the September 2014 issue of the magazine.

Q: Is inflation really dead?

A: Inflation, which is below 2% per year, may very well move above 2%. In fact, that is very much the Federal Reserve’s objective. So it will move up, but only from below 2% to just above 2%. But in terms of whether we will have an inflationary problem, I don’t think we have much to worry about. Back in my youth, in the days of Paul Volcker at the Fed in the early 1980s, inflation was considered the No. 1 problem. Now I’m not even sure it’s on the top 10 list, but it for darned sure ain’t No. 1.

Q: What’s holding inflation down?

A: First, we’ve had very low inflation for a long time, and there’s inertia to inflation. The best indicator of where inflation will be next year is to start from where it is this year. We won the war against inflation. It’s that simple.

Second, we still have slack in our economy, in both labor markets as well as in product markets. Companies have very little pricing power—as an aside, the Internet is a reinforcing factor because consumers can find the price of everything. And we have too many people unemployed or underemployed for workers to be running around demanding raises.

Finally, the Fed has credibility, so expectations of inflation are low. Unmoored expectations could foster higher inflation, as companies try to anticipate higher costs. Fed credibility is a bulwark against that. Unlike 30 years ago, the Fed has had demonstrable success in keeping prices stable by showing it is willing to raise short-term rates to slow growth and inflation.

Q: What about quantitative easing, in which the Fed buys bonds with money it creates? Doesn’t that create inflationary pressure?

A: I’ve been hearing that song for the last five years. And inflation has yet to show up on the dance floor. People say, “The Fed’s been printing money. It’s got to someday show up in higher inflation.” My answer, borrowing from the famous economist Forrest Gump, is that money is as money does. And it ain’t doin’ much.

Q: You mean money isn’t getting out of banks into the broader economy to drive up prices?

A: Yeah. I mean the Fed has created a lot of money, but it’s done so when the private sector is in deleveraging mode, meaning people are trying to get out of debt. There has been low demand for credit, so the inflationary effect of money creation has been very feeble.

Q: You’ve said that a low-inflation world also means low yields and low fixed-income returns. Why?

A: People my age—I’m 57—remember the days of double-digit interest rates and double-digit inflation. But as the Fed’s fought and won its multidecade war against inflation, interest rates have come down. And it has been a glorious ride for bond investors from a total-return perspective because when interest rates fall, bond prices go up, so you earn more than the stated interest rate.

But now inflation is actually below where the Fed says it should be. So there’s nowhere lower that we want to go on inflation to pull interest rates down further. Now what you see is what you get, which is low stated nominal yields. In fact, rates will drift up in the years ahead, which is actually negative for the prices of bonds.

Q: What does this mean for how I should be positioning myself as a bond investor?

A: First and foremost is to set realistic expectations that low single digits is all you’re going to get from your bond allocation.

New normal

Q: Is there anything I can do to get better yields?

A: For bond investors, what makes sense right now is to be in what Pimco Total Return Fund manager Bill Gross calls “safe spread” investments. These are shorter-duration bonds—meaning they are less sensitive to interest rate changes—that also pay out higher yields than Treasuries do. These could be corporate bonds or mortgage-related debt. They can also be global bonds.

Q: Pimco says investors should also hold some TIPS, or Treasury Inflation-Protected Securities. Why would I own an inflation-protected bond in a low-inflation world?

A: It’s a diversification bet in some respects. But also, the Fed’s objective is 2% inflation, higher than it is now. What’s more likely? That the Fed misses the mark by letting inflation fall to 1%, or by letting inflation hit 3%? I think 3% to 4% is more likely. TIPS protect you against the risk of 3% to 4% inflation. The Fed has made clear that if it’s going to make a mistake, it wants to tilt to the high side, not the low.

Q: Why wouldn’t the Fed just aim for the lowest possible inflation rate?

A: When the next recession hits, do you want a starting point of inflation in the 1% zone? No. A recession pulls down inflation, and then you are in the zero-inflation or deflation zone.

Q: And deflation is bad because … ?

A: Because then people with debt face a higher real burden of paying it off.

Q: How much time does Pimco spend guessing what the Fed will decide? Pimco Total Return lagged in 2013 when the Fed signaled an earlier-than-expected end to quantitative easing.

A: You’ve asked me a difficult question because I wasn’t here. But I was here for the entire first decade of the 2000s, and I know a lot about the firm. I can tell you the firm spends a huge amount of time and, more important, intellectual energy in macroeconomic analysis, including trying to reverse-engineer what the Fed’s game plan is. Fed anticipation is a key to what Pimco does. You don’t always get it right, but not for a lack of effort.

Q: You argued the 2008 crisis was the result of good times making investors complacent. With Fed chair Janet Yellen talking about high prices for things like biotech stocks, is complacency a danger again?

A: I don’t worry too much about irrational exuberance in things like biotech. It doesn’t involve the irrational creation of credit, as the property bubble did. Think of the Internet and tech bubble back in 1999. It created a nasty spell, but it didn’t lead to five years in purgatory for the economy either.

MONEY Investing

Why You Aren’t Making Any Money on Your Rental

140825_REA_RentalNoMoney
Patrick Strattner—Getty Images

Many landlords struggle to generate cash from their investment properties. Here are five reasons why.

I have said it before and I will say it again: bringing in more in rent each year than you send out in expenses is the key ingredient for a buy-and-hold real estate investor to turn a profit.

Without positive cash flow, your time as an active real estate investor will be limited. So why is your property not generating cash? Here are some possibilities.

1. You Paid Too Much

In real estate, you make your money when you buy, not when you sell. Paying too high of a price for a house is perhaps the number one reason landlords end up with no leftover cash each year. When you overpay you will struggle to make a profit from day one.

To avoid this losing scenario, you really need to know and understand your market. Study long and hard what homes are listed for and end up nabbing in your area. Look at dozens of properties before you buy.

2. Your Rents Are Under Market

Rents across the country have been rising.

Unfortunately so has the cost of maintaining a home, such as taxes, utilities, insurance, and repair costs. Have your rents kept pace with these rising costs? If not, check to see if your rents are at current market rates. Check local ads on Craigslist. Ask a realtor you know. Call the phone number listed on rental signs and talk with other investors. The knowledge you gain will help you determine the appropriate market rent for your property.

Related: Is Now a Good Time to Raise Rents?

3. Your Turn-Over Is Too High

Tenant turn-over is a cash flow killer. You need long-term stable tenants to turn a profit each year. To reduce turn-over, screen out frequent movers. Make sure not to raise the rent out of line with your local market. Keeping it even a bit under market can pay off.

Be attentive to tenant needs and requests. Keep your properties clean and maintained.

4. You Are Spending Too Much

Clean and properly maintained properties are a must. But that does not mean you need to pay top dollar for repairs and upgrades. Calling the service companies with the largest ads will likely end up costing you more than you need to spend. Having your tenant call any old repair pro and then sending you the bill also will likely result in you paying more than necessary.

Find and develop relationships with contractors and other service personnel that will work with investors and not charge premium (retail) rates. They can be hard to find but they are out there. Get referrals from your local Real Estate Investors Association or from other trusted contractors.

5. You Are Spending Too Little

Properties simply have to be maintained.

You cannot cut your way to profitability here. If you let your properties deteriorate and do not complete necessary repairs, your tenants will eventually get fed up and move. You’ll also develop a slumlord reputation, making it difficult to attract new tenants. Renters you do attract will not be the most desirable. This situation can easily send a property into an ever deepening downward spiral. Don’t let it start.

 

More from BiggerPockets:

6 Acronyms Every Beginner Real Estate Investor Should Know

4 Things to Check Before Allowing Pets in Your Rental Property

The Key to Saving Money in Real Estate: Property Maintenance

 

This article originally appeared on BiggerPockets, the real estate investing social network. © 2014 BiggerPockets Inc.

MONEY Investing

35 Smart Things to Do With $1,000 Now

Andrew B. Myers

These moves can make you smarter, healthier, happier—and richer.

1. Buy 1 share of Priceline Group THE PRICELINE GROUP INC. PCLN -1.1226%
The fast-growing travel biz has just 4% global market share, leaving plenty of room to expand.

2. Buy 10 shares of Apple APPLE INC. AAPL -1.0233%
The Mac daddy has a dividend yield of 1.9% and a cheap price/earnings ratio of 14.1.

3. Buy 50 shares of Ford FORD MOTOR CO. F -0.8452%
The automaker has a P/E of 10.5, a 2.8% dividend yield, and a record (5%) market share in China.

4. Grab the last of the great TVs
While they’re considered superior to LCDs—for having deeper blacks and any-angle viewing—plasma TVs haven’t been profitable enough for manufacturers, so most are curbing production. LG is one of the last in the game, and its ­60-inch 60PB6900 smart TV (around $1,000) has apps to stream digital content and 3-D performance besting its peers. Get the extended warranty, since a service company would have to replace the TV if parts are no longer available.

5. Kick tension to the curb with yoga…
Half of workers say they’re less productive due to stress, the American Psychological Association found; worse, research from the nonprofit Health Enhancement Research Organization found that health care expenses are 46% higher for stressed-out employees. Regularly practicing yoga can help modulate stress responses, according to a report from Harvard Medical School. Classes cost about $15 to $20 a pop, which means that $1,000 will keep you doing downward dog twice a week for about half a year.

6. …Or acupuncture
A recent article in the Journal of Endocrinology found a connection between acupuncture and stress relief. Your insurer may cover treatment, but if not, sessions run $60 to $120 a piece. So you can treat yourself to around 10 to 15 with $1,000.

7. …Or biking
Research suggests that 30 minutes a day of moderate exercise can lower levels of the stress hormone cortisol. So take a bike ride after work. The ­Giant Defy 2 ($1,075) is one of the best-value performance bikes out there, Ben Delaney of BikeRadar.com says.

8. Give your kids ­a jump on retirement
Assuming your kids earn at least a grand this year from a summer job or other employment, you can teach them the importance of saving for retirement by depositing $1,000 (or, if they earn more and you’re able, up to $5,500) into Roth IRAs in their names. Do so when the child is 17, and it’ll grow to over $18,400 by the time he’s 67 with a hypothetical 6% annual return, says Eau Claire, Wis., financial planner Kevin McKinley.

9. Get over your midlife crisis
Would getting behind the wheel of your dream vehicle make you feel a teensy bit better about reporting to a 30-year-old boss? Then sow your oats—for 24 hours. Both Hertz and Enterprise offer luxury rentals; you can find local outfits by searching for “exotic car rental” and your city. Gotham Dream Cars’ Boston-area location rents an Aston Martin Vantage Roadster for $895 a day.

 

Andrew B. Myers

10. Iron out your wrinkles
For a safer and cheaper alternative to going under the knife, try an injectable dermal filler. Dr. Michael Edwards, president of the American Society for Aesthetic Plastic Surgery, recommends Juvéderm Voluma XC, which consists of natural hyalu­ronic acid that helps smooth out deep lines and adds volume to cheeks and the jaw area. It lasts up to two years and costs near $1,000 per injection.

11. Live out a dream
Play in a fantasy world with these adult camps, which cost in the neighborhood of $1,000 with airfare: the four-day Adult Space Academy in Huntsville, Ala. ($650); the Culinary Institute of America’s two-day Wine Lovers Boot Camp in St. Helena, Calif. ($895); or the one-day World Poker Tournament camp in Vegas ($895).

12. Hire someone to fight with your folks
Is your parents’ home bursting at the seams with decades of clutter … er, memories? Save your breath—and sanity—by hiring a profes­sional organizer (find one at napo.net) for them. Mom and Dad may listen more to an impartial party when it comes to deciding what to toss, says Austin organizer Yvette Clay. Focus on pile-up zones, like the basement, garage, and living room (together, $500 to $1,500).

13. Launch you.com
A professional website will help you stand out to employers, says Jodi Glickman, author of Great on the Job. Buy the URL of your name for about $20 a year from GoDaddy and find a designer via Elance​.com or Guru.com; $1,000 should get you a nice-looking site with a bio, blog, photos, and portfolio of your work.

14. Become a techie—or just learn to talk to one
Technical knowledge isn’t just for IT folks anymore. “Digital literacy is becoming a required skill,” says Paul McDonald, a senior executive director of staffing agency Robert Half International. Get up to speed with one of these strategies. Understanding how websites, videogames, and apps are built is useful to almost any job dealing in big data or search algorithms, says McDonald. Take a course in programming for nonprogrammers at ­generalassemb.ly ($550), then get a year’s subscription to Lynda.com ($375) for more advanced online tutorials.

15. Get tweet smarts
Take a class to give you expertise—and confidence— in using social media and analyzing metrics. MediaBistro’s social media boot camp includes five live webcast sessions for $511, and you can add four weeks of classroom workshops with pros for $449. #olddognewtricks

16. Buy the Silicon Valley gear
Need a new laptop now that you’re a tech whiz? To best play the part, go with Apple’s MacBook Air ($999) or its big brother the MacBook Pro ($1,099). With a long battery life and powerful processors, the Air and Pro are the preferred picks for developers, coders, and designers, says PCmag.com’s Brian Westover.

David Kilpatrick—Alamy

17. Save your cellphone camera for selfies
Your most important memories shouldn’t be grainy. Get a digital SLR camera featuring a through-the-lens optical viewfinder, “which is still essential for shooting action,” says Lori Grunin of CNET. Her pick, Nikon’s D5300 ($1,050). Its 18–140mm lens produces sharp images shot quickly enough for most personal photography.

18. Class up your castle
Interior decorating can cost a fortune—insanely priced furnishings, plus a 30% commission. Homepolish.com, launched in 2012 and now in eight metro areas, upends the model. The site’s decorators charge hourly ($130 or less) and suggest affordable furnishings.

19-21. Hire a good manager
With only 10 C-notes, your mutual fund choices are limited by minimum investment requirements. Besides simply letting you in the door, these actively managed funds have relatively low fees and beat more than half their peers over three, five, and 10 years:
Oakmark Select large blend; 1.01% expenses
Schwab Dividend Equity large value, 0.89% expenses
Nicholas large growth, 0.73% expenses

22. Primp the powder room
Get a new sink and vanity for a refresh of your guest bathroom without a reno. You can find a combined vanity and sink set for under $650; figure another $100 to $200 each for faucet and labor.

23. Replace light fixtures
Subbing in new lighting in the dining room, the front hall, and possibly the kitchen can take 20 years off your house, suggests Pasadena realtor Curt Schultz. You’re likely to pay $100 to $400 per fixture, plus $50 to $100 for installation.

24. Swap out the front door
It’s the first impression guests and buyers have of your home. Look for a factory-finished door—possibly fiberglass if it’s a sunny southern or western ­exposure without an overhang. You could pay $1,000 for the door and the installation.

25. Catch up on retirement.
If you’re 50 or older, you can put in $1,000 more in an IRA (above the $5,500 normal limit) each year. Do so from 50 to 65, and you’ll have $27,000 more in retirement assuming you get a 6% annual return, per T. Rowe Price.

Ingolfur Bjargmundsson—Getty

26. Fly solo to see the Northern Lights
As more companies package deals to Iceland, prices are dropping, says Christie McConnell of Travelzoo.com. You could recently find four-night packages with airfare, hotel, and tours for $800 a person. Go in late fall to see the Northern Lights.

27. Hit the beach in Hawaii
The islands are still working through the overbuilding of hotels that began before the recession, says Anne Banas of Smartertravel.com. Three-night packages for fall with hotel and airfare start around $500 a person from the West Coast.

28. Give your car a makeover
You can’t get a new set of wheels for 1,000 smackers, but you can make your old car feel new(ish) again with this slew of maintenance fixes: A new set of tires ($600), a full car detail ($100), new wiper blades ($50), a wheel alignment ($150), and a synthetic oil change ($100). You’ve likely been putting these off until something breaks, but there’s good reason to do them all at once. Besides giving your car a smoother ride, “this preventative maintenance will help you nurse your car longer, while also saving some gas,” says Bill Visnic, senior editor at Edmunds.com. New car smell not included.

29. Make like (early) Gordon Gekko
Wall Street buyout firms KKR and Carlyle are inviting Main Street investors into private equity funds for $10,000 and $50,000, respectively. Want to play the game with less scratch? Invest $1,000 in Blackstone GroupBLACKSTONE GROUP LP, THE BX -1.5565% . Shares of the private equity giant have a 5.1% yield and a cheap P/E of 8.5, plus Blackstone is a top-notch alternative-asset firm, says Morningstar’s Stephen Ellis.

30-32. Put your donations to work where they’ll do the most good
Groups that focus on improving healthcare in the developing world have some of the best measurable outcomes of all charities, says Charlie Bresler, CEO of The Life You Can Save. Many of the supplies used to improve and save lives, like vaccines or mosquito nets, cost pennies to produce, he says, and surgeries that cost tens of thousands in the U.S. can be performed for a few hundred bucks overseas. Three great organizations working in those areas: SEVA Foundation, which works to prevent blindness; Deworm the World, which seeks to eradicate worms and other parasitic bacterial disease; Fistula foundation, which provides surgical services to women with childbirth injuries.

33. Defend the fort
An alarm system can pare as much as 20% from a homeowner’s policy, and the latest ones have neat bells and whistles. Honeywell’s LYNX Touch 7000 (starting at $500, plus $25 to $60 a month) links to four cameras that stream live video. It randomly switches on lights to make an empty home look occupied—and can detect a flood and shut down water.

34. Enjoy a buffet of entertainment
The average cable bill is expected to hit $123 a month in 2015—or $1476 a year—according to the NPD group. What if we told you you could cut the cord, redeploy $1,000 of that to getting two years worth of the following digital libraries, and still bank about 500 bucks? Yeah, we thought so.
For old movies and TV shows…get Netflix ($7.99-$8.99/month). Analysts estimate the company’s library is much larger than that of Amazon Prime.
For current TV shows…watch via Hulu ($7.99/month), which offers episodes from more than 600 shows that are currently on air.
For music…stream with Spotify Premium ($9.99/month). The premium version lets you skip commercials and listen to millions of songs even offline.
For books…read via Kindle Unlimited ($9.99/month). You can access the company’s library of more than 600,000 ebooks and audiobooks with one of its free reading apps, which work Apple, Android or Windows Phone devices.

35. Protect your heirs.
For about $1,000 you can have a will, durable power of attorney, and health care directive written up. Find an estate planner at naepc.org.

Related: 24 Things to Do With $10,000 Now
Tell Us: What Would You Do With $1,000?

MONEY 401(k)

3 Things to Know About Your 401(k)’s Escape Hatch

ladder leading to a bright blue sky
Alamy

More and more 401(k)s offer a formerly rare option—a brokerage window. That's raising questions from Washington regulators. Here's what you should watch out for.

While 401(k)s are known for their limited menu of options, more and more plans have been adding an escape hatch—or more precisely, a window. Known as a “brokerage window,” this plan feature gives you access to a brokerage account, which allows you to invest in wide variety of funds that aren’t part of of your plan’s regular menu. Some 401(k)s also allow you to trade stocks and exchange-traded funds, including those that target exotic assets such as real estate.

No question, brokerage windows can be a useful tool for some investors. But these windows carry extra costs, and given the increased investing options, you also face a higher risk that you’ll end up with a bad investment. All of which raises concerns that many employees may not fully understand what they’re getting into with these accounts. Earlier this week the U.S. Labor Department, which has been fighting a long-running battle to make retirement plans cheaper and safer for investors, asked 401(k) plan providers for information about brokerage windows.

You may wonder if a brokerage window is something you should use in your 401(k). To help you decide, here are answers to three key questions:

How common are brokerage windows?

Not long ago these features were rare. As recently as 2003, just 14% of large plans included offered a brokerage window, according to benefits company Aon Hewitt. But they’ve grown steadily more popular over the past decade, with about 40% of plans offering this option as of 2013. Interestingly, the growth has taken place even as more 401(k)s have opted to take investment decisions out of workers’ hands by automatically enrolling them in all-in-one investments like target-date funds.

Those two trends aren’t necessarily at odds. Experts say companies often add brokerage windows in response to a small but vocal minority of investors, who, rightly or wrongly, believe they can boost returns by actively picking investments. But overall just 5.6% of 401(k) investors opt for a window when it is offered. The group that is most likely use a brokerage window: males earning more than $100,000, about 9% of whom take advantage of the feature, according to Hewitt. (Not surprisingly, this group also tends to have the corporate clout to persuade HR to provide this option.) By contrast, only about 4% of high-earning women use a window.

When can brokerage windows make sense for the rest of us?

That depends in part on whether the other offerings in your 401(k) meet your needs. If you want an all-index portfolio, for example, a brokerage window may come in handy. Granted, more plans have added low-cost index funds, especially if you work for a large or mid-sized company. Today about 95% of large employers offer a large-company stock index fund, such as one that tracks the S&P 500, according to Hewitt.

Workers at small companies are less likely to enjoy the same access, however. These index funds are on the menu only about 65% of the time in plans with fewer than 50 participants, according to the Plan Sponsor Council of America, a trade group.

Moreover, even in large plans investors seeking to diversify beyond the broad stock and bond market can find themselves out of luck. Only about 25% of plans offer a fund that invests in REITS. And only about two in five offer a specialty bond fund, such as one that holds TIPS.

But even if a window allows you to diversify, you need to consider the additional costs. About 60% of plans that offer a brokerage window charge an annual maintenance fee for using it, according to Hewitt. The average amount of the fee was $94. And investors who use the window typically also pay trading commissions, just like they do at a regular brokerage.

Where does that leave me?

Before you decide to opt for a brokerage window, check to see if the fees outweigh the potential benefits. Here are some back-of-the-envelope calculations to get you started:

If you have, say, $200,000 socked away for retirement, paying an extra $100 a year to access a brokerage window works out to a modest additional fee of 0.05%. While the brokerage commission would increase that somewhat, you can minimize the damage by trading just once a quarter or once a year.

If your plan includes only actively managed mutual funds with annual investment fees in the neighborhood of 1%, the brokerage window could allow you to access ETFs charging as little as 0.1%. That means you could end up paying something like 0.15% instead of 1%.

If your plan has low-cost broad market index funds, however, a brokerage window offers less value. Say you want to add more more specialized investment options, such as a REIT or emerging market fund. Even if you have $200,000 in your 401(k), you’ll probably only invest a small amount in these more exotic investments—perhaps $5,000 or $10,000. So a $100 brokerage fee would increase your overall costs on that slice of your portfolio to 1% to 2%. Plus, you’ll pay brokerage commissions and fund investment fees. In that case, better to leave the escape hatch shut.

MONEY Housing Stocks

Smart Ways to Play the Uneven Housing Recovery

Home Depot shopping cart in store aisle
Jim Young—Reuters

While shares of homebuilders remain iffy, there are other attractive stocks in the broader real estate recovery.

The U.S. housing market roared in July, but investors may want to tiptoe rather than jump into the sector.

That’s because much of the 15.7% increase in new home construction in July, the first gain in two months, came from apartment buildings, which tend to attract lower income renters and do not generate as much overall economic activity as single-family homes.

The appeal of apartments to millennials, a generation laden with student loan debt that may make it difficult to afford a down payment on a home, is one reason why some noted investors, such as DoubleLine Capital’s Jeffrey Gundlach, have said they are betting against the shares of homebuilding companies.

Fannie Mae on Monday downgraded its outlook for home sales and construction, estimating that 1.4 million single-family units will be constructed during 2014 and 2015 combined, compared with an earlier forecast of 1.6 million units.

“From an investment standpoint the homebuilder trade has been one of the most hotly anticipated trades over the past few years. Yet it continues to be nothing spectacular,” says James Liu, a global market strategist at J.P. Morgan Funds.

Fund managers, as a whole, are not taking a rosy view of the homebuilding segment. Actively managed U.S. mutual funds, on average, devote just 1.06% of their portfolio to companies such as Toll Brothers TOLL BROTHERS TOL -0.4974% and KB Home KB HOME KBH 0.1339% , according to Lipper. That was unchanged from the end of 2013.

Yet analysts and strategists say there are some attractive pockets of the housing market.

Housing-Related Retail

Phil Orlando, chief equity strategist at Federated Investors, built up positions in select retail stocks throughout the summer in expectation that a slowly improving housing market would help retailers such as Home Depot THE HOME DEPOT INC. HD 0.1417% and apparel and home fashion company TJX TJX TJX 0.1352% , parent of TJ Maxx and HomeGoods.

Both companies should benefit not just from new home construction, which accounts for approximately 8% of the housing market, but from rising home prices, which could spur homeowners to upgrade their appliances or otherwise put more money into their homes, he says.

“I’m very comfortable that when the dust settles we will see a resurgent consumer in the back-to-school season,” he says.

Home Depot on Tuesday reported a higher-than-expected 6.4% increase in same-store sales in the United States and raised its full-year forecast. Shares of the company are up nearly 8% for the year, or nearly one percentage point more than the broad S&P 500 index.

Apartment Buildings

To be sure, some investors have already done very well betting on a 2014 multi-family housing market. Exchange-traded funds focusing on residential real estate investment trusts, which typically hold apartment buildings and other multi-family developments, have been on a tear this year. The iShares Residential Real Estate Capped ETF is up 22.3% year-to-date, while the Vanguard REIT ETF is up 17.6%.

Those gains raise the possibility that shares of the companies in the multi-family sector already reflect the boom in apartment buildings and have little room to run, analysts say.

“The data remains inconclusive and uneven, says Dan Veru, chief investment officer at Palisade Capital, “and that’s the nature of the housing recovery right now.”

MONEY Behavioral Economics

Why You Shouldn’t Overplay a Hot Hand — in Basketball or Investing

Miami Heat's LeBron James
© Mike Stone—Reuters

New research says there is such a thing as a hot hand in basketball — like momentum in investing. Trouble is, hot hands lead to overconfidence, which leads to cold spells.

A couple of winters ago, Larry Summers gave a 30-minute talk to the Harvard’s men’s basketball team over pizza. During the peroration, per Adam Davidson in the New York Times, the former Treasury Secretary and Harvard president engaged in a bit of Socratic dialogue.

He asked the students if they thought a player could have a “hot hand” and go on a streak in which he made shot after shot after shot? All the players nodded uniformly. Summers paused, relishing the moment.

“The answer is no,” he said. “People apply patterns to random data.”

In this case, Summers may be wrong.

A new study by three Harvard grads — using data based on tracking cameras in 15 arenas that captured 83,000 shot attempts in the 2012-13 NBA season — found that “players who are outperforming (i.e. are ‘hot’) are more likely to make their next shot if we control for the difficulty of that shot.”

When you account for the difficulty of the shot, the authors discovered “a small yet significant hot hand effect.” To put a number on it, a player’s chance of making his next shot increases by 1.2% for each prior shot he made.

So what?

While your basketball skills may never carry you to the NBA, there is a lesson to be learned from the paper’s findings.

And it has to do with how you invest.

The study’s authors concluded the following: “Players who perceive themselves to be hot based on previous shot outcomes shoot from significantly further away, face tighter defense, are more likely to take their team’s subsequent shot, and take more difficult shots.”

This basically means when someone makes certain shots (think three-pointers) at a higher percentage than they normally do, the opposing defense reacts by guarding the player more closely. And as defenders start paying more attention to the shooter, he has to take shots from longer range, which are inherently more difficult.

What does this have to do with your portfolio?

Well, consider what’s going on. A player makes a few shots and gets “hot.” He’s in the zone, so he starts growing overconfident. Not only does he start to take more shots, but he starts taking increasingly difficult shots.

While he may be more likely to make those difficult shots at the outset since he’s on a roll, the more difficult shots come with a lower percentage of accuracy. Which means he will eventually start to miss more and cool down. In other words, his overconfidence leads him to take shots that eventually take him “out of the zone.”

This is a lot like momentum investing.

Momentum is a real force in the markets. History, for instance, shows that investors — at least in the short run — are much better off riding last year’s winners than the laggards, says Sam Stovall, managing director for U.S. equity strategy at S&P Capital IQ.

So investors who ride the market’s momentum invest in a winning stock or sector. Those investments rise in value. This trend repeats a few times and before long investors believe their skills as a trader are leading to the gains, rather than the momentum effect. Before long, these investors are trading more frequently to capitalize on their “hot hands.” But this has the effect of racking up trading costs and mistakes, which are a headwind to investors that eventually cools them down.

This doesn’t mean you should eschew momentum altogether. As MONEY’s Paul Lim noted in his March 2014 article, “A decent body of research suggests that entire asset classes that shine in one year have a better-than-average chance of outperforming in the next.”

The trick is to find a way to ride the hot hand without taking increasingly inefficient shots.

One idea is to minimize your trading costs by limiting your trading to just once a year. According to researchers at the asset-management firm Leuthold Group, a time-tested way to do this is to buy last year’s second-best performing asset class and hold that for a year (last year’s second-best asset class was large, U.S. stocks). Then repeat the process the following year. Historically, such a strategy returned five points more annually than the S&P 500, while experiencing only slightly more volatility. (Of course, you shouldn’t tilt your entire portfolio toward momentum sectors. Think 10%.)

By incorporating a little bit of the “hot hand” into your investing strategy, you should be able to book slightly higher returns. And you don’t even have to go to the gym.

MONEY Ask the Expert

Here’s How to Protect Your 401(k) from the Next Big Market Drop

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: Bull markets don’t last forever. How can I protect my 401(k) if there’s another big downturn soon?

A: After a five-year tear, the bull market is starting to look a bit tired, so it’s understandable that you may be be nervous about a possible downturn. But any changes in your 401(k) should be geared mainly to the years you have until retirement rather than potential stock market moves.

The current bull market may indeed be in its last phase and returns going forward are likely to be more modest. Still, occasional stomach-churning downturns are just the nature of the investing game, says Tim Golas, a partner at Spurstone Executive Wealth Solutions. “I don’t see anything like the 2008 crisis on the horizon, but it wouldn’t surprise me to see a lot more volatility in the markets,” says Golas.

That may feel uncomfortable. But don’t look at an increase in market risk as a key reason to cut back your exposure to stocks. “If you leave the market during tough times and get really conservative with long-term investments, you can miss a lot of gains,” says Golas.

A better way to determine the size of your stock allocation is to use your age, projected retirement date, as well as your risk tolerance as a guide. If you are in your 20s and 30s and have many years till retirement, the long-term growth potential of stocks will outweigh their risks, so your retirement assets should be concentrated in stocks, not bonds. If you have 30 or 40 years till retirement you can keep as much as 80% of your 401(k) in equities and 20% in bonds, financial advisers say.

If you’re uncomfortable with big market swings, you can do fine with a smaller allocation to stocks. But for most investors, it’s best to keep at least a 50% to 60% equities, since you’ll need that growth in your nest egg. As you get older and closer to retirement, it makes sense to trade some of that potential growth in stocks for stability. After all, you want to be sure that money is available when you need it. So over time you should reduce the percentage of your assets invested in stocks and boost the amount in bonds to help preserve your portfolio.

To determine how much you should have in stocks vs. bonds, financial planners recommend this standard rule of thumb: Subtract your age from 110. Using this measure, a 40-year old would keep 70% of their retirement funds in stocks. Of course, you can fine-tune the percentage to suit your strategy.

When you’re within five or 10 years of retirement, you should focus on reducing risk in your portfolio. An asset allocation of 50% stocks and 50% stocks should provide the stability you need while still providing enough growth to outpace inflation during your retirement years.

Once you have your strategy set, try to ignore daily market moves and stay on course. “You shouldn’t apply short-term thinking to long-term assets,” says Golas.

For more on retirement investing:

Money’s Ultimate Guide to Retirement

MONEY Google

10 Ways Google Has Changed the World

Google Earth view
Google

It's been a decade since Google went public. Here are 10 ways the company has transformed the market—and our lives— since.

Back in 2004, investors weren’t entirely sure what to make of Google, and skeptics abounded. Fast-forward to today, when we can look back at how far the company has come, in ways that inspire both awe and concern. Below are 10 examples of its influence.

1. It has changed our language. Despite Microsoft’s best efforts, there’s a reason “Bing” never caught on as a verb, let alone as a beleaguered anthropomorphic meme. The phrase “to Google” is so popular that the company is actually worried about losing trademark rights if the term becomes generic, like “escalator” and “zipper,” which were once trademarked.

2. It has changed our brains. Recent research has confirmed suspicions that 24/7 access to (near) limitless information is not only bad for human discourse—it’s also making us worse at remembering things, regardless of whether we try. And even if we aren’t conscious of it, our brains are primed to think about the Internet as soon as we start trying to recall the answer to a tough trivia question. Essentially, Google has become our collective mental crutch.

3. It set the stage for Facebook and Twitter’s sky-high valuations. Yes, lofty valuations based on mere speculation were also common back in the dot-com fervor of the ’90s, says Ed Crotty, chief investment officer for Davidson Investment Advisors. But Google broke new ground by proving that even just the potential for a huge audience could pay off in a big way.

“In the early days, when people were thinking in terms of web portals, the barriers to entry didn’t seem high for search,” Crotty says. That meant Google’s competitive advantage wasn’t clear. But “the tipping point was when Google was able to scale up their audience enough to attract ad agencies, and then further improve their algorithms, since those get better with scale. That’s partly why you see tech companies now willing to forgo profits for a period of time in order to build an audience.” And also why investors are willing to throw money their way.

4. It has taken over our cell phones. Since the first Android phone was sold in 2008, Google’s mobile operating system has bulldozed the competition. Today it claims nearly 85% of market share, nearly doubling its hold over the last three years. Next stop, self-driving cars?

5. It has transformed the way we use e-mail. Gmail was invented a decade ago, before bottomless inboxes were a sine qua non. It’s hard even to remember those dark ages when storage space was sacred—and deleting emails was as tedious-but-necessary as flossing. Today our accounts serve as mausoleums, housing long-forgotten files, links, and even whole relationships. Google itself has touted alternative uses for Gmail, such as setting up a virtual time capsule for your newborn—though in practice accounts can’t be owned by anyone under 13. But even that last point is about to change.

6. It’s changed how we collaborate. Back in 2006, Google acquired the company behind an online word processor named Writely. With that bet, Google created a world where it’s taken for granted that people can collaborate on virtually any type of document, whether for work, play, or (literally) revolution.

7. It has allowed us to travel the globe from our desks. Yes, MapQuest was popular first. But Google Maps (and Earth) has become much more than a tool for measuring travel routes and times. Since Google Street View came onto the scene in 2007, it’s been possible to “visit” distant destinations, give friends a virtual tour of your hometown, plan ahead of trips, and waste even more time on the Internet. Of course, the more popular a tool, the more useful it is to those who’d like to spy on us.

8. It has influenced the news we read. Ranking high in Google search results is serious business and can have a profound effect on the success of companies, media outlets, and even politicians. When I just Googled “how SEO affects journalism,” this link was at the top of my search results. How is that significant? Well, for one, that story itself has been so successfully search engine optimized that it still tops the list despite being four years old.

But most importantly, many of the concerns raised in the piece have not gone away—such as the pressure to “file some pithy blog post about the hot topic of the moment” at the expense of covering stories that would be prioritized based on traditional measures of newsworthiness. What that means for you, the reader: more headlines like this and this.

9. It has turned users into commodities. We all love free stuff, but it’s easy to forget that services offered by companies like Google and Facebook aren’t truly “free,” as data expert Bruce Schneier has pointed out. Remember that all of your data (across ALL of the services you use, and that includes Calendar, Maps, and so on) is a valuable good that Google is packaging and selling to its real customers—advertisers.

10. It’s changed how everyone else sees YOU. Unlike your Facebook profile, the links that turn up when potential employers (or love interests) Google you can be near-impossible to erase. Perhaps unsurprisingly, Google uses the fear of embarrassing search results to encourage people to manage their image through Google+ profiles.

Related:
4 Crazy Google Ambitions
The 8 Worst Predictions About Google

MONEY tech stocks

Which 80-Year-Old Billionaire Would You Trust With Your Tech Portfolio?

Diptych of Warren Buffett and George Soros
Mark Peterson/Redux (Buffett)—Luke MacGregor/Reuters (Soros)

Billionaire hedge fund manager George Soros and billionaire investor Warren Buffett are both buying tech stocks—but decidedly different kinds. So who would you bet your portfolio on?

Both billionaire investor Warren Buffett and billionaire hedge fund manager George Soros have had somewhat troubled relationships with tech stocks over the years.

Buffett famously punted on tech throughout the 1990s, declaring that “we have no insights into which participants in the tech field possess a truly durable competitive advantage.” So his investment company Berkshire Hathaway severely lagged the S&P 500 in the late 1990s — but at least it missed the tech wreck in the early 2000s. For Soros, the opposite was the case: His fund stayed at the Internet party too long in 2000.

Recently, though, both octogenarians have been dabbling in this sector — but in decidedly different ways.

SEC filings released on Thursday indicate that while Buffett is looking to the past for time-tested but overlooked plays on this sector, Soros seems only to be interested in future trends.

Buffett and ‘Old Tech’

Buffett is taking the old school approach. Quite literally. His tech sector holdings — indeed, his entire portfolio — looks as if it was straight out of the early or mid 1990s.

For instance, one of his biggest tech holdings, which recent SEC filings indicate he’s been adding to, is the century-old IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM -0.5584% .

This technology service provider — which has run into difficulties in the crowded cloud computing space lately — has seen its revenue growth decline for several quarters while its stock has been under fire.

IBM Chart

IBM data by YCharts

No doubt, Buffett clearly sees IBM as a value, as the stock trades at a price/earnings ratio of around 9, which is about half what the broad market currently trades at. In his most recent letter to Berkshire shareholders, Buffett described IBM as one of his “Big Four” holdings, along with American Express, Coca-Cola, and Wells Fargo.

Beyond IBM, Buffett prefers lower-priced but slower growing internet backbone companies to fast-growing but pricey content providers. This is part of a tech investing trend that MONEY contributing writer Carla Fried recently addressed.

Other stocks he recently purchased or positions that he has been adding to include the Internet infrastructure company Verisign VERISIGN INC. VRSN -0.635% and internet service providers Verizon VERIZON COMMUNICATIONS INC. VZ -0.4801% and Charter Communications CHARTER COMMUNICATIONS INC. CHTR -0.5748% .

Soros’ ‘New Tech” Bets

By contrast, Soros seems to be trying to ride current and future trends — albeit with highly profitable names.

In the second quarter, Soros added to his stake in the social media giant Facebook FACEBOOK INC. FB -1.5296% . Last month, Facebook shares hit a record high after the company reported robust profits. Plus, Facebook has proven to Wall Street that it can conquer the mobile advertising market, as nearly two-thirds of its revenues now come from mobile ads.

Facebook isn’t the only mobile bet Soros is making. He has also been recently adding to his stake in Apple APPLE INC. AAPL -1.0124% , which along with Google dominates the mobile computing space. New data from IDC showed that Apple’s iOS operating system held about a 12% market share among phones shipped in the second quarter — even though demand for iPhones has fallen as consumers await the arrival of the new iPhone 6, which will be introduced in September.

For the moment, Soros’ bets on these new tech names seem to be in the lead.

AAPL Chart

AAPL data by YCharts

But over the long-term, would you bet on Team Soros or Team Buffett?

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