MONEY Tech

Amazon Investors Are Stuck in the 1990s

150429_INV_AmazonInvestors
Lisa Werner—Getty Images

Are investors getting Amazon wrong?

Shares of Amazon.com AMAZON.COM INC. AMZN -0.93% soared over 14% last Friday following the release of its first quarter earnings report. While revenue came in slightly ahead of expectations, the primary source of excitement was new information about the growth and profitability of the Amazon Web Services cloud computing business.

Indeed, AWS revenue grew 49% year-over-year to $1.57 billion. This puts it on pace for annual revenue of more than $6 billion.

However, Amazon investors and analysts may be getting a little carried away about the profitability of AWS. Its apparently strong profit margin is being bolstered by a 1990s-era accounting trick that should have been laid to rest long ago.

The stock options expensing controversy

For decades, U.S. tech companies have used stock awards — primarily in the form of stock options — as a major part of their employee compensation. And for decades, they fought against including those stock awards as an expense in their official earnings statements.

Silicon Valley companies argued that since stock was not cash, it did not qualify as an expense. Economists almost universally derided this rationalization. Tech companies also claimed that it was difficult to value stock options. Economists retorted that models for valuing options have become quite sophisticated.

In 2004, the Financial Accounting Standards Board — which sets U.S. accounting and reporting standards — finally updated its generally accepted accounting principles to require the expensing of stock options. Thus, tech comapnies are now required to report GAAP earnings, including the cost of stock awards. But they have reacted by promoting the use of non-GAAP financial metrics that once again remove the cost of stock-based compensation.

Stock awards at Amazon

Amazon is one such tech company making heavy use of stock-based compensation. For the most part, it rewards employees with restricted share units — essentially stock with some restrictions on selling — rather than options. Valuing these RSUs is much more straightforward than valuing employee stock options, removing one major argument against expensing them.

Yet Amazon still puts non-GAAP financial measures — segment operating income and consolidated segment operating income (or CSOI) — front and center in its earnings releases. Conveniently, both metrics ignore stock compensation.

This has an enormous impact on reported profitability. In 2014, Amazon CSOI totaled $1.8 billion. But after deducting $1.5 billion in stock that it handed out to employees, as well as some other expenses it excludes from CSOI, the company actually lost money.

How this applies to AWS

Amazon broke out results for its Amazon Web Services segment for the first time in the recent earnings report. Investors were pleased to see that AWS operating income totaled $265 million on revenue of $1.57 billion, for a relatively robust 16.9% segment operating margin.

But segment operating income is not a very good measure of profitability, because this metric excludes stock-based compensation. For the full company, stock-based compensation reached $407 million last quarter. As a result, CSOI of $706 million was nearly three times its GAAP operating income of $255 million.

Since stock-based compensation is most prevalent in the tech industry, and AWS is the high-tech portion of Amazon, it seems reasonable to attribute a significant chunk of stock compensation expense to AWS.

As a rough estimate, suppose Amazon were to allocate its stock compensation expense according to each business segment’s proportion of CSOI. AWS segment operating income of $265 million represented 37.5% of first quarter CSOI. Allocating to AWS a proportionate chunk of the $407 million in stock-based compensation would have reduced its segment operating income to just $112 million, for a much more modest 7.2% segment margin.

Stock compensation is a real cost

By excluding stock-based compensation from its segment results, Amazon encourages investors to ignore a significant category of expenses, just as most 1990s-era tech titans did. But while stock-based compensation is a non-cash cost, it leads to shareholder dilution over time.

If Amazon eventually tries to offset that dilution through share buybacks, then it will become a very real cash cost. The number of common shares and underlying shares for stock awards has increased by 36 million in the past six years. At the current stock price, it would need to spend more than $15 billion on share buybacks to offset all of that dilution.

After adding back the cost of stock-based compensation, Amazon looks a whole lot less profitable. There may not be a single “best way” to allocate that cost across the different operating segments. But however it is divided up, profitability at AWS — and the company as a whole — looks much less impressive once stock compensation is accounted for.

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MONEY stocks

14 Simple Ways to Be a Smarter (and Richer) Investor

brain made out of gold bars
Hiroshi Watanabe—Getty Images

Picking stocks is hard—and you still might not beat throwing darts at the stock pages. Here some easier ways to get yourself an edge.

1. Don’t pay 33% of your money in fees. Mutual fund charges look small, but the cost of paying an extra 1% a year in fees is that you give up 33% of your potential wealth over the course of 40 years. An index fund like Schwab Total Stock Market SCHWAB TOTAL STOCK MARKET SWTSX -0.21% can keep your expenses below 0.1%, compared with over 1% for many stock funds.

2. Mix your own simple plan. Four very low-cost index funds, recommended in the Money 50, deliver all the world’s major markets. (See graphic below.) The more aggressive you are, the more you can tilt toward stocks.

Source: MONEY research

3. Or pick just one fund. You don’t have to be fancy to be an effective investor. A classic balanced mix (about 60% stocks/40% bonds) provides plenty of equities’ upside, with less pain during crashes. The Vanguard Wellington VANGUARD WELLINGTON INV VWELX -0.3% balanced fund has earned an annualized 8% over a decade.

4. Or hire a robo-adviser. Outside of a 401(k), if you want a plan that’s more tailored to you, web-based automated investment services can put you in a mix of low-cost index funds and then rebalance as you go. Betterment and Wealthfront stand out as low-cost options, charging 0.35% of assets or less.

5. Patch the holes in a 401(k). Many workplace plans offer at least an S&P 500 or total stock market index fund as a low cost option for buying U.S. stocks. But if your plan doesn’t offer good choices in other asset classes, such as bonds and foreign stocks, diversify elsewhere. Save enough to get the company match. Then fund an IRA, where you can choose which bond funds or foreign funds to go with.

6. While you’re at it, dump company stock. About $1 out of every $7 in 401(k)s is invested in employer shares. But your income is already tied to that company. Your retirement shouldn’t be too.

7. Pick an asset, any asset. You can get into trouble by being too clever by half. The average investor has barely beaten inflation in the past 20 years as a result of buying trendy assets high and selling low. Forget all that. As the chart below shows, you’re better off buying and holding almost any major asset class.

Sources: Bloomberg, Morningstar, DalbarNotes: Returns are through Dec. 31, 2013.

8. Be patient with funds. Some well-known bargain-minded funds, such as Dodge & Cox Stock DODGE & COX STOCK FUND DODGX -0.02% , have struggled this past year. That doesn’t mean you should flee. True value funds refuse to buy popular—read expensive—stocks, so they often lag in frothy times. But over the past 15 years, Dodge & Cox has outperformed its peers by 2.5 percentage points a year and the S&P by more than four points.

9. Be stingy with funds. Cheapskates know index funds aren’t their only options. Actively managed blue-chip stock funds with an expense ratio of 0.35% or less have returned 8.5% over the past decade. That’s 0.5 percentage point better annually than the S&P 500. A great option: Vanguard Equity-Income VANGUARD EQUITY INCOME INV VEIPX -0.4% , charging 0.29%, has outpaced the market’s gains by 3.5 points annually over the past 15 years.

10. Rebalance? Maybe not. Routinely resetting your stocks and bonds to their original levels “is a nice idea in theory,” says planner Phil Cook. But “if you rebalance too often, you can give up a lot of potential returns.” In your twenties and thirties, when you’re almost all in stocks, you can skip it. As you age, though, gradually increase the frequency of rebalancing to every few years.

11. Break up with your high-cost adviser. Stock and bond returns are expected to be muted in the coming decade, so cutting advisory fees—often 1% of assets—matters. Vanguard Personal Advisor Services charges just 0.3% of assets. Some tech-based services, such as Betterment and Wealthfront, charge even less.

12. Put your portfolios together… If you hold a third of your 401(k) in bonds, your mix may be riskier than you think if your spouse is 100% in stocks. Coordinating also improves your options. If your spouse’s plan has a better foreign fund, focus your international allocation there.

13. …and your assets in the right place. Once you’ve maxed out your IRAs and 401(k)s, use taxable accounts for the most tax-efficient investments in your mix. They include index and buy-and-hold equity funds that trade infrequently and generate few capital gains distributions.

14. Take a fresh look at a classic. You’ve now built up enough assets that advisers will be eager to sell you clever ideas to beat the market. Before you bite, read the 2015 edition of A Random Walk Down Wall Street. Burton Malkiel has updated his skeptical investment guide to take on the latest new flavor, “smart” ETFs. If a fund has a greater return, says Malkiel, it’s probably because it’s taking on more risk.

Adapted from “101 Ways to Build Wealth,” by Daniel Bortz, Kara Brandeisky, Paul J. Lim, and Taylor Tepper, which originally appeared in the May 2015 issue of MONEY magazine.

MONEY Warren Buffett

Was Warren Buffett Wrong About Google?

Warren Buffett, chief executive officer and chairman of Berkshire Hathaway Inc.
Brendan McDermid—Reuters Warren Buffett, chief executive officer and chairman of Berkshire Hathaway Inc.

Buffett and Munger may have been too optimistic about Google’s moat.

Warren Buffett and Charlie Munger have long gushed about Google’s GOOGLE INC. GOOG -0.4% dominance in Web search. Munger in 2009 said he had “probably never seen such a wide moat,” according to MarketWatch‘s reporting of Berkshire Hathaway’s shareholder meeting that year. At the same meeting, Buffett called Google’s business model “incredible” and intimated that he also believed the company had a sizable moat.

Six years later, Google’s once-impenetrable moat is showing signs of drying up. The company is struggling to maintain market share in Web search as the number of mobile apps and specialized search engines multiplies. Google needs fresh innovations to maintain its massive lead in search.

Google’s leaky moat

More than a decade after its initial public offering, Google is still dependent on its search-based advertising platform for the vast majority of its revenue. Over 68% of Google’s 2014 revenue came from advertisements served on its own websites (Google.com, YouTube, Google Finance, etc.), and its main search engine is still the crown jewel of the company.

Google is the undisputed leader in web search, but its moat may be narrowing. In January, Google’s U.S. market share slipped to below 75% for the first time StatCounter started tracking data in 2008. Compounding the problem, cost per click — what advertisers pay Google each time a user clicks on its search ads — has been declining for several quarters, falling 8% in the fourth quarter. Although the number of paid clicks is increasing, falling market share and cost per click are challenging Google’s growth expectations.

Internet in transition

Google’s main problem stems from the proliferation of new and better ways to search the Web. For instance, Web users increasingly employ specialized search engines, such as Amazon.com and Kayak, to search for certain information instead of using Google. As the Internet matures, niche search engines might direct more searches away from Google’s generalized system — turning Google’s recent market share struggles into a long-term secular trend.

The same trend toward specialized search engines is engulfing the mobile space as well. Users are increasingly turning to mobile apps like Yelp’s to make targeted searches. Yelp averaged 72 million monthly mobile unique visitors in the fourth quarter of 2014, up 37% from the year-ago quarter. Cumulative reviews grew 35% in 2014 to 71 million. While Google has responded to threats from Yelp with Google+ Local, it must continue to outmaneuver its competitors in order to maintain its mobile market share.

For now, Google maintains an outstanding 84% mobile market share, according toStatCounter. Mobile search now accounts for 29% of all search activity, according to a report by comScore,. which says smartphone searches grew 17% and tablet searches grew 28% in 2014, while desktop searches declined 1%. The increasing number of mobile searches is putting downward pressure on Google’s cost per click. Mobile ads are smaller and harder to fit on a screen than desktop search ads, thus making them a less profitable advertising avenue. As mobile searches ramp up, Google’s cost per click is declining — falling 10% in 2013 and 7% in 2014 for Google’s websites. This is the single biggest sign that Google’s moat might not be durable.

Was Buffett wrong?

Despite its challenges in mobile ad monetization, Google is still a strong and growing company. Paid clicks on Google websites increased 29% in 2014, more than offsetting its single-digit decline in cost per click and powering an 18% increase in advertising revenue.

However, investors shouldn’t let Google’s revenue growth mask its deteriorating cost-per-click numbers. If the metric continues to decline, Google’s profitability is sure to follow. This could be why Buffett hedged his stance at Berkshire’s 2012 annual shareholder meeting, telling investors, “I would not be at all surprised to see [Google] be worth a lot more money 10 years from now, but I would not buy [it]. I sure as hell wouldn’t short [it], either.”

Buffett knows Google has a powerful business model, but investors shouldn’t take its booming growth for granted. If Google fails to find a more profitable model for mobile search, long-term shareholders could be left holding a busted growth stock.

Related:

MONEY ETFs

Humdrum ETFs Are Overtaking Racy Hedge Funds

Tortoise and the hare
Milo Winter—Blue Lantern Studio/Corbis

It's part of a gradual change in culture on Wall Street that's encouraging low costs and long-term thinking.

It’s like the investment world’s version of the race between the tortoise and the hare. And the hare is losing its lead.

Hedge funds, investment pools known for their exotic investment strategies and rich fees, have long been considered one of the raciest investments Wall Street has to offer, with $2.94 trillion invested globally as of the first quarter, according to researcher Hedge Fund Research.

Despite their mystique and popularity, though, hedge funds are about to be eclipsed by a far cheaper and less exclusive investment vehicle: exchange-traded funds.

According to ETF researcher ETFGI, exchange-traded funds — index funds that have become favorites of financial planners and mom and pop investors — have climbed to more than $2.93 trillion. ETFs could eclipse hedge funds as early as this summer, according to co-founder Debbie Fuhr.

In some ways the milestone is one that few people outside the money management business might notice or care about. But even if you don’t pay much attention to the pecking order on Wall Street, there’s reason to take notice.

The fact that ETFs have caught up with hedge funds reflects broader trends toward lower costs and a focus on long-term passive investing, both of which benefit small investors.

Exchange-traded funds, which first appeared in the 1990s and hit the $1 trillion mark following the financial crisis, have gained fans in large part because their ultra-low cost and hands-off investing style.

While there are many varieties of ETFs, the basic premise is built on the notion that investors get ahead not by picking individual stocks and securities but by simply owning big parts of the market.

Index mutual funds have been around for a long time. (Mutual funds control $30 trillion in assets globally, dwarfing both ETFs and hedge funds). But ETFs allow investors to trade funds like stocks, and they can be more tax efficient than mutual funds. Both ETFs and traditional index funds are known for ultra-low fees, sometimes less than 0.1% of assets invested. That means investors keep more of what they earn, and pay less to Wall Street.

Hedge funds by contrast exist for elaborate investment strategies. They are investment pools that in some ways resemble mutual funds, but they can’t call themselves that because they aren’t willing to follow SEC rules designed to protect less sophisticated investors.

Because of their special legal status, hedge funds aren’t allowed to accept investors with less than than $1 million in net worth, hence the air of wealth and exclusivity.

But hedge fund managers also enjoy a lot more freedom in how they invest, for instance, sometimes requiring shareholders to lock up money for months at a time or taking big positions in complex derivatives.

Hedge funds aren’t necessarily designed to be risky — they get their name from a strategy designed to offset not magnify market swings. But hedge fund investors do expect managers to deliver something the market cannot. Otherwise why pay the high fees? Hedge funds typically charge “two and twenty.” That is 2% of the amount invested each year, plus 20% of any gains above some benchmark. No that is not a typo.

Of course, hedge funds’ rich fees wouldn’t be a problem if they delivered rich investment returns. The industry has long relied on some fabulously successful examples to make its case. But critics have also suspected that, like the active mutual fund industry in its 1990s’ heyday, this could be a case of survivorship bias, with a few rags-to-riches stories distracting from more common stories of mediocre performance.

Hedge funds’ performance in recent years seems to be bearing that out. (By contrast ETFs, whose returns are typically tied to the stock market, have benefited from one of the longest bull markets in history.)

Why should you care if a bunch of rich guys blow their money chasing ephemeral investment returns? One reason, is you might be among them, even if you don’t know it. Pension funds are among the biggest hedge fund investors.

The good news: They too are embracing indexing, if not specifically through ETFs. Calpers, the giant California pension fund, said last year that it was dumping hedge funds, while also indexing more of its stock holdings.

Unlike ETFs, hedge funds — because they need to justify their rich fees — often suffer from short-term focus. In recent years, one popular strategy has been so-called “activist investing,” where a hedge fund buys a big stake in an underperforming company and demands changes.

While the stock market often rewards those moves in the short-term, many investors worry moves like cutting costs and skimping on research ultimately make those businesses weaker, hurting long-term investors. It’s no surprise then that one of activist investing’s most outspoken critics is BlackRock Inc. As the largest ETF provider, BlackRock represents the interests of millions of small investors.

And finally, there are those fees. The surging popularity of low-cost investments such as ETFs will inevitably focus more attention on fees, putting pressure on active investment managers — and even hedge funds themselves — to slash prices. And in the the end, that benefits everybody.

MONEY 401(k)s

Terrible Advice I Hope Young People Ignore

incorrect road signs
Sarina Finkelstein (photo illustration)—John W. Banagan/Getty Images (1)

Please, invest in a 401(k).

I like James Altucher. He’s a sharp writer and a smart thinker. It’s just those kinds of people — people who know what they’re talking about — who deserve to be called out when they say something silly.

Altucher did a video with Business Insider this week pleading with young workers not to save in a 401(k).

It is — and I’m being gracious here — one of the most misguided attempts at financial advice I’ve ever witnessed. It deserves a rebuttal.

Altucher begins the video:

“I’m going to be totally blunt. Are you guys in 401(k)s? OK, you’re in 401(k)s. I honestly think you should take your money out of 401(k)s.”

Why? His rant begins:

“This is what is actually happening in a 401(k): You have no idea what’s happening to your money.”

Everyone who has a 401(k) can see exactly what’s happening with their money. You can see exactly what funds you’re investing in, and what individual securities those funds invest in. These disclosure requirements are legal obligations of the fund sponsor and the managers investing the money.

You might choose not to look, but the information is there. An investor’s ignorance shouldn’t be confused with an advisor’s scam.

Altucher lobs another complaint:

“And, by the way, if you want that money back before age 65, which is 45 years from now, you have to pay a huge penalty.”

You can take money out of a 401(k) without penalty starting at age 59-and-a-half. You can also roll 401(k) money into an IRA and use it for a down payment on a first home or for tuitionwithout penalty.

A lot of companies also offer Roth 401(k) options, where you may be able to withdraw principal at any time without taxes or penalty.

According to the Census Bureau, 91.2% of Americans currently of working-age will turn 65 in less than 45 years.

Another gripe:

“They’re doing whatever they want with your money. They’re investing wherever they want.”

There are no 401(k)s where someone does “whatever they want with your money.”

All 401(k)s are heavily regulated by the Department of Labor and have to abide by strict investment standards under the Employee Retirement Income Security Act of 1974.

Part of those rules require that you, the worker, have control over how your money is invested. Here’s how the Department of Labor puts it (emphasis mine):

There must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund,and diversify among the investment alternatives offered. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is volatile.

A lot of companies still offer subpar investment choices, but check out this article on how to lobby your employer for a better 401(k). Someone at your company has a legal duty to provide choices that are in your best interest.

“They’re paying themselves salaries.”

It’s true: Mutual fund managers earn a salary.

You know who else takes a salary from the stuff you buy?

Plumbers, accountants, electricians, doctors, nurses, construction workers, shoe salesman, car mechanics, pilots, dentists, receptionists, gas station attendants, TV anchors, the guy behind the counter at the coffee shop, the lady who scans your groceries, me, and — at some point in his life — probably James Altucher.

Look, a lot of fund managers are overpaid. It’s an injustice. But skipping a 401(k), the employer match, and decades of tax-deferred returns because they draw a salary is madness. The employer match, in many cases, offers a risk-free and immediate 100% return on any money contributed to a 401(k). A mutual fund manager’s salary likely eats up a fraction of 1% annually.

Plus, fees have come way down in recent years. Here’s a report by the Investment Company Institute:

The expense ratios that 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000. In 2000, 401(k) plan participants incurred an average expense ratio of 0.77 percent for investing in equity funds. By 2013, that figure had fallen to 0.58 percent, a 25 percent decline.

What does Altucher say to do with your money instead of saving in a 401(k)?

“Hold on to your money. Put your money in your bank account.”

Haha, OK. I shouldn’t invest in a 401(k) because mutual fund managers take a salary. I’m sure the bankers where I have my checking account work for free?

His biggest beef is that people just don’t make money in 401(k)s:

“The average 401(k) — they won’t really tell you this — probably returns, like, one-half percent per year.”

There’s a reason they “won’t really tell you” that: It’s nonsense.

According to a study of 401(k) investors by Vanguard, “Five-year [2008-2013] participant total returns averaged 12.7% per year.”

The average return from 2002 to 2007 was 9.5% per year.

Even from 2004 to 2009, which is one of the worst five-year periods the market has ever produced, the average 401(k) investor in Vanguard’s study earned 2.8% annually.

This is Vanguard, the low-cost provider. But even if you subtract another percentage point from these returns to account for higher-fee providers, you won’t get anywhere close to half a percent per year.

There’s actually a good reason to think investors will do better in a 401(k) than in other investments.

The rules designed to make it difficult for people to take money out of a 401(k) until they’re retired create good behavior, where investors leave their investments alone without jumping in and out of the market at the worst possible times. Automatic payroll deductions also help keep long-term investing on track.

Take this stat from Vanguard:

Despite the ongoing market volatility of 2009, only 13% of participants made one or more portfolio trades or exchanges during the year, down from 16% in 2008. As in prior years, most participants did not trade.

The majority of 401(k) investors dollar-cost average every month and never touch their investments again. That is fantastic. If you could recreate this behavior across the entire investment world, everyone would be rich.

Altucher has another problem with tax deferment:

“You don’t really make money in a 401(k). It’s just tax-deferred. When you’re in your 20s, what does tax-deferred really mean?”

What does it really mean? About a million freakin’ dollars.

Save $10,000 a year in a 401(k) — half from you and half from your employer — and in 45 years (Altucher’s preferred timeframe, here), the difference between taxable and tax-deferred at an 8% annual return is massive:

You can play around with the assumptions as you’d like with this calculator.

Here’s his final takeaway:

“What you should do in your 20s and 30s is invest in yourself. Building out multiple sources of income, investing in getting greater skills, and so on.”

Great advice! But you can do all of that and still invest in a 401(k). And virtually everyone should.

** James, are you reading this? Let’s do a video together and duke this out in person! My email is mhousel@fool.com **

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MONEY stocks

How to Beat the Summer Market Doldrums

Matt Harrison Clough

Contrary to market lore, summer is no time to sell stocks and sit on cash, but it is a chance to adjust.

There’s an old Wall Street saying: “Sell in May and go away,” because stocks tend to do poorly in the summer. That’s been attributed to traders going on vacation, or the notion that spring bonuses on the Street stoke a buying euphoria that wears off by June. It may just be that the old saying itself creates a self-fulfilling prophecy. Because, surprisingly, there’s something to it. Since 1926 stocks have returned only around half as much from May through October as they have in the rest of the year.

The summer doldrums are nearly here. Plus, the Federal Reserve is threatening to hike interest rates, and the bull market is feeling old. So you’re probably already hearing the drumbeat telling you to sell.

Yet there’s one thing proponents of sell-in-May leave out. For practical purposes, it still doesn’t beat buying and holding. “It makes sense only if you have an alternative investment,” says Steve LeCompte, editor of CXOadvisory.com. And you really don’t: Even during the May–October stretch, stocks on average outpace cash and bonds. Factor in trading costs, and sell-in-May looks even worse.

Since 1871, finds LeCompte, buy-and-hold produced an annual rate of return of 8.9%, vs. 4.8% for the seasonal strategy. That doesn’t mean you must totally ignore stocks’ summer blahs, though. There are two ways to take advantage of the pattern without betting big on timing the market.

Make that “rebalance in May”

You may already be rebalancing every year or two. The logic of rebalancing is that by resetting your assets back to their original mix, you often are selling a faster-growing investment that’s gotten expensive. You don’t need to do this often when you are young and mostly in stocks anyway, but later on rebalancing helps keep a conservative portfolio conservative.

Yet if you do this near the end of the year, as many do, you may be selling stocks when they still have some pep. Rebalance in May, and you’ll give up less return in the short run. From May through October, the annualized growth rate for stocks is just 0.7 percentage points more than for bonds.

Stay away from riskier plays

While there’s no reason to bail in May, it isn’t the best time to add new risks. Sam Stovall, U.S. equity strategist for S&P Capital IQ, says the summer effect is particularly strong in economically sensitive areas like consumer discretionary stocks and small-caps. If you set aside part of your portfolio for more-speculative bets, consider coming back to it in autumn. You may find you have more bargain-priced choices. And your beach days will have been less stressful.

Read Next: How to Tame the (Inevitable) Bear Market

MONEY Food & Drink

Chipotle Is Killing It, but Investors Want More

While Chipotle had a first quarter most companies would envy, high investor expectations saw the fast-casual restaurant's stock drop more than $40.

MONEY retirement planning

Here’s Your 3-Step 15-Minute Retirement Plan

With a plan, you're likely to save four times as much. And it doesn't have to be complex to be effective.

Want to get serious about preparing for retirement? Get a plan. A 2014 Wells Fargo survey found that middle-class Americans who have a written retirement plan saved four times as much as those without one. Fortunately, a plan doesn’t have to be complex to be effective. In fact, putting together a perfectly acceptable one can be as easy as 1-2-3.

Step #1: Pick a savings target. Don’t get hung up on trying to identify the exact amount need to save. When you’re saving for a retirement that’s many years off in the future, there are too many unknowables to be that precise. To get things rolling, I suggest you shoot for 15% of pay, which is the figure cited for the typical household by the Boston College Center For Retirement Research in a recent paper. If that amount seems too daunting, then start at 10% and boost that figure by one percentage point each year until you hit 15% of salary.

The important thing, though, is to push yourself a bit when it comes to saving, as there may be some years when unexpected expenses or a job layoff prevent you from reaching your savings goal. Indeed, when researchers for TIAA-Cref’s Ready-to-Retire survey asked retirees last year what they wished they had done differently to prepare for retirement, almost half said they wish they had saved more of their paycheck for retirement. They also expressed regret that they hadn’t started saving sooner, So once you pick your target saving rate, start stashing your dough away immediately.

One more note about your savings rate: If you contribute to a 401(k) or other workplace plan and your employer matches a portion of what you save, those employer matching funds should count toward your savings target. So if your company contributes 50% of the amount you save up to 6% of salary for a 3% match—a typical formula—you would have to save just 12% of salary to reach a 15%.

Step #2: Settle on your investing strategy. This step trips up people for several reasons. Some get flustered because they know little or nothing about investing. Others think they’ve got to sift through dozens of investments to find the “best” of the lot. Still others feel that they aren’t doing an adequate job investing for retirement unless they’ve stuffed their portfolio with every possible investment representing every conceivable asset class known to man.

I have one word for people worried about such issues: chill. Investing doesn’t have to be complicated. In fact, whether you’re a neophyte or a grizzled veteran of the financial markets, simpler is better when it comes to building a retirement portfolio.

Here’s all you have to do. First, restrict yourself to low-cost index funds. You can build a diversified portfolio with just two funds: a total U.S. stock market index fund and a total U.S. bond market index fund. If you want to get fancy, you can throw in a total international stock index fund. (If you prefer, you can use the ETF versions of such funds instead.) You can find these investments at such firms as Vanguard, Fidelity and Schwab.

Second, settle on a stocks-bonds mix that’s appropriate given your tolerance for risk. You can get a recommended mix by going to the Investor Questionnaire-Allocation Tool in RealDealRetirement’s Toolbox. Once you’ve settled on a stocks-bonds mix, leave it alone, except perhaps to rebalance every year or so. Or, if you can’t see yourself building even a simple portfolio with a few funds, just invest in a target-date retirement fund. This type of fund—available from the same three firms mentioned above—gives you a fully diversified portfolio that becomes more conservative as you approach and enter retirement.

Step 3: Do an initial assessment. Now it’s time to see where you stand. That may seem premature if you’re really just getting started. But the idea is you want to get a sense of what kind of retirement you’ll end up with if you follow the course you’ve set in steps one and two. Think of it as establishing a baseline so you can gauge whether or not you’re making progress when you re-do this evaluation every 12 months or so.

Doing this assessment is pretty simple. Go to a retirement income calculator that uses Monte Carlo analysis to make projections, plug in such information as your age, salary, savings rate, the amount, if any, you already have stashed in retirement accounts, the stocks-bonds mix you arrived at in step 2, the age at which you intend to retire, the percentage of pre-retirement income you’ll require in retirement (80% or so is a decent estimate) and how many years you expect to live in retirement (I suggest to age 95 to be on the conservative side)…and voila! The calculator will churn a few seconds and forecast the probability that you’ll be able to retire on schedule given how much you’re saving and how you’re investing.

Generally, you’d like to see a probability of 80% or higher, although you shouldn’t freak out if your chances are much lower. The point of this exercise is to see where you stand now so you can adjust your planning to tilt the odds of success more in your favor, if that’s necessary. The most effective adjustment is saving more, but there are other possibilities, such as staying on the job longer, working part-time in retirement, maximizing Social Security benefits and relocating to a lower cost area once you retire.

Do you have to write all this down to get the benefit of this plan? I wouldn’t say it’s absolutely necessary. But I think it’s a good idea to jot down your target savings rate and the asset mix you’ve decided on if for no other reason than doing so can make you feel more committed to following through. You should also save a digital or hard copy each time you do an evaluation so you can see whether you’re making progress or backsliding.

You’ll want to refine and tweak this plan as you go along, but for now the most important thing is to get started. Because the sooner you set a savings rate and start funding your retirement accounts, the better your chances of having a secure and enjoyable retirement down the road.

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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