MONEY Ask the Expert

When It’s Risky to Be Conservative With Stocks

Investing illustration
Robert A. Di Ieso, Jr.

Q: I’m 26 years old and have $100,000 invested in mutual funds, with 50% in stocks and 50% in bonds. Is this the right strategy for my age? — Oliver in Hillside, New Jersey

A: The right investment strategy is, ultimately, the one that makes the most sense for your goals, your risk tolerance, and your time horizon.

That said, if this money is for retirement, you should probably lighten up on the bonds given your age. “My recommendation for someone this age is to increase their stock exposure to up to 80% or 90% of the total portfolio,” says Brian Cochran, a certified financial planner with John Moore & Associates in Albuquerque, N.M.

If you’re wary of stocks, you’re not alone. “This is extremely common among people of this generation,” says Cochran. “Growing up during the financial crisis and recession seems to have left a bad taste in their mouths.” In a UBS Wealth Management survey published last year, in fact, millennials (people ages 21 through 36) reported having just 28% of their assets in equities – and a whopping 52% in cash.

Here’s the thing: Over the long term, it’s actually risky to be too conservative.

Historically, stocks have appreciated in the high single digits, says Cochran, and bonds have appreciated in the low single digits. With your allocation, that’s a difference of a couple percentage points a year, and it adds up. A $100,000 portfolio that appreciates 6% a year on average, for instance, would be worth about $600,000 in 30 years. One that grows 4% a year will end up at $331,000 or about half as much.

“The danger of a 50/50 allocation is that inflation could grow faster than a portfolio with that allocation,” says Cochran. “At 3% inflation, $1,000 today would be worth the equivalent of $412 in 30 years.”

And your time horizon may be even longer, possibly 40 years. “We’re preparing most clients in their 20s to retire around age 70,” says Cochran.

Meanwhile, after three decades of falling bond yields – which translates to rising bond prices – many experts warn that bond investors could actually lose money when interest rates finally move the other direction. “We don’t expect a lot of returns from bonds in the next two to three years,” he adds.

You can get a quick overview of where you should be using Bankrate.com’s asset allocation calculator.

If you have a retirement plan with a large brokerage, you should have access to some more robust planning tools, which will help you dial in that allocation in more detail.

If you’re still unsure, consider opting for a target-date retirement mutual fund that will allocate your assets based on your retirement age; you are probably looking at a 2060 target-date fund, says Cochran.

Alternatively, consider working with a fee-only financial planner to help you fine- tune your portfolio. In the end, these big-picture planning decisions carry even more weight than the individual stocks or funds you choose. Kudos to you for thinking about this now.

TIME universities

A Billionaire Hedge Fund Manager Made Harvard’s Biggest Donation Ever

Harvard Interest Rate Swaps
Bloomberg—Bloomberg via Getty Images Harvard University pennants sit on sale at the Harvard Cooperative Society in Cambridge, Massachusetts, U.S., on Tuesday, Dec. 15, 2009.

It topped the $350 million record

Billionaire hedge fund manager John Paulson donated $400 million to Harvard’s School of Engineering and Applied Sciences, the New York Times reports. Harvard’s engineering school, which is expanding across the river from Cambridge, Mass., will be renamed the Harvard John A. Paulson School of Engineering and Applied Sciences.

The gesture marks the largest gift in the university’s 379-year history, surpassing last-year’s record-setting donation by Hong Kong-born investor Gerald Chan, who gave $350 million to the School of Public Health.

Paulson graduated from Harvard Business School in 1980 and went on to found Paulson & Company in 1994. Since then, the company has grown from managing $2 million with one employee to managing more than $19 billion with 125 workers worldwide.

Paulson’s gift is part of a $6.5 billion fundraising campaign the university launched in September 2013. The donation is part of a string of high-sum donations in recent years to schools with already large endowments, highlighting the growing divergence between the have and have-not universities. Moody’s Investors Service followed 208 private universities over 10 years to track giving patterns. The study found that schools with more than $1 billion in cash and investments claimed 67% of total donations in 2013, up from 62% in 2003, while universities with less than $100 million in cash brought in less than 3% of total donations.

Schools with smaller endowments rely more heavily on tuition revenue to keep things running, whereas colleges with large cash reserves can weather bad years and still keep tuition low.

MONEY financial advice

Nobel Prize-Winning Economist Shares His Best Financial Advice

Nobel Prize winner Robert Shiller talks about the upside of financial advisers and the downside of compound interest.

Nobel Prize winner Robert Shiller tells investors to get a financial planner. He advises people to speak frankly and honestly with an adviser about their financial situation. Financial advisers are not always right, but Shiller says there is a lot to be gained by speaking to an adviser or fiduciary. He also warns that compound interest may not compound as much as you hope it will.

MONEY

Attention Millionaires and Millionaires in the Making!

Do you already have a seven-figure net worth, or are you on your way there? If so, MONEY would love to chat with you about the smart financial moves you’ve made that put you on the path toward becoming a millionaire. Whether you’re a relentless saver, a shrewd investor, real estate mogul, or an entrepreneur, we want to know what makes you tick, what drives you, and strategies you’ve employed to get you to your goals.

It doesn’t matter if you’re a young professional or a seasoned investor — millionaires in the making from all walks of life are welcome!

 

MONEY bonds

The Weird Reason You Should Buy Treasury Bonds Right Now

141339733
Henglein and Steets—Getty Images/Cultura RF

New research shows sunshine matters to the market.

Market timing is never a great strategy, but if you’ve been thinking about buying Treasury bonds to diversify your portfolio, the sunny spring days we are currently enjoying may be a great time to start.

Why’s that?

A surprising new study finds that seasonal affective disorder (SAD) doesn’t just affect individual investor’s decisions: It actually affects the market as a whole.

University of Toronto researcher Lisa Kramer and her team found that monthly returns on Treasury bonds swing 80 basis points on average between October and April, peaking in the fall and bottoming out in the spring.

“That kind of a systematic difference is huge,” says Kramer.

The variation seems to be caused by SAD, a seasonal mood disorder that affects up to 10% of the population.

Even after controlling for other explanations—like Treasury debt supply fluctuations and auction cycles—the study found that the bond return differences could be explained best by the increase in seasonal depression during dark winter months.

Kramer has also found similar effects of SAD on the stock market: Specifically, equity investors are more risk-averse as nights become longer (leading to lower returns) and then start becoming more open to risk as winter gives way to spring.

MONEY financial advice

CEO of World’s Largest Mutual Fund Shares His Best Financial Advice

The CEO of the world's largest mutual fund company shares the best financial advice he ever got and reveals his biggest money mistake.

MONEY investing strategy

How to Invest Better By Paying Less Attention

The secret to investing is not caring what happens.

Jiddu Krishnamurti spent his life giving spiritual talks. As he got older, he became more candid. In one famous moment, he asked the audience point-blank if they wanted to know his secret.

He whispered, “You see, I don’t mind what happens.”

I’ve spent the last five years as an investor trying to do the same. I’ve made a concerted attempt to care less about what happens in the investment world. I still pay attention, of course. It’s my job. But I’m far more selective about what I read. It has helped more than I could have possibly imagined.

Caring gives a false impression that what you’re thinking about is important. If I pay attention to quarterly earnings, shouldn’t I be a better investor? If I check what the market did this morning, am I not more informed?

Common sense tells you yes. But it’s wrong. More often than not, not caring is the way to go.

My journey started with a realization that the more media investors paid attention to, the worse they did. The more they analyzed, the more decisions they had to make. The more decisions they made, the more chances they had at being wrong, letting their emotions take over, and doing something regrettable. Find someone who has mastered personal finance, and you’ll find someone with a pathological ability to not give a damn.

There are so few exceptions to this rule it’s astounding. Where is the evidence that paying attention to every last piece of market news makes you a better investor? I’ve looked. I can’t find it.

So I stopped caring about a few things.

1. Finding the perfect portfolio

Investors crunch numbers to find the perfect number of international stocks they should own at a certain age, the precise amount they should allocate to bonds, and exactly when they should cut back on stocks when historical models show they’re overvalued.

Here’s the truth: None of these models are perfect, so back-of-the-envelope, “good enough” estimations will usually do just fine.

Harry Markowitz won the Nobel Prize for creating modern portfolio theory, a formula that precisely calculates the optimal asset allocation to maximize return at a given level of risk.

With his own money, he found this too complicated.

“I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it,” Markowitz once said. “So I split my contributions 50/50 between stocks and bonds.”

Good enough.

2. Quarterly earnings

The median company in the S&P 500 was founded in 1949. So it’s 66 years old. Therefore quarterly earnings tell you what happened in the last 90 days, or 0.3%, of its life. The odds that groundbreaking developments will occur in such a short period of time are slim, and they approach zero as time goes on. It’s the equivalent of judging how your day is going by analyzing the last four minutes.

Amazon.com CEO Jeff Bezos says he runs his life on a “regret minimization” framework. His goal is to look back at age 80 and regret as few things as possible.

What are the odds that I’ll be 80 years old and say, “Man, I wish I paid more attention to Microsoft’s Q2 2011 revenue”? Pretty low. So I choose not to care.

3. Wondering why the market fell

The Dow fell 0.4% on Wednesday. Why?

Lots of reasons were given. One article blamed fluctuating interest rates. Another cited “Greece worries.” Others pointed to the Fed, weak GDP growth, and falling energy prices.

“Random, unidentified marginal sellers were a little bit more motivated than random, unidentified marginal buyers” wasn’t mentioned. But it’s the best explanation for why stocks fell. The same goes for almost every day.

4. Getting other investors to agree with me

Let’s say your weather app says it’ll be 78 and sunny tomorrow, and mine says it will be 74 and overcast.

Would we argue about this? Go on TV and duke it out? Call each other names?

Of course not. We’d say, “Eh, let’s just see what happens. Probably doesn’t matter either way.”

Investors don’t think this way. The fights people get into about whose forecast is right are off the charts.

Unlike weather, money is an emotional subject. And unlike tomorrow’s temperature, our investment decisions are in our control. So many investors get offended when others disagree with them. But once you realize that A) your views are just as biased as everyone else’s and B) there’s a good chance you’re both wrong, you stop seeing any reason to argue. Debate, sure. But life’s too short to argue.

Investing is so much more fun when you come to terms with these things. Set up a portfolio that suits you — one that lets you sleep at night and gives you a reasonable chance of meeting your financial goals. Give it room for error. Have a backup plan. It’s the best you can do.

After that, you see, I don’t mind what happens.

For more:

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.
MONEY Shopping

The Death of the Shopping Mall Has Been Greatly Exaggerated

The Crystals shopping, dining, and entertainment complex at CityCenter in Las Vegas.
Jamie Pham—Alamy The Crystals shopping, dining, and entertainment complex at CityCenter in Las Vegas.

High-end malls are hot with investors

Even as the rise of online retailers such as Amazon.com leads analysts to predict the eventual death of the American shopping mall, real estate fund managers are betting some will prosper – if they can lure the right kind of consumer.

Simon Property Group, the largest high-end mall operator in the country with properties including Palo Alto, California’s Stanford Shopping Center and suburban Philadelphia’s King of Prussia Mall is the top holding in 53 of the 71 U.S. real estate funds tracked by Lipper. The average real estate fund devotes 8.8% of its portfolio to Simon, a bigger average bet than the 7.6% that tech funds invest in Apple and almost one percentage point more than the weight of Simon in the benchmark S&P U.S. REIT index.

Still a symbol of a car-based, middle-class suburban America, malls are increasingly seen as viable only if they attract the affluent. Fund managers are bullish on so-called Class A malls, anchored by department stores like Bloomingdale’s and featuring retailers like Apple, reflecting how better-off consumers have thrived since the end of the financial crisis while middle and lower income consumers have struggled.

“Class A malls are repositioning themselves to be destinations, with more restaurants, which is making them more resilient to what’s going on with the Internet,” said Rick Romano, a portfolio manager of the $3.8 billion Prudential Global Real Estate fund, who holds 4.5% of his portfolio in Simon, his top holding.

Class A malls are also the only shopping centers able to attract an Apple store, which can post annual sales of more than $5,000 a square foot – the highest of any U.S. retailer – and boost sales growth for other retailers throughout the mall, Romano said. As a result, Simon has been able to post rent increases of 18.9% for new leases over the last 12 months, according to Paul Morgan, an analyst at MLV & Co.

Simon’s average rent per square foot – which includes ongoing and new leases – rose 4.5% in the first quarter compared with the year before, or about six times the 0.8% pace of inflation in the U.S. Bloomingdale’s is the most frequent anchor store at the highest-rated malls in the country, followed by Nordstrom.

Those Americans in the top 20% of income – or Class A mall shoppers – have seen their household assets jump from about $15 trillion in 2010 to $25 trillion in 2014, according to Green Street Advisors. Household assets for Class B and lower mall customers rose from about $7 trillion in 2010 to a little over $10 trillion in 2014.

Class B malls are often saddled with struggling department stores such as Sears or J.C. Penney as anchors, making them less attractive to prospective tenants. Some 24 such malls have closed since 2010, and an additional 60 are on the brink of closure, according to Green Street Advisors.

No REIT fund hold Class B or lower mall operators as their largest holding, according to Lipper. J.C Penney and Sears are the most frequent anchor stores at Class C and lower malls, according to Green Street.

There are about 1,000 enclosed shopping malls in the U.S. Foot traffic at malls during the November and December holiday shopping season fell from approximately 35 billion visits in 2010 to 17.6 billion in 2013, according to an October Cushman and Wakefield report. Online commerce now accounts for 15% of retail sales – just 5 percentage points less than the percentage of retail sales that come from malls and gaining, according to a report from Green Street Advisors.

DEMAND FOR HIGH-END RISING

Investor demand for high-end malls will rise even if consumer spending overall flattens or starts to slow, said Jason Ko, a co-portfolio manager of the $2.1 billion J.P. Morgan Realty Income fund who has 7.8% of his portfolio in Simon, his largest position.

Macerich, the third-largest mall owner in the U.S., rejected a $16.8 billion takeover offer from Simon Property on April 1, a merger that would give Simon an even larger hold of the high-end mall market. Simon is not expected to come back with a higher offer, analysts and fund managers said.

“What that attempt signifies is that high quality malls are irreplaceable: difficult to build and difficult to buy,” Ko said.

Shares of Simon Property are down 5.5% since Macerich rejected its takeover offer, while shares of Macerich have fallen 2.2% over the same time. Over the last 12 months, shares of Simon are up 5.7%, or about 2 percentage points less than the 7.9% gain in the benchmark index.

Simon shares closed Wednesday at $181.31, compared with the average target price of $217.05 among analysts tracked by Thomson Reuters. At that price, Simon is selling at 39 times trailing 12 month earnings, slightly below the average 45 times earnings among its peers, according to Thomson Reuters data.

Class B malls, meanwhile, will not only feel the effects of sales declines at J.C. Penney and Sears, but will see increased competition from so-called power centers – suburban developments that are often next to a major highway and include a Home Depot or Best Buy alongside a traditional strip mall, said Ian Goltra, who helps oversee $2 billion in real estate investments at San Francisco-based Forward Funds.

Goltra has several short positions for Class B mall operators in his funds, yet expects shares of Simon to rise, even with its high percentage of fund ownership. He has been adding shares of Simon as it has traded in the $180s, down from a high of $205.31 on Jan 28th.

“They have the largest portfolio of blue-chip tenants, and that’s something their competitors have not been able to replicate,” he said.

Your browser is out of date. Please update your browser at http://update.microsoft.com