MONEY stocks

How Watching TV Can Make You Poorer

Jim Cramer on the "500th Episode" of /CNBC'S "MAD MONEY."
Jim Cramer on the "500th Episode" of CNBC'S "MAD MONEY." Giovanni Rufino—© CNBC

Financial TV is entertainment, not enlightenment, say two TV pundits in a new book. Here's the real story about market gurus.

You cannot listen to the steady barrage of confident yet conflicting opinion on financial TV programs today without wondering which, if any of them, are getting it right. It’s been this way since the incomparable Louis Rukeyser launched the weekly PBS program Wall Street Week in 1970.

The pioneering cable station Financial News Network, which CNBC later bought, upped the ante in 1981 with daily money programming. That set the foundation for three decades of growth in the market for folks who could talk convincingly about the direction of stocks. This period made stars of analysts who often got it wrong—from Joe Granville and Robert Prechter in the 1980s to Henry Blodget and Jim Cramer in more recent times.

Yet as the voices of market gurus have grown louder and more numerous, the advice hasn’t got any better. The poor individual investor—stripped of his pension guarantees and wanting little more than to manage his 401(k) in a sound manner—has been left dizzy from the noise. This, at least, is the basic premise of Clash of the Financial Pundits, a book by financial commentators that takes aim at financial commentators.

The authors are former CNBC personality Jeff Macke and current contributor Joshua M. Brown, co-founder of Ritholtz Wealth Management. They write mostly in the voice of Macke, who during the depths of the financial crisis grew disillusioned with his role on Fast Money and disappeared—though not before an epic on-camera meltdown that can only be described as must-see TV. In some ways, this book reads like a cathartic undertaking meant to exorcise Macke’s demons. He is now host of the financial show Breakout, which appears on Yahoo Finance. I wonder if he realizes that by dredging up the memory of his public implosion five years ago more people will see it on YouTube than saw it live.

Clash is a stroll down memory lane for anyone that has been around the financial markets a while. It recounts bubbles past, starting with the South Sea Co. in the early 1700s when Sir Isaac Newton lost a fortune. The authors recount the rise and fall of “Calamity Joe” Granville, the spectacularly wrong Harry S. Dent, and the absurd Dow 36,000 prediction from journalist James K. Glassman and economist Kevin A. Hassett. Other names that pop up along the way include Ben Stein, Jim Rogers, Carl Icahn, James Altucher, Martin Zweig and more.

Brown and Macke give credit where it is due: Zweig’s real-time call of the 1987 crash on Wall Street Week, Cramer’s October 2008 sell-it-all message delivered on The Today Show, Blodget’s almost comical prediction in 1998 that Amazon.com would hit $400, which it did in just two months. But the whole point is to also note their miscalls and downfalls. Blodget, for example, was banned from the industry for life in 2002 after privately advising certain investors to sell stocks that he was publicly bullish on. Cramer took a beating on Jon Stewart’s Daily Show for being bullish on the soon-to-collapse Bear Stearns.

Being right and wrong is all part of the forecasting business, the authors point out, which is why it’s foolish to invest solely on one pundit’s view at any given moment. “At a certain point, the folly of forecasting becomes obvious,” the authors write. “It is at the dawning of this realization that we begin to grow as investors.”

As a young financial writer at USA Today, I watched the market for market punditry explode in the 1980s and 1990s. I was the first mainstream reporter to cover the annual “10 Surprises” list that helped elevate Morgan Stanley’s Byron Wien. Brown and Macke note that Wien’s innovation, which other forecasters soon picked up on, was a clever way to make a predication that could easily be dismissed if it did not come true. After all, who could be surprised if a surprise didn’t happen?

I worked next to Dan Dorfman, possibly journalism’s first $1 million investing columnist. In the 1980s, Dorfman wrote three times a week for USA Today and was on TV at least that often. His comments routinely moved stock prices and inspired other writers to try their hand at the market-moving game: Gene Marcial at Business Week, John Crudele at the New York Post, Herb Greenberg at the San Francisco Chronicle, to name three.

But Dorfman, who is not mentioned in Clash, had all but cornered this market. Ultimately, he got spread too thin and just couldn’t sustain the pressure to keep moving stocks. He was thought to be tied to a stock promoter and lost his job in 1996 when he refused to disclose his sources to his editor. (Full disclosure: Dorfman was working for Money magazine at the time.) At one point, venerable Coca-Cola responded to a Dorfman report with this statement: “Dan Dorfman does not have a clue.”

I’ve had my own brushes with TV punditry and seen firsthand how bookers, under pressure to get a warm body on camera, often don’t understand the topic to be discussed. They just want someone out there who will have an opinion and be entertaining. Once a booker asked me to go on air and talk about CEO pay. I had spent a week researching the subject and written a column about it. I was ready. On air, the host introduced the topic as Wall Street pay—which is a very different subject. I had almost nothing to contribute and was never invited back.

Macke and Brown explore this theme throughout and conclude that a successful pundit’s key attribute is the willingness to speak confidently on any topic, whether or not they understand it. Writing about Granville, whose “early warning” calls moved the market in the 1980s, they note that what he “had lacked in breadth and depth, he made up for with sheer personality and moxie. He had figured out the secret to all punditry, market or otherwise: certitude.”

The question underlying all of this is simple: Should you believe any financial forecaster and adjust your investments accordingly? The authors say no. They cite a 2005 study that looked at 27,000 forecasts by hundreds of experts over 15 years and concluded, “The experts’ forecasts were no more accurate than those of dart-throwing chimpanzees.”

That doesn’t mean expert opinion has no value. But the value is in the experts’ rationale and supporting arguments and how those jibe with your own considered view—not in blind loyalty to their advice. Key questions to ask include:

  • Who are the experts and what do they get for having an opinion?
  • Is their time frame the same as yours?
  • How many investment ideas do they generate each day or week? Is that realistic?
  • Why am I watching in the first place? Entertainment—or genuine need for this kind of information?

I didn’t expect to like this book. Pundits pontificating on the art of pontification feels light. Besides, even the pros know you should buy an index fund and head to the beach. The daily clatter is for traders and possibly ordinary people who just want to be entertained and try to understand how the market works.

But, like the punditry the authors explore, the material in Clash is entertaining. The book is built around engaging Q&A sessions and includes historical perspective that makes it useful in a big-picture kind of way. If you didn’t already know that the vast majority of talking heads are experts in name only, Clash will beat you over the head with examples until you are enlightened. As Cramer says in this book: “In the end it is just TV.”

More on how to invest:

 

MONEY Investing

Do You Really Need Stocks When Investing For Retirement?

Senior man on rollercoaster
Joe McBride—Getty Images

You may want to skip the thrills and chills of equities. But if you stick with bonds, be ready to do serious saving to reach your goals.

Even when stocks are doing well—and they’ve been on an incredible run the past five years with 17% annualized gains—there’s always a looming threat that the bottom could fall out of the market as it did when stock values plummeted more than 50% from the market’s high in 2007 to its trough in 2009. So it’s understandable, especially now when doubts abound about the longevity of this bull market, that you might ask yourself: Should I just skip stocks altogether when investing for retirement?

But if you’re inclined to give stocks a pass—or even just considering that option—you should be aware of the drawbacks of that choice. And, yes, there are substantial drawbacks.

Despite their gut-wrenching volatility—or, more accurately, because of it—stocks tend to generate higher returns than other financial assets like bonds, CDs and Treasury bills by a wide margin over the long term. That superior performance isn’t guaranteed, but it’s been pretty persistent over the last 100 years or longer.

Those higher long-term gains give you a practical advantage when it comes to saving for retirement. For a given amount of savings, you are likely to end up with a much larger nest egg by investing in stocks than had you shunned them. Another way to look at it is that by investing in stocks you can build a large nest egg without having to devote as much of your current income to savings.

Just how much of an advantage can stocks bestow? Here’s an example based on some scenarios I ran using T. Rowe Price’s Retirement Income Calculator, which you can find in Real Deal Retirement’s Retirement Toolbox.

Let’s assume you’re 30, earn $40,000 a year and are just beginning to save for retirement. The calculator assumes you’ll want to retire on 75% of your salary, so the target retirement income you’re shooting for is $30,000 (This is in today’s dollars; the calculator takes into account that your income will be much higher 35 years from now.)

First, let’s see how much you would have to save if you invest in, say, a mix of 70% stocks and 30% bonds, certainly nothing too racy for a 30-year-old with 35 years until retirement. To have at least a 70% chance of retiring on 75% of your pre-retirement salary at age 65 from a combination of Social Security payments and draws from your nest egg, you would have to set aside roughly 15% of your salary each year. (Or, if you have an employer generous enough to match, say, 6% of your salary, you’d have to kick in only 9% to reach 15%.)

You could improve that 70% probability by saving more or homing in on low-cost investment options, but let’s stick with the scenario above as a baseline for comparison.

So how would you fare if you decide to skip stocks altogether and invest solely in bonds? Well, if you stick with a 15% savings rate, your chances of being able to generate 75% of your pre-retirement income would drop to less than 20%. Not very comforting. You can boost the odds in your favor by saving more. But to get your chances of generating 75% of pre-retirement income back up to the 70% level, you would have to save almost 25% of your income each year. That’s a standard most people would have trouble meeting.

And the percentage of salary you would have to save would be even higher if you decide to hunker down in cash equivalents like money funds and CDs: just under 30%, or almost a third of your income.

Even if you had the iron will and perseverance to meet such lofty savings targets, diverting so much income from current spending to saving could seriously diminish the standard of living you and your family could enjoy during your career.

Just to be clear, I’m not suggesting anyone should just load up on stocks willy-nilly. That would be foolish, especially as you near or enter retirement, when a stock-market meltdown could derail your retirement plans. Indeed, in another column, I specifically warn against relying too much on outsize returns (whether from stocks or any other investment) to build a nest egg. Smart investing can’t replace diligent saving.

The point, though, is that stocks should be part of your investing strategy prior to and even during retirement. The percentage of your savings that you devote to equities can vary depending on such factors as your age, how upset get when the market goes into a steep funk and how much you’re willing to entertain the possibility of not having enough money to retire comfortably or running short of dough during retirement. Some of the links in my Retirement Toolbox section can help you settle on a stocks-bonds mix that makes sense for you.

But if after considering the pros and cons, you decide stocks just aren’t for you, fine. You’d just better be prepared to save your you-know-what off during your career, and keep especially close tabs on withdrawals from your nest egg after you retire.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

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MONEY financial literacy

Why Workers and Retirees Missed the Roaring Bull Market

Glass half Empty
Jupiterimages—Getty Images

Investor optimism dips, especially among retirees, a new survey finds. Maybe it's because 1 in 10 investors haven't noticed the huge gains in the market.

Quick, how much did the stock market gain last year? Tough question, right? Okay, let’s try a multiple choice: Based on the S&P 500 index, did the market rise 10%, 20%, or 30%? Evidently, that’s a tough question too because the vast majority of investors haven’t a clue.

Only 11% of adults with at least $10,000 in savings and investments got it right in a Wells Fargo/Gallup poll. This stands in stark contrast to the 67% that rate themselves somewhat or highly knowledgeable about investing and underscores the extent to which so many people simply don’t know what they don’t know.

For the record, the S&P 500 rose 30% in 2013—you received a total return of 32% if you reinvested dividends. This is the 13th biggest gain in a calendar year since 1926. Forget about getting the percentage right. Anyone paying attention should at least know that last year was a huge winner. Yet only 64% of investors even knew the market was up. Of those who did, 57% thought the gain was just 10% while 27% thought the gain was 20%. About 1% was looking through rose-colored glasses and thought the market rose 40% or more.

The poll also found that retirees were feeling much less optimistic in the second quarter. The Wells Fargo/Gallup Investor and Retirement Optimism index declined modestly overall but the portion looking only at retirees plunged 41%. This too seems incongruous. Second-quarter GDP surged 4%, one of the sharpest quarterly gains since the Great Recession.

One reason for this gloom is that about half of both retirees and workers are worried they will outlive their money, the poll found. Sadly, this may be a self-fulfilling prophecy. Playing it safe and earning 1% in a money market account won’t amount to much over time. Meanwhile, those who stayed true to a diversified portfolio of stocks through the downturn are doing better than ever. They were present for that 32% market gain—even if they have no idea how great last year was for them.

As a whole, the findings suggest that many people remain fixated on the past. The recession was a harrowing and humbling experience. But it is over. Real estate prices have turned up and the job picture is better. The stock market has more than doubled from the bottom. Yet when asked what they would do with a $10,000 gift, 56% in the poll said they would hold it as cash or stash it in an ultra-safe bank CD—not invest for growth. At this rate, expect more declines in optimism, especially as retirees stuck in cash see further declines in income.

Related stories:

 

MONEY stocks

WATCH: How to Make Better Investing Decisions

T. Rowe Price Chairman Brian Rogers how to be like Warren Buffett and avoid information overload.

MONEY Investing

Use This Trick to Beat Your Friends at Fantasy Football

Minnesota Vikings running back Adrian Peterson
Jeff Hanisch/USA Today Sports—Reuters

The start of the football season is close and fantasy football drafts have begun. Here's why thinking like a long-term investor can ruin your season.

Last November, one National Football League running back had a particularly good day.

Strong, agile, and quick, this player absolutely tore apart the Atlanta Falcons defense on Nov. 17 to the tune of 163 rushing yards and three touchdowns. Fantasy football owners fortunate to have him on their rosters were awarded almost 35 points from his performance alone—more than a third of the total usually needed to win a whole game.

So who was this guy? Future Hall of Famer Adrian Peterson? The Philadelphia Eagles buoyant halfback LeSean McCoy? Jim Brown? No, no, and of course not. He was an undrafted second-year player out of Western Kentucky named Bobby Rainey. Who, you ask? Exactly. On that same day Peterson himself, perhaps the greatest running back since Jim Brown, ran for 100 fewer yards than Rainey and never touched the end zone en route to a pedestrian 8.5 fantasy points.

It’s hard not to look for a lesson in this episode. And for someone like me, immersed in the investing world, the inclination is to draw a parallel to value investing, the discipline made famous by Warren Buffett. Value investing involves looking for companies that the market does not fully appreciate in hopes that, over time, they will outperform expectations and send the stocks soaring.

But as the fantasy football season gets under way, with millions of fans around the country drafting players over the next few weeks, I’m here to tell you that a Buffett-like approach to fantasy football probably won’t lead to glory.

Why not? Well, to start, value-focused buy-and-hold investing is all about ignoring short-term market fluctuations and sticking with your investment philosophy over the long-haul. Coca-Cola THE COCA COLA CO. KO 0.4161% has a bad quarter? Johnson & Johnson JOHNSON & JOHNSON JNJ 0.4872% delivered poor earnings-per-share growth? No matter. Value investors often see these rough patches as buying opportunities. And one of the foundational principles of value investing is that no investor can consistently predict exactly when to buy this stock or trade that one. When investors do engage in this perilous behavior, they generally end up losing money.

That ethos, however, falls flat when it comes to fantasy football. For one thing, there is no long-term in fantasy football. The season only lasts 17 weeks, which means you have only 17 chances to maximize your total scoring output. While one or two days of poor returns won’t hurt your portfolio, one or two weeks of fantasy football failure could ruin your season. Most leagues have around 10 teams, and, in order to make the playoffs, you’ll usually need seven wins. So if one of your players isn’t performing well, or hasn’t reached his full potential, you don’t have the time to wait.

In other words, don’t be scared to grab onto a hot player until he cools off. For instance, take another look at Peterson and Rainey. Going into the 2013 season, ESPN ranked Peterson the top fantasy football player to draft. Bobby Rainey is not Adrian Peterson. For his career, Rainey only has 566 rushing yards. Peterson has 10,115.

Nevertheless, Rainey was the superior running back over the last seven weeks of the 2013 NFL season. Using the NFL.com scoring system, Rainey earned 79.3 points from week 11 to 17, while Peterson (due in part to injury) only scored 54.8. Even if you take out Rainey’s career day against the Falcons, the two running backs scored pretty much the same number of points.

This isn’t an isolated example, either. Two weeks earlier, Nick Foles, who began the season as the Philadelphia Eagles second-string quarterback, threw for seven touchdowns and garnered 45.2 points for his fantasy owners. Foles would go on to accumulate a total of almost 260 points for the season (more than superstars Tom Brady, Ben Rothlisberger, and Matt Ryan) despite starting in only 11 of 16 games.

In fact, last season, 15 different players scored the most points in a given week (Peyton Manning and Drew Brees each did it twice). Of those 15 players, not one was listed in the top five on ESPN’s pre-season best fantasy football players list. Brady never scored the most points in any one week, for example, but Bears back-up quarterback Josh McCown did, in week 14.

In short, buying the football equivalent of Coca-Cola shares (one of Buffett’s most beloved and long-held stocks) and hanging on through thick and thin can be a losing game.

I learned this lesson the hard way, having drafted Buffalo Bill running back C.J. Spiller with my first pick last season. Ranked the 7th best player by ESPN going into last season, Spiller scored 3.5, 11.7, 3, and 7.7 over the first four weeks. Unwilling to give up on such a high pick, however, I kept him in my starting lineup for most of the season. I ended up in the bottom of my league and learned a valuable lesson in sunk cost theory.

Of course finding seven weeks of Rainey, or spotting the next Foles off the waiver wire, is difficult. Some up-and-comers are just flashes in the pan and will deliver worse returns than your first-round pick. But when this season’s Foles takes off, don’t be surprised. If you play fantasy football you must learn to embrace the shooting star—and if that star burns out, find another.

MONEY inversions

WATCH: Stephen Colbert and Jon Stewart Slam “Corporate Deserters” Who Flee U.S. Taxes

The late night duo are the newest celebrities to speak out against corporate inversions.

Last night the Comedy Central dream team of Jon Stewart and Stephen Colbert each took a moment on their respective shows to attack the growing number of American corporations moving their official addresses abroad to escape U.S. taxes.

The specific kind of tax flight the duo is talking about is known as an inversion, and these maneuvers have become all the rage in recent months. As MONEY’s Pat Regnier explains, an inversion is when a U.S. company merges with a (typically smaller) foreign company in tax-friendly country. The U.S. company then claims it is now based in the foreign company’s nation and thus avoids paying U.S. taxes while continuing to enjoy many benefits of essentially remaining an American company.

“It’s like me adopting an African child, and then claiming myself as his dependent,” quipped Colbert.

This practice has been widely condemned as unpatriotic and unfair to American taxpayers who will be stuck footing the bill if the government needs to replace corporate tax dollars with new sources of revenue. The anti-inversion chorus has so far included public figures ranging from President Obama to entrepreneur and Dallas Mavericks owner Mark Cuban, who recently advised his Twitter followers to divest from inversion-happy corporations.

On Wednesday, Stewart and Colbert added their own two cents, with Colbert bringing on Fortune’s Allan Sloan, author of a recent seminal article on inversions, to talk about the problem.

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MONEY 401(k)s

Are You a Saver or an Investor? It Matters in a 401(k)

Close-up piggy bank
Fuse—Getty Images

Most 401(k) participants see themselves as savers, new research shows. And it's holding them back.

The venerable 401(k) plan has many failings and is ill suited as a primary retirement savings vehicle. Yet it could do so much more if only workers understood how to best use it.

The vast majority of 401(k) plan participants view themselves as savers, not investors, according to new research. As such, they are less likely to allocate money to 401(k) plan options that will provide the long-term growth they need to retire in comfort.

Only 22% of workers in a 401(k) plan in the U.S., U.K. and Ireland say they are knowledgeable about investing, State Street Global Advisors found. This translates into a low tolerance for risk: only 27% in the U.S., 15% in the U.K., and 10% in Ireland say they are willing to take greater risk to achieve better returns.

This in turn leads to sinking retirement confidence. Only 31% in the U.S., 26% in the U.K., and 16% in Ireland feel they will save enough in their 401(k) plan to fund a comfortable retirement, the survey shows.

The faults of 401(k) plans are well documented and range from uncertain returns to high fees to failing to provide guaranteed lifetime income. Economic activists like Teresa Ghilarducci, a professor of economics at the New School and author of When I’m Sixty-Four, have been arguing for years that we need to return to something like the traditional pension.

But the switch to 401(k) plans from traditional pensions has taken more than three decades. A broad reversal will be slow too, if it comes at all. In the meantime, workers need to understand how to best use their 401(k) or other employer-sponsored defined contribution plan. Like it or not, these plans have become our de facto primary retirement savings vehicles.

At a basic level, plan participants of all ages must begin to embrace higher risk in return for higher rewards. The State Street survey reveals broad under-exposure to stocks, which historically have provided the highest long-term returns. A popular rule of thumb is to subtract your age from 110 to determine your allocation to stocks. But the latest research suggests that even just a few years from retirement you are better off holding more stocks.

There is much more to making the most of your 401(k) plan than just adding risk. You need to contribute enough to capture the full employer match and be well diversified, among other things. But it all starts with understanding that saving in a secure fixed-income product is not investing, and it is not enough to get you to the promised land.

Yes, the financial crisis is still fresh and the market’s deep plunge is an all-too-real reminder that stocks have risk. But just five years later the market has fully recovered, and 401(k) balances have never been plumper. Fixate on the recovery, not the downturn. A diversified stock portfolio almost never loses money over a 10-year period. It took the Great Depression and then the Great Recession to produce 10-year losses, which were less than 5% and disappeared quickly in the recovery.

If you feel nervous about investing in stocks, consider opting for a target-date retirement fund, which will give you an asset mix that shifts to become more conservative as you near retirement. While they may not suit everyone, target-date funds tend to outperform most do-it-yourselfers, research shows. With your asset mix on cruise control, you can focus on saving, which is enough of a challenge.

MONEY Planning

When Conventional Wisdom About Retirement is Good Enough

Retirement investing isn't an exact a science. Rather than worrying whether the rules need to be tweaked, just start saving.

What keeps you up at night?

As a money manager, I recently polled my clients on several questions, and that was one of them. Replies ranged from “my bladder” to worries about the Federal Reserve printing too much money.

The most common answer, though, was fear of outliving one’s savings.

For decades, people have confronted the issue of how much they need to retire. Today the topic hits with special force. People are living longer, and the financial crisis of 2007-2009 set millions of people back twenty squares on the economic game board of life.

Now, there’s much debate about whether traditional retirement planning advice needs to be tweaked.

The traditional advice on income, for instance, is that people in retirement need about 60% to 70% of their old annual income to keep roughly the same standard of living. Remember, when you retire, your taxes may be lower, your children may be grown, your commuting and clothing expenses may shrink, and you may move out of a big house into a smaller house or apartment.

If savings and investments were your sole source of income, you would need – again, by conventional wisdom – about 25 times that sum in hand when you start your retirement. That is based on the traditional assumption that you can safely withdraw 4% of your initial nest egg each year and still have it last at least 30 years, regardless of market conditions.

That means if you earned $100,000 a year at the peak of your career, you would need about $65,000 a year in retirement, and 25 times that amount is $1,625,000.

Of course, inflation may increase your costs as years pass. If inflation runs at a 3% clip, a loaf of bread that costs $2.50 today will cost $4.50 in 2034. At 5% inflation, the same loaf would cost you $6.62.

You can offset some of the effects of inflation by your savings and investments, post-retirement. My father retired at 77 but invested in the stock market, logging prices and trends on charts he kept by hand. When he died at 98, his net worth had increased 75% from the day he retired.

Social Security can help, too. Despite doomsayers’ screeds, I believe the Social Security system will be around in 30 years. But benefits may be a little less generous than they are today.

These days, I see a lot of articles by financial planners questioning the guideline that it’s prudent to withdraw 4% a year.

I’ve seen planners argue for anything from a 2.8% withdrawal rate to a 5% one.

Those arguing for a smaller withdrawal rate — which implies the need for a bigger nest egg — say it’s hard to earn 4% a year after taxes without wading into risky investments. Savings accounts are paying a paltry 1% to 2%, and that’s before taxes.

But I think that’s a short-term view. Savings rates probably won’t stay as paltry as they are – just as inflation didn’t stay sky-high, as it was in the early 1980s.

For the long run, I think the 4% rule provides a decent, if crude, approximation.

Let’s be realistic here. Accumulating a pre-retirement hoard of 25 times the expected annual need is an ambitious target to start with.

But it’s something to strive for.

MONEY stocks

The Market’s New Message: Show Me the Money Now!

Investors lost patience last week, punishing companies like Amazon that aren't generating profits while rewarding those such as Facebook that are delivering on their promise.

The stock market has a reputation for looking ahead.

That’s why equity prices tend to predict shifts in the economy six to nine months before they happen. It’s also why investors recently punished shares of the credit card giant Visa VISA INC. V -0.3733% after the company posted solid earnings but hinted that revenues later in the year would fall short of expectations.

Still, there are times when Wall Street adjusts its perspective and focuses on the here and now. And Friday was one of those occasions.

In what turned out to be a rather brutal end of the week, investors gave companies—including some of the market’s darlings of the past few years—an extremely short leash. Those that lived up to their promise came out relatively unscathed, but those that fell short got hammered.

Just ask Jeff Bezos and Mark Zuckerberg.

For years, Bezos’ Amazon.com AMAZON.COM INC. AMZN -8.3403% soared as it posted robust sales growth while promising strong earnings were just around the corner. The e-commerce giant delivered the exact same message (and results) when it announced its quarterly earnings last week. This time, though, investors responded by erasing $16 billion of market value from the company in half the time it takes the company to deliver packages to its Prime membership customers.

Other examples of companies that couldn’t deliver on growth and earnings now were the streaming music service Pandora Media PANDORA MEDIA INC. P -13.4948% and Dunkin’ Brands DUNKIN BRANDS GROUP DNKN 2.5227% , the parent company of the Dunkin’ Donuts chain, which is struggling to fight off Starbucks and McDonald’s in the coffee wars.

DNKN Price Chart

DNKN Price data by YCharts

On the flip side, Zuckerberg’s Facebook FACEBOOK INC. FB 0.7871% not only blew past Wall Street’s revenue and earnings expectations in the recent quarter, it proved that it was making big strides in mobile advertising, the area the social network giant’s investors were most worried about in recent years.

Not surprisingly, shares of Facebook—and other companies firing on all cylinders, such as Starbucks STARBUCKS CORP. SBUX 1.2961% —defied the market’s end-of-the-week sell-off and are at or near their all-time record highs.

Here’s a closer look at the week’s winners and losers:

Amazon and Pandora Slammed by Wall Street for Weak Earnings

Dunkin, Mickey D’s, or Starbucks? The Surprising Winner of the Coffee War

Facebook’s Next Battle is Wrestling Your Credit Card Number from Amazon

MONEY financial advice

How Listening Better Will Make You Richer

140724_HO_Listening_1
Ruslan Dashinsky—iStock

A financial adviser explains that when you hear only what you want to hear, you can end up making some bad money choices.

Allison sat in my office, singing the praises of an annuity she had recently purchased. She was 64 years old, and she had come in for a free initial consultation after listening to my radio show.

“The investment guy at the bank,” she crowed, “told me this annuity would pay me a guaranteed income of 7% when I turn 70.”

I asked her to tell me more.

Allison had invested $300,000 as a rollover from her old 401(k) plan. She was told that at age 70, her annuity would be worth $450,000. Beginning at age 70, she could take $31,500 (7% of $450,000) and lock in that income stream forever.

“And when you die, what will be left to the kids?” I asked.

“The $300,000 plus all my earnings!” she said.

Suddenly my stomach began to sour.

Allison, I was sure, had heard only part of what the salesperson had told her.

I followed up with another question: “Besides the guaranteed $31,500 annual income, will you have access to any other money?”

“Oh yes,” she answered. “I can take up to 10% of the account value at any time without paying a surrender charge. In fact, next year I plan to take $30,000 so I can buy a new car!”

This story was getting worse, not better.

It was time to break the news to Allison.

I asked her to tell me the name of the product and the insurance company that issued it. Sure enough, I knew exactly the one she bought, since I had it available to my clients as well.

That’s when the conversation got a little tense.

I explained that if she withdrew any money from her annuity prior to beginning her guaranteed income payment, there was a strong likelihood she wouldn’t be able to collect $31,500 per year at age 70. Given the terms of the annuity, any such withdrawals now would reduce the guaranteed payment later.

She disagreed.

I explained that, with this and most other annuities, if she started the income stream as promised at $31,500, she would not likely have any money to pass on to the children.

She told me I was wrong — and defended the agent who sold her the annuity. She said that she bought a guaranteed death benefit rider so that she could protect her children upon her death.

I encouraged her to read the fine print. As expected, she reread the paragraph that stated that the “guaranteed death benefit” was equal to the initial investment plus earnings, less any withdrawals. When I told her that her death benefit in all likelihood would be worth nothing by age 80, she quickly said, “I need to call my agent back and check on this.”

I have conversations like this a lot, and not just with annuities. When it comes to investments, whether they’re annuities, commodity funds, or hot stocks, people often hear only what they want to hear. At various points in his sales pitch, the annuity salesman had probably said things like “guaranteed growth on the value of the contract,” “guaranteed income stream,” “can’t lose your money,” and “heirs get everything you put in.” What she had done was merge the different parts of the sales pitch together and ignore all the relevant conditions and exceptions.

When people hear about a product, there’s an emotional impact. “I want to buy that,” they think. They focus only on the benefits of the product; they assume the challenging parts of the product — the risks — won’t apply to them.

This story has a happy ending. Before Allison left my office, I asked when she received her annuity in the mail. “Three days ago,” she said.

I reminded her of the ten-day “free look” period that’s given to annuity buyers as a one-time “do-over” if they feel that the product they purchased isn’t right for them.

She called me back within two days. “The agent doesn’t like me very much,” she said. She had returned the annuity under the “free look” period and expected to get a full refund. The annuity salesman had just lost an $18,000 commission.

And I once again saw the wisdom of something I tell my clients every day: Prior to ever making a financial decision, it is absolutely critical you evaluate how this decision integrates into your overall financial life. That’s what’s important — not falling in love with a product.

———-

Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

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