MONEY stocks

How to Tame the (Inevitable) Bear Market

baby bear in front of scary bear shadow
Claire Benoist

Stocks will eventually suffer a downturn, but don't assume it has to be a grisly one. Here's what you need to do now to get your portfolio ready.

The current bull market is looking almost old enough to qualify for Social Security. Now in its seventh year, this rally is nearly twice the length of the typical bull and is the fourth-oldest since 1900. Meanwhile stocks are getting expensive, profits are slowing, and equities will soon face another headwind in the form of Federal Reserve interest-rate hikes, possibly starting as soon as summer.

Yet this is not a call to hightail it out of the market. Few suggest a bear attack is around the very next corner. And even if a selloff is coming soon, two-thirds of bull markets over the past 60 years have added gains of at least 20% in their final stage, according to InvesTech Research. So there’s a risk to overreacting.

Money

That said, “how you invest in the seventh year of a bull market is not the same as at the start of a bull market,” says InvesTech president James Stack. And the next bear market is probably going to look a lot different from the ones you’ve grown used to.

So here’s a playbook for getting your portfolio ready:

Expect a less grisly bear

The last two downturns you recall happen to be among the worst in history, so it’s understandable if you’re concerned about getting mauled. But this time “we don’t see any bubbles or concerns that would suggest we’re heading for a repeat of 2000 or 2007,” says Doug Ramsey, chief investment officer at the Leuthold Group.

Ramsey expects a “garden variety” downdraft of around 27.5% (see chart). After a six-year rally in which the market has soared more than 200%, that’s not catastrophic. Also, it’s psychologically difficult to buy on the dips in a megabear that might drag on for years. But a run-of-the-mill bear market can be viewed as “an opportunity,” says Kate Warne, investment strategist at Edward Jones.

Warne’s advice: Plan to rebalance your portfolio to your target stock allocation in the next bear. Get ready to do so once your mix changes by around five percentage points. A 70% stock/30% bond portfolio will hit that point as equity losses approach 20%. Selling bonds to replenish your equities will set you up for the next bull.

Stay committed abroad

In the last bear, global economies tumbled in sync. Not so this time. In the U.S., the Fed is on the verge of lifting rates on the strength of our economy. Yet the eurozone and Japan are stuck in neutral, and their central banks are trying to stimulate growth. “Their stocks reflect that weakness, making them more attractive right now compared to the U.S.,” says Warne.

The broad U.S. market trades at a price/earnings ratio of 17.7 based on profit forecasts. Yet stocks held by Fidelity Spartan International IndexFIDELITY SPARTAN INTL INDEX INV FSIIX 0.08% and Dodge & Cox International DODGE & COX INTERNATIONAL STOCK DODFX 0.25% —both in the MONEY 50—trade at about 15 times earnings. Warne suggests keeping up to a third of your stocks in developed foreign markets.

Don’t overlook late-stage bull leaders

While the S&P 500 is trading modestly above its long-term average, the median P/E of all U.S. stocks is at an all-time high. “That tells you that small- and midcap stocks have higher P/Es, and they will be the ones to fall the furthest in a bear market,” says Stack.

That makes blue chips more compelling. InvesTech also studied the final stage of bull markets and found that the energy, technology, health care, and industrial sectors tend to outperform. Energy is obviously a tricky case given the recent volatility in oil prices, but Stack says it should not be shunned. MONEY 50 pick Primecap Odyssey Growth PRIMECAP ODYSSEY GROWTH FUND POGRX -0.29% has nearly 80% of its assets in those sectors.

Dial back on alternatives

If you’ve been using high-yielding utility stocks as bond stand-ins, now is the time to take some profits. Along with financial and consumer discretionary stocks, utilities are late-stage laggards.

And if you’ve reduced your fixed-income allocation in favor of higher-yielding alternatives such as REITs or master limited partnerships, it’s time to shift back to core bonds. Such income alternatives are more highly correlated with stocks than are basic bonds. Fixed-income returns may be muted once rates start rising. But that doesn’t change the role of high-quality bonds: shock absorbers when stocks are falling.

MONEY index funds

The One Investment You Need Most For A Successful Retirement

two men walking toward hole on golf course
Chris Ryan—Getty Images

Market returns may be lower in future. But you can make the most of them by focusing on low-cost funds and ETFs.

Whether you’re still building your nest egg or tapping it for income, you need to re-evaluate your investing strategy in light of lower projected investment returns in the years ahead. The upshot: Unless you’re putting most of your money into low-cost index funds and ETFs, you may very well be jeopardizing your shot at a secure retirement.

As if we needed more confirmation that future investment gains will likely be anemic, investment adviser and ETF guru Rick Ferri recently unveiled his long-term forecast for stock and bond returns. It’s sobering to say the least. Assuming 2% yearly inflation, he estimates stocks and bonds will deliver annualized gains of roughly 7% and 4% respectively over the next few decades. That’s quite a comedown from the 10% for stocks and 5% or so for bonds investors had come to expect in past decades.

Given such undersized projected rates of return, you can’t afford to give up any more of your gain to fees than you absolutely have to if you want to have a reasonable shot at attaining and maintaining a secure retirement. Which means broad-based index funds or ETFs with low annual expenses should be the investment of choice for individual investors’ portfolios.

Check Out: 4 Retirement Mistakes That Can Cost You $250,000 or More

Here’s an example. Let’s say you’re 25, earn $40,000 a year, get 2% annual raises and plan to retire at 65. Back when stocks were churning out annualized gains of 10% and bonds were delivering 5% yearly, you might reasonably expect an annualized return of 8% or so from a 60% stocks-40% bonds portfolio. Assuming 1.25% in annual expenses—about average for mutual funds, according to Morningstar—that left you with an annual return of roughly 6.75%. Given that return, you would have to save about 11% of salary through0ut your career to end up with a $1 million nest egg at retirement.

But look at how much more you have to stash away each year if returns come in at current low projections. If stocks return 7% annually and bonds generate gains of 4%, a 60-40 portfolio would return roughly 6%. Deduct 1.25% in expenses, and you’re looking at an annualized return of 4.75%. With that return, the 25-year-old above would have to save 17% of salary annually to accumulate $1 million by age 65. In short, he would have to increase the percentage of salary he devotes to saving by almost 55% each year, enough to require a major lifestyle adjustment.

There’s not much you can do to boost the returns the market delivers. But you do have some control over investment expenses. Suppose that instead of shelling out 1.25% a year in expenses, our 25-year-old lowers annual costs to 0.25% by investing exclusively in low-cost index funds and ETFs. That would boost his potential return on a 60-40 portfolio by one percentage point from 4.75% to 5.75%. With that extra percentage point in return, our hypothetical 25-year-old would be able to build a $1 million nest egg at 65 by saving 13% of salary annually instead of 17% year. Granted, 13% is still more than the 11% he had to save when he was paying 1.25% annually in expenses and stocks and bonds were delivering higher historical rates of return. But investing low-fee index funds and ETFs clearly gives him a better shot at building a seven-figure nest egg than he would have with funds that charge higher expenses.

Check Out: 10 Smart Ways To Boost Your Investment Results

Holding the rein on expenses in the face of expected subpar returns is just as important when you’re tapping your nest egg. For example, if you follow a systematic withdrawal system like the 4% rule—i.e., draw 4%, or $40,000, initially from a $1 million 60% stocks-40% bonds portfolio and increase that amount each year for inflation—reducing annual expenses by a percentage point will significantly increase the probability that your nest egg will last 30 years or more.

Can I guarantee that you’ll be able to duplicate these results exactly? Of course not. Given the choices in your 401(k) or other retirement accounts, you may not be able to reduce expenses as much as in these scenarios. Even if you can, there’s no assurance that every cent you save in expenses will translate to an equivalent gain in returns (although research shows funds with lower costs do tend to outperform their high-cost counterparts).

And let’s not forget that we’re dealing with projections here. They may very well get it wrong. Even if they’re spot on, you won’t earn that annualized return year after year. Some years will be higher, others lower, which will affect both the size of the nest egg you accumulate as well as how long it will last. It’s also possible that you may be able to generate a higher return than the market ultimately delivers (although doing so typically means taking on more risk).

Check Out: The Retirement Income Mistake Most Americans Are Making

But the point is this: If returns do come in lower than in the past—which seems likely given the current low level of interest rates—the more you stick to low-cost index funds and ETFs, the better the shot that you’ll have at accumulating the savings you’ll need to maintain your standard of living in retirement, and the more likely your savings will last at least as long as you do.

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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MONEY Warren Buffett

Why History Will Forget Warren Buffett–But Investors Never Will

Billionaire investor Warren Buffett
Bill Pugliano—Getty Images

Unlike the great business moguls of America's past, Buffett didn't invent a product or process that will live on in perpetuity.

How will historians write about Warren Buffett 100 years from now? Will they treat him like the magnificent Commodore Cornelius Vanderbilt? Or will the 84-year-old multibillionaire play a more muted role in history books, akin to the venerated Gilded Age stock operator Henry Clews? I believe it will be the latter. While Buffett’s shareholder letters secure his place in the minds of curious future investors, his unique role in American finance, coupled with the fate of his fortune, seems to ensure a subdued legacy.

Buffett’s contribution is hard to define

It would be silly to argue that Buffett isn’t one of the most accomplished Americans alive today. He transformed an ailing textile company into a vast conglomerate holding dozens of profitable subsidiaries. His investment returns over half a century are second to none. He taught millions of people how to invest in a prudent yet lucrative manner. And he acted as a savior during the worst economic downturn since the Great Depression, injecting billions of dollars into ailing businesses during the financial crisis of 2008-2009.

But unlike the great business moguls of America’s past, Buffett didn’t invent a product or process that will live on in perpetuity. Vanderbilt gave us steamship lines, the New York Central Railroad, and New York City’s Grand Central Station. Carnegie industrialized steel, paving the way for skyscrapers and the Golden Gate Bridge. Ford popularized mass production and democratized the automobile. Even J. P. Morgan, while playing a similar role to Buffett’s, put America’s financial sector on the map by supplanting the Rothschilds and Baring brothers at the summit of global finance.

By comparison, Buffett’s contribution is more elusive. As William Thorndike points out in The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, Buffett’s innovation consisted of using insurance float to fund a corporate conglomerate. It was brilliant, and others have since copied this approach — most notably, hedge fund manager David Einhorn and the team at Markel Corporation — but outside of finance, Buffett’s innovative use of float is difficult for the average person to grasp and all but impossible to copy.

Forgoing dynasty and monuments to wealth

Buffett also decided nearly a decade ago to donate the lions’ share of his now $71 billion fortune to philanthropic organizations. He explained at the time that neither he nor his late wife Susan Buffett ever wanted to give their children dynastic wealth. “Our kids are great,” Buffett told Fortune’s Carol Loomis. “But I would argue that when your kids have all the advantages anyway, in terms of how they grow up and the opportunities they have for education, including what they learn at home — I would say it’s neither right nor rational to be flooding them with money.”

This decision puts Buffett in rarefied company. It elicits comparisons to Carnegie, who, at the age of 65, sold his empire to a J. P. Morgan-controlled trust, known today as U.S. Steel, and spent the rest of his life giving away his fortune. Or to Alfred P. Sloan, the one-time head of General Motors who, childless like Carnegie, used his fortune to endow an array of philanthropic organizations that continue to finance the arts, education, and science 50 years after his death.

But what distinguishes Buffett’s charitable giving from the likes of Carnegie’s and Sloan’s is its anonymity. The Ford family created the Ford Foundation. J. Paul Getty created the J. Paul Getty Trust. Robert Wood Johnson, a founder of Johnson & Johnson, has the Robert Wood Johnson Foundation. All of these people also have libraries, university buildings, museums, and performing arts centers that conspicuously bear their names. Meanwhile, Buffett is giving most of his wealth to the Bill and Melinda Gates Foundation.

Along these same lines, there’s little reason to believe that Buffett will leave behind grand residences or other monuments that will keep his achievements fresh in the minds of future generations. John D. Rockefeller built the Kykuit mansion. Two of Cornelius Vanderbilt’s grandsons constructed the Biltmore Estate and The Breakers. And J. P. Morgan’s library and mansion continue to occupy almost an entire city block in midtown Manhattan. Tens of thousands, if not hundreds of thousands, of tourists visit these residences every year. Yet Buffett still lives in the same five-bedroom house on Omaha’s Farnam Street that he purchased for $31,500 in 1958.

Buffett’s gift to future generations

What Buffett will leave, of course, are his letters to the shareholders of Berkshire Hathaway. These overflow with pithy anecdotes and invaluable lessons about investing, and they’re written in a style that’s accessible to even novice investors. They teach us the importance of being “greedy when others are fearful and fearful when others are greedy.” They introduce the concept of a durable competitive advantage. And they drive home the point that it’s “far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

However, while Buffett’s writings are destined to live on in perpetuity, they will eventually be familiar to only a small niche of investors. The legacy of Henry Clews, the famed money manager from the Gilded Age, serves as a revealing analogy. Like Buffett, Clews was brilliant, generous with his knowledge, and conscious to communicate the lessons he learned in accessible language. And like Buffett, Clews — though to a lesser degree — was financially successful and widely respected by his peers. But even though Clews went on to write the eminently readable and instructive classic on investing 50 Years in Wall Street, few people today have heard Clews’ name, and even fewer are familiar with his writings.

All of this isn’t to say that Buffett doesn’t deserve a greater role in history books than he seems likely to get. He personifies the American dream, second only to Benjamin Franklin. He achieved phenomenal success, becoming the world’s second-richest person without compromising his integrity or losing his humility. Yet by forgoing the opportunity to create dynastic wealth, choosing instead to vest his friend Bill Gates’ organization with the lion’s share of his fortune, Buffett has all but ensured for himself a diminished role in the minds of subsequent generations.

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MONEY Ask the Expert

Which Wins for Retirement Savings: Roth IRA or Roth 401(k)?

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 30 and just starting to save for retirement. My employer offers a traditional 401(k) and a Roth 401(k) but no company match. Should I open and max out a Roth IRA first and then contribute to my company 401(k) and hope it offers a match in the future?– Charlotte Mapes, Tampa

A: A company match is a nice to have, but it’s not the most important consideration when you’re deciding which account to choose for your retirement savings, says Samuel Rad, a certified financial planner at Searchlight Financial Advisors in Beverly Hills, Calif.

Contributing to a 401(k) almost always trumps an IRA because you can sock away a lot more money, says Rad. This is true whether you’re talking about a Roth IRA or a traditional IRA. In 2015 you can put $18,000 a year in your company 401(k) ($24,000 if you’re 50 or older). You can only put $5,500 in an IRA ($6,500 if you’re 50-plus). A 401(k) is also easy to fund because your contributions are automatically deducted from your pay check.

With Roth IRAs, higher earners may also face income limits to contributions. For singles, you can’t put money in a Roth if your modified adjusted gross income exceeds $131,000; for married couples filing jointly, the cutoff is $193,000. There are no income limits for contributions to a 401(k).

If you had a company match, you might save enough in the plan to receive the full match, and then stash additional money in a Roth IRA. But since you don’t, and you also have a Roth option in your 401(k), the key decision for you is whether to contribute to a traditional 401(k) or a Roth 401(k). (You’re fortunate to have the choice. Only 50% of employer defined contribution plans offer a Roth 401(k), according to Aon Hewitt.)

The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. With a traditional 401(k), you make contributions with pre-tax dollars, so you get a tax break up front, which helps lower your current income tax bill. Your money—both contributions and earnings—will grow tax-deferred until you withdraw it, when you’ll pay whatever income tax rates applies at that time. If you tap that money before age 59 1/2, you’ll pay a 10% penalty in addition to taxes (with a few exceptions).

With a Roth 401(k), it’s the opposite. You make your contributions with after-tax dollars, so there’s no upfront tax deduction. And unlike a Roth IRA, there are no contribution limits based on your income. You can withdraw contributions and earnings tax-free at age 59½, as long as you’ve held the account for five years. That gives you a valuable stream of tax-free income when you’re retired.

So it all comes down to deciding when it’s better for you to pay the taxes—now or later. And that depends a lot on what you think your income tax rates will be when you retire.

No one has a crystal ball, but for young investors like you, the Roth looks particularly attractive. You’re likely to be in a lower tax bracket earlier in your career, so the up-front tax break you’d receive from contributing to a traditional 401(k) isn’t as big it would be for a high earner. Plus, you’ll benefit from decades of tax-free compounding.

Of course, having a tax-free pool of money is also valuable for older investors and retirees, even those in a lower tax brackets. If you had to make a sudden large withdrawal, perhaps for a health emergency, you can tap those savings rather than a pre-tax account, which might push you into a higher tax bracket.

The good news is that you have the best of both worlds, says Rad. You can hedge your bets by contributing both to your traditional 401(k) and the Roth 401(k), though you are capped at $18,000 total. Do this, and you can lower your current taxable income and build a tax diversified retirement portfolio.

There is one downside to a Roth 401(k) vs. a Roth IRA: Just like a regular 401(k), a Roth 401(k) has a required minimum distribution (RMD) rule. You have to start withdrawing money at age 70 ½, even if you don’t need the income at that time. That means you may be forced to make withdrawals when the market is down. If you have money in a Roth IRA, there is no RMD, so you can keep your money invested as long as you want. So you may want to rollover your Roth 401(k) to a Roth IRA before you reach age 70 1/2.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: The Pros and Cons of Hiring a Financial Adviser

MONEY Ask the Expert

When Going All In Is Not A Risky Bet

hands pushing poker chip stacks on table
iStock

Q: I’m 33 and recently received a $200,000 windfall. But I’m lost on how I should put it to work. Should I invest in phases or all at once? I’m nervous about investing at all-time market highs. – Rod in Los Angeles

A: Assuming you’re investing this money for the long term — and you have sufficient cash set aside to meet short-term needs and emergencies — go ahead and invest it all at once, says Jerry Miccolis, founding principal of Giralda Advisors, a Madison, N.J. firm that specializes in risk management. “Don’t let headlines about the market hitting new highs make your nervous because, if the market does what it’s supposed to do, that should be the norm,” says Miccolis.

Now, you may have heard the term “dollar-cost averaging.” This notion of automatically investing small amounts at regular intervals, as you do in a 401(k) retirement plan, does tend to smooth out the natural ups and downs of the market. It’s one of many perks of investing consistently, come what may.

Still, if you have cash at the ready to put to long-term use, says Miccolis, it’s just as well to invest all at once – and given your age primarily in equities.

This isn’t to say that short-term market corrections – even sizable ones – won’t happen again. “You’ll probably see many in your lifetime,” says Miccolis. “But you risk losing a lot more waiting around for something to change before you invest.”

In fact, investors who’ve had the bad luck of getting in at the very top of a market have ultimately come out ahead – provided they stayed the course. Consider this analysis from wealth management tech company CircleBlack: An investor who put $1,000 in the Standard & Poor’s 500 index of U.S. stocks at the beginning of 2008 (when stocks fell 37%) and again in early 2009 would have been back in positive territory by the end of 2009.

A critical caveat: This advice assumes that you actually keep your savings invested, and not panic sell when things look ugly. Hence, before you make your decision, try to gauge your tolerance for risk – here’s a quick survey to understand your comfort level – as well as your capacity for risk.

While tolerance generally refers to how risk affects you emotionally, capacity refers to how much risk you can actually afford. (You may have a high tolerance for risk but low capacity, or vice versa.)

If you have a steady income, little debt, and several months of emergency savings, the odds that you’d be forced to tap your long-term savings should be low, meaning that your capacity for risk is adequate. If the rest of your financial advice is a bit of a mess, however, you’ll want to use some of this windfall to tighten your ship before you commit to investing it.

Another exception to the advice to invest in one-fell swoop: If you can’t afford to max out on your 401(k) plan, earmark some of this money for living expenses so you can divert a bigger chunk of your salary to these tax-deferred contributions.

MONEY investing strategy

16 Facts You Never Would Have Believed Before They Happened

"History never looks like history when you are living through it." — John W. Gardner

A reminder for those making predictions.

You would have never believed it if, in the mid-1980s, someone told you that in the next two decades the Soviet Union would collapse, Japan’s economy would stagnate for 20 years, China would become a superpower, and North Dakota would be ground zero for global energy growth.

You would have never believed it if, in 1930, someone told you there would be a surge in the birthrate from 1945 to 1965, creating a massive generation that would have all kinds of impacts on the economy and society.

You would have never believed it if, in 2004, someone told you a website run by a 19-year-old college dropout on which you look at pictures of your friends would be worth nearly a quarter-trillion dollars in less than a decade. (Nice job, Facebook.)

You would never have believed it if, in 1900, as your horse and buggy got stuck in the mud, someone pointed to the moon and said, “We’ll be walking on that during our lifetime.”

You would have never believed it if, in late 1945, someone told you that after Hiroshima and Nagasaki no country would use a nuclear weapon in war for at least seven decades.

You would have never believed it if, eight years ago, someone told you the Federal Reserve would print $3 trillion and what followed would be some of the lowest inflation in decades.

You would have never believed it if, in 2000, someone told you Enron was about to go bankrupt and Apple would become the most innovative, valuable company in the world. (The opposite looked highly likely.)

You would have never believed it if, in 1910, when forecasts predicted the United States would deplete its oil within 10 years, that a century later we’d be pumping 8.6 million barrels of oil a day.

You would have never believed it if, three years ago, someone told you that Uber, an app connecting you with a stranger in a Honda Civic, would be worth almost as much as General Motors.

You would have never believed it if, 15 years ago, someone told you that you’d be able to watch high-definition movies and simultaneously do your taxes on a 4-inch piece of glass and metal.

You would have never believed it if, in 2000, someone said the biggest news story of the next decade — economically, politically, socially, and militarily — would be a group of guys with box cutters.

You would have never believed it if, in 2002, someone told you we’d go at least 11 years without another major terrorist attack in America.

You would have never believed it if, in 1997, someone told you that the biggest threat to Microsoft were two Stanford students working out of a garage on a search engine with an odd, misspelled name.

You would have never believed it if, just a few years ago, someone told you investors would be buying government debt with negative interest rates.

You would have never believed it if, in 2008, as U.S. “peak oil” arguments were everywhere, that within six years America would be pumping more oil than Saudi Arabia.

You would have never believed it if, after the lessons of World War I, someone told you there’d be an even bigger war 25 years later.

But all of that stuff happened. And they were some of the most important stories of the last 100 years. The next 100 years will be the same.

For more on this:

MONEY Tech

3 Companies Hoping the Apple Watch Fails

150408_INV_HopingWatchFails
Stephen Lam—Reuters

Apple's new gadget will shrink a few stocks if it's a hit.

Investors are gearing up for this month’s rollout of Apple’s APPLE INC. AAPL -0.16% new smartwatch. There will be plenty of winners outside of the Cupertino-based tastemaker of consumer tech when the Apple Watch hits the market. The companies making the components will naturally benefit from the incremental sales, and one analyst even showed traditional retailers some love on the thesis that springtime mall sales will get a boost from folks buying the high-tech wristwatches at local Apple Store locations.

However, you don’t introduce a pricey gadget without disrupting the business models of others. Let’s take a look at three publicly traded companies that aren’t going to be too happy about the Apple Watch arrival.

1. Garmin GARMIN LTD. GRMN 0.18%

Citi downgraded shares of Garmin to sell on Monday, slapping a bleak $42 price target on the shares that suggests the stock will be moving lower in the year ahead.

The Apple Watch debut was cited as a primary reason for the downgrade, eating into Garmin’s fitness trackers. Garmin is a company that most of us still associate with GPS devices that helped drivers get around a decade ago, but obviously that market’s been drying up over the years. The connected car has made it easier to get around using Bluetooth-enabled smartphones to make it happen.

Garmin’s been able to hold itself up by pushing into the great outdoors, arming hikers and runners with devices to help them know where they are and track their activities. Automotive devices now make up less than half of its revenue.

Apple Watch will naturally make it harder for Garmin to stand out in the fitness market. Yes, the Apple Watch surprisingly doesn’t offer GPS. It relies on the iPhone to provide that feature, and that’s going to be a deal breaker for marathon enthusiasts that don’t want to be weighed down by smartphones as they train and compete. However, future Apple Watch generations will likely embrace built-in GPS to compete in this niche of active consumers. Merely waiting for this to happen could be enough to freeze near-term Garmin gadgetry sales to iPhone owners.

2. Google

There are some arguments to be made that Apple Watch will actually benefit Google’s globally dominant Android operating system. If the Apple Watch does for smartwatches what the iPhone did for smartphones and the iPad did for tablets, then it will help educate the market that will eventually flock to cheaper Android-fueled wrist huggers. This hasn’t happened so far with most of the Android smartwatches failing to generate material buzz.

Making smartwatches popular would also benefit Google’s market leadership in online advertising. The smartwatch may be small, but it still represents a new screen for Google to serve up sponsored missives as some app makers try to monetize their programs.

However, things can also go the other way for Google. The Apple Watch, after all, is a way to keep iPhone owners loyal. Folks investing at least $349 for an Apple Watch later this month aren’t likely to migrate to Android when it’s time to upgrade their iPhones. The Apple Watch — for now, and possibly forever — works exclusively with the iPhone. Every person spending $349 or more is making a commitment to the Apple ecosystem. The same can be argued the moment that the first hot Android-exclusive smartwatch becomes available, but that may take time.

3. Fossil FOSSIL INC. FOSL 2.5%

Apple has put out plenty of gadgetry over the years, but this is its first push into wearable computing.

“The Apple Watch is the most personal device we’ve ever created,” CEO Tim Cook said during last month’s media event. “It’s not just on you, it’s with you.”

This is high-tech jewelry, and that’s going to take a bite out of the premium wristwatch makers. Fossil could be easy pickings. We’re not wearing traditional wristwatches the way that we used to. It doesn’t make sense to own a watch when the smartphone in your pocket does that and so much more. Fossil has held up considerably better than its peers, largely on the fashionable merits of its timepieces. Apple Watch’s success could change that, especially given the many,many, many reports that paint iPhone owners as more affluent and likely to spend money than Android users.

Fossil is already feeling the pinch. It’s probably not a coincidence that earnings fell short of expectations during the holiday quarter — just after Apple officially announced that it would be entering the smartwatch market — after several quarters of beating the market. Analysts see sales and earnings declining at Fossil in 2015.

It could get uglier than that if Apple Watch becomes the new trendy wristwatch. A wrist occupied by an Apple Watch isn’t going to have room for a Fossil or a Rolex. These will be challenging times for an industry that may have peaked.

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MONEY shoes

The 107-Year-Old Hipster Sneaker That’s Saving Nike

Red converse sneakers
Jens Mortensen—Gallery Stock

Chuck Taylor would be proud.

When Nike Inc NIKE INC. NKE 0.4% announced mixed quarterly results two weeks ago, I suggested at the time that investors were right to celebrate. Even though Nike’s 7% revenue growth missed expectations thanks to foreign currency headwinds, shares of the footwear and athletic apparel behemoth climbed more than 4% to a new all-time high that day.

Excluding the effects of foreign exchange, however, Nike’s revenue would have climbed 13%, including 11% growth in Nike brand revenue to $6.9 billion. Nike also exceeded estimates for earnings, which grew 19% to $0.89 per share.

But the fact that Nike’s overall growth outpaced that of its namesake brand indicates that it had another smaller, faster-growing source of revenue to make up for the difference — a secret weapon, perhaps, operating under the radar and bolstering the rest of the business.

Chuck Taylor for the win

For that, look no further than Nike subsidiary Converse, sales from which grew an impressive 28% (33% excluding currencies) last quarter to $538 million. For perspective on that growth, Nike acquired Converse for just $305 million back in July 2003, when the smaller brand had annual sales of just $205 million.

So after nearly 12 years under Nike’s wing, why is growth at Converse accelerating now?

According to Nike CFO Don Blair in the company’s follow-up conference call, Converse’s performance was “boosted by the acceleration of Q4 shipments in advance of a major systems go live.” Meanwhile, Blair elaborated, “The balance of the growth was driven by continued strength in North America, the conversion of several European markets to direct distribution, and strong growth in [direct-to-consumer].”

That’s fair enough. After all, three months earlier, Blair cited similar factors as driving Converse’s 21% growth in the previous quarter. And at the same time, he noted that Converse’s earnings before interest and taxes fell 12% because of “investments infrastructure, demand creation, and DTC to enable long-term growth.” It would appear, then, that we’re beginning to see the fruits of those investments.

The legal factor

But we also shouldn’t forget the more difficult-to-measure impact of Nike’s decision to finally crack down on Chuck Taylor lookalikes last October. Specifically, that’s when Converse filed 22 separate trademark infringement lawsuits against 31 companies for their alleged illegal use of core design elements of Converse Chuck Taylor shoes.

To be fair, Nike tried to avoid the courts, saying it had served around 180 cease-and-desist letters to the defendants since 2008. But when nothing else stopped the accelerating flow of Chuck Taylor knockoffs into the market, the courts became Nike’s primary avenue for defending the iconic Converse brand.

As it turns out, the lawsuits are proving extremely effective so far. According to a report from Fashionista in February, Converse has already voluntarily dismissed a number of the cases after coming to agreements with prominent defendants including H&M, Tory Burch, Zulily, andRalph Lauren.

And while the exact terms weren’t disclosed, U.S. International Trade Commission documents a few weeks earlier confirmed that the ITC had found 36 Ralph Lauren shoe styles in violation of Converse trademarks. As a result, Ralph Lauren agreed not only to pay Converse monetary damages, but it also would be required to destroy all infringing shoes, as well as any associated molds, tools, and marketing material.

Of course, it’s hard to tell just how much of a positive effect this has had, especially since Converse was growing nicely before its legal actions. But if one thing seems sure, it’s that Converse is more popular than ever before. In the end, with its competition effectively neutralized and Nike piling cash into marketing, infrastructure, and direct-to-consumer channels, Converse appears poised to play an increasingly important role dictating the fortunes of Nike shareholders for the foreseeable future.

TIME Startups

Here’s the Major Downside of So Many $1-Billion ‘Unicorn’ Startups

Uber
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Billion-dollar startups aren't rare. They're practically a dime a dozen these day—and that's not an entirely good thing

We live in a magical age of unicorns, those pre-IPO tech startups valued at $1 billion or more. And unlike the dot-com bubble, most of these startups are for real. They are companies whose services–like Uber, Spotify or Pinterest–we use every day. You could even say we consumers are the ones that are helping these unicorns to fly.

There is only one problem: Most of us consumers, as individual investors, are being shut out of the party.

These days, you hear a lot of people in the tech-investing world talk about how this is not 1999. The red ink has been washed away by the black at the strongest startups. A confluence of new technologies–the cloud, social networks, smartphones–are creating the mega-brands of the future. As one CEO memorably put it, “It’s the biggest wave of innovation in the history of the world.”

This is more or less true, but another big difference between today’s tech market and the tech market of 1999 is often overlooked: During the dot-com bubble–when most of the IPOs were pipe dreams waiting to crash–individual investors were able to buy their shares freely. Today, by contrast, most of the investments in the hottest tech startups are happening behind the velvet ropes of private financing.

US securities laws set up last century ensured that only accredited investors—currently, people earning at least $200,000 a year or with a net worth of more than $1 million—could buy stocks in private offerings. Those laws were intended to protect smaller investments from the risks of traditional private investments, and they worked for a long time. But recent changes, such as the JOBS Act, allowed private companies to more easily avoid IPOs if they so desired. And most of them have so desired.

The result is that tech companies that would have been open to ownership by everyday people in earlier decades are now open only to the elite. Hedge funds and other institutional investors jockey for access to occasional venture rounds rather than the daily battle of public markets. Corporate insiders have greater control in setting valuations, while executives escape the scrutiny of quarterly disclosures.

And so, unsurprisingly, the tech IPO has become as rare as, well, a unicorn. According to Renaissance Capital, 35% of the companies that went public in 2011 were technology startups. By last year, only 20% of the 273 IPOs were in the tech industry, and most were in the enterprise space rather than the brand names consumers knew. In the first quarter of 2015, only four tech companies went public. And none of them were exactly unicorns.

Three of those four tech IPOs have a history of losses–cloud-storage company Box, online-ad platform MaxPoint Interactive, and domain registrar GoDaddy. Only Inovalon, which runs cloud services for health-care companies, went public with a profit. In the wake of the recession, it was all but impossible for companies to go public with a history of losses but that changed starting last year, when according to Renaissance, 64% of large tech IPOs debuted with net losses, the highest ratio since 2000.

The companies that are choosing to go public aren’t the cream of the crop. Box may have a bright future, but like GoDaddy it went public at the behest of its investors and did so only after months of delays. Box also priced its IPO below its last private round, following late 2014 IPOs like New Relic and Hortonworks that took so-called “haircuts.”

Which brings up another reason for other companies to avoid IPOs–why do it when you can get better valuations in illiquid private markets? True, liquidation preferences and other private perks justify some of that premium, but private valuations are often more art than science.

The pace of tech IPOs are likely to pick up, but few of the candidates in the current pipeline are the highly coveted unicorns. Next week, Chinese e-commerce platform Wowo is expected to raise $45 million. Craft marketplace Etsy is also hoping to raise $250 million in the coming weeks. And mobile software Good Technology aims to list soon as well. All three have steady histories of net losses.

When it comes to the companies with the brightest futures, they are conspicuously absent from the pipeline. Long before the term “unicorn” became popular, CB Insights compiled a list of hot startups expected to go public in 2014. A year later, their list of hot startups expected to go public in 2015 looked suspiciously similar. And now that we’re into the second quarter, there’s little sign that many of them are planning to go public.

Ride-sharing giant Uber, lodging disruptor Airbnb, online-storage pioneer Dropbox, social-ephemeralist Snapchat, social-pin star Pinterest, music-streaming king Spotify, mobile-payments upstart Square–all have been sought after and well funded in private rounds. All have intimate connections to consumers, and would be broke without them. All couldn’t care less, it seems, when it comes to sharing their success with those consumers.

Maybe that’s why they’re called unicorns. Not because billion-dollar startups are rare–they’re practically a dime a dozen these days–but because, for most investors, they might as well be myths frolicking on the far end some of some rainbow.

Read next: Why This Apple Watch Rival Is Very Important

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