MONEY retirement planning

4 Tips to Plan for Retirement in an Upside-Down World

upside down rollercoaster
GeoStills—Alamy

The economic outlook appears a lot dicier these days. These moves will keep your retirement portfolio on course.

Gyrating stock values, slumping oil prices, turmoil in foreign currency markets, predictions of slow growth or even deflation abroad…Suddenly, the outlook for the global economy and financial markets looks far different—and much dicier—than just a few months ago. So how do you plan for retirement in a world turned upside down? Read on.

The roller coaster dips and dives of stock prices have dominated the headlines lately. But the bigger issue is this: If we are indeed entering a low-yield slow-growth global economy, how should you fine-tune your retirement planning to adapt to the anemic investment returns that may lie ahead?

We’re talking about a significant adjustment. For example, Vanguard’s most recent economic and investing outlook projects that U.S. stocks will gain an annualized 7% or so over the next 10 years, while bonds will average about 2.5%. That’s a long way from the long-term average of 10% or so for stocks and roughly 5% for bonds.

Granted, projections aren’t certainties. And returns in some years will beat the average. But it still makes sense to bring your retirement planning in line with the new realities we may face. Below are four ways to do just that.

1. Resist the impulse to load up on stocks. This may not be much of a challenge now because the market’s been so scary lately. But once stocks settle down, a larger equity stake may seem like a plausible way to boost the size of your nest egg or the retirement income it throws off, especially if more stable alternatives like bonds and CDs continue to pay paltry yields.

That would be a mistake. Although stock returns are expected to be lower, they’ll still come with gut-wrenching volatility. So you don’t want to ratchet up your stock allocation, only to end up selling in a panic during a financial-crisis-style meltdown. Nor do you want to lard your portfolio with arcane investments that may offer the prospect of outsize returns but come with latent pitfalls.

Fact is, aside from taking more risk, there’s really not much you can do to pump up gains, especially in a slow-growth environment. Trying to do so can cause more harm than good. The right move: Set a mix of stocks and bonds that’s in synch with your risk tolerance and that’s reasonable given how long you intend to keep your money invested and, except for periodic rebalancing, stick to it.

2. Get creative about saving. Saving has always been key to building a nest egg. But it’s even more crucial in a low-return world where you can’t count as much on compounding returns to snowball your retirement account balances. So whether it’s increasing the percentage of salary you devote to your 401(k), contributing to a traditional or Roth IRA in addition to your company’s plan, signing up for a mutual fund’s automatic investing plan or setting up a commitment device to force yourself to save more, it’s crucial that you find ways to save as much as you can.

The payoff can be substantial. A 35-year-old who earns $50,000 a year, gets 2% annual raises and contributes 10% of salary to a 401(k) that earns 6% a year would have about $505,000 at 65. Increase that savings rate to 12%, and the age-65 balance grows to roughly $606,000. Up the savings rate to 15%—the level generally recommended by retirement experts—and the balance swells to $757,000.

3. Carefully monitor retirement spending. In more generous investment environments, many retirees relied on the 4% rule to fund their spending needs—that is, they withdrew 4% of their nest egg’s value the first year of retirement and increased that draw by inflation each year to maintain purchasing power. Following that regimen provided reasonable assurance that one’s savings would last at least 30 years. Given lower anticipated returns in the future, however, many pros warn that retirees may have to scale back that initial withdrawal to 3%—and even then there’s no guarantee of not running short.

No system is perfect. Start with too high a withdrawal rate, and you may run through your savings too soon. Too low a rate may leave you with a big stash of cash late in life, which means you might have unnecessarily stinted earlier in retirement.

A better strategy: Start with a realistic withdrawal rate—say, somewhere between 3% and 4%—and then monitor your progress every year or so by plugging your current account balances and spending into a good retirement income calculator that will estimate the probability that your money will last throughout retirement. If the chances start falling, you can cut back spending a bit. If they’re on the rise, you can loosen the purse strings. By making small adjustments periodically, you’ll be able to avoid wrenching changes in your retirement lifestyle, and avoid running out of dough too soon or ending up with more than you need late in life when you may not be able to enjoy it.

4. Put the squeeze on fees. You can’t control the returns the market delivers. But if returns are depressed in the years ahead, paying less in investment fees will at least increase the portion of those gains you pocket.

Fortunately, reducing investment costs is fairly simple. By sticking to broad index funds and ETFs, you can easily cut expenses to less than 1% a year. And without too much effort you can get fees down to 0.5% a year or less. If you prefer to have an adviser manage your portfolio, you may even be able to find one who’ll do so for about 0.5% a year or less. Over the course of a long career and retirement, such savings can dramatically improve your post-career prospects. For example, reducing annual expenses from 1.5% to 0.5% could increase your sustainable income in retirement by upwards of 40%.

Who knows, maybe the prognosticators will be wrong and the financial markets will deliver higher-than-anticipated returns. But if you adopt the four moves I’ve outlined above, you’ll do better either way.

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 stocks

What This 20-Year Study on Marijuana Use Means for the Pot Market

Marijuana plant
Pablo Porciuncula—AFP/Getty Images

There's reason for cautious optimism—but it's not time to invest yet.

Marijuana laws and public perception have come a long, long way over the past 20 years.

In 1996, we witnessed the first approval for marijuana on a medical basis by a state, and in 2012, Washington and Colorado became the first two states to approve marijuana use on a recreational, adult-use basis. As I write today, there are 23 states that have legalized medical marijuana and four states that now allow marijuana to be used on a recreational basis.

Public perception has been a major motivator in this shift. According to Gallup, which polls Americans every so often on whether or not they believe marijuana should be legal, just one in four respondents 20 years ago were in favor of legalization. That figure stood at 58% as of 2013. Between the need for additional revenue at the state level to help reduce or close budget gaps and providing solutions to people with serious medical conditions, marijuana’s momentum is undeniable.

I’d be remiss, though, if I didn’t also state that many questions remain, such as whether or not the government will change its stance on marijuana being a schedule 1 drug, and if marijuana’s benefits outweigh its risks. The last question is particularly hard to answer as we have very limited long-term data, and what we do have was primarily focused on the risks of marijuana rather than the benefits.

Five intriguing marijuana finds

However, a recently released study from Dr. Wayne Hall, a the director of the Centre for Youth Substance Abuse Research at the University of Queensland, sheds new light, both good and bad, on long-term marijuana use.

Hall’s study examined the effect of marijuana over a 20-year period (1993-2013), and was made possible by the fact that recreational cannabis use has risen, and stronger cannabis has become available in recent years. Hall’s review notes that between 1980 and 2006, the amount of THC found in marijuana increased more than fourfold to 8.5% from less than 2%.

Specifically, Hall’s review led to five intriguing findings about marijuana.

1. It’s essentially impossible to overdose on marijuana

One of the most common comments I’ve received in my research into medical marijuana from readers is that “no one has ever overdosed from smoking marijuana.” This turns to out to practically be true, according to Hall’s review. The study points out that it would take between 15 grams and 70 grams of marijuana to cause someone to overdose, which is an amount higher than even a heavy user could consume in a day.

By comparison, opioid analgesics, which are commonly used to treat pain, one of the indications for which marijuana is typically prescribed, led to 16,007 deaths in 2012 based on data from the Centers for Disease Control and Prevention. In other words, the implication is that marijuana might be a solution to dramatically reducing opioid-related overdose deaths.

2. Marijuana use and driving don’t mix

We know that drinking and driving don’t mix, but Dr. Hall’s study, which included a meta-analysis of drivers who smoked and a control group that didn’t, definitively showed that smoking marijuana nearly doubles your risk of an accident.

Why does this matter? A number of states are beginning to legalize marijuana for recreational use, so there’s concern we could see an increase in accidents caused by marijuana. Further, the review in Australia notes that public education about the dangers of driving under the influence of marijuana may not be enough to deter drivers. There would have to be a real fear of their cannabis use being detected by law enforcement in order to get drivers to give up their keys.

3. Cannabis addiction exists, especially in adolescents

A good chunk of negative marijuana studies focus on the drugs’ effect in adolescents. It turns out that those fears may be on target. Per Dr. Hall’s review, cannabis addiction does exist, and it’s more prevalent in adolescents than adults. One in 10 adults who use marijuana on a regular basis become addicted to it compared to one in six adolescents.

4. Marijuana can negatively impact your IQ

It turns out that marijuana can actually lower your IQ as well, but according to the review, only if you’re a heavy marijuana user. The study notes that “these effects on IQ were only found in the small proportion of cannabis users who initiated in adolescence and persisted in daily use throughout their 20s and into their 30s.” This news mirrors a recent abstract we examined that showed marijuana users on average had a slightly lower IQ than non-users.

In addition to potentially lower IQs, the review also suggests that cannabis use is strongly associated with the use of other illicit drugs.

5. Marijuana’s long-term effect on respiratory health is inconclusive

Lastly, Dr. Hall’s study also brought up one glaring inconclusive finding: that being whether smoking marijuana had a negative effect on the users’ respiratory function. Previous studies have gone both ways on this question, and this review notes that there’s no conclusive evidence that smoking marijuana will lead to reduced respiratory function or respiratory cancer. The primary reason this turned out inconclusive is because most marijuana users were also smoking tobacco products, making it impossible to differentiate the effect on the body of one from the other.

Bifurcated results for marijuana

Based on the study’s findings, the outlook for medical marijuana and recreational marijuana is widely bifurcated.

With inconclusive data on the long-term respiratory effects of marijuana, and given the fact that a person’s chances of overdosing from marijuana are extremely slim, it potentially strengthens the case for exploring marijuana’s medical benefit profile. Let’s remember that marijuana can be absorbed a number of ways beyond smoking, so the respiratory concern can possibly be eliminated.

This would be good news for GW Pharmaceuticals GW PHARMACEUTICALS PLC GWPH 2.24% , a predominantly clinical-stage company focused on creating drugs using the more than five dozen cannabinoid compounds it’s discovered to date. Currently, it has just one drug approvedoutside the U.S. (Sativex), which is absorbed as an oramucosal spray to treat spasticity associated with multiple scleorsis, but is working on a range of additional studies, including cancer pain, type 2 diabetes, and adult and pediatric epilepsy. As long as marijuana studies continue to point toward the drug being safe to use, it’ll only further strengthen the need for GW and its peers to conduct more research into its potential uses.

On the other hand, the case for recreational expansion continues to take a hit based on these studies. Although the four states that have approved marijuana for purchase have strict age requirements in place, it’s clear from a number of other statistics and studies that adolescents are still getting their hands on this drug — and that adolescents are the most susceptible to negative effects from its use.

As an investor, I continue to view the space with cautious optimism. I’d be thrilled to see marijuana or marijuana-based compounds help patients control serious diseases. But, I’m also a realist who understands that the federal government is unlikely to change its stance on marijuana anytime soon. Also, a vast majority of marijuana-based companies simply don’t have viable business models, so you might as well be throwing your nest egg at the roulette table and hoping for the best. I’ll continue to closely follow marijuana studies moving forward, but I have no intention of investing in the space anytime soon.

MONEY stocks

3 Companies That May Not Last Through 2015

RadioShack consumers electronics store, Falls Church, Virginia.
Saul Loeb—AFP/Getty Images RadioShack consumers electronics store, Falls Church, Virginia.

Watch these companies closely this year.

For more than six years now, the stock market has defied naysayers in a bull-market run that has pushed major-market benchmarks to record levels. Yet no matter how strong the stock market is, you can always find pockets of weakness among certain companies that simply haven’t lived up to expectations. Indeed, in extreme cases, some companies find that it no longer makes sense to stay in business, either breaking themselves up in major asset sales or declaring bankruptcy. The result is often a plunging stock price that leaves shareholders with major losses.

To help you identify some potential danger areas, three Motley Fool contributors picked companies that they believe might not live to see the end of 2015. Their views certainly aren’t a guarantee of failure for these stocks, but they nevertheless believe that you should watch these companies closely before you put your investing dollars at risk.

Jeremy Bowman (Radio Shack)

Radio Shack has been a fixture in electronics retail for over a generation with over 4,000 stores nationwide, but this year could be its last. A combination of declining sales, steep losses, and pressure from its creditors may force it into bankruptcy and liquidation.

The company still brings in substantial sales at more than $3 billion over the last twelve months, but its share price has fallen all the way to $0.39 as of Monday’s close, valuing the company at $39 million, or slightly more than a penny for every dollar in sales.

Radio Shack was already in trouble this time last year with same-store sales falling by double digits, but the company’s hopes for a turnaround took a sudden turn for the worse when creditors rejected a plan to close 1,100 stores last spring, claiming that doing so would violate debt covenants. Since then, cash has evaporated, and the Shack was left with just $62 million in liquidity as of its third quarter earnings report when it turned in an operating loss of $114 million.

Since then, Radio Shack has resorted to what seem to be desperate moves, suspending employee 401(k) contributions and, in December, bringing in its third CFO in just four months. Its marketing chief also quit in December, during the crucial holiday selling season, a further sign that the company’s demise could come even sooner than expected.

The retailer’s moment of truth should come this Thursday, when the deadline it has with lender Standard General arrives. Radio Shack must prove it has $100 million in liquidity in order to implement a financing package with Standard General agreed on in October. If Radio Shack is unable to secure additional funding, the company’s prospects look essentially dead. Moreover, even if it shows up with the $100 million, that’s no guarantee it will remain viable through the end of the year.

Bob Ciura (Aeropostale)

Aeropostale AEROPOSTALE ARO 0.91% might not make it out of 2015 alive, even though shares of the teen retailer jumped more than 20% on January 8 after better-than-expected holiday sales. Aeropostale said comparable holiday sales fell 9%, better than last year’s 15% decline. But the results still signify this is a company in severe decline. Shares of Aeropostale lost nearly three-quarters of their value last year due to collapsing sales, and management’s plan to turn the company around mostly involves shuttering stores. The company plans to close as many as 240 Aeropostale stores and all of its P.S. children’s concept. Not only are total sales falling, but sales per square foot are falling as well, which means store closings are not likely to restore growth

Aeropostale announced a smaller-than-expected loss for the fourth quarter. Management expects the company will lose $18 million-$23 million in the quarter, down from a prior forecast of $28 million-$34 million. Still, this hardly seems reason to celebrate. Over the past three quarters, Aeropostale lost nearly $200 million, approximately double the loss from the same period one year ago.

The teen fashion landscape changes very quickly, and companies that fall out of favor find it hard to catch up. While Aeropostale suffers the effects, investors shouldn’t touch this company that might not survive through 2015

Dan Caplinger (Sears Holdings)

One of the most often-chosen stocks for a potential implosion is retailer Sears Holdings SEARS HOLDINGS CORP. SHLD 0.17% , which has struggled for years to navigate difficult conditions in its niche of the big-box retail segment. The company is on pace to lose money for the fourth year in a row, and restructuring charges and asset sales that for most companies are extraordinary events have become commonplace for the operator of Sears and KMart stores.

Sears is infamous for its long string of spinoffs, with last year’s Lands’ End LANDS END INC COM USD0.01 LE 1.66% IPO having been one of the more successful of its former parent’s corporate moves. Many believe that CEO Eddie Lampert’s primary strategy has been to unlock the value of Sears Holdings’ assets through such moves, with the eventual goal of leaving the money-losing retail business as a used-up husk. Yet many have been surprised at just how long Sears has managed to stay in business, and a recent hacker-attack against the company’s KMart division was just another problem that the company will have to face in trying to attract shoppers.

It’s entirely possible that Sears Holdings shareholders could receive further valuable distributions on their stock through spinoffs or other corporate moves. Yet the odds of Sears Holdings continuing in anything like its current form grow smaller every day.

MONEY investing strategy

Americans Watch Less CNBC—And That’s a Good Thing

CNBC van
Nic Cleave Photography—Alamy

Smart investors ignore the daily losses and gains.

[Editor’s note: CNBC recently dropped Nielsen ratings for daytime programming, arguing that the audience measurement company focuses on traditional home viewerships and overlooks viewers who watch its shows in offices and airports and on mobile devices.]

Despite the ongoing bull market, financial television channel CNBC had one of its worst years in 2014, according to Nielsen. The financial blog Zero Hedge, relying on Nielsen data, reported that Squawk Box, Power Lunch, and Mad Money all had their worst year ever among the much-coveted 25-54 demographic. And the terrible year is part of a longer-term decline in viewers for the once-popular cable channel.

So how do we explain CNBC’s ongoing demise in a year when the S&P 500 delivered double-digit returns?

The Fed-phobic Zero Hedge implies that retail investors have given up on the channel that has “devolved into endless cheerleading of failed policies and rigged markets.” Other observers feel CNBC has become too entertainment-focused and not serious enough. Others counter that it’s actually not entertaining enough.

Personally, I don’t have a clue why ordinary investors are watching less. I do know, however, that tuning out CNBC and similar financial channels is very good for your portfolio. Research presented in Daniel Kahneman’s Thinking, Fast and Slow shows that following financial news on a minute-by-minute (or even day-by-day) basis can result in poor investing performance.

Read a book and then take a nap

Kahneman’s findings are simple to grasp. He discovered that the pain of frequent small losses is much greater than the pleasure of equally frequent small gains. When investors use a narrow frame – a process where one makes decisions without considering the context of the entire portfolio – then a sequence of small losses might lead to hasty, bad decisions. A better approach would be to ignore the daily losses and gains, while using a broad frame – a process where decisions are related to the overall portfolio. Kahneman writes:

The combination of loss aversion and narrow framing is a costly curse. Individual investors can avoid that curse, achieving the emotional benefits of broad framing while also saving time and agony, by reducing the frequency with which they check how well their investments are doing. Closely following daily fluctuations is a losing proposition, because the pain of frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and may be more than enough for individual investors.

Given that “following daily fluctuations is a losing proposition,” you can see why it’s a very good thing that fewer people are watching the minute-by-minute updates on stocks, commodities, interest rates, and other topics on CNBC.

A tendency for financial media to dwell on bad news can also have particularly negative consequences for ordinary investors, according to Kahneman. He notes that the typical response to bad news in general is increased loss aversion, which can result in poor decisions for your portfolio over the long term. Tuning out all the negativity will make you “less prone to useless churning of your portfolio.” A commitment to holding on to your positions, regardless of the breathless commentary in the financial media, will improve your investing performance, according to Kahneman.

Smart is as smart does

So maybe the reason investors are tuning out CNBC is that they are becoming smarter. Anyone who wanted to follow Kahneman’s advice surely wouldn’t want to expose their fragile temperaments to the frenetic coverage of financial television.

There was also additional evidence from 2014 that retail investors might be getting smarter. Using data through November 2014, The Wall Street Journal reported that investors poured $244 billion into low-fee, passively managed funds, while pulling $12.7 billion from higher-fee, active funds.

In a year when 74% of active, U.S. funds underperformed their benchmark, retail investors decided to buy low-fee index funds and tune out CNBC. Those seem like very wise decisions to me, though I admit it probably wouldn’t make for a very interesting story on financial television.

MONEY stocks

China’s Boom Is Over — and Here’s What You Can Do About It

Illustration of Chinese dragon as snail
Edel Rodriguez

The powerhouse that seemed ready to propel the global economy for decades is now stuck in a period of slowing growth. Here’s what that means for your portfolio

Every so often an investment theme comes along that seems so big and compelling that you feel it can’t be ignored. This happened in the 1980s with Japanese stocks. It happened again with the Internet boom of the 1990s. You know how those ended.

Today history appears to be repeating itself in China.

Just a decade ago, China was hailed as the engine that would single-handedly drive the global economy for years to come. That seemed plausible, as a billion Chinese attempted something never before accomplished: tran­sitioning from an agrarian to an industrial to a consumer economy, all in a single generation.

Recently, however, this ride to prosperity has hit the skids. A real estate bubble threatens to crimp consumer wealth; over-investment in a wide range of industries is likely to dampen growth; and the transition to a developed economy is stuck in an awkward phase that has trapped other emerging markets.

No wonder Chinese equities—despite a strong rebound last year—are down around half from their 2007 peak.

iSCH1

Like the Japan and dotcom manias before it, China looks like an old story. “Do you have to be in China?” asks Henrik Strabo, head of international investments for Rainier Investment Management in Seattle. “The truth is, no.”

If you’ve bought the China story—and since 2000 hundreds of thousands of U.S. investors have plowed $176 billion into emerging-markets mutual and exchange-traded funds, which have big stakes in China—that’s a pretty bold statement.

In fact, even if you haven’t invested directly in Chinese stocks and simply hold a broad-based international equity fund, China’s Great Slowdown has an impact on how you should think about your portfolio. Here’s what you need to understand about China’s next chapter.

China Has Hit More Than a Speed Bump

After expanding at an annual clip of more than 10% a decade ago, China’s economy has slowed, growing at just over 7% in 2014. That’s expected to fall to 6.5% in the next couple of years, according to economists at UBS. And then it’s “on to 5% and below over the coming decade,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab.

Why is this worrisome when gross domestic product in the U.S. is expanding at a much slower 3%?

For starters, it represents a steep drop from prior expectations. As recently as three years ago, economists had been forecasting that China would still be growing at roughly an 8% clip by 2016.

The bigger worry is that the slowdown means that China has reached a phase that frustrates many emerging economies on the path to becoming fully “developed,” a stage some economists refer to as the middle-income trap.

On the one hand, a growing number of Chinese are approaching middle-class status, which means wages are on the rise. That sounds good, but rising labor costs chip away at China’s competitive advantage in older, industrial sectors. “You’re seeing more and more manufacturers look at other, cheaper markets like Indonesia, Vietnam, and the Philippines,” says Eric Moffett, manager of the T. Rowe Price Asia Opportunities Fund.

At the same time, the country’s new consumer-centric economy has yet to fully form. About half of China’s urban population is thought to be middle-class by that nation’s standards, but half of Chinese still live in the countryside, and the vast majority of those households are poor. Couple this with the deteriorating housing market—which accounts for the bulk of the wealth for the middle class—and you can see why China isn’t able to buy its way to prosperity just yet.

This in-between stage is when fast-growing economies typically downshift significantly. After prolonged periods of “supercharged” expansion, these economies tend to suffer through years when they regress to a more typical rate of global growth, according to a recent paper by Harvard professors Lawrence Summers and Lant Pritchett.

In some cases, like Brazil, this slowdown prevents the economy from taking that final step to advanced status. Brazil had been expanding 5.2% a year from 1967 to 1980, but that growth slowed to less than 1% annually from 1981 to 2002.

No one is saying China will be stuck in this trap for a generation, like Brazil, but China could be looking at a long-term growth rate closer to 4% to 5% than 8% to 10%.

iSCH2

Your best strategy: Go where the growth is—at home. A few years ago the global economy was ex­pected to expand at an annual pace of 4.2% in 2015, trouncing the U.S.  Today the forecast is down to 3.1%, pretty much the same pace as the U.S. economy, which is expected to keep accelerating through 2017.

In recent years, some market strategists and financial planners have instructed investors to keep as much as 40% to 50% of their stocks in foreign funds. But ­dropping that allocation to 20% to 30% still gives you most of the diversification benefit of owning non-U.S. stocks.

The Losers Aren’t Just in Asia

China’s rise to power lifted the fortunes of its neighboring trade partners too, so it stands to reason that a broad swath of the emerging markets is now at risk. “China is still the beating heart of Asia and the emerging markets,” says Moffett. “If it slows down, all the other countries exporting to and importing from China will see their growth prospects affected.”

The country’s biggest trading partners in the region are Hong Kong, Japan, South Korea, and Taiwan, and all are slowing down. Economists forecast that the growth rates in those four nations will slip below 3% next year.

Beyond Asia, “you have to be careful with the commodity exporters,” says Rainier’s Strabo. China’s slowdown over the past five years is a big reason commodity prices in general and oil specifically have sunk more than 50% since 2011.

China consumes about 40% of the world’s copper and 11% of its oil. As the country’s appetite for commodities wanes, natural resource producers such as Australia, Russia, and Latin America will feel the blow.

Your best strategy: Keep your emerging-markets stake to around 5% of your total portfolio. If your only foreign exposure is a total international equity fund, then you’re probably already there. If, however, you’ve tacked on an emerging-markets “tilt” to your portfolio to try to boost returns, unwind those positions, starting with funds focusing on Asia, Latin America, or Russia.

Here’s another bet that’s now played out: A popular strategy in the global slowdown was to take fliers on Western companies with the biggest exposure to China—companies such as the British spirits maker Diageo (think Johnnie Walker and Guinness) and Yum Brands (KFC and Pizza Hut)—solely because of their China reach. And for a while, that paid off.

Now, though, the stocks of Yum and Diageo have stalled, and major global companies such as Anheuser-Busch InBev and Unilever have reported disappointing results recently in part owing to subpar sales in China as well as in other emerging markets.

Demographic Problems Will Only Make Things Worse

For years, China’s sheer size was seen as a massive competitive advantage. Indeed, China has three times as many workers as the United States has people.

Yet as the country’s older workers have been retiring, China’s working-age population has been quietly shrinking in recent years. Economists say this will most likely lead to labor shortages over the coming years, putting even more pressure on wages to rise.

iSCH3

China’s demographic problem has been exacerbated by the country’s “one-child” policy, which has prevented an estimated 400 million births since 1979. But China isn’t the only emerging market suffering from bad demographic trends.

Birthrates are low throughout East Asia. The ratio of people 15 to 64 to those 65 and older will plummet from about 7 to 1 to 3 to 1 in the next 15 years in Taiwan, South Korea, and Hong Kong, dragging down growth.

Your best strategy: If you’re a growth-focused investor who wants more than that 5% stake in emerging markets, concentrate on developing economies with more youthful populations and more potential to expand. One fund that gives you that—with big holdings in the Philippines, Saudi Arabia, Egypt, and Colombia—is Harding Loevner Frontier Emerging Markets HARDING LOEVNER FRONT EM MKTS INV HLMOX 0.24% . Over the past five years, the fund has gained around 7% a year, more than triple the return of the typical emerging-markets portfolio.

Another option is EGShares ­Beyond BRICs EGA EMERGING GLOBA EGSHARES BEYOND BRICS ETF BBRC 1.38% . Rather than investing in the emerging markets’ old-guard leaders—Brazil, Russia, India, and China—this ETF counts firms from more consumer-driven economies, such as Mexico and Malaysia, among its top holdings.

The Parallels Between China and 1990s Japan are Alarming

For starters, China is facing a real estate crisis similar to Japan’s, says Nariman Behravesh, chief economist at IHS. With easy access to cheap credit, developers have flooded the major cities with excess housing. Floor space per urban resident has grown to 40 square meters, compared with just 35 square meters in Japan and 33 in the U.K.

Not surprisingly, prices in 100 top Chinese cities have been sliding for seven months. Whether China’s property bubble bursts or not, falling home values chip away at household net worth; that, in turn, drags down consumer sen­timent and spending, Behravesh says.

Other unfortunate similarities between the two nations: Excess capacity plagues numerous sectors of China’s economy, ranging from steel to chemicals to an auto industry made up of 96 car­ brands.

Also, Chinese officials face political pressure to focus on short-term growth rather than long-term fixes. This type of thinking has resulted in the rise of so-called zombie companies, much like what Japan saw in the ’90s. “These are companies that aren’t really viable but are being kept alive,” Behravesh says. Yet for the economy to get back on track, inefficiently run businesses have to be allowed to fail, market strategists say.

Your best strategy: Focus on the few major differences between the two countries. Unlike Japan, for instance, China is still a young, emerging economy. Slowdown or not, “the growth of the middle class will continue in China, and that will absorb some of the overhang in the economy, which is something Japan couldn’t count on,” says Michael Kass, manager of Baron Emerging Markets Fund.

What’s more, when Japan’s bubble burst in late 1989, stocks in that country were trading at a frothy price/earnings ratio of around 50. By contrast, Chinese shares trade at a reasonable P/E of around 10.

To be sure, not all Chinese stocks enjoy such low valuations. As competition heats up to supply China’s population with basic goods, valuations on consumer staples companies have nearly doubled over the past four years to a P/E of around 27.

At the same time, the loss of faith in the Chinese story means there are decent values in industries that cater to the established middle and upper-middle class, says Nick Niziolek, co-manager of the Calamos Evolving World Growth Fund. Health care and gaming stocks in particular suffered setbacks last year. And Chinese consumer discretionary stocks are trading at a P/E of just 12, down from 20 five years ago.

You can invest in such businesses through EGShares Emerging Markets Domestic Demand ETF EGA EMERGING GLOBA EGSHARES EMERGING MKTS DOME EMDD 0.79% , which owns shares of companies that cater to local buyers within their home countries, rather than relying on exports. Chinese shares represent about 17% of the fund, led by names such as China Mobile.

That one of the world’s great growth stories is now best viewed as a place to pick up stocks on the cheap might seem a strange twist—until you remember your Japanese and Internet history.

MONEY stocks

Why Fidelity’s New App Won’t Make You a Better Investor

Personal familiarity with a company can backfire.

Fidelity has added a new GPS feature called “Stocks Nearby” to its flagship mobile app. Open it up and it shows your location on a map, plus all the businesses around you that are connected to a publicly traded company. So if you are standing next to a Starbucks, its ticker symbol (SBUX) will show up on the map with a link to info on the stock.

Fidelity’s press release says the tool helps people follow the maxim “buy what you know.” What that means is shopping in a packed Apple store or indulging in a delicious burger at Shake Shack might inspire you to invest in the underlying business.

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Fidelity Investments

The company doesn’t say so, but that idea was popularized back in the 1980s by legendary Fidelity Magellan fund manager Peter Lynch, who liked to tell a story about discovering his winning investment in Hanes when his wife brought home L’Eggs pantyhose from the supermarket. Great story. And it was also great marketing, because it made investing seem a lot less mysterious.

Not a great investing strategy, though. For example, one study shows that people who invest in industries they work in do worse than traders who don’t work in the business. “Investors confuse what is familiar with what is safe,” says Larry Swedroe of Buckingham Asset Management.

There are several other reasons not to base investment decisions on a stroll through your neighborhood. For one, the businesses you’re most familiar with are likely mostly consumer products—which means the approach would likely leave entire industries out of your portfolio.

Furthermore, says Swedroe, if buying individual companies you “know” tilts your portfolio toward companies with outposts in your home town or city, you may miss out on the protection that geographic diversification affords. Say you own real estate in your city, in addition to shares in nearby companies: Then you’re especially vulnerable to a downturn in the local economy.

Even if you were to invest in a global company like Walmart—a likely stop on your shopping routine if you are among the majority of Americans—being a consumer doesn’t make you an expert. “If you notice a brand is doing well, it’s naive to believe you have valuable information,” says Swedroe. “Mutual fund managers and other professionals have access to the same or better information about a company’s prospects, so it’s more likely that you are actually at a disadvantage.”

In other words, you are likely to ignore the riskier qualities of a company you think you know well as a customer or as a local and feel excited about. That confirmation bias, in addition to overconfidence in your own impressions, has been shown to lead to lower returns.

Fidelity public relations director Rob Beauregard says the company does not intend for users to trade stocks without doing research first—and that the new “Stocks Nearby” tool is “an investing idea generator, not a stock picker.”

No matter how it’s spun, a focus on buying what you know gets the thinking backwards. You have to really know what you are buying.

MONEY Kids & Money

What Investors Can Learn from the Famous Marshmallow Study

Plate of marshmallows
Elena Elisseeva—Alamy

You've probably heard what happened when a psychologist left 4-year-olds alone in a room with a marshmallow. But you've probably forgotten the study's most important insight.

I’m so sick of hearing about the marshmallow test.

You’ve probably heard of it. If not, here’s the short story.

In the 1960s, a psychologist named Walter Mischel studied a group of four-year olds. Mischel was fascinated with his own children’s cognitive development, and how — like most children — they seemed incredibly impulsive.

“I realized I didn’t have a clue what was going on in their heads,” he said recently.

He wanted to measure impulse control, so he came up with a game. A group of children could have one marshmallow right now. It sat on a plate in front of them. Or, if they waited a few minutes while he stepped out, they could have two when he returned.

Some impatiently took the first marshmallow. Others waited.

Mischel followed the kids for 50 years, measuring how impulse control correlated with future success in life.

It was huge.

Kids who delayed gratification in the marshmallow test went on to achieve higher standardized test scores, had higher educational attainment, even better BMI scores. (One girl ate the marshmallow before the game’s instructions were even explained. Bless her.)

The marshmallow test made its way into seemingly every book, article, and speech about behavioral psychology. I’ve seen it countless times. It’s way overused.

But the most important part of the study is often left out.

The original takeaway from Mischel’s research, and one still told today, was that people with more willpower are set up for more life success than their impulsive peers.

But after watching hundreds of kids take the marshmallow experiment, Mischel discovered something different.

The marshmallow test wasn’t necessarily about willpower. Almost every kid will take the first marshmallow if it’s put in front of them. If they’re looking at it, they’re nearly incapable of not eating it, even if a bigger reward awaits.

Instead, Mischel found that kids who successfully waited for a second marshmallow were often just better at distracting themselves, taking their minds off the treat.

They hid under a desk. Or sang a song. Or played with their shoes.

Impulse control isn’t really about a four year old’s ability to patiently wait for a second marshmallow. It’s more about that four year old’s propensity to say, “Hey, look, a soccer ball!”

Smokers trying to quit consistently overestimate their ability to turn down a cigarette. Dieters do the same. What Mischel’s research shows is if we want to be better at self-control, trying to have more willpower isn’t the solution. Instead, not putting yourself in a position where you’ll be tempted by cigarettes or junk food may be the best answer. Because if you’re around them, you’ll smoke, or eat. You can’t help it.

As Jonah Lehrer once put it: “Willpower is really about properly directing the spotlight of attention, learning how to control that short list of thoughts in working memory. It’s about realizing that if we’re thinking about the marshmallow, we’re going to eat it, which is why we need to look away.”

It is the same in finance.

Bad investing behavior is the greatest cause of investor misery (fees are a close second).

People get excited and buy high, then panic and sell low. They fall for bubbles. They trade. They rotate. They fidget. They worry. They get a new idea, and go all in. Then change their mind, sell it all, and go to something else.

It’s devastating. If you can find a way to be less emotional and feel less need for constant action in investing, you’ve figured this game out.

But how do you do that?

Just like the four year old who found a path to the second marshmallow. You distract yourself with something else.

If watching financial news constantly tempts you to tweak your portfolio, turn it off.

If reading market forecasts has caused you to make regrettable decisions, stop reading them.

Go do something else.

Maybe read more books and fewer articles.

Be more choosy about who you’re willing to listen to.

The amount of financial information available has exploded over the last decade, but the amount of financial information that you need to be informed has not.

You have to learn how to sift through the news, and filter out what you don’t need. “A wealth of information creates a poverty of attention,” Herbert Simon said. It also creates a dangerous tendency to lose self-control over your ability to be a patient long-term investor.

Just look the other way.

For more:

More from The Motley Fool: Where Are The Customers’ Yachts?

MONEY Markets

Why Investors Are So Bad at Predicting Market Crashes

NYSE New York Stock Exchange
Stephen Chernin—Getty Images

After the market does well, no one expects a crash. After it crashes, everyone expects it to crash.

Stocks have boomed for nearly six years now. Are we due for a crash?

Yeah, probably. It’ll happen some day. Crashes happen.

But anytime I see people touting metrics that supposedly predict when a cash will occur, I shake my head. None of them work.

Yale School of Management publishes a “Crash Confidence Index.” It measures the percentage of individual and professional investors who think we won’t have a market crash in the next six months. The lower the index, the more investors think a crash is coming.

Yesterday came the headline: “More And More Investors Are Convinced A Stock Market Crash Is Coming.”

The Crash Confidence Index plunged in December to its lowest level in two years. “Less than a quarter of institutional investors and less than a third of individual investors believed that stocks wouldn’t crash,” Business Insider wrote.

Before you panic and liquidate your account, the most important line in Business Insider’s article is this: “On the bright side, this indicator may be a contrarian indicator.”

Bingo.

Plot the Crash Confidence Index (in blue) next to what the S&P 500 did during the following 12 months (in red), and you get this:

Investors were increasingly confident that stocks wouldn’t crash in 2007, and then a crash came. Then they were sure a crash would occur in 2009, just as a monster rally began. Same thing to a lesser degree in 2011.

If you plot the Crash Confidence Index next to what stocks did in the previous two months, you kind of see what’s going on here.

After the market does well — like in 2007 — no one expects a crash. After it crashes — like in 2009 — everyone expects it to crash:

This is similar to the consumer confidence index, which consistently peaks just before the economy is about to get ugly and bottoms when things are about to turn. (Although we only know the timing in hindsight.)

Stocks have done poorly during the last few weeks, so it’s not too surprising that expectations of a crash are growing. People like to extrapolate returns into the future.

We’ll have a crash some day. But more money has probably been lost trying to predict and hedge against a looming crash than has been lost by just expecting and enduring one when it comes.

For more on on this stuff:

More from The Motley Fool: Where Are The Customers’ Yachts?

MONEY Jobs

Why Is Employment Picking Up? Thank Government

public construction workers
Reza Estakhrian—Getty Images

After hurting the employment picture for so long, local, state and federal governments are finally adding to payrolls.

The U.S. economy continued its winning streak by adding 252,000 jobs in December, the 11th consecutive month employers hired more than 200,000 workers. The unemployment rate fell to 5.6%, a post-recession low, as various sectors (from business services to health care to construction) added to payrolls.

Boosting hiring isn’t exactly new when it comes to private businesses, which have been bolstering their staffing for every month for almost five years.

What’s different about the recent pickup in employment is the positive effect of governments (state, local and federal). While jobs aren’t being added at rapid pace, they have grown steadily over the past year, and are no longer subtracting from the labor market like they were not too long ago.

Government employment increased by 12,000 in December, compared to a reduction of 2,000 employees in the last month of 2013. Compared to a year ago, state and local governments throughout the country have added a combined 108,000 jobs.

As recently as last January the government shed 22,000 positions. Sustained, incremental growth beats much of the sector’s post-recession record, which saw employment drop off thanks to lower tax revenue and austerity measures.

Government payrolls increased by about 0.5% over the last year — which doesn’t look terribly good compared to the private sector’s 2.1% gain. But when you look at the recent gains against the 0.05% decrease in the twelve months before January 2014, you start to appreciate the recent uptick.

Gov't jobs

What’s going on?

Well, state and local government finances have stabilized and marginally improved over the past couple of years, giving statehouses and municipalities a chance to improve its fiscal situation.

Take this note from a recent National Association of State Budget Officers report which says, “In contrast to the period immediately following the Great Recession, consistent year-over-year growth has helped states steadily increase spending, reduce taxes and fees, close budget gaps and minimize mid-year budget cuts.”

The nation’s economy grew at an annualized 5% rate in the third quarter, after jumping 4.6% in the three months before. The trade deficit fell in November to an 11-month low, thanks in part to lower energy costs, which will help fourth quarter growth.

NASBO expects states’s revenues to increase by 3.1% in the next fiscal year, compared to an estimated 1.3% gain in 2014, with much of that spending dedicated to education and Medicaid.

With a more solid financial position, governments across the country are able to spend more on basic items, like construction. Public construction, for instance, increased by 3.2% last November compared to the same time last year, according to the Census Bureau.

Overall government spending has stopped following dramatically and actually picked up in the third quarter on a year-over-year basis.

Expenditure

Of course, government employment still has a ways to go before returning to normal. In the five years after the dot-com inspired recession, public sector employment gained by 4.5%. (It’s fallen by 2.8% since the recession ended in June 2009.) And while state budgets have normalized, Governors aren’t exactly flush with cash.

Says NASBO: “More and more states are moving beyond recession induced declines, but spending growth is below average in fiscal 2015, as it has been throughout the economic recovery.”

Not to mention hourly earnings fell by five cents, to $24.57, a decline of 0.2%.

Still, some employment growth is better than none at all.

Updated with earnings data.

MONEY Millennials

How to Set Financial Priorities When You’re Young and Squeezed

man counting coins
MichaelDeLeon—Getty Images

You have a lot of demands on your money—and not a lot of it. Here's what to do first.

The most financially challenging state of life is not retirement, it is early career.

That’s the time when your salary is still probably low, but you have the longest list of expenses: career clothes, cell phone bills, your first home furnishings, cars, weddings, rent—need I go on? You probably don’t have enough money to pay for all of that at once, unless your parents have set you up very well or you are a junior investment banker.

The rest of us have to make choices with our limited “discretionary” income. Here is a rough priorities list for newbies who have shopping lists that are bigger than their bank accounts.

First, feed the 401(k) to the match, not the max. If your employer matches your contributions, make sure that your paycheck withdrawals are high enough to capture the entire company match. That is free money. If you have enough money to contribute more to your 401(k), that is a good thing to do, but only if you’re able to cover other key expenses.

Invest in items that will improve your lifetime earning power. A good interview suit. An advanced degree. The right electronic devices and services for the serious job hunt.

Pay off credit card balances. Chasing those “balance due” notices every month will kill just about any other financial goal you have. If you’re carrying significant credit card balances, abandon all other extra savings and spending until you’ve paid them off, in chunks as large as possible.

Put money into a Roth individual retirement account. The younger you are and the lower your tax bracket, the better this works out for you. Money goes in on an after-tax basis and comes out tax-free in retirement. You can withdraw your own contributions tax-free whenever you want. Once the account has been in existence for five years, you can pull an additional $10,000 out, tax-free, to buy a home. It’s nice to have a Roth, and the younger you start it the better.

Save for a home down payment. Homeownership is still a smart way to build equity over a lifetime. New guidelines will once again make mortgages available to people who make downpayments as low as 3%. Even though interest rates are still at unrewarding lows, it’s good to amass these earmarked funds in a savings or money market account.

Pay down high-interest student loans. If you had private loans with interest rates over 8%, find out whether you can refinance them at a lower rate. If not, consider paying extra principal to burn that costly debt more quickly. Don’t race to pay off lower-interest student loans; the interest on them may be tax deductible, and there are better places to put extra cash.

Buy experiences, not things. Still have some money left? Fly across the country to attend your college roommate’s wedding. Take road trips with friends. Spend money to join a sports team, theater group, or fantasy football league. Focus your finances on making memories, not acquiring things—academic research holds that you get more happiness for the dollar by doing that, and you’ll probably be moving soon anyway.

Buy a couch. For now, make this the bottom of your list. Sure, everyone needs a place to sit, but there’s nothing wrong with living like a student just a little bit longer. If you defer expensive things for a few years while you put money towards all the higher priorities on this list, you’ll be sitting pretty in the future.

UPDATE: This story has been updated to clarify that Roth IRA holders can withdraw their own contributions at any time and do not have to wait until the account is five years old.

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