MONEY 401(k)s

Terrible Advice I Hope Young People Ignore

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

Please, invest in a 401(k).

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

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

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

Altucher begins the video:

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

Why? His rant begins:

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

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

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

Altucher lobs another complaint:

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

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

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

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

Another gripe:

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

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

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

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

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

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

“They’re paying themselves salaries.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Take this stat from Vanguard:

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

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

Altucher has another problem with tax deferment:

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

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

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

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

Here’s his final takeaway:

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

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

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

For more on this topic:

MONEY stocks

How to Beat the Summer Market Doldrums

Matt Harrison Clough

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

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

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

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

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

Make that “rebalance in May”

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

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

Stay away from riskier plays

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

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

MONEY Food & Drink

Chipotle Is Killing It, but Investors Want More

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

MONEY retirement planning

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY Airlines

JetBlue’s Surprising Upscale Gambit Is Working

JetBlue Mint suites
JetBlue

JetBlue's Mint premium seats are getting more expensive -- and they're still in high demand.

Last June, JetBlue JETBLUE AIRWAYS JBLU -1.67% began a new chapter of its history with the introduction of its Mint premium service. Instead of using its standard all-coach configuration, JetBlue added a 16-seat premium cabin with full flat-bed seats for some of its new A321s. (Four of the seats even come as private mini-suites!)

JetBlue opted to make this change in order to boost its profitability on the ultra-competitive New York-Los Angeles and New York-San Francisco routes. Less than a year in, it’s pretty clear that this move is paying off even more handsomely than originally expected.

Mint ramps up

The routes from New York’s JFK Airport to Los Angeles and San Francisco are highly contested — JetBlue competes with all three legacy carriers as well as Virgin America VIRGIN AMERICA INC VA 0.21% . Until last June, JetBlue had been the only one not offering a swanky premium section on these flights. Not surprisingly, this took it out of the running for attracting the most lucrative travelers.

JetBlue created Mint in order to narrow the revenue gap with its rivals. The idea was to offer a lie-flat seat at a much lower price than the prevailing fares in order to court the small/medium business and upscale leisure markets: i.e., people who were priced out of the premium cabin on other airlines.

JetBlue has been phasing in Mint flights since last June as the specially configured Airbus A321 planes have arrived. It is finally reaching a full schedule of eight daily round-trips to Los Angeles and five daily round-trips to San Francisco this spring.

Strong demand across the board

Ever since JetBlue launched its Mint service, company executives have noted that they were pleasantly surprised by the level of demand for its premium seats. As expected, Mint has been popular with small/medium businesses and well-to-do leisure travelers.

More surprisingly, Mint has also generated strong interest among large corporations. JetBlue had assumed that its rivals — mainly the legacy carriers, but also Virgin America to some extent — had that business locked up. Instead, JetBlue’s entry into the market has disrupted the status quo.

Virgin America CEO David Cush noted in February that JetBlue’s entry into the market had driven average premium fares down by 30%-40% on the Mint routes. This indicates competitors have had to at least meet JetBlue halfway in terms of pricing in order to prevent customers from bolting.

Fares strengthen

In the first few months of Mint’s existence, JetBlue was offering a starting non-refundable fare of $599 one-way. There were two higher fare “buckets”: $799 and $999. Depending on the level of demand for a particular flight, JetBlue’s revenue management system would determine how many seats to sell at each price point in order to maximize revenue.

Because of the strength of demand, JetBlue’s Mint cabin was frequently sold out last summer. As a result, in the fall, the company revised its Mint pricing tiers. In October, JetBlue’s then-president — and current CEO — Robin Hayes explained that JetBlue had moved the refundable fare up to $1,199 and then to $1,209. Meanwhile, it had made the $999 price point a third non-refundable fare.

More recently, JetBlue has apparently determined that the market can support even higher fares. There’s still an introductory fare of $599, but there seem to be fewer of these tickets available, especially on busy travel days.

Furthermore, on the San Francisco route, the refundable fare has moved up to $1,249, while the intermediate non-refundable fares have risen to $809 and $1,049. Fares are even higher for New York-Los Angeles flights. The refundable fare there is now set at $1,299, with the intermediate non-refundable fares at $899 and $1,149.

A big profit tailwind

JetBlue has been posting by far the best unit revenue growth in the industry recently. It would be naive to attribute this performance to a single factor, but the strong reception of its Mint premium offering is clearly having a big impact. JetBlue is regularly pulling in one-way fares of more than $800 — and, increasingly, more than $1,000 — on routes where just two years ago, its average one-way fares were less than $250.

Late last year, JetBlue told investors that for the month of September, its profit margin on the Mint route to Los Angeles had risen by 17 percentage points year over year. Given that it has raised prices several times since then, its Mint routes are surely even more profitable now.

For competitors like Virgin America, this is mixed news. In the short run, it’s better if JetBlue is commanding higher prices, because it limits the need for other airlines to discount their fares to match JetBlue. But in the long run, JetBlue’s massive success on the New York-Los Angeles and New York-San Francisco routes could encourage it to add flights, putting even more pressure on the competition.

MONEY bonds

Germany’s Bond Market is Kind of Crazy Right Now. And it Affects You.

A German flag flies in front of the Bundesbank headquarters in Frankfurt, Germany.
Ralph Orlowski—Bloomberg via Getty Images A German flag flies in front of the Bundesbank headquarters in Frankfurt, Germany.

German 10-year bond yields are about to go negative. Here's what that means for you.

Imagine a world where you have to pay to loan the government money. Sound strange? It’s already the reality in Germany, where yields on government bonds, including those maturing as far away as eight years from now, have fallen into negative territory. The 10-year Bund, the German equivalent of a U.S. Treasury and a benchmark for long-term interest rates in Europe, is just a hair away from zero. If (or when) long-term German rates go negative, expect to see headlines about the the global economy’s strange new post-financial-crisis rules.

How are negative rates possible? And why would anyone invest in something that they knew would be unprofitable? Before we dive into those questions, here’s some background on the whole situation.

Bonds go negative when they get expensive

On the most basic level, Bunds, like Treasuries, are essentially a cash IOU from the government that needs to be paid back in a certain timespan. Since government bonds from solid countries like Germany are all but certain to be paid back, investors snap them up when they’re concerned the economy will be sluggish and don’t see any better investment opportunities.

Europe’s economy has been stalled for a while, and prospects are dim. That drives up the price of bonds (their current market value), which has an inverse relationship on their yields (their rate of return over time). Meanwhile, the European Central Bank (Europe’s version of the Federal Reserve) has been trying to stimulate the economy with “quantitative easing,” a bond buying program that puts further downward pressure on rates. Over the past year, yields on 10-year German debt have fallen from roughly 1.5% to 0.07%.

Why would investors pay to lose money?

The idea that someone would pay for negative-returning asset might seem crazy, but it’s not quite as strange as it sounds. Investors are always expected to accept lower returns for safer assets. Cash, the safest asset of all, often loses value over time due to inflation.

But inflation is not a big worry for Europeans right now. In fact, they are more worried about deflation, or falling prices. If Europe has low inflation or deflation, the real yield on Bunds won’t be as low—and could even be positive while nominal rates are negative.

It’s worth noting that sub-zero bond yields aren’t exclusive to Germany. In the U.S., the inflation-protected Treasury bonds (called TIPS) also went just slightly negative last week. So real, inflation-adjusted 10-year yields are near zero in the U.S. too. The demand for safe money is a global thing.

What all this means for you

Germany’s oddball bond market isn’t just interesting in an abstract sort of way. It’s also very significant for American investors. First of all, lower yields on European investments send some investors looking for other assets that have a higher return—which means they’ve been sending capital to the U.S., where nominal rates are higher.

International demands for American bonds is one reason the U.S. dollar has become so strong in recent months. A strong dollar is good for your travel budget, but it’s been putting a drag on the economy by making American exports more expensive.

Low European yields are also keeping a lid on how high U.S. interest rates can go. The 1.8% yield on regular 10-year Treasuries is pretty attractive compared with German and other sovereign bonds, so that’s helped keep global demand for Treasuries high.

Falling Treasury yields mean rising bond prices, which has been good to the total return of bond mutual funds over the past year or so. But anyone relying on bond yields for a steady stream of income is not going to be happy with the direction things are headed. Broadly diversified bond funds are paying income of only 2% or so. If you are putting your savings in cash, of course, you’ve been earning even less.

House hunters, on the other hand, might be quite pleased. Mortgage rates are generally tied to the 10-year Treasury, so if yields stay low, so will the price of owning a home. The same is loosely true with credit card interest rates.

In short, keep your eye on those Bunds. In global economy, what happens in Europe doesn’t stay in Europe. Not for a second.

MONEY stocks

My $505,845 Mistake

Netflix on phone and envelopes
Andrew Harrer—Bloomberg via Getty Images

This is why you have to "buy and hold."

Pull up a stool, and let me tell you a bittersweet tale about the one that mostly got away. It was 2002, and I finally got Netflix NETFLIX INC. NFLX -2.66% . I was skeptical when it went public in May of that year. I bashed it — viciously — a few weeks later, but my tune changed a few months later when I became a subscriber and an investor.

Netflix was starting to build out its network of distribution centers, and that means that the laughable weeklong roundtrip delivery cycle for someone on the East Coast between disc rentals could be shortened to as little as two days.

It also didn’t hurt that the same stock that I blasted when it was in the high teens in June had fallen into the mid-single digits by October. I bought in, wagering roughly $2,500 to pick up 500 shares. For once in my life I had actually nailed the bottom on a stock.

By the time that Netflix declared a 2-for-1 stock split two years later, my cost basis on what would have been 1,000 shares dropped to about $2.50 a share. The key nugget in that lesson is “would have been” because I had unfortunately sold most of my shares well before the split.

Ouch.

Hurts so good

Identifying great growth stocks is sometimes easier than mustering the patience to see that greatness play out. In my case, I got trigger happy when Netflix began to bounce back. I sold 80% of my stake too soon. It felt right at the time. It always does.

The only thing that makes this tale bearable is that I kept 100 of my original 500 shares. It didn’t seem right to punch out entirely, especially when Netflix was disrupting what was then a thriving DVD rentals market. Those 100 shares became 200 after the stock split in 2004.

However, I sold half of my remaining shares a few years later. Netflix was the biggest winner in my portfolio, but I wanted to raise some money to join a luxury destination club. That was another bad call, of course. The vacation club I went on to join would go on to file for bankruptcy, but seeing that get wiped out was no match for the regret that I have for cashing out in the first place.

The glass is a tenth full

One can argue that I shouldn’t complain. I still have 100 shares at a cost basis of $2.50. Some folks are lucky to see a 10-bagger or a 20-bagger in their investing tenures, and here I am as the proud owner of a 200-bagger following Thursday’s pop.

It’s hard to be resentful in knowing that I turned $250 — a tenth of my initial $2,500 investment — into more than the average person makes in a year. However, I can’t lie and say that there isn’t a bittersweet twinge whenever my stock moves higher the way it did on Thursday afteranother blowout quarter. The split-adjusted 900 shares that I sold along the way would be worth $505,845 as of Thursday’s close, and that obviously would’ve gone a long way toward retirement, dreaming, or giving my kids one less reason to be resentful.

MONEY Investing

Why Wary Investors May Keep the Bull Market Running

running bull
Ernst Haas—Getty Images

Retirement investors are optimistic but have not forgotten the meltdown. That's good news.

Six years into a bull market, individual investors around the world are feeling confident. Four in five say stocks will do even better this year than they did last year, new research shows. In the U.S., that means a 13.5% return in 2015. The bar is set at 8% in places like Spain, Japan and Singapore.

Ordinarily, such bullishness following years of heady gains might signal the kind of speculative environment that often precedes a market bust. Stocks in the U.S. have risen by double digits five of six years since the meltdown in 2008. They are up 3%, on average, this year.

But most individuals in the market seem to be on the lookout for dangerous levels of froth. The share that say they are struggling between pursuing returns and protecting capital jumped to 73% in this year’s Natixis Global Asset Management survey. That compares to 67% in 2013. Meanwhile, the share of individuals that said they would choose safety over performance also jumped, to 84% this year from 78% in 2014.

This heightened caution makes sense deep into a bull market and may help prolong the run. Other surveys have shown that many investors are hunkered down in cash. That much money on the sidelines could well fuel future gains, assuming these savers plow more of that cash into stocks.

Still, there is a seat-of-the-pants quality to investors’ behavior, rather than firm conviction. In the survey, 57% said they have no financial goals, 67% have no financial plan, and 77% rely on gut instincts to make investing decisions. This lack of direction persists even though most cite retirement as their chief financial concern. Other top worries include the cost of long-term care, out-of-pocket medical expenses, and inflation.

These are all thorny issues. But investing for retirement does not have to be a difficult chore. Saving is the hardest part. If you have no plan, getting one can be a simple as choosing a likely retirement year and dumping your savings into a target-date mutual fund with that year in the name. A professional will manage your risk and diversification, and slowly move you into safer fixed-income products as you near retirement.

If you are modestly more hands-on, you can get diversification and low costs through a single global stock index fund like iShares MSCI All Country or Vanguard Total World, both of which are exchange-traded funds (ETFs). You can also choose a handful of stock and bond index funds if you prefer a bit more involvement. (You can find good choices on our Money 50 list of recommended funds and ETFs.) Such strategies will keep you focused on the long run, which for retirement savers never goes out of fashion.

Read next: Why a Strong Dollar Hurts Investors And What They Should Do About It

MONEY stocks

Why Netflix Is Splitting Its Stock

Headquarters of Netflix, Inc., in Los Gatos, California
Tripplaar Kristoffer—Sipa USA Headquarters of Netflix, Inc., in Los Gatos, California

Netflix is asking shareholders to pave the way toward a drastic stock split. But it really doesn't matter -- with a few notable exceptions.

Netflix NETFLIX INC. NFLX -2.66% shares are about to split, probably in a drastic manner. The company is asking shareholders for permission to go as far as a 30-for-1 share exchange. It sounds very dramatic, but most investors really shouldn’t care at all.

Here’s why.

What’s new?

Netflix just filed a preliminary version of its 2015 proxy statement, asking shareholders to vote on seven proposed actions before the June 9 annual meeting. Among the typical issues, including approving Netflix’s chosen auditing firm and reelecting a tranche of directors for the next three years, is a more unusual request straight from the board of directors.

In Proposal Four, Netflix asks for a simple majority vote to approve a vastly expanded reserve of capital stock. This is an important first step toward splitting Netflix shares, which have looked rather pricey in recent years.

The board is currently authorized to issue as many as 160 million common shares. If the fourth proposal is approved, that limit will soar to 5 billion potential certificates.

This move could lead in many directions:

  • Some companies raise their share counts before selling a heap of additional certificates back to shareholders. That’s one way to raise capital — and dilute the stock’s value for current shareholders.
  • It could also go toward a generous stock-based compensation program, which would artificially boost bottom-line earnings, but with another helping of share dilution.
  • Netflix even said the extra shares could be used for share-based buyouts, paying off the target company’s current owners with fresh Netflix stock instead of cash. Again, dilution follows.

Netflix made no bones about the intended purpose, though. The company said it “does not have any current intention” to explore any of the activities I just listed, other than supporting the share-based compensation strategy that is already in place.

Sure, the board reserved the right to issue additional shares for these purposes at a later date, without asking stockholders for another share count expansion. But there’s no reason to expect any of these things to happen anytime soon.

No, this is all about powering “a stock split in the form of a dividend.”

Simmer down now

Now, just because Netflix is likely to get its wish doesn’t mean you should expect the entire 5 billion shares to hit the market right away.

For example, Netflix doesn’t use its entire 160 million share allotment today. The company only has 60 million shares on the market at this time, and could do a simple 2-for-1 split without even asking for shareholder permission.

In fact, it’s absolutely normal to have a large reserve of approved but unprinted shares. Netflix said it set the 5 billion share count to be “consistent with the number of shares authorized by other major technology companies.”

Following that trail of cookie crumbs, you’ll find IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM -0.43% has 988 million shares on the open market but a shareholder-approved maximum allotment at 4.7 billion stubs. Microsoft MICROSOFT CORP. MSFT -1.28% is allowed 24 billion shares but has only issued 8.2 billion. Apple APPLE INC. AAPL -1.2% lifted its approved share count from 1.8 billion shares to 12.6 billion just before running through a 7-for-1 split last year, but has only issued 5.8 billion tickets so far.

All of these major tech stocks sit on approved share counts somewhere in the same ZIP code as the proposed Netflix target. They also have the power to execute a modest stock split anytime they like, or to put their share reserves to work in any of the other actions I mentioned earlier.

It’s just a nice buffer to have, and I expect the Netflix split to stop far short of the maximal 30-for-1 ratio. Something like a 10-for-1 split would leave plenty of future wiggle room while lowering Netflix’s share prices well below the psychological $100 barrier.

What’s the big deal?

In most cases, stock splits are nothing but a massive play on investor psychology. Buying 10 Netflix shares at $470 each serves exactly the same purpose as picking up 100 stubs for $47 each. In both cases, you built a $4,700 position with a single commission-spawning transaction.

But a $47 stock certainly looks more affordable than a $470 version, even if all the usual valuation ratios stay unchanged. And the move actually does make a difference every once in a while.

For example, Apple would not be a member of the Dow Jones Industrial Average today if it hadn’t performed a radical stock split first. On the price-weighted Dow, the pre-split Apple ticker would have overshadowed the daily moves of the other 29 members, and the Dow was never meant as a proxy for Apple investments.

Netflix isn’t exactly in position to snag a Dow spot anytime soon, but you never know. Extreme share prices can make for some strange and interesting situations. Keeping share prices low (but not too low!) can save Netflix some sweat if the company ever gets close to a Dow Jones seat — or any other price-based honor that could boost the company’s market status.

Finally, the single-share price might matter to very modest investors who could afford a couple of $47 Netflix shares but would have to save their pennies to get a single $470 stub. Options contracts also become more affordable at lower prices, since they often represent 10 or 100 shares each.

So when capital is tight, lower share prices actually matter. From that perspective, stock splits are shareholder-friendly moves.

NFLX Shares Outstanding Chart

Final words

I expect this proposal to pass, because such plans rarely meet much resistance. Investors tend to like stock splits, and it doesn’t hurt to give the company’s board and management some extra financial flexibility.

Then, we’ll see Netflix pay out a special dividend. For each current share, Netflix owners will receive another four to nine additional shares for a final split ratio between 5-for-1 and 10-for-1.

The move won’t change Netflix’s total market value. Nor will it affect the direct value of your current Netflix holdings. We’ll all get more granular access to the stock. So we can make smaller trades and have more control over the size of our Netflix investments.

This is a fairly nice move with no real downside. But it’s also no reason to break out the champagne bottles and order up fireworks.

It’s ultimately just another housekeeping item that won’t move Netflix stock at all. Or if it does, the change will be based on nothing but day-trader psychology and will fade quickly.

Feel free to buy or sell Netflix shares based on whatever happens in Wednesday afternoon’s first-quarter earnings report. But for all intents and purposes, you can ignore the upcoming stock split.

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