MONEY Investing

Thinking About Becoming a Landlord? Avoid These 6 Rookie Mistakes

For Rent sign
Zachary Zavislak

Putting your property up for rent can be tricky. Here’s how to sidestep six of the most common blunders.

Ever considered becoming a landlord? There are plenty of reasons you might. For some, it’s the temptation to scoop up a cheap property before the last of the deals vanish. Or maybe you’re like the 39% of homebuyers who told real estate firm Redfin that they’re interested in renting out their old place. Then there’s the lure of steadily escalating rents. The cost of renting the typical single-family home or apartment rose 4.5% in the past year, and spiked by more than 10% in the hottest areas, according to Trulia.

Becoming a landlord can be a profitable move, but learning the ropes requires some effort; it’s easy to take a misstep and end up in the red. “It’s not a passive investment, like putting your money in a mutual fund,” says Robert Cain, founder of landlord resource site Rental Property Reporter. Below, six slip-ups frequently made by newbie landlords, and strategies that will help you avoid making the same mistakes.

No. 1: Underestimating costs

You’ll most likely account for your insurance, taxes, and if you have one, mortgage. But you might miss expenses such as water, garbage, gardening, and regular repair and upkeep tasks. Even riskier, you may fail to put aside a large enough pot for unexpected expenses and big-ticket items. “Mom-and-pop investors tend to skimp on reserve and emergency funds,” says John Yoegel, author of Perfect Phrases for Landlords and Property Managers.

For a realistic estimate, plan for annual costs (not including your mortgage) to run at least 35% to ­ 45% of your yearly rental income, says Leonard Baron, who runs the real estate investor website ­ProfessorBaron.com. When calculating future income, it’s a good rule of thumb to include only 10 or 11 months of payments per year. After all, whenever a tenant moves out, you’ll still be stuck with expenses.

Parsing Rising Rents

No. 2: Breaking the law

Tenant and landlord laws vary from state to state and even city to city. For example, in some areas, you can require a month-to-month tenant to move out within 15 days, while in others you must give him 60 days’ notice. Yet when real estate site Zillow quizzed landlords on basic rental laws, the average respondent missed at least half the questions. One easy way to avoid getting into legal hot water: Never buy generic lease or other tenant forms, which don’t account for local laws, from a general real estate site or a big-box store, says Cain. To get the skinny on what’s permitted in your town, talk to your local or state landlord or apartment owners association. These groups usually cost at least $50 to join.

You know that federal law prohibits you from denying a rental to someone based on race, religion, or gender. Keep in mind that it also means that you can’t advertise a place as perfect for female roommates or specify no kids. You may, however, include a cap on the total number of occupants or ban pets.

No. 3: Skimping on vetting prospective tenants

When you’re looking for a good renter, it’s not enough to trust your instincts, or even to go on a referral from a friend. “Landlords get in trouble when they are in a hurry to find tenants and when they feel sorry for someone,” says Cain.

Never rent your property without checking the prospective tenant’s credit, confirming the source and amount of income, and checking in with the current and previous landlords, he says. Look for income to run at least 2½ times annual rent. Sites such as E-Renter.com and MySmartMove.com provide credit and background details for around $25.

No. 4: Ignoring renters insurance policies

Landlord policies cover the structure of the home, your appliances, and liability in case of injuries or property damage. Not on this list? The tenant’s stuff. You may think that’s not your problem, but Michael Corbett of Trulia warns that renting to one of the 65% of tenants who lack a policy can cause problems if something goes wrong. “Tenants lash out when they realize they aren’t being compensated,” he says.

In places where it’s legal, such as California, he recommends requiring that renters purchase a policy (go to your local landlord association to check the law in your state). This may shrink your pool of potential tenants, but is likely to increase the odds that you end up with someone responsible. If that’s not an option, be sure to explain to your tenant that you are not covering his things, and suggest he buy his own insurance.

No. 5: Failing to check out the property regularly

Don’t count on your renter to tell you about problems. “A tenant will complain about an inconvenience, such as plumbing issues, but not necessarily something like broken rain gutters that can produce major problems down the road,” says Yoegel. What begins as a dripping pipe or watermark on the ceiling can quickly swell into a multi-­thousand-dollar repair if left unaddressed. “Water damage is a big one,” says Corbett. “It can be outrageously expensive to fix.”

While you must respect your tenant’s privacy and cannot legally enter the residence without advance notice, you should find a way to take a regular look at the property. One solution: Add a clause to the lease specifying that you or your property manager will inspect the home at least every six months. It’s also a good idea to drive by the place once a week or so to look for exterior trouble spots. Finally, swing by anytime work is being done; you can verify that the job goes as you see fit and take a quick glance around for other potential issues.

No. 6: Going DIY at tax time

The tax treatment of rental properties is nothing like that of your home, and keeping it all straight is nearly impossible for novice landlords. The rules of depreciation are a prime example. The IRS requires that you take a deduction for wear and tear on the property each year. However, “the rules say depreciation is ‘allowed’ or ‘allowable,’ so people assume it’s optional,” says Cindy Hockenberry of the National Association of Tax Professionals. If you don’t claim the deduction for depreciation, you’ll miss a yearly tax break. Then, when you sell, the IRS requires you to retroactively depreciate the home, and that’s likely to leave you with a larger-than- expected tax bill. Not tricky enough? Starting this year the government “complicated” the regulations about what types of repairs you can deduct annually, says Hockenberry.

The bottom line? Get a professional’s help—at least for the first year or two until you fully understand the rules. And don’t forget to keep receipts for everything: You can deduct all the costs involved in managing your property, including the mileage for all those drop-bys.

MONEY A Pick From A Pro

For Lions Gate, The Hunger Games is Only the Appetizer

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From left to right: Woody Harrelson ("Haymitch Abernathy," left), Josh Hutcherson ("Peeta Mellark," center) and Jennifer Lawrence ("Katniss Everdeen," right) star in Lionsgate Home Entertainment's THE HUNGER GAMES: CATCHING FIRE. Murray Close—Lionsgate

So says Federated Investors' Lawrence Creatura. The studio's next challenge: parlaying its hits into franchises for years to come.

The Pro: Lawrence Creatura, co-manager of the Federated Clover Small Value fund

The Fund: Federated Clover Small Value invests in shares of undervalued small- and medium-sized U.S. companies. Under Creatura, the fund has beaten more than 70% over the past 15 years.

The Pick: Lions Gate LIONS GATE ENTERTAINMENT CORP. LGF 0.5262%

The Case: Lions Gate has gone from a bit player in Hollywood — a decade ago it was mostly known for small, independent films such as Dogville and Monster’s Ball — to the king of the young-adult heroine blockbuster.

The film and TV production company purchased Summit Entertainment, which included the Twilight franchise and library rights, in 2012. Throw in The Hunger Games and Divergent, its newest franchise, and you have potentially more than 10 films and dozens of branding opportunities going forward.

In television, Lions Gate also has big hits on its hands such as Netflix’s Orange is the New Black and AMC’s Mad Men. Such shows have helped the production company increase revenue by 66% since 2011.

There is a downside, though, to hitting the big time: Investors constantly want to see big results. And when the company announced late last week that revenues had fallen in the recently ended quarter and fiscal year, the stock lost more than 10% of its value in a day.

Nevermind the fact that in its most recent fiscal year, Lions Gate had only 13 wide release films compared to 19 in the prior year — and that the most recent quarter only included about 10 days worth of Divergent’s box-office.

Federated’s Creatura says investors misunderstand the nature of Lions Gate’s business. “They think it’s a hit-driven volatile business,” he says, “when it has a portfolio of evergreen property which will produce dependable cash flows for years and years and years to come.”

These are franchises such as Twilight, The Hunger Games, and Divergent, which just started filming its sequel.

The Hits Go On
Lions Gate’s dive into young adult franchise films gives the company a seemingly endless number of movies to produce. “The first Hunger Games starts with the 74th annual Hunger Games — what happened to the first 73?” asks Creatura.

And if Lions Gate decides to make 73 prequels, there’s reason to think they’ll be profitable. The most recent Hunger Games, for instance, took home more than $860 million in theaters, per BoxOfficeMojo.com, and cost $130 million. Divergent made more than $266 million and cost just $85 million.

Not only are Lions Gate films profitable, they generate a ton of so-called free cash flow, which is the amount of money left after paying all the bills and making all necessary investments in the business. (See the chart below.)

Lions Gate Free Cash Flow Yield
Lions Gate’s free cash flow yield beats that of rival Dreamworks Animation

Relative Value
Lions Gate is a play on fast growth. But that doesn’t mean the stock is necessarily expensive, says Creatura. Lions Gate’s price/earnings ratio based on estimated profits, for instance, is 20.3. That’s not considered cheap, but compare that to the 33.3 P/E for Dreamworks Animation. Plus the company’s earnings are expected to grow 17% annually for the next five years.

“The stock is not expensive if you consider the likelihood and longevity of future cash flow,” says Creatura. “These properties are evergreen – they can be reused and reformed again and again.”

Box office risks
While Lions Gate may have valuable franchises in the canon, there is a limit to what one brand can get you. Is Lions Gate more than The Hunger Games?

Divergent did perform well, but took in about a third of the box office of the first The Hunger Games film. Ender’s Game, another book based on a young adult novel (although this one featuring a male lead), failed to develop an audience and only made $125 million worldwide –limiting it’s potential for a viable franchise.

Ender’s Game wasn’t the blockbuster that some believe it could have been and that hurt the perception of the stock,” says Creatura.

MONEY College

Are You Ahead of Your Peers on College Savings?

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Happy 529 Day! Sarina Finkelstein/bravo1954—Getty Images

A new report shows that 529 accounts are growing, but that investors are shying away from stocks.

Americans have a record high college savings level of more than $230 billion, and are adding to that at a rate of about $700 million more every month in 2014, some recent studies have show.

That sounds like a lot of money—until you consider that there are more than 82 million Americans under the age of 20. So overall Americans have saved just $2,800 per youngster, and the average amount set aside annually per kid divides out to just a hair over 100 bucks.

But in a special report issued on May 29 in honor of 529 Day, Morningstar pointed out some hopeful news. At least Americans are paying less to have their college savings invested in 529 plans. The fund companies with the lowest fees now have the biggest market share, Morningstar says.

Plus, competition is forcing most 529 managers to cut their fees, says Kathryn Spica, a senior analyst at Morningstar and author of the report.

Related: College Savings Cheat Sheet: It’s As Easy As 5-2-9

That’s good for investors, since research shows that low-fee funds tend to outperform more expensive competitors over the long term.

“There are a lot of positive signs,” Spica says.

However, Morningstar also found that investors have lately been opting for more conservative investment options. And that’s not a positive for everyone.

529safetyb
SOURCE: Morningstar

Protecting assets when your children are older—or when stock valuations are high, as they are today—is sensible.

But parents saving for younger children, who thus have many years to ride out stock market corrections, would do better to invest aggressively. As the Morningstar report showed, the average 529 conservative allocation tallied an annual return of 8.4% a year from 2008 through 2013. More aggressive funds have risen faster—about 14.4% a year over the same period.

Related: How much do you need to save for college?

Additionally, in a 2012 paper, Vanguard found that over 18 years, investors who start out aggressively and smoothly taper down their equity holdings are likely to end up with significantly higher college savings. (See especially Fig. 4.) Investing $1,000 a year aggressively early on results in an average balance of $40,000 after 18 years, versus $27,000 for conservative investors.

James Dahle, a Salt Lake City area emergency physician who has started 15 529s—for his three children and 12 nieces and nephews—says that one of the main advantages of 529 plans is that investments can grow tax-free. So investors who put their 529 savings in, say, bonds, which won’t grow very much, lose out on one of the biggest advantages. “The more you earn, the more you save on taxes,” says Dahle, who blogs about his investments at WhiteCoatInvestor.com.

MONEY early retirement

I Retired At 50—Here’s How

It is possible to retire early—if you live below your means and stick to a detailed budget. You can even splurge once in a while on things that really matter to you.

What does it take to retire early, or to retire at all? How much do you need to save before you can make the leap? And once you’re retired, how will you manage your investments for reliable income?

Almost everybody faces these questions eventually. If you’re thinking about them sooner than later, then you’re ahead of the game. Those with successful careers and a taste for simple living have the best options. That was my situation: Instead of climbing further up the corporate ladder, or inflating my lifestyle, I retired at age 50.

How did I do it? I was fortunate to grow up in a military family where I learned integrity, economy, and the value of hard work. In college I earned an engineering degree, discovered personal computers, and taught myself to program. Eventually I started my own small software company, which I merged with another, and helped grow into a larger company.

But I’m not a dot-com millionaire. I didn’t become financially independent from selling a business or flipping real estate or trading hot stocks. I did it the traditional way: hard work, frugality, prudent investing, and patience. Financial independence was a slow process: I began serious saving and investing in my mid-30′s—maxing out my retirement contributions, invested raises and bonuses—and ultimately it paid off in early retirement.

Along the way, I had the help of some wise financial mentors, and my wife Caroline, who, like me, has always been happy living below our means. We ignore what other people are buying, and splurge in the few areas that matter to us. I track our expenses and keep a detailed budget. We can number on one hand the times we didn’t pay off credit card balances in the same month, and it’s been decades since we had a car loan. We paid off our house early too. Even when it might make economic “sense” to borrow, we don’t, favoring the simplicity and security of living debt-free.

In my investment portfolio, I also focus on simplicity and accountability. After some early detours, I’ve resisted the urge to pick stocks or chase the latest hot idea. The bulk of our portfolio now consists of just 10 holdings (all low-cost mutual funds or ETFs) in just two accounts. I’ve tracked our net worth for many years, and calculated our overall portfolio return each year, so I would understand if we were going in the right direction, and why or why not.

At heart, I’m still an engineer. When it comes to managing money, my top priorities are simplicity, reliability, and safety. Now my mission is to help others get on track to financial freedom, through my blog and other writing about personal finance. Whatever your starting point—whether you’re just leaving school, working to get out of debt, or building your retirement savings—you can reach financial independence sooner by using the principles I’ll discuss here.

In the months ahead I’ll be drawing on my experience plus some of the latest research to explore strategies for saving, investing, and retiring earlier. My favorite topics include saving big, cheap travel, passive index investing, retirement calculators, and early retirement lifestyles. You’ll get my best tips and lessons learned—first-hand knowledge for becoming financially independent and retiring sooner in the real-world. So stay tuned!

__________________________________________

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. Now he writes regularly about saving, investing, and retiring on his blog CanIRetireYet.com. This column will appear monthly.

More from Darrow Kirkpatrick:

The One Retirement Question You Must Get Right

How to Figure Out Your Real Cost of Living in Retirement

4 Secrets of Financial Freedom

MONEY

Are Stocks Overpriced?

James Montier (L) says stock returns won't keep up with inflation over the next seven years. Richard Bernstein (R) thinks the five-year-old bull market has several more years to run. Photos: joe pugliese

Facing a stock market that has doubled in price over the past five years—and with memories of the last market collapse still vivid—you can’t help but wonder: Is another disaster lurking around the corner?

Holding vastly different opinions are two strategists with decades of insight and experience. Richard Bernstein, former chief investment strategist at Merrill Lynch, now an adviser to funds for Eaton Vance, is bullish. James Montier, who helps manage $117 billion at GMO — itself an adviser to two Wells Fargo funds — is bearish.

Both make strong arguments — ones that may challenge your view of today’s investing climate.

THE BULL: RICHARD BERNSTEIN

Are stocks overpriced?

The market is priced roughly at fair value. You have to look at valuations in light of inflation. Our firm uses sophisticated models for that, but a rule of thumb is that the price/earnings multiple and the inflation rate should add up to less than 20.

Inflation is now at about 1.5%. The P/E for stocks in the Standard & Poor’s 500, as we speak, is about 17, based on trailing earnings. So a little below 20, or roughly fair value.

Related: American Airline employees locked out of 401(k) funds — here’s why

Stocks are not cheap, but that doesn’t mean the bull market is over. Pension funds in the U.S. have their lowest equity allocations in 40 years. Wall Street strategists recommend an underweight of equities. I’ve found, over three decades, that the consensus asset allocation is a very reliable contrary indicator of where the market is headed.

A version of the P/E that carries a lot of weight now is the one championed by Yale’s Robert Shiller. By that measure, based on 10 years of earnings, P/Es are very high.

In the past, when these high Shiller P/Es signaled an overpriced market, we’ve had much higher rates of inflation than we do now.

Related: Tools to make your money grow

When interest rates and inflation decrease, P/Es tend to expand. When rates or inflation rise, P/Es contract. The theory is that inflation eats away at a company’s future value, for several reasons. Earnings might rise, but inflation-adjusted earnings might not. Earnings quality tends to decline, in part because you’re simply paying off debt with cheaper dollars. And overall investor confidence tends to deteriorate. So you have to adjust for inflation, but professor Shiller doesn’t.

If you do adjust for lower inflation, it predicts normal returns — about 8% to 9% a year. We look at more than valuation, though. For example, sentiment is still attractive. We actually think you’re going to get above-average returns — say, 10% to 15% a year over the next several years.

Two years? Five years?

I think we’re halfway through one of the biggest bull markets of our careers. The stock market has been up for the same reason it always goes up in an early-cycle environment. Expectations are extremely low, monetary and fiscal policies kick in, and the economy begins to grow. That’s what happens every cycle, and it happened this cycle too.

Now we are entering a mid-cycle phase in which you get the tug of war between rising rates — a bearish sign — and unanticipated improvement in the economy — a bullish sign. Sentiment isn’t exactly ebullient, and the economy keeps improving.

Related: How to get in trouble in your 401(k)

But when your readership believes there’s no risk in equities, the bull market is almost over. And in the kiss of death, the yield curve inverts, meaning that long-term interest rates drop below short-term rates. In other words, people are so desperate to lock in long-term rates that they pay more for them than for short-term rates.

Watching for an inverted yield curve will keep you out of trouble. That simple little indicator suggests the bond markets are beginning to expect significantly weaker growth. Generally this occurs before the stock market begins to anticipate slower growth. And we haven’t seen it yet.

You’ve noted that a classic sign of a bubble is increased use of borrowed money to invest. Margin buying of stocks is at a record high.

Nobody knows how much of that is long — betting that stocks will rise — and how much of it is short — betting stocks will fall. In the past, when individuals played a greater role in the market, you assumed that margin was used to be levered long. Today hedge funds are a much bigger force, and my research suggests they’re relatively neutral. Some of that margin is being used for shorting. So I don’t think increased leverage is driving up prices.

What other bubble indicators do you look for?

When sentiment becomes overwhelmingly bullish to the point where people jettison diversification, that is very, very worrisome.

Related: How we feel about our finances

You see that now in highflying tech, social media, some biotech. Valuations are so out of whack with reality. You’d think that people would have learned from the hot stove.

What do you say to analysts who worry that equities are inflated by the artificial suppression of interest rates by central banks?

I get that question all the time. The point of stimulative monetary policy has always been to artificially inflate asset prices. Interest rates are lowered so that people take more risks and multiples expand. Companies get a cheaper cost of capital, which they can then use to invest.

The notion that the Fed is the only reason the stock market is up is what people claim during the early stages of every bull market. The time to worry is when the Fed inflates asset prices too much and the characteristics of a bubble emerge.

What happens if earnings — the “E” in P/E — drop to historical norms?

Profit margins are at an all-time high. There’s no doubt about that. But profit levels are also a function of sales. When margins compress, companies generally start to fight for market share. We think earnings forecasts for large-cap multinationals may be way too optimistic; we are concerned about emerging markets and the impact they could have on multinationals’ earnings. But domestic U.S. manufacturing is gaining market share. I’m not talking about 3D printing. I’m talking about ball bearings and grease. Small- and mid-caps.

Examples, please?

I’m not a stock picker. But we believe investors should probably focus on more domestically oriented stocks and avoid emerging-market stocks as much as possible. In addition, since profit margins around the world seem likely to contract, investors should aim at market-share gainers. We like U.S. small-cap industrials. If you know the name of the company, the odds are that they have too much international exposure.

Also, I think that high-yield municipal bonds are a tremendous value play right now.

Really?

They yield more than high-yield corporates for the first time in history.

So when will you know your portfolio is overpriced — that it’s time to get out of small-cap industrials or high-yield munis?

We look at gaps between perception and reality. Over the past several years, the sentiment toward small-cap stocks, despite their superior performance, has been quite poor. But ultimately that gap between perception and reality will begin to change.

There will be more negative-earnings surprises because expectations get too high. Flows into small-cap funds will pick up. We’ll hear people talking about how cheap they are, as opposed to how expensive they are. [Laughs.] Then we’ll find other investments that look more attractive.

THE BEAR: JAMES MONTIER (cont.)

THE BEAR: JAMES MONTIER

Are stocks overpriced?

There is no doubt that the U.S. stock market is exceedingly overvalued.

What makes you so sure?

The simplest sensible benchmark is the Shiller P/E. Right now we’re looking at a broad index like the Standard & Poor’s 500 trading at something like 26, 27 times the Shiller P/E. Fair value would be 16 or 17 times historical earnings.

But bulls say the Shiller P/E doesn’t look so bad if you adjust it for interest rates or inflation.

It doesn’t make any sense to do that. The history of stock prices shows that they are good long-run inflation hedges. That’s because companies can generally raise their prices when their input costs rise, which protects their profits and dividends from inflation. And since equities are valued based on profits per share, equities are largely immune from inflation too.

Adjusting for interest rates is even more bizarre. Empirical horseraces show that valuation ratios — say, P/Es — unadjusted by current interest rates have predicted long-run returns far better than valuations adjusted by interest rates.

What if you look at P/Es based on expected earnings for the next year?

I spent nearly 23 years working at investment banks surrounded by analysts, and I have to say I think analysts probably were put on this planet to make astrologers look like they know what they’re doing.

The idea of basing a valuation on a forward earnings number is laughable. Most analysts spend all of their time being spoon-fed by company management and thinking about the next quarter’s earnings release — a horizon that is just not meaningful.

But maybe rising profits will justify higher stock prices. Maybe corporate profit margins will be higher than they used to be.

It is possible. We spend a lot of time worrying about that: What could prevent margins from falling?

[GMO co-founder] Jeremy Grantham puts it very well. For most investors, he says, “This time is different” are the four most dangerous words. But for value investors [who buy stocks they think the market has undervalued], “This time it’s never different” are the five most dangerous words. They lead to simple-minded extrapolation — an unchecked belief that the future will be like the past.

For a really good example of that, think of value managers who bought financials in 2008 because they were “cheap.” They failed to understand the dangers posed by the bursting of the credit bubble and the way in which earnings had been inflated during the housing bubble.

But profits as a percentage of gross domestic product have indeed been elevated for a sustained period. Now the data show profit ratios are not increasing anymore, and that may be the first sign that they’re beginning to peak. Looking forward, more federal budget cuts are coming, which should reduce profits.

Are we in a bubble now?

The technology bubble of ’99 was a good old-fashioned mania. People really did believe this time was different — that the dotcoms would change the way the world worked forever. I think what we are seeing today is more of a near-rational bubble.

When you have central banks around the world setting interest rates below the rates of inflation, effectively telling you that cash will earn nothing, then you tend to seek out other vehicles for investing. That distorts pricing across a wide range of assets.

I’d call it a foie gras market, in which investors are the geese being force-fed risk assets by central banks. It isn’t pleasant, but it may be the best that you can do given the alternatives that are available to you.

So what should investors do?

Personal investment advice is not our business. But when you look at the S&P 500 at today’s valuations, our return forecast is negative 1.5% annually after inflation. Cash will earn something like minus half a percent over the next seven years.

It’s hard to find bits of the market that are actually attractive. So we look for high-quality stocks, which have three features: high profitability, stable profitability, and low leverage: the Johnson & Johnsons JOHNSON & JOHNSON JNJ 0.6119% , Procter & Gambles THE PROCTER & GAMBLE CO. PG -0.2469% , and Microsofts MICROSOFT CORP. MSFT 0.4679% of the world. They’re certainly not cheap. But they are the best of the bad bunch.

And outside the U.S.?

Globally, European value stocks also probably deserve a place in a portfolio. So do some emerging markets, which is probably a brave call given the events that are unfolding around the world. In our unconstrained portfolios, we have just under 50% in equities spread among those groups, and then the rest in a combination of things like Treasury Inflation-Protected Securities and cash.

Related: How much will I need to retire?

You don’t want to be fully invested or else you give up the ability to take advantage of shifts in the opportunities you face. Also, we have found that if you shift assets depending on your opportunities, you’ve greatly reduced the risk of lifetime ruin — running out of money before you die.

Does that mean timing the market? Or simply having a global portfolio and rebalancing once a year? That is, selling the asset that’s performed the best and buying the one that’s done the worst?

Rebalancing is the simplest of all valuation-based strategies and a really good start. But I think one absolutely should try to market-time based on valuation.

Ben Graham actually said that in Security Analysis [a classic investing book co-written by David Dodd and first published in 1934]. He said, “It is our view that stock-market timing cannot be done…” and that’s the bit everybody quotes. But he goes on to say “unless the time to buy is related to an attractive price level,” which I think is exactly right.

Any tips on how to market-time?

My colleague Ben Inker says you should smoothly and slowly enter and exit markets. Rather than trying to pick the top or bottom, which you’ll never do, move maybe 5% or 10% of your portfolio in or out each quarter. That’s what we’re doing.

We are slowly drawing down our equity exposure in recognition of the fact that the markets have been expensive. If they get more expensive, we may sell a little faster, and if they get less expensive, we may stop selling.

Being patient is a massively underestimated virtue when it comes to investing because there is nothing worse than sitting there watching your neighbor get rich because he’s been invested and you haven’t because you think the market’s expensive. But if you can be patient, a valuation-based framework is exactly the right way to do things.

MONEY Investing

Emerging Markets that Merit a Closer Look

Pedestrians walk past a Citibank branch in Mumbai Dhiraj Singh / Bloomberg / Getty Images

Emerging economies have tumbled in unison, yet some have far better prospects than others

The best time to buy something is when it’s on sale.

The place to look for stock bargains may finally be among developing economies, where share prices collectively are down 17% from their recent spring 2011 peak and stocks are trading at an average price/earnings ratio of 10.7 — a 40% discount to shares of developed nations.

Notes Jeff Shen, head of emerging markets at BlackRock: “That’s about the widest spread in more than 15 years.”

True, with risks rising abroad, there are reasons developing-nation stocks are so cheap. China’s growth is slowing, Brazil faces deficits, Russia just annexed Crimea — the list goes on. And as the Federal Reserve tapers bond purchases, global credit is shrinking, which hurts smaller countries dependent on foreign investment.

For those with a discerning eye, however, the recent selloff could spell opportunity.

“Emerging-market nations are no longer monolithic, and some are in pretty good shape,” says T. Rowe Price emerging-markets specialist Todd Henry.

He expects these healthier economies to spur the benchmark MSCI Emerging Markets Index to deliver 11.5% earnings growth in 2014 — more than two percentage points higher than the forecast for the S&P 500 index.

The following strategy will help you identify the most promising areas, while limiting your risks.

Look under the hood

Three trends seem likely to move emerging markets this year:

Asia will deliver solid growth. As China shifts from an economy propelled by exports to one driven by domestic consumption, its expansion is slowing. Yet concerns about stagnation seem overblown, given forecasts for a 7.5% rise in GDP in 2014.

“That’s more than twice as fast as developed nations,” says Justin Leverenz, manager of Oppenheimer Developing Markets, which has a 19% stake in China. Even if China stumbles, Taiwan and South Korea look strong.

“These countries have big current-account surpluses, as well as global trade that isn’t dependent on China,” says Arjun Jayaraman, co-manager of Causeway Emerging Markets.

Scary markets will stay scary. Case in point: Russia, where stocks have fallen 17% this year. Even before the Crimean crisis, Russia’s economy was in a slump, partly from political uncertainty.

“Disruption goes with the emerging-market territory,” says Craig Shaw, co-lead manager of Harding Loevner Emerging Markets. Shaw is sticking with a 6% stake in Russia.

Emerging markets do often rebound sharply before their economies recover. Over the past year, for example, stock prices in Greece, which was demoted to emerging-market status last fall, have jumped 52%, even though its debt problems aren’t resolved. Whether those gains are sustainable if there’s no progress soon is another question.

Think smaller for bigger gains. The least-developed emerging economies — so-called frontier markets, such as Ghana, Estonia, and Vietnam — tend to perform differently from more established markets.

Over the past year, for instance, the MSCI Frontier Index has risen 22.6%. The challenge: It can be tough to get in on the action since these shares tend to be thinly traded and most emerging-markets funds hold only a small stake.

Fine tune with two funds

Given the risks, “most people should put no more than 5% of their overall portfolio into emerging markets,” says Chicago financial planner Mary Deshong-Kinkelaar.

Start with a diversified fund that gives you exposure to all these countries, but maintains a bigger stake in more stable areas. For instance, Vanguard Emerging Markets Stock Index VANGUARD INTL EQUI EMERGING MARKETS PORTFOLIO VEIEX -0.6916% , recommended on our MONEY 50 list, has 23% of its assets in China, 15% in Taiwan, and 5.2% in Russia. T. Rowe Price Emerging Markets ROWE T PRICE INTL EMERGING MKTS STK FD PRMSX -0.6062% , also on the MONEY 50, holds similar country stakes.

Then add a second fund, tilting toward added safety or a riskier bet, as you prefer. Cautious investors might gravitate to Matthews Asian Growth & Income MATTHEWS INTL FDS ASIAN GW&INC INV MACSX -0.3425% , which holds dividend-paying stocks from developed and emerging Asian countries.

Looking for more pop? Add a frontier-market fund, such as Guggenheim Frontier ETF CLAYMORE ETF TST 2 GUGG FRONTIER MARKETS ETF FRN 0.1236% . Just be sure to fasten your seat belt for the inevitably bumpy ride.

MONEY Investing

Can Netflix keep competitors at bay?

Netflix took down Blockbuster. Now it deals in a more complicated marketplace, with major players like Comcast and Amazon.

Netflix has transformed itself from a mail-delivered DVD rental service to an online, on-demand behemoth whose users suck up a third of all the bandwidth in North America.

Now comes the hard part: maintaining that lead in the fast-changing world of streaming video, where the competition ranges from subscription services such as Hulu to content providers like HBO to cash-rich tech giants such as Apple APPLE INC. AAPL 0.0586% and Amazon.com, which offers streaming-video content to its Prime members.

Can Netflix NETFLIX INC. NFLX 0.5092% beat them back, or will it fold like a house of cards?

More eyeballs

With more subscribers than HBO and Hulu Plus combined, Netflix has a big lead in streaming video. And the gap is growing now that the company is gaining traction abroad. Morningstar analyst Peter Wahlstrom views this as “a headstart rather than a sustainable competitive advantage.”

What could go wrong? Big content producers could walk. They’re being paid about 20¢ per content hour by Netflix, vs. $1.20 by cable and satellite TV, according to Needham.

Netflix’s appeal would suffer if more production houses like Viacom take their shows to rival Amazon AMAZON.COM INC. AMZN -0.0588% . Along those lines, HBO and Amazon announced a deal in late April that would allow Prime members to stream some old HBO hits like “The Sopranos” and “The Wire.” Wedbush Securities analyst Michael Pachter says not to overlook Amazon. The retailer may have fewer streaming subscribers now, but the company is worth seven times more than Netflix.

More expenses

When Netflix began producing award-winning shows such as House of Cards and Orange Is the New Black, the company seemed to be stealing a page from HBO’s playbook. “The newer content has worked extremely well in getting new sign ups and keeping their subscriber churn levels down,” says Chris Baggini, senior portfolio manager at Turner Investment Partners, which owns the stock.

The truth is, the company must turn to original shows as a cheaper source of programming. The costs of acquiring content keep climbing as licensing contracts expire and the competition for the right to stream TV shows and movies intensifies.

“While Netflix is a big player today, it is still simply one pipe for the content to flow through,” says Wahlstrom.

High valuations

After soaring 60% annually over the past five years, Netflix shares are now priced for perfection. Yet there are plenty of challenges ahead. As usage has grown, for instance, the speed at which Netflix content flows to Comcast COMCAST CORP. CMCSA 0.1101% and Verizon VERIZON COMMUNICATIONS INC. VZ 0.5371% customers has been slowing lately.

To address this problem, Netflix recently agreed to pay Comcast and Verizon to stream Netflix’s content more quickly. The deals, though, gives Internet service providers leverage to assess more such “tolls” down the road.

Meanwhile, Comcast and tech giant Apple are reportedly in talks to launch a competing streaming-video service that would use Apple set-top boxes. Mere news of those discussions sent Netflix stock down 7% in late March.

MONEY Millennials

Young Investors Are Hoarding Cash

Young investors are keeping nearly 50% of their portfolio in cash, which might make sense for some millennials. But if you want to expand your stock portfolio, here's how to get started.

According to investment adviser UBS, people in their early to mid-thirties with at least $100,000 to invest keep 42% of their money in cash. UBS concludes young savers are unusually conservative.

Or they’re realistic: When your career has been dominated by the Great Recession, you know the value of a cash buffer.

So what’s the right cash stake? How to decide — and what to do once you have enough:

Be cash savvy

Have expenses covered. Financial planner Mary Beth Storjohann, who specializes in working with younger investors, says that to get through an unexpected job loss, you should set aside three to six months of living expenses in cash.

Focus on the big picture. Of course, some savers may be holding cash not because they want an emergency reserve, but because they are anxious about volatile markets.

For young investors, though, these numbers put that risk in perspective: Over periods of 30 years, stocks have never lost money and outperformed cash-like short-term Treasuries by an annualized average of 7 percentage points.

Related: Why should you invest?

Keep it simple. If you’ve been out of the market, the number of investment choices for getting back in may be overwhelming. One broadly diversified index fund, such as Schwab Total Stock Market Index SCHWAB CAPITAL TST MK INDEX SELCT SWTSX -0.1636% , gets you a solid portfolio with little fuss and low costs.

TIME Travel

Why La Quinta Is Not Just Another Cheap Motel Brand

La Quinta, the hotel company undergoing an IPO of its stock this week, is a limited-service brand favored by travelers on tight budgets. At some properties, rooms start under $50 a night. But La Quinta is not just a run-of-the-mill cheap place to stay.

The IPO of La Quinta Holdings, backed by the Blackstone Group, didn’t get off to a particularly good start. On Wednesday, the IPO price was set at $17 per share, down from the original projected price range of $18 to $21. Despite the lower price, at least initially La Quinta shares barely moved, hovering around the $17 mark through midday Wednesday.

While investors seem uncertain about La Quinta, in many ways middle-income, price-conscious travelers—who truly represent the vast majority of travelers—have already offered their verdict about the brand: They’re fans. Here are a few of the reasons that La Quinta stands out in a good way in the crowded mid-scale lodging category.

Low room rates. It’s rare for a La Quinta Inns & Suites to run over $100 a night. La Quinta is usually lumped into the mid-tier limited-service (no restaurant) hotel category with brands such as Hilton’s Hampton Inn, Holiday Inn Express, and Marriott’s Fairfield Inn, and LQ rates generally match or undercut the competition. Because all of these brands tend to fill up with business travelers Monday-Friday, weekends are slow periods, and La Quinta entices last-minute bookings with weekend deals from $49 per night.

(MORE: Airline Travelers, Your Future Will Look a Lot Like … Cleveland)

Travelers tend to think of La Quinta first and foremost as a good value, and that’s reflected in survey ratings: A few years back, the brand was named the second-best midprice hotel (after Hampton Inn) by Business Travel News, and in a more recent traveler survey, conducted by Temkin Group, La Quinta and Best Western received the highest scores of all the industry for best customer experience.

No-hassle reservations. To reserve a room, you must give a credit card number, right? Not at La Quinta. Starting in 2012, the company began offering an Instant Hold option, allowing one-the-go users to reserve a room via a mobile phone with just a phone number. The idea came about because somebody realized that travelers liked to look up hotels and last-minute available with their phones, but it was a pain to enter a credit card number on the device. So La Quinta now lets guests place instant holds on a phone for up to four hours (you’re expected to show up in person by then), and also allows you to browse TripAdvisor reviews of the property and see Yelp ratings of restaurants in the area without having to hop over to another app.

Another unique reservation policy from La Quinta involves advanced bookings. The majority of hotel brands give discounts for reserving two or more weeks ahead of arrival, but there’s usually a big caveat: At Hampton Inn, for example, the tradeoff to a 15% room rate discount for an advanced booking is that payment must be made in full when making the reservation, and no changes or cancellations are allowed. La Quinta offers discounts of 10% to 20% for rooms reserved at least 14 days in advance, but there’s no prepayment required, and cancellations can be made with no penalty up to 24 hours before expected arrival.

Good amenities, minimal nickel and diming. Free Wi-Fi is standard, and rooms are outfitted with flat-screen HDTVs. Several years ago, the company implicitly acknowledged that guests would want to enjoy their own entertainment via laptops and other devices, so it basically gave up on upselling them with pay-per view TV movies and shows. “We have retired that model and replaced it with a solution that instead of preventing guests from plugging their own devices to the TVs in hotels encourages them to do so,” a La Quinta executive explained in 2011.

(MORE: Southwest Airlines: We’re Not Really About Cheap Flights Anymore)

Also, breakfast is always free for guests, and almost all properties allow pets to stay at no additional charge. Most properties have pools too.

More and more locations. The overall mid-tier hotel category has pretty obvious mainstream appeal for travelers. “Limited-scale, mid-price properties are probably in the sweet spot in attracting middle-income America from the leisure standpoint” and business travel, Jan Freitag, senior vice president at the lodging research firm STR Inc., told Bloomberg News in a story about the company’s IPO.

Even in a category that’s been marked by robust growth over the last decade or so, La Quinta’s expansion has been especially impressive. The company now boasts more than 800 locations in the U.S., Canada, and Mexico, up from around 500 in the mid-’00s. Last spring, after a particularly big quarter for new openings, a company press release cited data from Smith Travel Research, which showed “La Quinta grew faster than any other select service lodging brand in its main competitive set in the years 2002-2012, growing by more than 141% in that period.”

A report by Skift on the IPO notes that La Quinta currently has 187 new properties in the pipeline. That includes 17 new locations in Mexico, a market that much of the hotel industry has overlooked in recent years, and where, despite the company’s Latino name, there are only five operational La Quintas right now.

MONEY Investing

When Wall Street Becomes a Landlord

First the pros snap up cheap houses. Then come new ways for you to invest in them. Be careful.

The stronger-than-expected housing recovery — a 20% rebound since 2010 — owes a lot to the investors who swept into recession-ravaged cities and scooped up distressed homes.

Nowhere has that been truer than in the suburbs ringing Atlanta, where rampant overbuilding and economic woes produced a flood of foreclosures.

At the same time, the local rental market couldn’t absorb all the displaced owners. That combination proved irresistible to mom-and-pop investors, whose all-cash purchases stabilized the market: Atlanta home prices rebounded from a 12.7% decline in 2009 to flat in 2010.

Related: Cities where the real estate deals are

Then Wall Street came to town. This second wave of housing investors is spending billions to flip foreclosures into single-family rentals. In January one in every four homes sold in Atlanta went to a large investor, four times the national average, says RealtyTrac.

“They’re coming from all over, even out of the country,” says Atlanta agent and property manager Scott Goeber.

In June 2012 the Atlanta office of real estate manager Waypoint Homes was “me and my cellphone,” says regional director David Zanaty. By last fall he had hired 50 people and bought 600 homes, and hoped to own 1,500 by March.

Large investors are swarming local markets. Real estate powerhouse Blackstone has spent $8 billion to buy 43,000 homes nationwide. American Homes 4 Rent has spent $3.5 billion on 21,700 homes.

Now these buying sprees are being converted to investments.

Since December 2012, four single-family home real estate investment trusts, similar to REITs that own apartment buildings or shopping centers, have opened up to individual investors. American Homes 4 Rent’s AMERICAN HOMES 4 R COM USD0.01 'A' AMH -0.2781% is the largest; most recently Waypoint merged with the home-rental division of Starwood Property to form Starwood Waypoint Residential Trust STARWOOD WAYPOINT COM USD0.01 SWAY 0.0728% , a REIT that owns close to 5,800 homes.

Plus, a new breed of bonds, which bundle rents from single-family homes, is being peddled to institutional investors, such as pension managers or mutual funds. Last October, Blackstone rolled out a $479 million bond backed by 3,207 homes in five states. Deutsche Bank estimates that another $5 billion in home rental bonds will hit the market this year.

So far investors have not been enthusiastic. Some of Blackstone’s bonds are selling below the offer price, and most of the REITs have underperformed their index. The business model is too new, says Brad Thomas, editor of iREIT Investor.

The biggest firms expect to generate 5% to 7% a year in return from rents, according to a Bank of America report. But that hinges on keeping down the cost of maintaining far-flung homes.

“If a toilet breaks, you’ve got to send someone to fix it,” Thomas says. “It’s difficult to do that efficiently. In an apartment complex, a property manager can walk the building.”

Related: Dreary outlook for formerly hot housing markets

And REIT investors shouldn’t count on big price gains. “It’s unproven how their asset value will grow in a more normal market,” says Forward Real Estate Long/Short manager Ian Goltra.

Plus, the REITs have been plowing capital into buying homes, not paying big dividends. And yield is a big reason to own REITs, notes Goltra. Top apartment REITs currently pay more than 4%. The highest available yield in a single-family rental REIT is 1.2%.

“It’s early days,” says Goltra. “For now, they’re too risky.”

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