MONEY retirement planning

3 Simple Steps to Crash-Proof Your Retirement Plan

piggy bank surrounded by styrofoam peanuts
Thomas J. Peterson—Getty Images

The recent stock market slide is timely reminder to protect your retirement portfolio from outsized risks. Here's how.

At this point it’s anyone’s guess whether the recent turmoil in the market is just another a speed bump on the road to further gains or the start of a serious setback. But either way, now is an ideal time to ask: Would your retirement plans survive a crash?

The three-step crash-test below can give you a sense of how your retirement plans might fare during a major market downturn, and help you take steps to avert disaster. I recommend you do this stress-test now, while you can still make meaningful adjustments, rather than waiting until a crisis actually hits—and wishing you’d taken action beforehand.

1. Confirm your asset allocation. The idea here is to divide your portfolio into two broad categories: stocks and bonds. (You can create a third category, cash equivalents, if you wish, or throw cash into the bond category. For the purposes of this kind of review, either way is fine.)

For most of your holdings this exercise should be fairly simple. Stocks as well as mutual funds and ETFs that invest in stocks (dividend stocks, preferred shares, REITs and the like) go into the stock category. All bonds, bond funds and bond ETFs go into the bond category. If you own funds or ETFs that include both stocks and bonds—target-date funds, balanced funds, equity-income funds, etc.—plug their name or ticker symbol into Morningstar’s Instant X-Ray tool and you’ll get a stocks-bonds breakdown. Once you’ve divvied up your holdings this way, you can easily calculate the percentage of your nest egg that’s invested in stocks and in bonds.

2. Estimate the downside. It’s impossible to know exactly how your investments will perform in a major meltdown. But you can at least estimate the potential hit based on how your portfolio would have fared in past severe setbacks.

In the financial crisis year of 2008, for example, the Standard & Poor’s 500 index lost 37% of its value, while the broad bond market gained just over 5%. So if you’ve got 70% of your retirement portfolio in stocks and 30% in bonds, you can figure that in a comparable downturn your nest egg would lose roughly 25% of its value (70% of -37% plus 30% of 5% equals 24.4%—we’ll call it 25%). If your portfolio consists of a 50-50 mix of stocks and bonds, its value would drop about 15%.

Remember, you’re not trying to predict precisely how the market will perform during the next crash. You just want to make a reasonable estimate of what kind of hit your retirement savings might take so you can get an idea of what size nest egg you may end up with when things get ugly.

3. Assess the impact on your retirement. Go to a retirement income calculator that uses Monte Carlo simulations and enter your nest egg’s current value as well as such information as your age, income, when you plan retire, how your savings are invested and how much you’re saving each year (or spending, if you’re already retired). You’ll come away with the percentage chance that you’ll be able to generate the income you’ll need throughout retirement based on things as they stand now. Consider this your “before crash” estimate. Then, get an “after crash” estimate by plugging in the same info, but substituting your nest egg’s projected value after a downturn from step 2 above.

You’ll now be able to gauge the potential impact of a market crash on your retirement prospects. For example, if you’re 45, earn $80,000 a year, contribute 10% of pay to a 401(k) 70% in stocks and 30% in bonds that has a current balance of $350,000, you have roughly a 70% chance of being able to retire on 75% of pre-retirement salary, according to T. Rowe Price’s Retirement Income Calculator. Were your portfolio’s value were to drop 25% to $262,500 in a crash, your probability of retirement success would fall to 55% or so.

Once you see how a major setback might affect your retirement prospects, you can consider ways to protect yourself. For someone like our fictional 45-year-old above, switching to a more conservative portfolio probably isn’t the answer since doing so would also lower long-term returns, perhaps reducing the odds of success even more. Rather, a better course would be to consider saving more. And, in fact, by boosting the savings rate from 10% to 15%, the level recommended by many pros as a reasonable target, the post-crash probability of success rises almost to where it was originally.

If you’re closer to or already in retirement, however, the proper response to a precipitous drop in the odds of retirement success could be to invest more cautiously, perhaps by devoting a portion of your nest egg to an annuity that can generate steady, assured income. Or you may want to maintain your current investing strategy and focus instead on ways you can cut spending, should it become necessary, so you can withdraw less from your portfolio until the markets recover.

Truth is, there’s a whole range of actions you might take—or at least consider—that could put you in a better position to weather a market crash (or, for that matter, provide a measure of protection against other setbacks, such as job loss or health problems). But unless you go through this sort of stress test, you can’t really know what effect a big market setback might have on your retirement plans, or what steps might be most effective.

So run a scenario or two (or three) now to see how you fare, assuming different magnitudes of losses and different responses. Or you can just wait until the you know what hits the fan, and then scramble as best you can.

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.

More From RealDealRetirement.com

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3 Simple-But-Effective Portfolios For 2015 And Beyond

The Best Ways To Invest For Retirement Income

MONEY money management

7 Super Simple Ways to Simplify Your Finances in 2015

150105_FF_Simplify_1
Tay Junior/Getty Images

Make this the year you finally take control of your money—instead of letting it control you.

With the New Year comes a new chance to get a handle on your finances, and though the task may feel daunting, it’s not impossible.

Today’s technology can make it a lot easier to manage your accounts efficiently. So vowing to simplify your finances in 2015 could end up being the most manageable resolution you make this year.

Before the year gets into full swing—and the rest of your life gets complicated!—take these steps to streamline your financial life.

1. Figure Out What’s Important to You

The more financial objectives you have on your plate, the more challenging it will be to accomplish any of them, given the limited resources of time and money.

For best results, concentrate on between three and five financial goals at a time.

And be very specific about what you want, says Ellen S. Rogin, a Northfield, Ill. financial planner and author of Picture Your Prosperity. Having a clear picture helps you figure out what actions you need to take to accomplish your objective.

There are many different ways to prioritize and clarify your goals. You could write each down on an index card in great detail, then sort based on your gut, for example. But Rogin warns about getting too wrapped up in the analytical approach.

She says it’s often more effective to spur your creative juices—journaling, meditating or drawing pictures of what you want out of life, now and in the future.

2. Make Good Habits Automatic

When people are left to their own devices, they are typically not very proactive about their finances, says Bob Wander, financial planner and founder of Wander Financial Services in New York.

“Thus, for saving money,” he adds, “it has to be automatic, whether 401(k) payroll deduction or direct deposit from a bank account.”

So if you really want to save for a goal, decide now how much you want to stash each month and have that money moved from your account on payday. If you never see it, you’ll never miss it.

With your 401(k), you may even have the option to automatically increase your contributions annually on a date of your choosing (the month you expect to get a raise is a good one, since you won’t feel any pinch).

To avoid getting hit with expensive late fees, Wander also suggests setting up automatic payment for your bills. This may take 30 minutes or so to set up, but then you’ll never have to worry about making timely payments again. (You will need to make sure you have enough money in your account, but steps 5 and 6 should help with that.)

3. Buy One Fund—and Be Done

Is the dizzying array of investment choices in your 401(k) paralyzing you from investing at all? Or do you own 20 funds in hopes of having picked at least some of the right ones?

Target-date mutual funds can be particularly useful for people who feel uncomfortable creating an investment strategy, says Kristi Sullivan, financial planner and owner of Sullivan Financial Planning in Denver.

You select one of these based on the year you want to retire, and with just one single fund in your portfolio, you’re automatically exposed to a variety of stocks and bonds. What’s more, your asset allocation is automatically rebalanced based on your time horizon until retirement, growing more conservative as time goes on to protect the money you’ve accumulated.

Two thirds of 401(k) plans offer target-date funds, according to the most recent survey from the Plan Sponsor Council of America.

4. Consolidate Investment Accounts

According to the Bureau of Labor Statistics, U.S. employees have a median job tenure of 4.6 years, and that number is even lower for millennials. Transitioning to a new job is exciting, but don’t forget about your old 401(k) during the move.

“It’s harder to understand your finances when you have 401(k) plans with three or four former employers,” says Andrew Tupler, a financial planner in Bridgewater, N.J.

You can rollover your 401(k)s into an IRA. And with all your old retirement funds in one place, it’s easier to divide your money into the most effective asset allocation, make changes to beneficiary designations or addresses, and to pull money out during retirement, he adds.

5. Get a Check and Balance for your Checks and Balances

It’s good financial practice to monitor your bank and credit card account activity on a regular basis, Wander says. That way, you can spot and report any fraudulent activity early (which helps limit your liability), make sure you’re not overdrawing your bank accounts, and prevent yourself from spending more than you can manage on credit cards.

But who remembers to check every day?

Fortunately, most banks and credit cards allow customers to set up online alerts that do much of the monitoring for you.

While you should still review transactions yourself periodically, these alerts can let you know when you’re approaching a certain balance and when any unusual purchases have been made. You may even be able to set the dollar amounts for balances or purchases.

Additionally, for credit cards, you can set payment reminders. That way, if you won’t get hit with a late fee (which averages $35, according to CreditCards.com).

6. Get the Bigger Picture

Online financial tool Mint.com allows you to see your bank accounts, investments, credit cards, loans, and credit scores in one place in real time. And you have the ability to access that information anywhere, whether you’re on your work computer, smartphone or home PC, says Jorge Padilla, a client advisor at Lubitz Financial Group in Miami.

This gives you a broader picture of your finances, and ensures that you have all your financial information at your fingertips if you need to make a decision at the spur of the moment, Padilla says. Plus, having your investments together will make it easier to match up gains and losses during tax season.

The tool also allows you to create a custom budget. But it makes the otherwise laborious task of tracking your expenses automatic, by categorizing your purchases for you and totaling up the amount you spend per category.

Additionally, you can print reports or export data into Excel or Quicken—which allows for easy collaboration with your tax preparer come April, Padilla notes.

7. Pool Your Plastic

Transferring credit card balances on high-interest rate cards to one with a lower rate may help you consolidate your monthly payments and save on interest—though keep in mind that some of these cards have upfront fees of around 3% of the balance that erode some of the benefits.

So, if you expect to be able to pay off your debt in 15 months, go for MONEY’s 2014 pick for best balance transfer card, Chase Slate. You get a rate of 0% for that long and no balance transfer fee if you move your debt within the first two months. But after the 15 months, the rate resets to an APR that starts between 13% and 23%.

Need longer than 15 months to zero out your debt? Lake Michigan Credit Union Prime Platinum Visa has no balance transfer fee and the ongoing APR starts at 6%—which is about the lowest out there.

If you do transfer the balance, you might be tempted to close the old account to ward off any future temptations—but this may do more harm than good, says John Ulzheimer, a credit expert for CreditSesame.com. Since you will still have the same amount of debt but less available credit, your debt-to-limit ratio will increase, and that’s a number credit agencies pay close attention to in calculating your credit score.

A better move, if you’re worried about using the cards again: Shred them rather than canceling them. You’ll still have the credit line in your name, but you won’t have the temptation in your wallet.

More on resolutions from Money.com:

MONEY Markets

3 Key Lessons Investors Can Take From 2014

NYSE New York Stock Exchange
Stephen Chernin—Getty Images

The market was up, the market was down, but the smart money held steady.

Many investors will look back on 2014 as an exciting year during which the stock market hit new highs and delivered impressive returns. Then again, some of those very same investors may also remember 2014 as an anxious, uncertain time when stocks often seemed on the verge of flaming out.

So, what can you learn from such an up-and-down (and back up) year?

Here are three key lessons from 2014 that you can apply to your investing for 2015 and beyond.

1. Don’t give in to gut reactions. Unless something goes drastically wrong in the last few trading days of the year, stocks will deliver double-digit gains in 2014. But it’s hardly been a smooth ride, with stock prices dipping by 4% or more five times during the year. Indeed, the year got off to a rocky start with disappointing earnings and a lackluster manufacturing report pushing the Dow Jones Industrial Average down 7% by early February.

The problem is that when the market falters, it’s virtually impossible to tell whether it’s the start of something big or a minor setback from which stocks will quickly rebound. If you cut and run every time it looks like stocks might melt down, you can miss out on big gains if stocks recover and move to higher ground, as they did five times this year.

So how do you reap stocks’ rewards without becoming an emotional wreck during crashes? You create a mix of assets based on your tolerance for risk that gives you a shot at the returns you need while offering adequate downside protection. In other words, you diversify. Which brings us to the second lesson…

2. Diversification works—but you may not always like the results. If you had invested 100% of your money in a Standard & Poor’s 500 index fund at the beginning of the year, reinvested dividends, and ridden out the market’s ups and downs, you would be sitting on a double-digit gain going into the last week of the year.

But if you had expanded your holdings to include bonds, you would have earned less, as the broad bond market was on pace to earn less than half the S&P 500’s return. And if you had broadened your holdings still further into foreign shares, your portfolio’s return would have dipped even more, as international stocks were down roughly 3% heading into the last few days of the year.

Does that mean diversification didn’t work? Not at all. You don’t diversify to maximize return. You do it to manage risk. Spreading your money around limits your downside by assuring that you’ll never have all your money in the worst-performing assets. It also dampens the swings in your portfolio’s value. Lower volatility makes building a nest egg less of a crap shoot in which you either win big or lose big and also helps reduce your chances of running through your savings too soon when you begin tapping your nest egg in retirement.

There will always be years in which you’ll wish you’d had more money in some assets than others. But you can take comfort from the fact that it’s impossible to know in advance what those assets will be. U.S. stocks creamed foreign shares this year; the reverse was true in 2004 through 2007. Diversifying assures you’ll have at least some money in the better performers every year. Just don’t overdo it, turning diversification into di-worse-ification.

3. Ignore the investing noise. Virtually every time the stock market experienced a setback this year, some putative sage or another stepped forward to warn of impending doom and/or recommend fleeing stocks for more defensive investments. And, of course, in 2014 as in previous years market watchers warned of of a coming bond-market collapse. Which didn’t happen, again. In fact, the broad bond market is headed toward a return of more than 5% this year, while it appears long-term Treasuries will actually outperform stocks with a 20%-plus return.

If you draw no other lesson from 2014, at least hold on to this one: Don’t be swayed by the cacophony of pundits and advisers with their predictions and prognostications, telling you to buy this investment, sell that one, or move your money from here to there. Once you’ve settled on a mix of assets that jibes with your goals and appetite for risk, stick to it. That was the right thing to do in 2014, as it will be in 2015 and beyond.

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

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MONEY Warren Buffett

Warren Buffett and Bill Gates Agree—This Factor Was Most Important for their Success

Berkshire Hathaway Chairman and CEO Warren Buffett.
Nati Harnik—AP Berkshire Hathaway Chairman and CEO Warren Buffett.

Focus is one of the most important traits of successful people.

Warren Buffett, Steve Jobs, and Bill Gates have all attributed their success to one factor. In fact, this one trait is behind the success of all people that have performed massively better than the average person. Read on to find out what the trait is and how you can put it into practice in your own life and investing.

The most important factor for success

According to Alice Schroeder, in 1991 when Bill Gates’ dad asked Buffett and Gates what the most important factor for their success was, they both gave the same answer, “focus.”

Gates’ focus was illustrated in Walter Isaacson’s new book The Innovators, as well as Gates’ fellow Microsoft co-founder Paul Allen:

One trait that differentiated the two was focus. Allen’s mind would flit between many ideas and passions, but Gates was a serial obsessor.

“Where I was curious to study everything in sight, Bill would focus on one task at a time with total discipline,” said Allen. “You could see it when he programmed. He would sit with a marker clenched in his mouth, tapping his feet and rocking; impervious to distraction.”

Steve Jobs was the same way; he was relentlessly focused on attacking problems searching for the best answer. Apple’s founding marketing philosophy had three main tenets the second of which is focus:

In order to do a good job of those things we decide to do we must eliminate all of the unimportant opportunities.

Focus was key for Buffett as well, Schroeder writes: “He ruled out paying attention to almost anything but business—art, literature, science, travel, architecture—so that he could focus on his passion.”

Why is this so important?

In life and investing, you need to be relentlessly focused on your goals if you want to have better than average results.

Differentiation

To stick out from the crowd, you need to do something better than everyone else. There’s no standard definition of what “better” is though. McDonald’s does low prices and quick drive through service while Chipotle does massive burritos with a great service culture. They both have been wildly successful as they focus on doing one thing well.

What gets companies and people into trouble is when they try and do too much, leading to mediocrity.

McDonalds has been suffering lately as its menu has grown to accommodate so many different items that is has gotten unwieldy, leading to a confusing menu and longer wait times.

Apple was a disaster with 350 different products before Jobs came back in 1998. He refocused the business around the customer experience, simplifying Apple’s focus to just 10 products. Everyone knows the rest of the story.

Successful investing

Like success in life and business, to be successful in investing, you need focus and time if you want to do better than average. As Warren Buffett has explained,

“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”

Just getting to average performance is hard enough. While by definition, the average investor cannot do better than average, the average investor would do nearly 80% better if he or she simply earned the average market return. Most investors would be better off in index funds.

The first key part to be successful is to learn the mistakes that hold people back and avoid them. For investors these include being too active, overconfident, loss-averse, taking on debt to invest, and making rash decisions based on daily market movements, among others.

The second part is to know what your goals are and have a process where you constantly learn, think independently, and quickly try and figure out when you are wrong. You need to go put in the effort so that you can evaluate a selection of businesses and build a circle of competence, that is a set of businesses and industries that you can understand and can independently evaluate. Only then will you be able to select businesses whose values are misjudged by the market, providing an opportunity for you to profit. To get to that point, Buffett suggests:

Read 500 pages like this [annual reports, trade journals, etc.] every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.

Most people don’t do this. The key is to realize the limits of your knowledge, you can’t know and be good at everything. For this reason, most people shouldn’t try and invest in stocks to beat the market since they can’t put in the time and focus.

However, by learning about investing and how to evaluate businesses you build knowledge that will help you understand your job better, your industry better, and everyday life better. As Buffett has said,

“I am a better investor because I am a businessman and I am a better businessman because I am an investor.”

Investing is a lifelong journey, not a sprint. If you are willing to put in the time and focus, a commitment to learning how to invest will pay dividends for the rest of your life.

MONEY Food & Drink

Chipotle CEO Freely Admits He’s Unsure About the Company’s Future

A restaurant worker fills an order at a Chipotle restaurant in Miami, Florida.
Joe Raedle—Getty Images

And that's great news for investors.

When Chipotle Mexican Grill CHIPOTLE MEXICAN GRILL INC. CMG 0.59% released third-quarter results in October, the numbers were awe-inspiring.

Revenue jumped 31.1% year over year to $1.08 billion, helped by an amazing 19.8% increase in comparable-restaurant sales. Meanwhile, restaurant level operating margin climbed by 200 basis points to 28.8%, cash generated from operating activities rose 41.4% to $549.8 million, and net income increased a whopping 56.9% to $130.8 million.

However, the market was much less enthusiastic about Chipotle’s guidance, driving shares down 7% after the burrito maker called for 2015 comparable-restaurant sales to increase in the low- to mid-single digit range. During the subsequent conference call, analysts unsurprisingly grilled Chipotle management on exactly how they reached that range. After all, it seemed especially conservative considering Chipotle’s Q3 performance had just capped a six-quarter streak of accelerating comps growth.

Chipotle doesn’t have a clue

Here’s how Chipotle Chairman and co-CEO Steve Ells responded:

We don’t spend a lot of time trying to predict how we are going to leap over that number. What we do is, we take our current sales trends and we literally just push them out over the next 14 months — for the rest of this year and then for all of 2015. … This is the way we have always predicted comps. … [W]e really don’t have a magic approach or a crystal ball to predict how you are going to exceed like a 19% comp, for example.

Translation? Chipotle is happily ignorant when it comes to determining precisely what future comps will be. The company simply extrapolate sales trends out, as it always has, to get a rough ballpark figure of what the coming year might look like.

Why this is a great thing

And to be honest, though that might seem unsettling, I think Chipotle investors should be perfectly happy with this approach for two reasons.

First, though it’s true comps give us an idea of how effectively Chipotle is drawing in new customers and keeping them coming back for more, it’s far from a perfect metric to gauge the long-term prospects of the business. Comps tend to naturally ebb and flow with irregular events like price increases, as well as difficult (or easy) year-over-year comparisons. In the end, I’m relatively unconcerned that Chipotle’s not-so-scientific approach at modeling comps predicts it may finally decelerate growth from 19.8% — which, by the way, was its best result since going public in 2006.

On the other hand, I suppose near-term disappointments with comparable-store sales do create buying windows for opportunistic investors.

Second, note Chipotle is focusing on what really matters instead. Ells elaborated:

We are constantly working on improving our customer experience, we are constantly working on improving our people culture, and we are constantly looking to upgrade the quality of our ingredients. … So we are constantly working on the things that will enhance the dining experience. And over the years it has paid off, so that when we do a good job, when we have great teams, and when they do a good job of providing a great dining experience, customers want to come back to Chipotle more often.

Notice nowhere in that comment were actual comps mentioned. Rather, Ells has a singular focus on improving the Chipotle experience for customers, from fostering its amiable culture all the way down to improving the quality of its already excellent food.

In short, he’s thinking about Chipotle Mexican Grill not just as a stock ticker or piece of paper, but rather as the living, thriving, growing business it truly is. From an investor’s standpoint, it’s hard to think of a better way to create shareholder value than that.

MONEY IRAs

The Best Way to Tap Your IRA In Retirement

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

Q: I am 72 years old and subject to mandatory IRA withdrawals. I don’t need all the money for my expenses. What should I do with the leftover money? Jay Kahn, Vienna, VA.

A: You’re in a fortunate position. While there is a real retirement savings crisis for many Americans, there are also people with individual retirement accounts (IRAs) like you who don’t need to tap their nest egg—at least not yet.

Nearly four out of every 10 U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a study by the Investment Company Institute. At Vanguard, 20% of investors with an IRA who take a distribution after age 70 ½ put it into another taxable investment account with the company.

The government forces you to start withdrawing your IRA money when you turn 70½ because the IRS wants to collect the income taxes you’ve deferred on the contributions. You must take your first required minimum distribution (RMD) by April of the year after you turn 70½ and by December 31 for subsequent withdrawals.

But there’s no requirement to spend it, and many people like you want to continue to keep growing your money for the future. In that case you have several options, says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, look at your overall asset allocation and risk tolerance. Add the money to investments where you are underweight, Mingone advises. “You’ll get the most bang for your buck doing that with mutual funds or an exchange traded fund.“

For wealthier investors who are charitably inclined, Mingone recommends doing a direct rollover to a charity. The tax provision would allow you to avoid paying taxes on your RMD by moving it directly from your IRA to a charity. The tax provision expired last year but Congress has extended the rule through 2014 and President Obama is expected to sign it.

You can also gift the money. Putting it into a 529 plan for your grandchildren’s education allows it to grow tax free for many years. Another option is to establish an irrevocable life insurance trust and use the money to pay the premiums. With such a trust, the insurance proceeds won’t be considered part of your estate so your heirs don’t pay taxes on it. “It’s a tax-free, efficient way to leave more to your family,” Mingone says.

Stay away from immediate annuities though. “It’s not that I don’t believe in them, but when you’re already into your 70s, the risk you’ll outlive your capital is diminished,” says Mingone. You’ll be locking in a chunk of money at today’s low interest rates and there’s a shorter period of time to collect. “It’s not a good tradeoff for guaranteed income,” says Mingone.

Beyond investing the extra cash, consider just spending it. Some retirees are reluctant to spend the money they’ve saved for retirement out of fear of running out later on. With retirements that can last 30 years or more, it’s a legitimate worry. “Believe it or not, some people have a hard time spending it down,” says Mingone. But failure to enjoy your hard-earned savings, especially while you are still young enough and in good health to use it, can be a sad outcome too.

If you’ve met all your other financial goals, have some fun. “There’s something to be said for knocking things off the bucket list and enjoying spending your money,” says Mingone.

Update: This story was changed to reflect the Senate passing a bill to extend the IRS rule allowing the direct rollover of an IRA’s required minimum distribution to a charity through 2014.

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

Read next: How Your Earnings Record Affects Your Social Security

MONEY Stock trading

High School Student Rumored to Have Made $72 Million Trading Stocks

Stuyvesant High School at 345 Chamers Street, Manhattan, N.Y.
Craig Warga—NY Daily News via Getty Images 17-year-old (alleged) millionaire Mohammed Islam is a senior at Stuyvesant High School in New York City.

Published claims that a NYC high school student made a fortune trading securities turn out to be exaggerated.

[Editor’s note: See story update below.]

Well, here’s a creative way to make your college application stand out: Mohammed Islam, a senior at New York City’s Stuyvesant High School, has become a local celebrity with the publication of a profile in New York magazine that claims he’s made $72 million by trading stocks and other securities in between classes, homework, and extracurricular activities.

Islam, who also appeared on Business Insider‘s 20 under 20 list last year, says he has been trading stocks since he was 9, having been taught by an older cousin who now works at Goldman Sachs. Though he started off trading penny stocks, Islam says he’s made millions since then by betting on gold and crude oil futures, as well as small- and mid-cap stocks.

Depending on your perspective, this story could be read as an inspiring tale about the child of Bengali immigrants beating the odds. Or as a worrisome example of how Wolf of Wall Street-worship — along with a taste for bottle service, models, and BMWs — is corrupting our youth.

If the story is actually true — Islam told New York that his net worth is in the “high eight figures,” but it’s not clear where the $72 million figure came from and no documentation of his profits has yet appeared — it would be interesting to know a little something about his trading strategy. We’ll update if and when we hear from him; so far, Islam has not yet responded to our messages sent via Facebook.

Update: On December 15, Islam told CNBC’s Scott Wapner that he didn’t actually make $72 million trading; that he doesn’t know where the figure came from; that he in fact has made “a few million dollars” trading; and that he is uncomfortable with the way he was portrayed in New York. “The attention is not what we expected,” he told Wapner. “We never wanted the hype.” Later in the day, Islam admitted to New York Observer editor (and former MONEY columnist) Ken Kurson that he pretty much made up the whole story. In this December 16 article, I explain why nobody should have believed the story in the first place.

MONEY investing strategy

122 Ideas, Quotes, and Stats That Will Make You a Better Investor in 2015

Traders work on the floor of the New York Stock Exchange on November 21, 2014 in New York City.
Spencer Platt—Getty Images

Start the new year off right with this investing wisdom.

A year ago I started writing what I hoped would be a book called 500 Things you Need to know About Investing. I wanted to outline my favorite quotes, stats, and lessons about investing.

I failed. I quickly realized the idea was long on ambition, short on planning.

But I made it to 122, and figured it would be better in article form. Here it is.

1. Saying “I’ll be greedy when others are fearful” is easier than actually doing it.

2. When most people say they want to be a millionaire, what they really mean is “I want to spend $1 million,” which is literally the opposite of being a millionaire.

3. “Some stuff happened” should replace 99% of references to “it’s a perfect storm.”

4. Daniel Kahneman’s book Thinking Fast and Slow begins, “The premise of this book is that it is easier to recognize other people’s mistakes than your own.” This should be every market commentator’s motto.

5. Blogger Jesse Livermore writes, “My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything.”

6. As Erik Falkenstein says: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

7. There is a difference between, “He predicted the crash of 2008,” and “He predicted crashes, one of which happened to occur in 2008.” It’s important to know the difference when praising investors.

8. Investor Dean Williams once wrote, “Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same.”

9. Wealth is relative. As comedian Chris Rock said, “If Bill Gates woke up with Oprah’s money he’d jump out the window.”

10. Only 7% of Americans know stocks rose 32% last year, according to Gallup. One-third believe the market either fell or stayed the same. Everyone is aware when markets fall; bull markets can go unnoticed.

11. Dean Williams once noted that “Expertise is great, but it has a bad side effect: It tends to create the inability to accept new ideas.” Some of the world’s best investors have no formal backgrounds in finance — which helps them tremendously.

12. The Financial Times wrote, “In 2008 the three most admired personalities in sport were probably Tiger Woods, Lance Armstrong and Oscar Pistorius.” The same falls from grace happen in investing. Chose your role models carefully.

13. Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein: “He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.”

14. Investor Nick Murray once said, “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” Remember this the next time you’re compelled to cash out.

15. Bill Seidman once said, “You never know what the American public is going to do, but you know that they will do it all at once.” Change is as rapid as it is unpredictable.

16. Napoleon’s definition of a military genius was, “the man who can do the average thing when all those around him are going crazy.” Same goes in investing.

17. Blogger Jesse Livermore writes,”Most people, whether bull or bear, when they are right, are right for the wrong reason, in my opinion.”

18. Investors anchor to the idea that a fair price for a stock must be more than they paid for it. It’s one of the most common, and dangerous, biases that exists. “People do not get what they want or what they expect from the markets; they get what they deserve,” writes Bill Bonner.

19. Jason Zweig writes, “The advice that sounds the best in the short run is always the most dangerous in the long run.”

20. Billionaire investor Ray Dalio once said, “The more you think you know, the more closed-minded you’ll be.” Repeat this line to yourself the next time you’re certain of something.

21. During recessions, elections, and Federal Reserve policy meetings, people become unshakably certain about things they know very little about.

22. “Buy and hold only works if you do both when markets crash. It’s much easier to both buy and hold when markets are rising,” says Ben Carlson.

23. Several studies have shown that people prefer a pundit who is confident to one who is accurate. Pundits are happy to oblige.

24. According to J.P. Morgan, 40% of stocks have suffered “catastrophic losses” since 1980, meaning they fell at least 70% and never recovered.

25. John Reed once wrote, “When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles — generally three to twelve of them — that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.” Keep that in mind when getting frustrated over complicated financial formulas.

26. James Grant says, “Successful investing is about having people agree with you … later.”

27. Scott Adams writes, “A person with a flexible schedule and average resources will be happier than a rich person who has everything except a flexible schedule. Step one in your search for happiness is to continually work toward having control of your schedule.”

28. According to Vanguard, 72% of mutual funds benchmarked to the S&P 500 underperformed the index over a 20-year period ending in 2010. The phrase “professional investor” is a loose one.

29. “If your investment horizon is long enough and your position sizing is appropriate, you simply don’t argue with idiocy, you bet against it,” writes Bruce Chadwick.

30. The phrase “double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of “financial collapse” in 2006 and 2007. It did come. A similar story can be told virtually every year.

31. According to Bloomberg, the 50 stocks in the S&P 500 that Wall Street rated the lowest at the end of 2011 outperformed the overall index by 7 percentage points over the following year.

32. “The big money is not in the buying or the selling, but in the sitting,” said Jesse Livermore.

33. Investors want to believe in someone. Forecasters want to earn a living. One of those groups is going to be disappointed. I think you know which.

34. In a poll of 1,000 American adults, asked, “How many millions are in a trillion?” 79% gave an incorrect answer or didn’t know. Keep this in mind when debating large financial problems.

35. As last year’s Berkshire Hathaway shareholder meeting, Warren Buffett said he has owned 400 to 500 stocks during his career, and made most of his money on 10 of them. This is common: a large portion of investing success often comes from a tiny proportion of investments.

36. Wall Street consistently expects earnings to beat expectations. It also loves oxymorons.

37. The S&P 500 gained 27% in 2009 — a phenomenal year. Yet 66% of investors thought it fell that year, according to a survey by Franklin Templeton. Perception and reality can be miles apart.

38. As Nate Silver writes, “When a possibility is unfamiliar to us, we do not even think about it.” The biggest risk is always something that no one is talking about, thinking about, or preparing for. That’s what makes it risky.

39. The next recession is never like the last one.

40. Since 1871, the market has spent 40% of all years either rising or falling more than 20%. Roaring booms and crushing busts are perfectly normal.

41. As the saying goes, “Save a little bit of money each month, and at the end of the year you’ll be surprised at how little you still have.”

42. John Maynard Keynes once wrote, “It is safer to be a speculator than an investor in the sense that a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.”

43. “History doesn’t crawl; it leaps,” writes Nassim Taleb. Events that change the world — presidential assassinations, terrorist attacks, medical breakthroughs, bankruptcies — can happen overnight.

44. Our memories of financial history seem to extend about a decade back. “Time heals all wounds,” the saying goes. It also erases many important lessons.

45. You are under no obligation to read or watch financial news. If you do, you are under no obligation to take any of it seriously.

46. The most boring companies — toothpaste, food, bolts — can make some of the best long-term investments. The most innovative, some of the worst.

47. In a 2011 Gallup poll, 34% of Americans said gold was the best long-term investment, while 17% said stocks. Since then, stocks are up 87%, gold is down 35%.

48. According to economist Burton Malkiel, 57 equity mutual funds underperformed the S&P 500 from 1970 to 2012. The shocking part of that statistic is that 57 funds could stay in business for four decades while posting poor returns. Hope often triumphs over reality.

49. Most economic news that we think is important doesn’t matter in the long run. Derek Thompson of The Atlantic once wrote, “I’ve written hundreds of articles about the economy in the last two years. But I think I can reduce those thousands of words to one sentence. Things got better, slowly.”

50. A broad index of U.S. stocks increased 2,000-fold between 1928 and 2013, but lost at least 20% of its value 20 times during that period. People would be less scared of volatility if they knew how common it was.

51. The “evidence is unequivocal,” Daniel Kahneman writes, “there’s a great deal more luck than skill in people getting very rich.”

52. There is a strong correlation between knowledge and humility. The best investors realize how little they know.

53. Not a single person in the world knows what the market will do in the short run.

54. Most people would be better off if they stopped obsessing about Congress, the Federal Reserve, and the president, and focused on their own financial mismanagement.

55. In hindsight, everyone saw the financial crisis coming. In reality, it was a fringe view before mid-2007. The next crisis will be the same (they all work like that).

56. There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and a winning investment are two different things.

57. The more someone is on TV, the less likely his or her predictions are to come true. (University of California, Berkeley psychologist Phil Tetlock has data on this).

58. Maggie Mahar once wrote that “men resist randomness, markets resist prophecy.” Those six words explain most people’s bad experiences in the stock market.

59. “We’re all just guessing, but some of us have fancier math,” writes Josh Brown.

60. When you think you have a great idea, go out of your way to talk with someone who disagrees with it. At worst, you continue to disagree with them. More often, you’ll gain valuable perspective. Fight confirmation bias like the plague.

61. In 1923, nine of the most successful U.S. businessmen met in Chicago. Josh Brown writes:

Within 25 years, all of these great men had met a horrific end to their careers or their lives:

The president of the largest steel company, Charles Schwab, died a bankrupt man; the president of the largest utility company, Samuel Insull, died penniless; the president of the largest gas company, Howard Hobson, suffered a mental breakdown, ending up in an insane asylum; the president of the New York Stock Exchange, Richard Whitney, had just been released from prison; the bank president, Leon Fraser, had taken his own life; the wheat speculator, Arthur Cutten, died penniless; the head of the world’s greatest monopoly, Ivar Krueger the ‘match king’ also had taken his life; and the member of President Harding’s cabinet, Albert Fall, had just been given a pardon from prison so that he could die at home.

62. Try to learn as many investing mistakes as possible vicariously through others. Other people have made every mistake in the book. You can learn more from studying the investing failures than the investing greats.

63. Bill Bonner says there are two ways to think about what money buys. There’s the standard of living, which can be measured in dollars, and there’s the quality of your life, which can’t be measured at all.

64. If you’re going to try to predict the future — whether it’s where the market is heading, or what the economy is going to do, or whether you’ll be promoted — think in terms of probabilities, not certainties. Death and taxes, as they say, are the only exceptions to this rule.

65. Focus on not getting beat by the market before you think about trying to beat it.

66. Polls show Americans for the last 25 years have said the economy is in a state of decline. Pessimism in the face of advancement is the norm.

67. Finance would be better if it was taught by the psychology and history departments at universities.

68. According to economist Tim Duy, “As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy.”

69. Study successful investors, and you’ll notice a common denominator: they are masters of psychology. They can’t control the market, but they have complete control over the gray matter between their ears.

70. In finance textbooks, “risk” is defined as short-term volatility. In the real world, risk is earning low returns, which is often caused by trying to avoid short-term volatility.

71. Remember what Nassim Taleb says about randomness in markets: “If you roll dice, you know that the odds are one in six that the dice will come up on a particular side. So you can calculate the risk. But, in the stock market, such computations are bull — you don’t even know how many sides the dice have!”

72. The S&P 500 gained 27% in 1998. But just five stocks — Dell, Lucent, Microsoft, Pfizer, and Wal-Mart — accounted for more than half the gain. There can be huge concentration even in a diverse portfolio.

73. The odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are pretty high.

74. The book Where Are the Customers’ Yachts? was written in 1940, and most people still haven’t figured out that brokers don’t have their best interest at heart.

75. Cognitive psychologists have a theory called “backfiring.” When presented with information that goes against your viewpoints, you not only reject challengers, but double down on your view. Voters often view the candidate they support more favorably after the candidate is attacked by the other party. In investing, shareholders of companies facing heavy criticism often become die-hard supporters for reasons totally unrelated to the company’s performance.

76. “In the financial world, good ideas become bad ideas through a competitive process of ‘can you top this?'” Jim Grant once said. A smart investment leveraged up with debt becomes a bad investment very quickly.

77. Remember what Wharton professor Jeremy Siegel says: “You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds [after inflation]. So which is the riskier asset?”

78. Warren Buffett’s best returns were achieved when markets were much less competitive. It’s doubtful anyone will ever match his 50-year record.

79. Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. It’s a great business to work in — not so much to invest in.

80. The United States is the only major economy in which the working-age population is growing at a reasonable rate. This might be the most important economic variable of the next half-century.

81. Most investors have no idea how they actually perform. Markus Glaser and Martin Weber of the University of Mannheim asked investors how they thought they did in the market, and then looked at their brokerage statements. “The correlation between self ratings and actual performance is not distinguishable from zero,” they concluded.

82. Harvard professor and former Treasury Secretary Larry Summers says that “virtually everything I taught” in economics was called into question by the financial crisis.

83. Asked about the economy’s performance after the financial crisis, Charlie Munger said, “If you’re not confused, I don’t think you understand.”

84. There is virtually no correlation between what the economy is doing and stock market returns. According to Vanguard, rainfall is actually a better predictor of future stock returns than GDP growth. (Both explain slightly more than nothing.)

85. You can control your portfolio allocation, your own education, who you listen to, what you read, what evidence you pay attention to, and how you respond to certain events. You cannot control what the Fed does, laws Congress sets, the next jobs report, or whether a company will beat earnings estimates. Focus on the former; try to ignore the latter.

86. Companies that focus on their stock price will eventually lose their customers. Companies that focus on their customers will eventually boost their stock price. This is simple, but forgotten by countless managers.

87. Investment bank Dresdner Kleinwort looked at analysts’ predictions of interest rates, and compared that with what interest rates actually did in hindsight. It found an almost perfect lag. “Analysts are terribly good at telling us what has just happened but of little use in telling us what is going to happen in the future,” the bank wrote. It’s common to confuse the rearview mirror for the windshield.

88. Success is a lousy teacher,” Bill Gates once said. “It seduces smart people into thinking they can’t lose.”

89. Investor Seth Klarman says, “Macro worries are like sports talk radio. Everyone has a good opinion which probably means that none of them are good.”

90. Several academic studies have shown that those who trade the most earn the lowest returns. Remember Pascal’s wisdom: “All man’s miseries derive from not being able to sit in a quiet room alone.”

91. The best company in the world run by the smartest management can be a terrible investment if purchased at the wrong price.

92. There will be seven to 10 recessions over the next 50 years. Don’t act surprised when they come.

93. No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.

94. The president has much less influence over the economy than people think.

95. However much money you think you’ll need for retirement, double it. Now you’re closer to reality.

96. For many, a house is a large liability masquerading as a safe asset.

97. The single best three-year period to own stocks was during the Great Depression. Not far behind was the three-year period starting in 2009, when the economy struggled in utter ruin. The biggest returns begin when most people think the biggest losses are inevitable.

98. Remember what Buffett says about progress: “First come the innovators, then come the imitators, then come the idiots.”

99. And what Mark Twain says about truth: “A lie can travel halfway around the world while truth is putting on its shoes.”

100. And what Marty Whitman says about information: “Rarely do more than three or four variables really count. Everything else is noise.”

101. Among Americans aged 18 to 64, the average number of doctor visits decreased from 4.8 in 2001 to 3.9 in 2010. This is partly because of the weak economy, and partly because of the growing cost of medicine, but it has an important takeaway: You can never extrapolate behavior — even for something as vital as seeing a doctor — indefinitely. Behaviors change.

102. Since last July, elderly Chinese can sue their children who don’t visit often enough, according to Bloomberg. Dealing with an aging population calls for drastic measures.

103. Someone once asked Warren Buffett how to become a better investor. He pointed to a stack of annual reports. “Read 500 pages like this every day,” he said. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

104. If Americans had as many babies from 2007 to 2014 as they did from 2000 to 2007, there would be 2.3 million more kids today. That will affect the economy for decades to come.

105. The Congressional Budget Office’s 2003 prediction of federal debt in the year 2013 was off by $10 trillion. Forecasting is hard. But we still line up for it.

106. According to The Wall Street Journal, in 2010, “for every 1% decrease in shareholder return, the average CEO was paid 0.02% more.”

107. Since 1994, stock market returns are flat if the three days before the Federal Reserve announces interest rate policy are removed, according to a study by the Federal Reserve.

108. In 1989, the CEOs of the seven largest U.S. banks earned an average of 100 times what a typical household made. By 2007, more than 500 times. By 2008, several of those banks no longer existed.

109. Two things make an economy grow: population growth and productivity growth. Everything else is a function of one of those two drivers.

110. The single most important investment question you need to ask yourself is, “How long am I investing for?” How you answer it can change your perspective on everything.

111. “Do nothing” are the two most powerful — and underused — words in investing. The urge to act has transferred an inconceivable amount of wealth from investors to brokers.

112. Apple increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days. It is never a straight path up.

113. It’s easy to mistake luck for success. J. Paul Getty said, the key to success is: 1) rise early, 2) work hard, 3) strike oil.

114. Dan Gardner writes, “No one can foresee the consequences of trivia and accident, and for that reason alone, the future will forever be filled with surprises.”

115. I once asked Daniel Kahneman about a key to making better decisions. “You should talk to people who disagree with you and you should talk to people who are not in the same emotional situation you are,” he said. Try this before making your next investment decision.

116. No one on the Forbes 400 list of richest Americans can be described as a “perma-bear.” A natural sense of optimism not only healthy, but vital.

117. Economist Alfred Cowles dug through forecasts a popular analyst who “had gained a reputation for successful forecasting” made in The Wall Street Journal in the early 1900s. Among 90 predictions made over a 30-year period, exactly 45 were right and 45 were wrong. This is more common than you think.

118. Since 1900, the S&P 500 has returned about 6.5% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

119. How long you stay invested for will likely be the single most important factor determining how well you do at investing.

120. A money manager’s amount of experience doesn’t tell you much. You can underperform the market for an entire career. Many have.

121. A hedge fund once described its edge by stating, “We don’t own one Apple share. Every hedge fund owns Apple.” This type of simple, contrarian thinking is worth its weight in gold in investing.

122. Take two investors. One is an MIT rocket scientist who aced his SATs and can recite pi out to 50 decimal places. He trades several times a week, tapping his intellect in an attempt to outsmart the market by jumping in and out when he’s determined it’s right. The other is a country bumpkin who didn’t attend college. He saves and invests every month in a low-cost index fund come hell or high water. He doesn’t care about beating the market. He just wants it to be his faithful companion. Who’s going to do better in the long run? I’d bet on the latter all day long. “Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ,” Warren Buffett says. Successful investors know their limitations, keep cool, and act with discipline. You can’t measure that.

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TIME Investing

This New App Makes It Way Cheaper to Trade Stocks

Robinhood
Robinhood Robinhood

Robinhood wants to convince Millennials to dip a toe into the stock market

Next up for disruption by the Silicon Valley set: Wall Street.

A new startup is aiming to convince Millennials to dip a toe into the stock market by making it cheaper and easier to buy securities. Robinhood, a new mobile-first brokerage that launched its iOS app today, lets users buy U.S.-listed stocks without paying a commission, a cost that typically runs individual investors $7 to $10 per trade.

The app’s slick interface lets users buy securities, track stock performance and keep tabs on their overall portfolio. Users don’t even have to maintain a minimum account balance, a common requirement of similar stock-swapping services.

“People in our age group were not being exposed to what we consider a pretty useful tool for building your wealth,” says Robinhood co-founder Vlad Tenev. He and co-founder Baiju Bhatt launched Robinhood in beta for a few thousand users earlier this year. Already half a million people have signed up to request the app, indicating a heavy appetite for cheaper trades. These users will begin being on-boarded to the app today, and newcomers can download the app to join the waitlist and view different stocks.

The company, which has netted $16 million in venture funding from backers like Andreessen Horowitz and Google Ventures, plans to make money by letting investors trade on margin (basically issuing loans to let customers buy additional stock).

Whether or not young investors really need a service that lets them buy stocks “as quickly as you can call an Uber,” as Bhatt puts it, is an open question. Most active stock pickers fail to outperform the overall stock market. During the first 9 months of 2014, only 9.3% of actively managed mutual funds outperformed the S&P 500, according to the Wall Street Journal — and those funds are managed by people whose job is to be good at picking stocks.

Tenev argues that stock-picking is a good way for young people to learn about investing. “It makes a lot of sense for a first-time investor who is an early adopter of technology and discovers companies through using their products and services,” he says.

That advice flies in the face of a lot of collective wisdom about investing, including from famed businessman Warren Buffet. But for those that are still confident they can beat the market and would like to attempt it more affordably, Robinhood will also be available on Android and on desktop soon.

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