MONEY Saving

WATCH: Tips From the Pros: The Secret to Financial Success

Financial experts reveal the one thing you must do to build wealth.

MONEY stocks

WATCH: Insider Trading is More Widespread Than You Thought

According to a new study, nearly 25 percent of all public company deals involve some insider trading.

MONEY Retirement

Eco Disaster: Lessons from Greenpeace’s Currency Bet Gone Bad

The global peace and sustainability nonprofit lost a bundle betting on currencies. Here's what you can learn from the mistake.

Superstars from Tiger Woods to Warren Buffett tell us the secret to their success is keeping it simple. So why would a donor-dependent, globally recognized nonprofit take a macro-economic flyer on which way currencies will move?

More important: What can the disastrous Greenpeace International bet on the direction of the euro tell us about how we handle our own financial matters? Greenpeace, which is quite good at promoting peace and sustainability, is really bad at macro analysis. Sometime last year the organization lost $5.2 million—more than 6% of its annual budget—when it bet wrongly against a rising euro.

This large loss came to light only this week, and it’s too soon to know its full effect. The organization says a financial pro on its staff overstepped and has been fired, and that the loss will not lead to a penny being cut from its causes. Still, it’s hard to believe that at least some donors won’t bristle and hold back donations. The consequences promise to go beyond simple embarrassment.

One lesson here is that currency speculation is a tricky business and best left to hedge fund managers like George Soros. If you must engage in currency bets alone, do so with only a small fraction of your savings and through straightforward international government bond funds. These pay interest in local currency and thus represent a foreign exchange bet. You might also consider a currency ETF from leaders CurrencyShares and WisdomTree.

The bigger lesson, though, is that it really does pay to keep things simple when investing. As Buffett writes in this year’s annual letter to shareholders:

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

Complexity is all around us. Exotic mortgages sunk millions of homeowners in the Great Recession. Unimaginably arcane financial derivatives contributed to the demise of Lehman Bros. and downfall of Bear Stearns, among other investment banks, during the financial collapse. Even bankers didn’t know quite what they were doing—not unlike the hapless, rogue finance staffer making a wrong-way bet on the euro for Greenpeace.

Individuals can make things as difficult or as easy as they want when they save and invest. Annuities are especially hot right now. Many people shy away from them because they believe all of them to be complex, and many others end up in the wrong type of annuity (and many other insurance products) because so many truly are complex. Yet for most people just looking to lock up guaranteed lifetime income, the venerable immediate or deferred immediate annuity are a sound and simple option.

Likewise, you can prospect for the hottest stock funds, only to be disappointed once you plunk down your dollars and see them eaten away by lackluster returns and high expenses—or you can choose low-fee diversified stock index funds, or maybe a target-date mutual fund, sleep well, and check back in just once a year to rebalance. Why layer chance on top of investment risk? You are good at something else, not macroeconomic analysis.

Reports suggest that the wayward Greenpeace employee was not nest feathering but trying to do the right thing for the future of the organization. Still, it went bad—even for someone in finance. As with many endeavors, when it comes to money, better to do as Buffett says and just keep it simple.

MONEY 401(k)s

Do I Really Need Foreign Stocks in My 401(k)?

Foreign stocks are supposed be a great way to diversify and get better returns. But these days? Not so much.

It’s long been a basic rule of retirement planning—allocate a portion of your 401(k) or IRA to international stocks for better diversification and long-term growth. But I’m not really sure those reasons hold up any more.

Better diversification? Take a look at the top holdings of your domestic large-cap or index stock fund. You’ll find huge multinationals that do tons of business overseas—Apple, Exxon, General Electric. Investing abroad and at home are close to being the same thing, as we saw during the financial crisis in 2008, when all our developed global markets fell together.

As for growth, we’ve been told to look to the booming emerging markets—only they don’t seem to be emerging much lately. Even as the U.S. stock indexes have been reaching all-time highs, the MSCI emerging markets benchmark has had three consecutive sell-offs in 2012, 2013 and 2014, missing out on a huge recovery. That’s diversification, but not in the direction I want for my SEP-IRA that I’m trying to figure out how to invest. (See “My 6 % Mistake: When You’ve Saved Too Little For Retirement.”)

Some market watchers have pointed out that after two decades, the countries that were once defined as emerging—China, Brazil, Turkey, South Korea—are now in fact mature, middle-income economies. If you’re looking for high-octane growth, you should really be considering “frontier” markets, funds that invest in tiny countries like Nigeria and Qatar.

That’s all well and good. But when it comes to Nigeria, I don’t really feel confident investing in a country where 200 schoolgirls get kidnapped and can’t be found. As for Qatar, it’s awfully exposed to unrest in the Middle East. (Dubai shares just tumbled, triggered by escalating violence in the Iraq.)

Twenty years ago, I was more than game for emerging markets and loved getting the prospectus statements for funds listing then exotic-sounding companies like Telefonas de Mexico and Petrobras. But I just don’t think I have the stomach, or the long time horizon, for it anymore.

My new skittishness around international stocks may be signaling a bigger shift in my investing style from growth to value, the gist of which is this: since you can’t always predict which stocks will grow, the best thing you can do is to focus on price. Quite simply, value investors don’t want to pay more for a stock than it is intrinsically worth. (Growth investors, by contrast, are willing to spend up for what they expect will be larger earnings increases.) By acquiring stocks at a discount to their value, investors hope profit when Wall Street eventually recognizes their worth and avoid overpriced stocks that are doomed to fall.

As Benjamin Graham, the father of value investing, wrote in his 1949 classic, “The Intelligent Investor,” “The habit of relating what is paid to what is being offered is an invaluable trait in an investment.” (Warren Buffett, among many others, consider “The Intelligent Investor” to be the investing bible. ) “For 99 issues out of 100 we could say that at some price they are cheap enough to buy and some other price they would be so dear that they should be sold,” Graham also wrote. And he famously advised that people should buy stocks the way they buy their groceries, not the way they buy their perfume, a lesson in price sensitivity that I immediately understand and agree with.

Looking at the international question through a value vs. growth lens, my choice is seems more clear—at least on one level. If emerging markets are down, now is probably a good time to buy. But the biggest single country exposure in the MSCI Emerging Markets Index is China, at 17%, and it might be on the brink of a major bubble.

It seems a bargain-hunting investing approach isn’t always that much safer, and I’m wondering if it might be worth paying more at times to avoid obvious trouble. Still, I’ve only just discovered my inner value investor. I’m going to keep reading Benjamin Graham and will let you know.

Ruth Davis Konigsberg, a fortysomething journalist and consultant to Arden Asset Management, writes weekly about retirement planning.

MONEY retirement income

To Invest for Retirement Safely, Know When to Get Out of Stocks

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Bill Bernstein Joe Pugliese

Investment adviser William Bernstein says there's no point in taking unnecessary risks. When you near retirement, shift your portfolio to safe assets.

A former neurologist turned investment adviser turned writer, William Bernstein has won respect for his ability to distill complex topics into accessible ideas. After launching a journal at his website, EfficientFrontier.com, he began writing numerous books, including “The Four Pillars of Investing” and “If You Can: How Millennials Can Get Rich Slowly.” (“If You Can,” normally $0.99 on Kindle, is free to MONEY.com readers on June 16.) His latest, “Rational Expectations: Asset Allocation for Investing Adults,” is written for advanced investors. But Bernstein, who manages money from his office in Portland, Oregon, is happy to break down the basics.

Q. Retirement investors have traditionally aimed to build the biggest nest egg possible by age 65. You recommend a different approach: figuring out how much you’ll need to spend in retirement, then choosing investments that will deliver that income. Why is this strategy a better one than the famous rule of withdrawing 4% of your portfolio?

There’s really nothing wrong with the 4% rule. But given the lower expected portfolio returns ahead, starting out with a 3.5% withdrawal, or even 3.0%, might be more appropriate.

It also makes a big difference whether you start out withdrawing 4% of your nest egg and increasing that amount by inflation annually, or withdrawing 4% of whatever you’ve got in your portfolio each year. The 4%-of-current-portfolio-value strategy may mean lower income in some years. But it is a lot safer than automatically increasing the initial withdrawal amount with inflation.

I also think that it makes sense to divide your portfolio into two separate buckets. The first one should be designed to safely meet your living expenses, above and beyond your Social Security and pension checks. In the second portfolio you can take investing risk in stocks. This approach is certainly a more psychologically sound way of doing things. Investing is first and foremost a game of psychology and discipline. If you lose that game, you’re toast.

Q. What are the best investments for a safe portfolio?

There are two ways to do it: a TIPS (Treasury Inflation-Protected Securities) bond ladder or by buying an inflation-adjusted immediate annuity. Neither is perfect. You might outlive your TIPS ladder, and/or your insurer could go bankrupt. But they are among the most reliable sources of income right now.

One other income source to consider: Social Security. Unless both you and your spouse have a low life expectancy, the best version of an inflation-adjusted annuity out there is bought by spending down your nest egg before age 70 so you can defer Social Security until then. That way, you, or your spouse, will receive the maximum benefit.

Q. Fixed-income returns are hard to live on these days.

Yes, the yields on both TIPS and annuities are low. The good news is that those yields are the result of central bank policy, and that policy has caused the value of a balanced portfolio of stocks and bonds to grow larger than it would have in a normal economic cycle—so you have more money to buy those annuities and TIPS. That said, there’s nothing wrong with delaying those purchases for now and sticking with short-term bonds or intermediate bonds.

Q. How much do people need to save to ensure success?

Your target should be to save 25 years of residual living expenses, which is the amount that isn’t covered by Social Security and a pension, if you get one. Say you need $70,000 to live on, and your Social Security and pension amount to $30,000. You’ll have to come up with $40,000 to pay your remaining expenses. To produce that income, you’ll need a safe portfolio of $1 million, assuming a 4% withdrawal rate.

Q. Given today’s high market valuations, should older investors move money out of stocks now for safety? How about Millennial or Gen X investors?

Younger investors should hold the largest stock allocations, since they have time to recover from market downturns—and a bear market would give them the opportunity to buy at bargain prices. Millennials should try to save 15% of their income, as I recommend in my book, “If You Can.”

But if you’re in or near retirement, it all depends on how close you are to having the right-sized safe portfolio and how much stock you hold. If you don’t have enough in safe assets, then your stock allocation should be well below 50% of your portfolio. If you have more than that in stocks, bad market returns at the start of your retirement, combined with withdrawals, could wipe you out within a decade. If you have enough saved in safe assets, then everything else can be invested in stocks.

If you’re somewhere in between, it’s tricky. You need to make the transition between the aggressive portfolio of your early years and the conservative portfolio of your later years, when stocks are potentially toxic. You should start lightening up on stocks and building up your safe assets five to 10 years before retirement. And if you haven’t saved enough, think about working another couple of years—if you can.

MONEY A Pick From A Pro

The Case for Hewlett-Packard in the Post-PC World

USAA Investment's Bob Landry thinks so. But to achieve a turnaround, Meg Whitman & Co. will have to develop new businesses.

The Pro: Robert Landry, portfolio manager, USAA Investment Management Co.

The Pick: Hewlett-Packard HEWLETT-PACKARD CO. HPQ -0.9953%

The Case: Last month Hewlett-Packard’s chief executive Meg Whitman announced that she’d be firing up to 16,000 employees. That’s on top of an additional 34,000 workers.

Revenues for HP, the elder statesman of Silicon Valley, have fallen for 11 consecutive quarters. In fact, the company’s trailing 12-month revenues are about the same as they were six years ago.

The company still earns a large portion of its revenue from older fare – think personal computers, and printers – at a time when cloud computing and mobile tablets are becoming the focal points of innovation. And Whitman is in the middle of a 5-year turnaround effort.

Nevertheless, investors have driven Hewlett-Packard stock up 37% over the past year.

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Why? Revenues may be down, but profits have been above $1 billion for the last six quarters. (Total expenses are also down over the last two quarters.)

Plus, USAA Investment’s Bob Landry thinks some investors don’t properly appreciate HP’s aptitude for change. “The biggest misconception is that people believe the company is an old dog that can’t be taught new tricks. That they can’t pivot from being a legacy hardware company to focusing more on enterprise services and software.”

It’s not as if Hewlett-Packard doesn’t have a hand in state-of-the-art technology, like “the Machine.” Cooked up in HP Labs, the Machine is sort of a post-cloud computing system that will be able to deal with huge amounts of data.

Whether Hewlett-Packard can actually evolve into the company Whitman, and her shareholders, want it to become remains to be seen.

Reinvestment

While reducing headcount by 50,000 cannot be good for morale (or perhaps for attracting top talent), the job losses from older parts of the company that have been struggling, says Landry.

“A lot of these people were tied to more legacy products that weren’t growing,” he says. “They’re trying to right size the company.”

This is part of the company’s larger to invest in growth areas, including tables, cloud computing, IT management software and big data.

And restructuring has helped operating margins, which have been positive for the last three quarters, after going negative for over a year.

Value

“Hewlett-Packard is a significant cash flow generator,” says Landry. In other words, after they meet all their obligations and make their capital investments, they still have cash left over that gives them financial flexibility. With a free cash flow yield of 12%, “management has pledged to return at least 50% to shareholders through buybacks and dividend increases,” Landry says.

For instance, last quarter Hewlett-Packard earned $3.0 billion in free cash flow, while returning $1.1 billion to shareholders.

Meanwhile, the stock is trading at a pretty reasonable valuation. With a price/earnings ratio of 8.8, based on estimated profits (per Bloomberg), Hewlett-Packard is a cheaper option than IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM -7.1134% and Xerox XEROX CORP. XRX 0% .

One reason why Landry likes Hewlett-Packard’s turn toward the software and networking aspects of its business is that those sectors are high margin business. Last quarter, operating margins on its software business was 19.2%, second only to printing. Enterprise (which includes networking) was third at 14.4%.

What if the plan doesn’t work?

While Landry is patient with Hewlett-Packard, and believes in its story, he says he eventually needs to see some revenue growth.

“If revenue growth doesn’t come throw, if it falls short of expectations, that would be a problem,” says Landry.

And last quarter proved problematic for some of Hewlett-Packard’s businesses, even its non-legacy ones. Software revenue was unchanged year-over-year, while the enterprise group fell by 2%.

One sector that did see gains (7%) was its personal systems section (which includes notebooks, desktops and workstations). Of course personal systems is a pretty low-margin business.

MONEY stocks

Friday the 13th Is a Lucky Day for Stocks, But Beware Next Friday

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History says it's unlikely that Jason will come after investors on Friday the 13th. Ronald Grant—Everett Collection

Historically, it’s so-called “Triple Witching” day, which comes next Friday, that really spooks the markets.

Calm down. Take a deep breath. Sure, the S&P 500 S&P 500 INDEX SPX 0.9143% has suffered three straight down days. And today, Friday the 13th, is supposed to be the scariest day of the year.

But the stock market is by nature counterintuitive. Friday the 13th, as luck would have it, turns out to be a decent day to invest in equities: Since 1950, returns on Fridays the 13th have averaged 0.88%, more than twice the 0.34% average gain of trading days in general. And “the frequency of advance” is higher on Friday the 13th than on other days, says Sam Stovall, managing director for U.S. equity strategy at S&P Capital IQ. In other words, there’s a greater chance that the S&P 500 will post a positive gain on Friday the 13th (56%) than other days (52%).

That doesn’t mean today’s market performance will match the average, of course, or that the average will hold in the future. But the fact is, as Jeffrey Hirsch, editor in chief of The Stock Trader’s Almanac, has put it, “Friday the 13th has been erroneously associated with market crashes.”

In fact, there’s been only one significantly bad Friday the 13th in recent market history. That was October 13, 1989, the day of the so-called mini crash of ’89, when the S&P 500 lost around 6.1% of its value and the Dow Jones industrial average fell around 190 points (which back then amounted to a 6.9% drop). The losses were triggered in part by a crisis in the junk bond market.

On the other had, there’s actually good reason to be freaked out about next Friday, which is a so-called Triple Witching day on which contracts for stock options, index futures, and index options expire simultaneously. Four times a year, on the third Friday of March, June, September, and December, investors are forced to decide whether to roll over those contracts into new ones or to unwind their positions. As a result, on those days, and especially during the final hour of trading on those days, volatility tends to spike.

Even worse, in the week that follows each June’s Triple Witching Day, the Dow has lost ground in 21 of the past 24 years. Says Hirsh: “The weeks after Triple-Witching Day are horrendous.”

MONEY Ask the Expert

Should I Gift Stocks to My Heirs Now or Make Them Wait?

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Robert A. Di Ieso, Jr.

Q: Is it better to transfer stock to my children before my death or let it go into the estate?—Sandra, Kernersville, N.C.

A: If your children have no immediate need for the money and your estate is small enough to avoid estate taxes, your best move is to hold on to the shares, says Charlotte, N.C. financial planner Cheryl J. Sherrard. By letting your children inherit the stock later instead of transferring it now, you’re helping them reduce the potential tax hit when they sell.

The price you paid for your stock is known as your cost basis. That’s the number you use to determine your gain or loss on the investment and figure out how much you owe in capital gains taxes when you sell. When you pass stock to an heir as part of your estate, your heirs get a “stepped-up” basis. That means their cost basis becomes the value of the stock at the time of your death.

So if you bought the stock for $100 and the price has reached $250 when you die, your heirs’ cost basis will be $250. If and when they chose to sell that stock, they will owe taxes only on any capital gains over $250, not $100.

If you simply gift the stock to your children during your lifetime, you’ll also pass on your original cost basis. In this example, that means your heirs would owe taxes on any gains over $100. Any time you’re sitting on big profits, gifting that stock could cause your heirs to pay significantly more in taxes than they would if they’d received the shares via the estate.

There’s one more consideration: If you expect your estate to be worth more than $5.34 million, which is when the federal estate tax kicks in, you may want to gift the stocks during your lifetime to reduce the size of your estate, says Sherrard. As an individual, you can gift up to $14,000 a year per person in 2014 without incurring any gift tax. A married couple can give up to $28,000 a year.

MONEY alternative investments

Wise Up About Funds that Claim to Take “Smart” Risks

A new group of funds that claim to outperform the broad market while taking less risk are worth exploring—if you're willing to look under the hood.

Ever since the dot-com crash more than a decade ago, Wall Street and the mutual fund industry have been on a relentless push to plug what they are now calling “smart” beta strategies. These funds promise reasonable returns with lower risk through a variety of techniques.

But pursuing a smart-beta strategy isn’t as simple as just buying a fund with that name and thinking it will outperform conventional index funds. There’s always a trade-off in costs, risk and return, so you need to dig much deeper to get beyond simplistic marketing pitches.

For example, let’s say you were seeking an alternative strategy to traditional S&P 500 index funds that weight the holdings in their portfolios by market valuation.

In such traditional “cap-weighted” S&P 500 funds, the top holdings would be Apple APPLE INC. AAPL 2.1399% at about 3% of the portfolio, followed by ExxonMobil EXXONMOBIL CORP. XOM 0.614% at 2.6% and Microsoft MICROSOFT CORP. MSFT 1.0314% at just under 2%. Every other stock in the portfolio would represent a slightly lower percentage of the total holdings.

The idea behind cap-weighting is that the biggest U.S. stocks by popularity ought to represent the largest portions of a broad-market portfolio. This is what economist John Maynard Keynes called a “beauty contest,” with investors bidding up the prices of the most glamorous stocks. The downside is that these companies may be overpriced and may not have as much room to grow as other, bargain-priced stocks.

One alternative in the smart beta fund category is a so-called equal-weighted stock index fund such as the Guggenheim S&P 500 Equal-weight ETF RYDEX ETF TR GUGGENHEM S&P500 EQUAL WEIG RSP 1.0574% , which holds the same stocks as the S&P Index, only in equal proportions. This design somewhat side-steps the overpricing issue because it’s less exposed to beauty contestants, especially when they falter a bit.

To date, both the long- and short-term performance of the equal-weighted strategy has been better than cap-weighted index funds. The Guggenheim fund has beaten the S&P 500 index over the past three, five and 10 years. With an annualized return of 9.7% over the past decade through June 6, it’s topped the S&P index by more than two percentage points over that period. But it costs 0.40% in annual expenses, compared with 0.09% for the SPDR S&P 500 Index ETF.

Once you start to ignore the beauty pageant for stocks, is there an even “smarter beta” strategy?

What if you picked the best stocks based on a combination of value, sales, cash flow and dividends? You might find even more bargains in this pool of companies. They’d have strong fundamentals and might be more consistently profitable over time.

One leading “fundamentally weighted” portfolio, which also resides under the smart beta umbrella, is the PowerShares FTSE RAFI US 1000 ETF POWERSHARES EXCHAN FTSE RAFI US 1000 PORTFOLIO PRF 0.903% , which also has outperformed the S&P 500 by about two percentage points over the past five years with an annualized return of 20 percent through June 6. It costs 0.39% annually for management expenses.

The PowerShares fund owns some of the most-popular S&P Index stocks like Exxon Mobil, Chevron CHEVRON CORP. CVX -0.2773% and AT&T AT&T INC. T 0.5869% , only in much different proportions relative to the cap-weighted indexes. The RAFI approach focuses more on cash, dividends and finding undervalued companies, so it’s not necessarily looking for the most-popular stocks.

Although looking at the rear-view mirror for index-beating returns seems to make equal- and fundamental-weighted strategies appear promising long term, you also have to look at internal expenses to see which strategy might have the edge.

Turnover, or the percentage of the portfolio that’s bought and sold in a year, is worth gauging in both funds. Generally, the higher the turnover, the more costly the fund is to run. That eats into your total return. The PowerShares fund has the advantage here with an annual turnover of 13%, compared to 37% for the Guggenheim fund.

Over the long term, “fundamentally weighted smart beta strategies are likely to outperform the equal weighted approach,” note Engin Kose and Max Moroz with Research Affiliates, a financial research company based in Newport Beach, California, which largely developed the concept of fundamental weighting and is behind RAFI-named indexes.

But just considering costs doesn’t end the debate on equal- and fundamentally weighted funds. While they may be higher-performing than most U.S. stock index funds over time, they are not immune from downturns. Both lost more than the S&P 500 in 2008 and 2011.

While it may be difficult to predict how these funds will perform in a flat economy or a sell-off, they are worth considering to replace your core stock holdings, and may be the wisest choices among the smarter strategies.

MONEY Savings

Millennials Are Saving, But Men Are Saving More. Here’s Why.

Among young adults, a savings gender gap is starting early. Are you ahead or behind?

You’ve probably heard that Millennials are doing better than previous generations in saving for retirement—those who landed jobs, anyway. But here’s something you may not have heard so much about: young men are saving significantly more than young women.

That’s the finding from a new Wells Fargo survey on Millennial savings habits, which found that overall 55% of young adults are saving for retirement. But that number disguises a wide gender gap. More than 60% of men are stashing money away, compared with just 50% of women.

“We were surprised to see the gap in this generation, when they have such similar profiles,” said Karen Wimbish, director of retail retirement at Wells Fargo. She points to the relatively few number of women in high-paying positions as a key reason for the disparity. For college-educated Millennial men, the median household income is $77,000, according to the survey; for women, it’s $63,000. (Those figures are similar to 2012 data from the Bureau of Labor Statistics, which found that women ages 20 to 24 earn just 89% the median earnings of their male counterparts.)

Given that difference in pay, it’s not that surprising that 26% of young men manage to save more than 10% of their incomes, compared with just 9% of women. The majority of women surveyed (53%) put away only 1% to 5% of their pay.

For both men and women, debt loads are making it more difficult to save. Some 40% of Millennials say they feel overwhelmed by debt. Nearly half say more than 50% of their pay is going toward debt repayment, and 56% “live from paycheck to paycheck,” the survey reported. The largest payments were owed to credit cards (16% of debt), followed by mortgages (15%), student loans (12%), auto loans (9%), and medical bills (5%).

Still, paying off debt, especially high-interest credit-card balances, can be a smart move, even if it delays saving, says Dan Weeks, a financial planner at Sound Stewardship in Overland Park, Kansas. But for many Millennials, those payments are likely to slow their ability to buy a house and start a family.

One bright spot: Millennials are becoming less risk averse—nearly one-third are invested in the stock market. Among college-educated young men, median financial assets, including stocks and bonds, were $58,500; for women, $31,400. And more than two-thirds of Millennial expect their life after retirement to be better than that of their parents. They could be right about that.

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