MONEY europe

Europe’s Version of the Fed Announces a Big New Stimulus Plan

The symbol of the Euro, the currency of the Eurozone, stands illuminated on January 21, 2015 in Frankfurt, Germany.
The symbol of the euro, the currency of the eurozone, outside the European Central Bank in Frankfurt, Germany. Hannelore Foerster—Getty Images

The European Central Bank just took on its own version of "quantitative easing." Get ready to feel the ripples.

On Thursday European Central Bank president Mario Draghi announced plans to implement a bond buying strategy known as quantitative easing. The ECB, which is the European equivalent of the U.S. Federal Reserve, is hoping to boost the struggling European economy. The Fed implemented a similar effort several years ago.

Under QE, the European bank will buy up tens of billions of euros worth of bonds each month. That should help keep interest rates low and help stave off a worrying trend of falling prices, or deflation.

With the U.S. economy finally humming along, you may be tempted to shrug off the news. But changes in interest rates and prices across the Atlantic quickly ripple across the globe. Here’s how the move could affect you.

It may hold down interest rates and bond yields.

Ever since the Fed cut key interest rates in the wake of the U.S. financial crisis, bond yields have been unusually low. Although many forecasters expect the Fed to begin raising rates in 2015, the ECB’s latest move could keep a lid on how far yields on Treasuries rise.

European bonds already yield considerably less than Treasuries—German government bonds maturing in 10 years pay 0.4%, compared to about 1.9% for Treasuries. If QE continues to depress European yields, more and more buyers are likely to seek out Treasuries, pushing Treasury prices upwards. Bond yields fall when prices rise.

Continued low rates would be good news for borrowers but a mixed bag for investors. Although bonds would lose value when rates begin to rise, many income oriented investors and saver have been frustrated by low payouts, forcing them to hunt for riskier alternatives.

It could further strengthen the dollar.

By buying up bonds, the ECB is essentially creating more euros. On Thursday, the value of the euro fell to $1.16, according to Blommberg. That’s its lowest level in more than a decade. In the long run that should help European companies by making it cheaper for U.S. consumers to buy their goods. But if you own foreign stocks, you’re likely to feel some pain, at least in the short run.

The European stocks you own are denominated in euros, but the value of your account is denominated in dollars. As the dollar rises, a European stock simply isn’t worth as many dollars as it was before, assuming its price in euros didn’t change. The good news is, you don’t need to worry unless you plan to sell right away. In the long run, such currency fluctuations should even out.

The U.S. stock market is happy—for now.

The Dow climbed about 117 points, or 0.7%, to 17,671 in morning trading. While it’s always tricky to interpret stock market ups and downs, it seems likely investors are applauding the ECB’s aggressive action to prevent a deep recession, just as they did over the past several years when the Federal Reserve made similar moves. With the U.S. economy finally humming, the Fed’s strategy seems to have worked. Ultimately the best thing for stock values is to get Europe, a major driver of global growth, back on the same path.

MONEY retirement planning

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

upside down rollercoaster
GeoStills—Alamy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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MONEY stocks

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

Personal familiarity with a company can backfire.

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

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

150112_INV_TinderStockApp2
Fidelity Investments

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

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

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

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

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

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

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

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

MONEY stocks

Your 3 Best Investing Strategies for 2015

Trophy with money in it
Travis Rathbone—Prop Styling by Megumi Emoto

Racking up big investing victories over the past six years was easy. Now, though, the going looks to be getting tougher. These three strategies will help you stay on the path to your goals.

There’s nothing like an extended bull market to make you feel like a winner — and that’s probably just how you felt coming into the start of this year.

Sure, the recent wild swings in the stock market may have you feeling a bit more cautious. Still, even now, the Standard & Poor’s 500 stock index has returned more than 200% since the March 2009 market bottom, while and bonds have posted a respectable 34% gain.

The question is, will the winning streak continue?

Should it persist through the current bout of volatility, the stock market rally will be entering its seventh year, making it one of the longest ever; at some point a bear will stop the party. Meanwhile, the Federal Reserve is signaling the end to its program of holding down interest rates and thus encouraging risk taking. And there’s zero chance that Congress will add further fiscal stimulus. In short, the post-crisis investing era—when market performance was largely driven by Washington policy and Fed ­intervention—is over. “As the global risks have receded,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab, “the focus is going back to earnings and other fundamentals.”

The stage is set for a reversion to “normal,” but as you’ll see, it’s a normal that lacks support for high future returns. For you, that means a balancing act. If you don’t want to take on more risk, you’ll have to accept the probability of lower returns. Following these three guidelines will help you maintain the right risk/reward balance and choose the right investments for the “new” normal.

1) Keep U.S. Stocks As Your Core Holding…

Stocks are expensive. The average stock in the S&P 500 is trading at a price of 16 times this year’s estimated earnings, about 30% higher than the long-run average. A more conservative valuation gauge developed by Yale finance professor Robert Shiller that compares prices with longer-term earnings shows that stocks are trading at more than 50% above their average.

“Given current high valuations, the returns for stocks are likely to be lower over the next 10 years,” says Vanguard senior economist Roger Aliaga-Díaz. He expects annual gains to average between 5% and 8%, compared with the historical average of 10%. Shiller’s numbers suggest even lower returns over the next decade.

That doesn’t mean you should give up on U.S. stocks. They remain your best shot at staying ahead of inflation, especially today, when what you can expect from a bond portfolio is, well, not much. “Stock returns may be lower,” says Aliaga-Díaz, “but bond returns will be much less, so the relative advantage of stocks will be the same.” And the U.S. economy, though far from peak performance, is the healthiest big player on the global field.

Your best strategy: Now is a particularly important time to make sure your stock allocation is matched to your time horizon. “The worst outcome for older investors would be a bear market just as you move into retirement,” says William Bernstein, an adviser and author of The Investor’s Manifesto. A traditional asset mix for someone in his fifties is the classic 60% stock/40% bond split, with a shift to 50%/50% by retirement. If your allocation was set for a 35-year-old and you’re 52, update it before the market does.

On the other hand, if you’re in your twenties and thirties, you should be far less worried about today’s prices. Hold 70% to 80% of your portfolio in equities. The power of compounding a dollar invested over 30 to 40 years is hard to overstate. And you’ll ride through many market cycles during your career, which will give you chances to buy stocks when they’re inexpensive.

2) …But Spread Your Money Widely

With many overseas economies barely out of recession or dragged down by geopolitical crises, international equity markets have been trading at low valuations. And some market watchers are expecting a rebound over the next few years. “Central banks in Europe, China, and Japan are making fiscal policy changes that are likely to boost global growth,” says Schwab’s Klein­- top. Oil prices, which have fallen 40% in recent months, may boost some markets as consumers spend less on fuel and step up discretionary buying.

But foreign stocks aren’t uniformly bargains. The slowdown in China’s economic growth threatens the economies of the countries that supply it with natural resources. Japan’s stimulus program to date has had mixed success, and the reason to expect stimulus in Europe is that policymakers are again worried about deflation.

Your best strategy: Spread your money widely. The typical investor should hold 20% to 30% of his stock allocation in foreign equities, including 5% in emerging markets, says Bernstein. Many core overseas stock funds, such as those in your 401(k), invest mainly in developed markets, so you may need to opt for a separate emerging-markets offering—you can find excellent choices on our ­MONEY 50 list of recommended mutual and exchange-traded funds. For an all-in-one fund, you could opt for Vanguard Total International Stock Index VANGUARD TOTAL INTL STOCK INDEX FD VGTSX 0.7638% , which invests 20% of its assets in emerging markets.

3) Hold Bonds for Safety, Not for Income

Fixed-income investors have few options right now. Today’s rock-bottom interest rates are expected to move a bit higher, which may ding bond fund returns. (Bond rates and prices move in opposite directions.) Yet over the long run, intermediate-term rates are likely to remain below their historical average of 5%. If you want higher income, your only alternative is to venture into riskier investments.

Your best strategy: If you don’t want to take risks outside your stock portfolio, then accept that the role of your bond funds is to provide safety, not spending money. “After years of relative calm, you can expect volatility to return to the stock market—and higher-quality bonds offer your best hedge against stock losses,” says Russ Koesterich, chief investment strategist at BlackRock. Stick with mutual funds and ETFs that hold either investment-grade, or the highest-rated junk bonds. Don’t rely solely on government issues. Corporate bonds will give you a little more yield.

You may be tempted to hunker down in a short-term bond fund, which in theory will hold up best if interest rates rise. But this is one corner of the market that hasn’t returned to normal. Short-term bonds are sensitive to moves by the Federal Reserve to push up rates. The Fed has less ability to set long-term rates, and demand for long-term Treasuries is strong, which will keep downward pressure on the rates those bonds pay. So an intermediate-term bond fund that today yields about 2.25% is a reasonable compromise. Sometimes in investing, winning means not losing.

Read next:
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TIME Markets

IPOs Raise $249 Billion in 2014 Amid Funding Frenzy

Dow Rises Over 400 Points Day After Fed Signals No Rise In Interest Rates
A trader works on the floor of the New York Stock Exchange in New York City during the afternoon of Dec. 18, 2014. Andrew Burton—Getty Images

Last year was a busy one for public offerings, even without Alibaba’s record-breaking listing

A company looking to raise money in 2014 didn’t have to look too far. Last year was the busiest for initial public offerings since 2010.

From Alibaba Group’s $25 billion IPO to much-hyped smaller listings, such as GoPro and Ally Financial, companies listing on the stock markets raised $249 billion worldwide, according to data collected by Thompson Reuters. Even without Alibaba’s record-breaking offering, last year was a standout period for IPOs.

IPOs picked up pace from 2013: about 40% more companies listed on public markets in 2014 compared to the year prior. They also raised more money. Leaving out Alibaba’s offering, which many agree is a once-in-a-generation kind of IPO, companies raised almost 36% more money year-over-year, according to the New York Times.

The booming market has led some analysts to speculate that it is inflated past realistic valuations, pumped up by overly optimistic investors. For instance, Lending Club’s December IPO valued the online lender at 35 times estimated revenue for 2017, which would put it on par with tech companies such as Facebook.

The public markets weren’t the only place to raise big bucks. The private market also saw big number sums, including Uber’s $1.8 billion fundraising round that valued it at $40 billion. Chinese smart phone maker Xiaomi and online home rental service Airbnb also raised huge sums that valued the startups at $10 billion or more.

Fundraising in both the public and private markets have been driven by a confluence of factors, including low interest rates that have pushed investors toward higher-growth opportunities and a skyrocketing stock market.

While no mega-IPO like Alibaba is set for the year ahead, there are some big-name companies that are scheduled to go public, including file-sharing startup Box and “fine casual” dining chain Shake Shack.

Other potential IPOs remain the subject of much speculation. Investors are watching startups such as Uber, Pinterest and Fitbit carefully, though none have yet indicated when or if they will list on public markets.

This article originally appeared on Fortune.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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By following a few simple steps, you can make sure gains in your portfolio don't result in a big gain in your tax bill.

MONEY Millennials

How to Make Money Off Millennials in 2015

People doing "the wave" in a stadium
Doug Pensinger—Getty Images

In 2015, the oldest wave of millennials turns (gulp) 35—a milestone with significant implications for the job market, stocks, and the economy at large.

You hear a lot about the drag that the graying of the baby boomers could have on long-term economic growth. What’s often overlooked, though, is the fact that the U.S. will be golden on another demographic front: The biggest birth year in the bigger-than-boomer millennial generation turns 25 in 2015, while the oldest wave turns 35. These are significant milestones not only for those who get a slice of birthday cake but for the economy at large.

After all, 25 is when one’s career starts to get into full swing. While the unemployment rate for 20- to 24-year-olds is 11%, it’s 6% among 25- to 34-year-olds. For those with college degrees, the rate drops to 5%. Meanwhile, the mid-thirties are “when you hit higher-earning years, are more inclined to get married, and start putting money into the stock and real estate markets,” says Alejandra Grindal, senior international economist for Ned Davis Research. Plus, “productivity growth tends to peak when workers are 30 to 35,” says Rob Arnott, chairman of investment firm Research Affiliates.

Here’s how you can profit from millennial-driven growth.

Favor U.S. stocks. The stock market has tended to take off when the number of workers 35 to 49 has surged. Boomers aging into this bracket, for example, coincided with one of the longest bull markets, from 1982 to 1999.

As a metric, investment pros look at the M/Y ratio, which is “mature” workers (ages 35 to 49) divided by young ones (20 to 34). The U.S. M/Y ratio has been declining since 2000 but will begin rebounding in 2015 and is expected to climb through 2029. “Certainly this improves opportunities here relative to Europe and Japan,” where the ratio is in decline, says Arnott.

Research from Vanguard shows you get almost as much of the diversification benefit of keeping 40% of your stock portfolio overseas by having just 20% abroad. So in 2015, shift to the low end, especially since Europe and Japan may be headed for recession (again).

rescue

Profit off their nesting. Three-quarters of Gen Y-ers surveyed last year by the Demand Institute planned to move in the next five years, many out of their parents’ homes. Capitalize on this trend by buying home-related stocks. Gain exposure via SPDR S&P Homebuilders ETF, which counts Bed Bath & Beyond, Home Depot, and Williams-Sonoma among its top holdings besides homebuilders. The ETF’s stocks trade at about 10% less than consumer stocks in general, owing to the slower-than-hoped real estate rebound.

Shoot for the middle on college. With the bulk of millennials past their undergrad years, college enrollment has been falling since 2011. Many schools are discounting tuition to lure students. If your child is applying, “don’t get your heart set on universities in cities on the coasts,” says Lynn O’Shaughnessy, author of the College Solution blog. Schools in the middle of the country, less in demand, may offer better deals. Also consider smaller mid-tier colleges, adds Robert Massa, former head of admissions at Johns Hopkins.

Illinois Institute of Technology, DePauw University, and Rockhurst University are three Midwest schools on MONEY’s Best Colleges list that recently offered first-year students average grant aid of at least 50% of published tuition, according to government data.

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MONEY stock market

Why Nobody Should Have Believed the $72 Million High School Stock Trader Rumor

disappearing stack of cash
Walker and Walker—Getty Images

We should have just done the math.

Now that high school senior Mohammed Islam has admitted to New York Observer editor (and former MONEY columnist) Ken Kurson that he completely made up that whole stock-trading boy-genius gazillionaire story, the Twittersphere is condemning New York magazine (and writer Jessica Pressler) for what’s assumed to be sloppy fact-checking.

There’s no doubt that the situation is embarrassing, and that the still-posted article — a section of the magazine’s “Reasons to Love New York” feature that already went through a headline revision Monday (“Because a Stuyvesant Senior Made $72 Million Trading Stocks …” became “Because a Stuyvesant Senior Made Millions Picking Stocks …”) — will need to be corrected further.

It now appears that there are no millions. Not the rumored 72. None.

Still, there’s an argument that Pressler and New York are not solely culpable for yesterday’s media circus. Let’s be honest: Many in the media who covered and disseminated this story (including, albeit very skeptically, MONEY) are New York-based media types, proud of our city and its if-you-can-make-it-here-you-can-make-it-anywhere mythology.

Taken at its word, the story felt like an ode to free markets and the American Dream. From hobbyists to professionals, investors are thrilled by the idea that with enough smarts and hard work anyone can go from rags to riches, no matter where they start. If an industrious first-generation American can build a massive fortune between the age of 9 and 17, you can too, right?

There’s a term for this impulse, in fact: “confirmation bias,” which is what experts call the common human tendency to seek out only information that confirms what we already think — or want to think.

The fact is, we should have done the math, as the graph and explanation below show.

Screen Shot 2014-12-16 at 8.44.58 AM
Source: MONEY calculations

In New York and other publications, Islam claimed he started trading using money from tutoring while he was in middle school. His starting age was given as either 9 or 11. Lets assume he had started at 9, in 2006. Then let’s assume he was exceptionally industrious with his tutoring, allowing him to start with $10,000 in savings. In order to end up with $72 million dollars by his senior year, Islam would have had to post average annual returns of 168% from age 9 to 17. That’s staggeringly unlikely.

But let’s take it further: Imagine that someone had spotted Islam’s prodigious talent and given him $100,000 to play with in the markets. Even then he would have had to return an average of 108% annually. That’s more than five times Warren Buffett’s average returns of 20%. And he would have had to do it every year for nearly a decade.

In other words, Islam’s story was preposterously unlikely even if we’d given him all of the benefits of all of our doubts.

Other stories of investing prodigies have come out recently, including one about a New Jersey teen who claims he turned $10,000 into $300,000 trading penny stocks, a feat that would require a one-year return of nearly 3,000% (which is improbable though not impossible). The reporter on that story seems more confident in his fact checking.

Bottom line: $72 million is an insane amount of money to make from scratch while day trading. Pressler originally did call it “unbelievable,” and that’s what it should have been, for all of us.

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