MONEY Markets

The Word on Wall Street Is It’s Okay to Be Bullish Again

After the market's triple-digit rebound on Friday, the bulls came out in force — on TV and social media. Here's how the talking heads explain the state of the market after one scary week.

After dramatic drops on Monday and Wednesday, the market took a turn for the better at the end of the week.

And the bulls started coming out of the woodwork.

“…the mid-week storm in the market was really a passing sun shower — though we did not know it at the time,” — Jonathan Lewis, chief investment officer, Samson Capital Advisors.

“…we remain steadfast with our multi-year bull-market scenario, as corrections and periods of consolidation are necessary ingredients to any prolonged bull market.” — Brian Belski, chief investment strategist BMO Capital Markets

“Whether the complete correction is over I’m not positive yet, but there looks to be some relative calm. I think the next leg is going to be higher.” – Jim Iuorio of TJM Institutional Services via CNBC

“The time to rebalance [and buy stocks] is when doing so requires courage and when things look ugly. Right now, investors are worried and see things as being ugly.” – David Kotok, chairman of Cumberland Advisors

A common theme from the bulls is that for all the worries about the global recovery, the U.S. economy looks solid:

“Ironically, the pullback in stocks has occurred against a backdrop of a strengthening U.S. economy.” — Gregg Fisher, chief investment officer at Gerstein Fisher

“The question is whether it is actually the beginning of a bear market. I don’t think so because I don’t expect a recession in the U.S. anytime soon.” — Edward Yardeni, president of Yardeni Research

Of course, Yardeni goes on to add that:

“the Eurozone and Japan may be heading in that direction now. So is Brazil. China is slowing significantly.”

Shouldn’t investors be worried, then, that a recession in the European Union could reverberate in the U.S.?

Fear not, the bulls have an answer for that:

“The impact of an E.U. slowdown on U.S. growth would be minimal: U.S. exports to the E.U. are a small proportion of GDP (2.8% in 2013)…” notes UBS economist Maury Harris.

Many point out that economic factors have not really shifted since a month ago, when the stock market seemed just fine.

“You can go deep in the weeds in this if you like, but the fact is that nothing fundamental has changed in recent weeks or months or quarters,” writes Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities.

In fact, global economic worries, which have led to lower oil prices, may end up being a boon.

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Many experts are saying that this week’s wild market swings are actually just the result of “narrative fallacy,” which leads investors to come up with explanations for market moves where they don’t necessarily exist — in this case placing blame on external forces like Ebola and fears of rising interest rates.

But who’s to say that the bulls aren’t the ones who are now coming with plausible-sounding explanations for why the rally should keep going?

For the record, the bears have more entertaining explanations in their quiver. For instance, there’s the McDonald’s theory. As in, “as the Big Mac goes, so goes the global economy.”

Permabear Marc Faber, who edits the Gloom Doom Boom site, noted the following:

“Now, McDonald’s is a very good indicator of the global economy. If McDonald’s doesn’t increase its sales, it tells you that the monetary policies have largely failed in the sense that prices are going up more than disposable income, and so people have less purchasing power.”

And Mickey D’s sales have been slumping badly lately.

Then there’s the so-called dental indicator.

Bloomberg Businessweek reported a nifty theory that says that the rate at which Americans cancel scheduled follow-up visits offers a good clue about the real state of the consumer — and in turn the financial markets.

“This is a forward indicator signifying lack of consumer confidence.” — Vijay Sikka, president of Sikka Software, as told to Bloomberg Businessweek

And the follow-through rate on follow-up dental visits has sunk to about where it was in 2007, just before the last downturn/bear market.

At this stage, it’s impossible to tell whether this is the start of bear market or a buying opportunity. However, what’s absolutely clear is that big dips are just a normal part of being a stock investor.

Despite anxieties about the Dow’s sudden plunge this week, if you look at historical performance, the index typically turns negative for the year often enough that it’s not a good doomsday indicator, says author and investment adviser Josh Brown.

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And at the end of the day, who’s to say which wacky theories wind up being right or wrong?

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MONEY stock market

3 Ways a Market Swoon Can Put Money in Your Pocket

Money in jeans pocket
Image Source—Getty Images

Though the stock market tumble has been scary, there are some upsides to all the bad news.

With the market down more than 7% in the last month, it’s easy to feel fearful for the parts of your life most immediately affected by a rocky financial world — like retirement savings and job security.

Certainly, there are plenty of good reasons to be cautious about the future, including high valuations and other signs the current bull market may be aging.

But a downtrodden market like this one can create pockets of opportunity for investors and consumers alike. Here are just a few ways you can benefit from the recent pullback.

1. Cheaper gas prices

Thanks to a supply glut and low demand, gasoline prices are hovering at less than $3 a gallon across the United States. And that’s despite international geopolitical unrest, which usually keeps oil expensive.

2. Low interest rates on mortgages

The Fed is keeping short-term rates low, and the sell-off has sent investors into Treasury bonds, driving down the yields that serve as a benchmark for borrowing costs throughout the economy. So mortgage rates have taken a big dip in the last month.

Interest on a 30-year fixed-rate mortgage is now 4.01%, which means that if you’re sitting on a much higher rate from buying a home a few years ago, now could be a very opportune moment to refinance. Though the paperwork might be intimidating, letting inertia get the best of you could mean leaving literally tens of thousands of dollars on the table.

3. Stock-buying opportunities

When the market takes a big dive, it can be a good moment to purchase stocks, especially if your goal is to buy and hold for the long term. This is particularly true for younger people who have time on their side, as they stand to lose very little in the short term (even if stocks continue to drop) and can gain much more when the market eventually recovers.

So if you are a millennial and have been putting off opening (or upping contributions to) that 401(k), now is your moment to choose a plan. And even Gen X-ers generally have enough years ahead to take on some risk in their retirement portfolios.

Finally, if you’re not a driver, homeowner, or investor, there’s always that trip to Paris you’ve been putting off: Thanks to economic uncertainty in Europe, the Euro is trading for less than $1.30—the cheapest it’s been since last summer.

MONEY Millennials

The Conventional Money Wisdom That Millennials Should Ignore

millennials looking at map on road
John Burcham—Getty Images/National Geographic

Maybe a 401(k) loaded with stocks isn't the best savings tool for some young people.

If you are in your 20s or early 30s, and you ask around for retirement advice, you will hear two things:

1. Put as much as you possibly can, as soon as you can, into a 401(k) or Individual Retirement Account.

2. Put nearly all of it into equities.

There’s a lot of common sense to this. Saving early means you can take maximum advantage of the compounding of interest. And your youth makes it easier for you to bear the added risk of equities.

But life is more complicated than these simple intuitions suggest. Here’s a troubling data point: According to a Fidelity survey of 401(k) plan participants, 44% of job changers in their 20s cashed out all or part of their money, despite being hit with taxes and penalties. Switchers in their 30s were only a bit more conservative, with 38% cashing out.

You really don’t want to do this. But let’s get beyond the usual scolding. The reality that so many people are cashing out is also telling us something. Maybe a 401(k) loaded with stocks isn’t the best savings tool for some young people.

The conventional 401(k) advice—which is enshrined in the popular “target-date” mutual funds that put 90% of young savers’ portfolios in stocks—imagines twentysomethings as the ideal buy-and-hold investors, as close as individuals can get to something like the famous, swashbuckling Yale University endowment fund. Young people have very long time horizons and no need to sell holdings for current income, the thinking goes, so why not accept the possibility of some (violently) bad years in order to stretch for higher return? But on a moment’s reflection on what life is actually like in your 20s, you see that many young people are already navigating a fair amount of economic risk.

Take career risk. On the plus side, when you’re young you have more years of earnings ahead of you than behind you, and that’s a valuable asset to have. Then again, you also face a lot of uncertainty about how big those earnings will be. If you are just gaining a foothold in your career, getting laid off or fired from your current job might be a short-term paycheck interruption—or it could be the reversal that sets you on a permanently lower-earning track. You may also be financially vulnerable if you still have high-interest debts to settle, a new mortgage that hasn’t had time to build up equity, or low cash reserves to get your through a bad spell.

This is why Micheal Kitces, a financial planner at Pinnacle Advisory Group in Columbia, Md., tells me he doesn’t encourage people in their 20s to focus on building their investment portfolio. You almost never hear that kind of thing from a planner, so let me clarify that he’s not saying you should spend to your heart’s content. (Kitces is in fact a bit stern on one point: He thinks many young professionals spend too much on housing.) He’s talking about priorities. For one thing, you need to build up that boring cash cushion. Without it, you are more likely to be one of those people who has to cash out the 401(k) after a job change.

Even before that’s done, you’ll still want to aim to put enough in a 401(k) to max out the matching contributions from your employer, if that’s on the table. (Typically, that’s 6% of salary.) So maybe all or most of that goes in stocks? An attention-getting new brief from the investment strategists Research Affiliates argues “no”—that instead of putting new savers into a 90%-equities target date fund, 401(k) plans should get people going with lower-risk “starter portfolios.”

I’m not sold on all of RA’s argument, which drives toward a proposal that 401(k)s should include unusual funds like the ones RA happens to help manage. But CEO Rob Arnott and his coauthor Lilian Wu offer a lot to chew on. They make two big points about young people and risk. One’s just intuitive: If you have little experience as an investor and quickly get your hat handed to you in a bear market, you could be so scarred from the experience that you get out of stocks and never come back. At least until the next bull market makes it irresistible.

The other is that 401(k) plan designers should accept the fact—all the advice and penalties notwithstanding—that many young people do cash them out like rainy-day funds when they lose their jobs. And so the starter funds should have a bigger cushion of lower-risk assets. That’s especially important given that recessions and layoffs often come after big market drops, so the people cashing out may well be selling stocks at exactly the wrong moment, and from severely depleted portfolios.

RA thinks a portfolio for new savers should be made up of just one third “mainstream” stocks, with another third in traditional bonds and the last third in what it calls “diversifying inflation hedges.” That last bit could include inflation protected Treasuries (or TIPS), but also junk bonds, emerging markets investments, real estate, and low-volatility stocks. Whatever the virtues of those investments, it seems to me that a starter portfolio should be easy to explain to a starting investor. “Diversifying inflation hedges” doesn’t sound like that.

But the insight that new investors might not be immediately prepared for full-tilt equity-market risk is valuable. Many 401(k) plans automatically default young savers into stock-heavy target date funds, but they could just as easily start with a more-traditional balanced fund, which holds a steady 60% in stocks and 40% in bonds. Perhaps higher risk strategies should be left as a conscious choice, for people who not only have a lot of time, but also a bit more market knowledge and a stable financial picture outside of their 401(k).

The trouble is, most 401(k) plans don’t know much about an individual saver besides their age. The 401(k) is a blunt, flawed tool, and just putting different kinds of mutual funds inside of it isn’t going to solve all of the difficulties people run into when trying to save for the future. Arnott and Wu’s proposal doesn’t do anything about the fact that using a 401(k) for rainy days means paying steep penalties. And it doesn’t help people build up the cash reserves outside their retirement plans that they’d need to avoid that.

As boomers head into retirement, we’ve all become very aware of the importance of getting people to prepare for life after 65. But millennials also need better ideas to help get them safely (financially speaking) to 35.

MONEY stocks

Stocks Plunge Wednesday on Global Economic Fears

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Spencer Platt—Getty Images

Volatility is back with vengeance, and it's being felt throughout the financial markets.

Updated: 4:30 pm

Volatility is back with a vengeance on Wall Street.

The Dow Jones industrial average plunged around 450 points on Wednesday afternoon before recovering to close at 175 points down, marking the sixth day in October that the stock market has suffered triple-digit losses. The Dow, which had been trading as high as 17,145 at the end of September, sank to below 15,900 before ending the day at 16,141.

^DJI Chart

^DJI data by YCharts

This capped off the worst three-day sell off for the broad market since 2011.

Small-company stocks — considered the market’s canary in the coal mine, since they’re more easily rattled by changes in the economy due to their size — sank around 1% on Wednesday and are in an official correction, defined as a 10% drop in value over an extended period. Micro-cap stocks, the tiniest sub-set of small stocks, also fell and they’re only a few percentage points off from an official bear market, or a 20% decline.

Why?

Wall Street is having flashbacks to the bad old days in the aftermath of the global financial panic, when there were real concerns that the global economy might slip back into a deflationary and recessionary spiral.

Right now, the big worry is that Europe and Japan will soon suffer their third recessions in the past six years. Policymakers in both countries are scrambling to find ways to jumpstart growth, yet their central banks are running out of ammunition.

Meanwhile China, once viewed as the engine driving global growth, has been slowing noticeably in recent quarters and can‘t find a way to reaccelerate, as it works through its own housing and financial crisis.

“While domestic growth is robust, slowing economies abroad have the potential to upset the recovery,” notes Jack Ablin, chief investment officer for BMO Private Bank.

Those global growth concerns are now being reflected in two troubling trends.

First, there’s the plunge in crude oil prices. While a barrel of crude oil traded above $100 a barrel as recently as this summer, prices fell to around $81 a barrel on Wednesday morning. Falling oil prices are often viewed as a good thing — since lower energy costs free up households and businesses to spend on other things. Yet the fact is, people aren’t necessarily spending that money on other things.

Michael Gapen, chief U.S. economist for Barclays Capital, noted that U.S. retail sales fell 0.3% in September. “The main downside surprise in this report,” he said, came in core retail sales — which strips out volatile food an energy prices — fell 0.2%. He said that was “against our expectation for a four-tenths rise.”

Moreover, the price of oil sometimes doesn’t cause good things so much as it reflects bad things already in the economy.

Right now, investors may be asking: “Is this the moment of truth when lower oil is signaling lower demand?” says Neal Dihora, an analyst with Morningstar.

Similarly, fears over the global economy tends to drive investors into slow-growing but safe assets, like Treasury bonds. And this morning, the yield on the 10-year Treasury fell below the 2% threshold for the first time since June 2013, a worrisome trend as MONEY’s Pat Regnier points out.

Even more troubling is the possibility that the market is telling us that the financial crisis may not be squarely in the rear view mirror.

BMO’s Ablin noted:

“Decades of debt accumulation touched off the 2008 financial crisis and critics argue that the solution, quantitative easing programs, simply shifted borrowing from the private sector to the public sector. The Fed’s primary lever since the Greenspan years, boosting asset prices and enticing borrowing by lowering interest rates, is no longer working now that short-term rates are effectively zero. Scarred by the financial meltdown and an underwater mortgage, households have had a change of heart and are now more interested in reducing debt.”

And as investors are keenly aware, reducing debt doesn’t help stimulate economic activity.

MONEY

Why Does a Hedge Fund Care About Breadsticks? This Video Explains

An "activist" fund just took over the board of the company that runs Olive Garden and wants to change the menu. Another investor is telling Apple what do with its cash. Who are these guys?

MONEY 401(k)s

Why Your Retirement Fund Is Riskier Than You Thought

Your 401(k) target-date fund may own a lot more stocks than it did before, as fund groups got a lot more aggressive. Too bad it happened just in time for the recent market downturn.

In changes that have raised the potential investment risks in many 401(k) retirement accounts, several major fund companies are increasing the stock allocation of their target-date funds, which are used by many of those with such plans.

BlackRock Inc, Fidelity Investments and Pacific Investment Management Co—all firms that have seen returns in their target-date funds lagging competitors—have made adjustments in the past year so that 401(k) plan participants, particularly those who are younger to middle age, are more invested in equities. In some cases employees who are in their 40s now find themselves in funds that are 94% allocated into stocks, up more than 10 percentage points.

The changes have prompted concerns from consultants and analysts who worry that the fund managers are raising the risks too high for 401(k) investors as they seek higher returns, perhaps as a way to boost their own profiles against rivals.

This anxiety could grow if the recent decline in the U.S. stock market—the S&P 500 is down 4.5% since reaching an all-time high in mid-September and dropped more than 2% on Thursday—gains momentum. On the other hand, the increased bets on equities can be seen as a vote of confidence in the bull market, and are also a reflection of expectations of low returns from bonds in the next few years if interest rates climb.

“The shared characteristic these funds have is they have not been doing so well since 2008,” said Janet Yang, a fund analyst at Morningstar. “The question is if the markets had gone down, would they have made these changes?”

For their part, executives at these firms say the changes are based on optimistic long-term forecasts for equities, lowered expectations for bond market returns and a better understanding of how much investors, particularly younger ones, rely on these funds as their primary retirement savings vehicle.

Target-date funds contain a mix of assets, such as stocks and bonds and real estate, and automatically adjust that mix to be less risky as the target maturity date of the fund approaches. The idea is that retirement savers can choose a target-date fund that lines up with their own expected retirement year and then not have to worry about managing their money.

These funds have increasing significance for retirement savers, because employers can and do automatically invest workers’ savings in target-date funds, though the workers can opt out. Some 41% of plan participants invest in these funds, up from 20% five years ago, according to the SPARK Institute, a Washington DC-based lobbyist for the retirement plan industry.

Nevertheless, the recent tilt towards heavier equity holdings raises questions about whether workers are entrusting professional money managers who might end up buying equities at or near market highs—the S&P is up 189% since March 2009.

“Our concern is that this is happening after a pretty good run in the equity market,” said Lori Lucas, defined contribution practice leader at Callan Associates, a San Francisco-based consultant to institutional investors. “If it’s a reaction to the fact that some target-date funds haven’t been competitive then it is a concern.”

A more aggressive approach has worked for some funds in recent years.

The target-date fund families of BlackRock, Fidelity and Pimco have performed among the bottom half of their peers over the last three- and five-year periods, according to Morningstar. Meanwhile, more aggressive target-date fund families, like those managed by The Vanguard Group, T. Rowe Price and Capital Research & Management, ranked among the top half of their peers.

As of June 30, BlackRock’s three-year return for its 2050 fund was 10.6%, according to Morningstar, compared with 10.16% for Fidelity’s similar fund and 7.14% for Pimco’s comparable fund. Meanwhile Capital Research’s 2050 fund returned 13.27% and Vanguard’s fund returned 12.26% for the same period.

Furthermore, with average expenses of 0.85% per year, these funds charge more than the 0.7% in fees levied by the typical actively managed balanced fund, according to Morningstar. The firms’ pitch is that investors are paying more for peace of mind and a set-it-and-forget it approach to managing their retirement money. Workers willing to make their own mix of indexed stock and bond funds could pay considerably less. The average expense ratio for an equity index fund is 0.13% and 0.12% for a bond index fund.

“There is some kind of expectation that we are making these changes because of the equity markets or because of what competitors are doing and that is incorrect,” said Chip Castille, head of BlackRock’s U.S. retirement group.

BlackRock decided to make its changes after a four-year research project cast new light on how younger workers look at their plans. Previously, BlackRock’s funds were focused on making sure that investors had enough at retirement. But given that employees’ wages tend to be flat or go up in value slowly, like a bond, BlackRock wanted to make sure that the target-date funds were designed to provide greater returns during the course of employees’ lifetimes, Castille said.

That, along with the firm’s positive 10-year forecast for equities, resulted in the changes, he said.

With the BlackRock changes, which take effect next month, 401(k) participants with 25 years left until retirement will see their equity allocation jump to 94% from 78%. Investors at retirement age saw their equities allocation jump to 40% from 38%.

Executives at the firms note that the increases in equities all fit within the age appropriate risk for the investors, and that those investors close to or at retirement are seeing a very small bump in their equities weightings.

Also they note that they believe the changes will combat risks of not having enough money at retirement due to inflation and also address concerns that as people live longer they will need more in retirement.

Fidelity made its changes in January after it revamped its capital markets forecasts, which it revisits annually, said Mathew Jensen, the firm’s director of target-date strategies.

Specifically, Fidelity has lowered its forecasts for bond returns from 4% a year to 1% to 2 %, not including inflation. That along, with internal research that showed that younger workers were not saving enough, led to the decision.

“None of our work was saying ‘hey the equity markets did well, we should be in equities,” Jensen said. “It was about if we have a dollar today, how do we want to put it to work based on what our capital markets assumptions are telling us.”

Now an investor in Fidelity’s 2020 fund has 62% invested in equities, compared with 55% previously, while an investor near or at retirement is 24% in equities, up from 20%.

Pimco raised the equity allocation in its target date funds late last year by 5 percentage points for some funds and 7.5 percentage points for others. The equity allocation for those at retirement is now 20%, up from 15%, while those investors planning to retire in 2050 saw their equity allocation jump to 62.5% up from 55%.

“The decision was supported by our view that the global macro environment had become more stable post the financial crisis,” said John Miller, head of U.S. retirement at Pimco, in an e-mailed statement.

MONEY stock market

7 Years Later, Is the Bear Stalking Again?

Grizzly Bear
Scott Markewitz—GalleryStock

While the start of the 2007-2009 bear market now seems a lifetime away, there are a number of similarities between this market and that one that makes it hard to forget.

Exactly seven years ago today, the stock market fell into the worst bear market this side of the Great Depression.

The crash, which unfolded from Oct. 9, 2007 to March 9, 2009, obliterated more than half of the total value of the U.S. stock market and threatened the very existence of iconic companies from General Motors to Merrill Lynch.

Of course, all of this seems like ancient history now that the stock market has fully recovered — and then some.

^SPX Chart

^SPX data by YCharts

After the fourth-longest bull market in history, the Dow Jones industrial average and the S&P 500 are both near all-time highs. The housing market is slowly but surely recovering. And the U.S. economy has recently been growing at an annual rate of 4.6%.

Sounds like a totally different scene than seven years ago, when the economy was about to slip into a recession, the housing market was melting down, and the global financial panic was at full tilt.

Yet if you start digging into the details, there are a number of glaring similarities between today’s market and where Wall Street was on this fateful day seven years ago.

The bull market is aging. The stock market rally was an older-than-average five years old on Oct. 9, 2007. On Oct. 9, 2014, the bull is an even-older-than-average five and a half years old.

The market is starting to look its age. One way to tell if a bull is losing steam is to see how many stocks are actually participating in the rally. In 2007, the percent of companies in the S&P 1500 total stock market index that were outperforming the broad market fell to a lower-than-average 35%. Today, it’s even lower at 30%.

The market is pricey. The price/earnings ratio for the S&P 500, based on projected corporate profits, stood at 15.2 on Oct. 9, 2007. Today, that P/E ratio is an even-higher-than-average 16.2.

The market is pricey, part 2. There’s another way to measure the market’s P/E, using 10 years of average profits. In October 2007, the S&P 500’s so-called Shiller P/E stood at 27. That marked one of only four sustained periods in history where this P/E ratio climbed and remained above 25. Today, the market’s Shiller P/E is at 26.

Since 1926, whenever this measure has exceeded 25, the average inflation-adjusted annual return for stocks has been a mere 0.5% over the subsequent decade. By contrast, the historic annual real return for stocks is closer to 7%.

Greed is back. Seven years ago, merger & acquisition activity in the U.S. hit a record high, as risk-taking returned to Wall Street. Today, M&A activity, based on the total number of deals, is on pace to be even higher.

Confidence is back. When company executives are confident that the market isn’t fully appreciating the strength of their business, they initiate stock buybacks of their company’s shares, on the theory that their own stock represents a good value. The Wall Street Journal recently reported that stock buybacks totaled $338 billion in the first half of this year. That marked the highest level of activity in any six-month period since 2007.

Risk-taking is back. You know investors are getting aggressive when they’re willing to use borrowed money to make their bets. The last times margin loan debt as a percentage of GDP exceeded 2.5% were in 2000 and 2007. Well, today, it’s back above this threshold.

Does this mean that the bull market is about to end? Not necessarily. These are signs of an aging bull, not necessarily precise predictors of when the market is about to turn. Still, after growing accustomed to seeing stocks go up and up and up for several years, it’s time to reflect on how scary the market can be when investors grow complacent.

MONEY retirement planning

8 Things You Must Do Before You Retire

sébastien thibault

Getting ready to retire? The moves you make in the months before you call it quits can smooth the way to a secure future.

After working diligently for more than 30 years—so you could set yourself up financially for your golden years—the glow of retirement is finally on the horizon. Alas, it’s not time to relax just yet.

Each day more than 10,000 baby boomers enter retirement. Yet only around one-quarter of workers 55 and older say they’re doing a good job preparing for the next phase, according to the Employee Benefit Research Institute. The last 12 months before you call it a career is especially critical to putting your retirement on a prosperous path. It’s time to get your portfolio, health care, and other finances in order so you can enjoy your new life.

THE TURNING-POINT CHECKLIST

12 Months Out:

Dial back on stocks now. You still need the growth that equities provide, but even a 15% market slide in the year before you retire can erase four years’ worth of income. Cap stock exposure to around 50% in your sixties, advises Rande Spiegelman, vice president of financial planning at Schwab Center for Financial Research.

Raise cash. Your paychecks are about to stop. So as you downshift from stocks, move that money into a savings or money market account to fund at least one year of expenses, says Judith Ward, T. Rowe Price senior financial planner.

Set a realistic retirement budget. Use the worksheet on Fidelity’s free retirement-income planner to list all of your fixed and discretionary expenses. Then use T. Rowe Price’s free retirement-income calculator to see how safe that level of spending is likely to be, based on the size of your nest egg and age.

6 Months Out:

Play out Social Security scenarios. You can claim Social Security at 62, but if you can hold off until 70 your checks will be 76% bigger. Tool around FinancialEngines.com’s free Social Security Income Planner to find the best strategy for you.

Figure out how you’ll pay for health care. Check if your company offers retirees medical, long-term care, and other insurance coverage. If you won’t get health insurance and aren’t yet 65 (when you qualify for Medicare), then compare plans offered via the Affordable Care Act at eHealthInsurance.com. Or use COBRA, where you can stay on your employer plan up to 18 months after leaving.

3 MONTHS OUT:

Begin the rollover process. In a small 401(k) plan, average fund expenses can run north of 0.6% of assets. You can cut those fees at least in half by shifting into index funds at a low-cost IRA provider. See if your plan provides free access to investment advisers to help you decide.

Sign up for Medicare. Nearing 65? You can enroll for Medicare up to three months before turning that age. Also, figure in supplemental plans to cover expenses that Medicare does not, such as dental care and prescription drugs.

Get a running start. Put your post-career itinerary into action. Research volunteer groups that you want to join, reach out to contacts if you plan to keep a hand in work, start a new exercise routine, or begin planning that big trip.

TIME Hong Kong

Hong Kong’s Protesters Are Fighting for Their Economic Future

Thousands of protesters attend a rally outside the government headquarters in Hong Kong as riot police stand guard
Thousands of protesters attend a rally outside the government headquarters in Hong Kong as riot police stand guard on Sept. 27, 2014 Tyrone Siu— Reuters

The city can't remain a global financial center without its own political process

The conventional wisdom about Hong Kong’s pro-democracy protests is that they are bad for business. Hong Kong has become one of the world’s three premier financial centers (along with New York City and London) because the city has been a bastion of stability in an ever changing region, the thinking goes, and therefore the tens of thousands of protesters who paralyzed downtown Hong Kong on Monday are a threat to its economic success. The Global Times, a state-run Chinese newspaper, used just such an argument to try to persuade the protesters to clear the streets. “These activists are jeopardizing the global image of Hong Kong, and presenting the world with the turbulent face of the city,” it said in an editorial on Monday.

That worry isn’t merely Beijing propaganda. Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, said one of the big questions facing Hong Kong over the long term is “whether the political standoff eventually impacts domestic and foreign perceptions of Hong Kong’s stability and attractiveness as an investment destination.” The fallout for Hong Kong’s financial sector from the Occupy Central movement was immediate. The stock market dropped, banks closed branches, and the Hong Kong Monetary Authority, the de facto central bank, had to reassure the investor community that it would “inject liquidity into the banking system as and when necessary” to overcome any possible disruptions.

But the real reason why Hong Kong has been so successful is that it is not China. When Hong Kong was handed back to Beijing by Great Britain in 1997, the terms of the deal ensured that the former colony, ­now called a “special administrative region,” or SAR, of China ­would maintain the civil liberties it had under British rule. That separated Hong Kong from the Chinese mainland in key ways. In China, people cannot speak or assemble freely, and the press and courts are under the thumb of the state. But Hong Kongers continued to enjoy a free press and freedom of speech and well-defined rule of law. The formula is called “one country, two systems.”

That held true in the world of economics and finance as well. On the Chinese side of the border, capital flows are restricted, the banking sector is controlled by the state, and regulatory systems are weak and arbitrary. Meanwhile, in Hong Kong, financial regulation is top-notch, capital flows are among the freest in the world, and rule of law is enshrined in a stubbornly independent judicial system. Those attributes have given Hong Kong an insurmountable advantage as an international business hub. Banks from all over the world flocked to Hong Kong, while its nimble sourcing firms orchestrated a global network of supply and production that became known as “borderless manufacturing.” While there has been much talk of Shanghai overtaking Hong Kong as Asia’s premier financial center, the Chinese metropolis simply cannot compete with Hong Kong’s stellar institutions, regulatory regime and laissez-faire economic outlook.

What happens if Hong Kong loses this edge? In other words, what happens if Beijing changes Hong Kong in ways that make its governance and business environment more like China’s? Hong Kong would be finished. The fact is that Hong Kong’s economic success, the nature of its institutions and the civil liberties enjoyed by Hong Kongers are all inexorably entwined. If Beijing knocks one of those pillars away, ­if it suppresses people’s freedoms or tampers with its judiciary, ­Hong Kong would become just another Chinese city, unable to fend off the challenge from Shanghai. Foreign financial institutions would be forced to decamp for a more trustworthy investment climate.

That’s why the Occupy Central movement is so critical for Hong Kong’s future. So far, Beijing has generally abided by its agreement with London and left Hong Kong’s economic system more or less unchanged. But when China’s leaders made clear last month that Hong Kongers would be able to choose their top official, known as the Chief Executive, from 2017 onward only from candidates who have the approval of Beijing, it became obvious that Hong Kong was going to face tighter control by China’s communists over time. That raises the specter that Beijing will at some point dismantle “one country, two systems” and along with it the foundation of the Hong Kong economy.

By fighting for their democratic rights, the activists in Hong Kong are fighting for an independence of administration and governance that will perpetuate their city’s economic advantages. Beijing should realize that ultimately a vibrant Hong Kong is in its own interests. China has benefited tremendously from Hong Kong over the past 30 years. It was Hong Kong manufacturers that were among the first to bravely open factories in a newly opened China, thus sparking the mainland’s amazing economic miracle. Chinese firms have been able to capitalize on Hong Kong’s stellar international reputation to raise funds and list shares on the city’s well-respected stock exchange. Even now, China continues to upgrade its economy by seeking Hong Kong’s expertise. The stock markets in Hong Kong and Shanghai are in the process of being linked to allow easier cross-border investment.

Of course, Hong Kong’s economy is far from perfect, and here, too, the importance of Hong Kong’s democracy movement can be found. The SAR suffers from a highly distorted property market and one of the widest income gaps in the world. Such ills have bred more resentment in the city toward Beijing. Yet right now many of the people of Hong Kong simply don’t trust their Beijing-chosen leaders to resolve these issues. Hong Kong requires a popular administration that commands the support of the people in order to implement the reforms necessary to tackle these critical problems. Thus the battle unfolding on the streets of central Hong Kong is a contest for the city’s very survival. Perhaps Hong Kong’s pro-democracy activists will disrupt the usually sedate financial district for a few days. But that’s a tiny sacrifice compared to the long-term damage Hong Kong faces if its citizens do nothing.

Schuman reported from Beijing.

MONEY stock market

These 3 Simple Steps Will Protect You If There’s a Market Meltdown

melting chocolate coins
Lara Jo Regan—GalleryStock

Every time the stock market hits a new high, we hear rumblings of a potential crash. But you can stop worrying about a meltdown if you prepare yourself -- and your portfolio -- ahead of time.

It seems that every time the stock market hits a new high these days—or retreats from one—we hear rumblings of a potential crash. In an interview last week after the Standard & Poor’s 500 hit yet another peak, Yale professor Robert Shiller noted that stock valuations were near levels that preceded meltdowns in the past and thus were “a cause for concern.”

But if you’re investing for retirement, should the prospect of a bear market give you a serious case of the jitters?

I don’t want to downplay the effects that a market meltdown can trigger. It can wreak havoc with the economy. And if you’re on the verge of retirement and have a big portion of your savings in stocks, a setback on the order of the 2007-2009 50%+ drop in stock prices could force you to sharply scale back your post-career lifestyle or stay on the job longer than you want.

But if retirement is many years away, even a severe downturn isn’t necessarily a big deal. It could even work to your advantage, as the stocks you scoop up at at a market bottom can earn the highest long-term return.

Regardless of what stage of retirement planning you’re in—just starting out, mid-career, ready to retire, or already retired—there are two important things you need to know about market crashes. One is that there’s no avoiding them. Bear markets have been around as long as we’ve had stock markets. Since World War II alone, we’ve had eight major downturns averaging nearly 39% and lasting an average of 19 months. Big, scary dives in stock prices are a normal part of the investing landscape that will always be with us. Rather than trembling in fear of their onset, smart investors learn how to live with the certainty that sooner or later stock prices will collapse.

The second thing you need to know is that, far more important than the meltdown itself, is how you handle it. And that largely depends on how well you prepare ahead of the crash. Once a major correction is really under way, there’s not a whole lot you can do to stave off damage to your portfolio; indeed, scrambling to mitigate the damage may make matters worse. Nor can you depend on some gut instinct or trusty technical indicator to get you out of the market just before things fall apart. In retrospect, it’s always easy to see when the meltdown started. But in real time, it’s impossible to tell in the early stages of a bear market whether it’s The Big One or is just another false alarm.

So what should you do to prepare in advance for an inevitable market setback, while also staying positioned to share in the gains if the market continues to rise rather than drop (which ends up being the case most of the time)?

1) Know thyself. Start by getting a handle on your true appetite for risk, specifically how much of a drop in the value of your savings you can stand before you start unloading stocks in a panic. The Investor Questionnaire in RDR’s Retirement Toolbox can help you make this assessment. As you do this risk evaluation, keep in mind that investors have a tendency to underestimate how much risk they’re taking when stock prices are rising and overestimate the risks they’re taking after prices have plummeted. Be careful not to get swept up in irrational exuberance when the market’s on a tear, and avoid becoming overly pessimistic in the wake of a crash.

2) Adjust your investments accordingly. Next, make sure your portfolio jibes both with the level of risk you’re willing to accept, and that your mix of stocks and bonds makes sense given your investment goals. Reconciling these two aims can be tricky. If you’re risk-averse by nature, you may feel much better emotionally by hunkering down almost exclusively in bonds or cash. But such a low-risk portfolio may not give you the returns you’ll need to build an adequate nest egg or allow you to draw sufficient income from your savings once you’ve retired.

So you need to balance your emotional needs with your financial needs. Your aim is to end up with a portfolio that has enough exposure to stocks so that you have a decent shot at earning a reasonable rate of return, but not so stock-heavy that you’ll be reaching for the Maalox every time some pundit prophesies doom. The Retirement Income Calculator in RDR’s Retirement Toolbox can help you gauge whether the mix of stocks and bonds you’re contemplating can give you a reasonable shot at achieving your retirement goals.

3) Sit tight. Once you’ve done that, you should largely stick to your mix of stocks and bonds regardless of what’s going on in the market or how your portfolio is doing at any particular moment. That can be tough. You can always come up with reasons to justify straying from your investing principles or strategy “just this once.”

Resist that temptation. Often, what seems like a good move in the moment isn’t wise for the long run. In the spirit of full disclosure, I recently wrote a column explaining how I abandoned my investing principles years ago by selling shares of Warren Buffett’s Berkshire Hathaway company only seven months after buying them. As a result of that lapse, I missed out on a near $400,000 gain on that stock. Ouch.

Hanging on every twist and turn of the market is no way to live, especially in retirement. So instead, learn to live with the fact that the market is flighty and the knowledge that every now and then it’s going to tumble. Just prepare ahead of time, so you can handle that volatility, financially and emotionally.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

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