MONEY Investing

Why Wary Investors May Keep the Bull Market Running

running bull
Ernst Haas—Getty Images

Retirement investors are optimistic but have not forgotten the meltdown. That's good news.

Six years into a bull market, individual investors around the world are feeling confident. Four in five say stocks will do even better this year than they did last year, new research shows. In the U.S., that means a 13.5% return in 2015. The bar is set at 8% in places like Spain, Japan and Singapore.

Ordinarily, such bullishness following years of heady gains might signal the kind of speculative environment that often precedes a market bust. Stocks in the U.S. have risen by double digits five of six years since the meltdown in 2008. They are up 3%, on average, this year.

But most individuals in the market seem to be on the lookout for dangerous levels of froth. The share that say they are struggling between pursuing returns and protecting capital jumped to 73% in this year’s Natixis Global Asset Management survey. That compares to 67% in 2013. Meanwhile, the share of individuals that said they would choose safety over performance also jumped, to 84% this year from 78% in 2014.

This heightened caution makes sense deep into a bull market and may help prolong the run. Other surveys have shown that many investors are hunkered down in cash. That much money on the sidelines could well fuel future gains, assuming these savers plow more of that cash into stocks.

Still, there is a seat-of-the-pants quality to investors’ behavior, rather than firm conviction. In the survey, 57% said they have no financial goals, 67% have no financial plan, and 77% rely on gut instincts to make investing decisions. This lack of direction persists even though most cite retirement as their chief financial concern. Other top worries include the cost of long-term care, out-of-pocket medical expenses, and inflation.

These are all thorny issues. But investing for retirement does not have to be a difficult chore. Saving is the hardest part. If you have no plan, getting one can be a simple as choosing a likely retirement year and dumping your savings into a target-date mutual fund with that year in the name. A professional will manage your risk and diversification, and slowly move you into safer fixed-income products as you near retirement.

If you are modestly more hands-on, you can get diversification and low costs through a single global stock index fund like iShares MSCI All Country or Vanguard Total World, both of which are exchange-traded funds (ETFs). You can also choose a handful of stock and bond index funds if you prefer a bit more involvement. (You can find good choices on our Money 50 list of recommended funds and ETFs.) Such strategies will keep you focused on the long run, which for retirement savers never goes out of fashion.

Read next: Why a Strong Dollar Hurts Investors And What They Should Do About It

TIME Economy

Don’t Trust the Markets: A Correction Is Coming

stock-market-data-screen
Getty Images

The Fed, despite its recent pronouncements, will trigger a fall in stock prices later this year

Up until yesterday’s Fed meeting, America’s central bankers said they were going to be “patient” about the timing of an interest rate hike, which most experts believe will ultimately result in a significant stock market correction (see my recent column about why). So why did that make markets go up so dramatically yesterday?

Because everything else about the Fed’s communication said “we’re going to be more patient than ever” about when and how to raise rates. The central bank downgraded its forecast on the US economic recovery, saying that the pace of the recovery had “moderated somewhat,” in large part because of the strong dollar.

Why is the dollar strong? Mainly because everyone knows that the easy money monetary policy in the US is coming to an end. (QE is over, and most economists are now predicting a rate hike by September.) Meanwhile, pretty much every other central bank is now easing monetary policy—witness the ECB’s new money dump, which has sent European markets soaring.

What does all this tell us? That markets and the real economy are disconnected in a way that is terrifying. Central banks are, as chief economic advisor to Allianz and former PIMCO CEO Mohamed El-Erian put it to me recently, “the only game in town.” Every time the Fed says it will keep rates low a little longer, the market party goes on. All that means is that there will be more pain, eventually, when the punch bowl gets pulled away.

MONEY stocks

Nasdaq 5000: Three Reasons “This Time Is Different” Doesn’t Fly

The Nasdaq Marketsite digital monitor wall is seen in New York March 2, 2015. U.S. stocks advanced on Monday, with the Nasdaq moving above the 5,000 mark for the first time in 15 years, helped by technology deals and mixed data that pointed to a slowly accelerating economy.
Shannon Stapleton—Reuters The Nasdaq Marketsite digital monitor wall is seen in New York March 2, 2015. U.S. stocks advanced on Monday, with the Nasdaq moving above the 5,000 mark for the first time in 15 years, helped by technology deals and mixed data that pointed to a slowly accelerating economy.

How sure are you that the Nasdaq isn't partying like it's 1999?

For only the second time ever, the Nasdaq composite index has climbed above the 5,000 mark — 15 years after momentarily accomplishing this feat just before the tech wreck in 2000.

This has led to a chorus of articles about how things are different from a decade and a half ago.

For instance, some have argued that the Nasdaq is not the same tech-heavy index it was in the late 1990s, when tech giants like Microsoft and Cisco Systems dominated the market. Others note that the Nasdaq is a bargain compared to March 10, 2000, when it hit 5048 and the dot.com bubble burst. And still others say there is much less euphoria surrounding the tech economy than in the 1990s.

Really?

Let’s explore these arguments.

1) Yes, tech makes up slightly less of this index than it once did. But the Nasdaq is still extremely tech-centric. In March 2000, technology stocks accounted for half the Nasdaq’s stock market value, and the top holdings consisted of Cisco Systems, Microsoft, Intel, Qualcomm, and Oracle. And today? Tech is 47% of the index, and the top stocks in the index are Apple, Microsoft, Google, Intel, Facebook, Amazon.com, and Cisco. So have things really changed? Not so much.

2) Yes, parts of the Nasdaq are cheaper than they were in the 1990s. For instance, Microsoft, Intel and Cisco all trade at discounts to the S&P 500. But comparing today’s Nasdaq to the Nasdaq of 2000 is sort of like comparing all windy days to Hurricane Sandy. Sure, by comparison things seem calmer.

At a price/earnings ratio of 21.5, today’s Nasdaq looks “reasonably” priced compared to its once-in-a-lifetime P/E of 175 in 2000. But it’s foolish to make relative judgments against such historically extreme cases, says Greg Schultz, a principal with Asset Allocation Advisors. The fact is, at an average P/E of 21.5, the Nasdaq is still considerably more expensive than the Dow Jones industrial average, the S&P 500, European stocks, emerging market stocks, and the list goes on and on.

3) The tech economy has matured. Yes, there are mature technology companies, such as Microsoft, Cisco, and Intel, which all now cash-rich dividend-paying stocks that yield more than the broad market and trade at decent valuations. But giant mainstream computer-based tech giants are no longer the focal point of the tech economy or the Nasdaq.

Last year, Ben Inker, co-head of asset allocation at the investment firm GMO, pointed out that the euphoria had shifted to smaller health-care and biotech names. He was right. Biotech stocks such as Isis Pharmaceuticals (up 538% since 2013; no profits) and drugmaker Incyte (up 422% since 2013; no profits) are now the hottest part of the Nasdaq. Overall, the Nasdaq Biotech index now trades at P/E of around 50.

Meanwhile, many of the Nasdaq’s hottest social and streaming media stocks this year — including Twitter, Netflix — are either profitless or trading at astronomical PE’s.

And as Fortune magazine recently pointed out in its cover story, The Age of Unicorns, tech entrepreneurs and venture capitalists only seem to get excited these days if they can create startups that are instantly valued at $1 billion or more.

So how sure are you that the Nasdaq isn’t partying—at least a little—like it’s 1999?

MONEY Inequality

Why the Nasdaq Is Back but the Middle Class Isn’t

The Times Square news-ticker announces the NASDAQ composite index topping 5,000 points on March 2, 2015 in New York City. The NASDAQ composite climbed over 5,000 points for the first time in 15 years.
Bryan Thomas—Getty Images The Times Square news-ticker announces the NASDAQ composite index topping 5,000 points on March 2, 2015 in New York City. The NASDAQ composite climbed over 5,000 points for the first time in 15 years.

Why the average American has missed out on the stock market's gains.

The Nasdaq touched 5,000 on Monday and investors are having some heady Y2K flashbacks. The tech-heavy index last approached such lofty heights in 2000, when the stock market bubble had yet to pop. It was time when electronic trading, tech funds and hot IPOs were middle class obsessions. It felt like everyone could get a piece of the action.

There’s some of that boom-boom feeling in air again. (See: Uber, Shake Shack and the growing herd of “unicorns,” Silicon-Valley-speak for start-ups valued at $1 billion.) But while the Nasdaq index has returned to prosperity, this stock rally in general has felt like, in investment blogger Josh Brown’s words, a rich man’s bubble. For one thing, for better or for worse, the percentage of adults invested in the stock market is at its lowest point in decades. The financial crisis forced many middle-income investors to liquidate their stock holdings in order to weather the following years of financial hardship.

150226_INV_GallupPoll

And nobody is under the illusion that everyone’s getting rich.

A study financed by the Russell Sage foundation found that the median household’s net worth declined by $32,000 between 2003 and 2013, from almost $87,992 to $56,335. That means a typical household lost 36% of its wealth in 10 years. Yet in that same 10 year time-span, not only the Nasdaq has boomed back. The S&P 500, the most commonly used indicator of stock market health, is up 60%.

The fact that fewer Americans are invested in the market is only part of the issue. Study co-author Fabian Pfeffer says home equity made up more than half of the median household’s wealth in 2007, just before the housing crash. Worse, the housing market has improved far more slowly than the stock market, resulting in a much slower recovery for middle-income households.

ycharts_chart-5

 

And so volatility has tended to amplify inequality, even when markets eventually bounce back. While the average American was forced to divest from the stock market when shares were (in hindsight now) cheap, wealthier people were not, meaning the latter group has benefited more when the economy improved. Wealthier Americans also had a higher percentage of their wealth outside the real estate market. Pfeffer says the median household in the richest 5th percentile held just 16% of their wealth in home equity, with the rest primarily held in either business assets (49%) or financial instruments like stocks and bonds (25%).

The end result? America’s wealthiest households prospered in the aftermath of the financial crisis as the stock market improved, while the middle class was largely passed over. Pfeffer’s research found the richest 5% of Americans held 24 times the wealth of the median household in 2013, up from 13 times the wealth of a typical household in 2003. In other words, wealth inequality essentially doubled over the last decade.

MONEY stocks

Are International Stocks Still Worth the Risk?

As the Eurozone continues to face the Greek economic crisis and slow growth overall for the continent, many investors are wondering if buying international stocks is worth the risk.

MONEY stocks

The Problem With Stock Market Games? They Aren’t Boring Enough

150221_INV_game_1
Alamy

If you think investing is fun, you're probably doing it wrong.

People often say the stock market is a game, but a growing number of companies are taking that literally. A slew of new apps, like Ivstr, Kapitall, and Bux (the latter isn’t yet available in the U.S.), say they can teach you about investing by turning it into a short-term competition, complete with scoreboards and points.

The apps keep everything simple by having users compete to predict whether a stock, or portfolio stocks, will go up or down in the next few hours, days, or weeks. (Ivstr goes up to a year.) A few try and crank up the excitement a little further with head-to-head “battles” against friends and little encouragements like “OMG!” after a player completes a trade. It’s all fake money at first, but Bux and Kapitall let users move on to real dollars.

These ideas all sound kind of fun. But do they really teach what you need to know about investing? Stock market apps tend to center around choosing a group of stocks and trading frequently based on their performance.

The trouble is, you’ll do better with your real-life money if you skip all the trading and just buy and hold a low-cost, diversified fund. Research has shown even hedge funds run by market pros can’t beat the market in the long term. Mutual funds mostly don’t beat the index either. Warren Buffett is currently winning his $1 million bet that an S&P 500 index fund will outperform a fund of hedge funds, net of all fees and expense, over just one decade.

You can actually measure how much investors as group cost themselves by trading. According to the mutual fund research group Morningstar, the average U.S. equity mutual fund earned an annualized 8.2% over the 10 years from 2004 through 2013. But the the typical fund investor (as measured by adjusting for cash flows in and out of funds) earned only 6.5%, thanks to poorly timed fund trades. Its hard to imagine retail stock traders are any better at guessing market trends.

Still, maybe there is something to this whole investing as a game idea. We just need to tweak it a little.

Allow me to introduce MONEY’s forthcoming iPhone app, RspnsblFnnclPlnnr. Here’s how it works:

  • Instead of having users pick stocks and watch the market, you spend the first hour looking for funds with the lowest fees and setting up a scheduled deposit. Then it would close.
  • The game will let you come back to check your accounts once a year, to rebalance your stock and bond allocations. But each additional viewing would cost 1000 Investo-Points.
  • Every time you try to trade a stock, the game’s in-app avatar will shake its head at you and ask if you really, really want to do that.
  • You can compete with friends! Thirty years from now, you’ll all get badges showing your huge balances, which you can post on Facebook. Because there will definitely still be a Facebook.

Okay, I suspect my app will have trouble getting past the first round of venture funding. It’s not exactly the most exciting game in the world. Except for the parts where you get to send your kids to college and retire with a decent nest egg. That part is pretty fun.

TIME stock market

Here’s the Biggest Change in Technology in Recent Memory

Yelp Yelp. If you’re on vacation or new in town (or even not-so-new in town) and you want to learn about what’s around you — shops, restaurants, dry cleaners, gas stations, bars, you name it — Yelp has you covered, complete with user reviews so you can separate the good from the bad.

It's not some new, slick gadget or big idea

With the bulk of the earnings season behind us, the stock market appears to be in a much better mood than it was a month ago. The S&P 500 is up 3.8% over the past month, while the tech-heavy Nasdaq 100 is up an even healthier 5.9%. Tech, it seems, is a popular sector refuge in the sea of uncertainty facing 2015.

But a closer look at the tech earnings from the past month shows a more complex story as not all tech names are being favored equally. In fact, some of the companies that dished out disappointing forecasts were hammered hard. If there is one key trend that emerged from the recent parade of fourth-quarter earnings, it’s that 2015 is turning into a stockpicker’s market for tech shares.

This is in contrast to the past couple of years, when waves of enthusiasm or caution swept across the tech sector at large. Last year, for example, an early rally for tech led to concerns that another bubble would emerge–concerns that were quickly dispelled by a brutal selloff come April. By June, stocks were recovering, and the Nasdaq 100 ended last year up 18.5% and the S&P 500 up 11.8%.

One trend from 2014 that’s continuing into this year is the outperformance of larger-cap tech stocks. Smaller tech shares tend to do well in the several months following their IPOs, then have a harder time pleasing investors. A good example is GoPro, which went public at $24 a share in June, surged as high as $98 in October and and fell back to $43 last week in the wake of its earnings report.

GoPro’s post-earnings performance illustrates the selective mood of investors. The company blew past analyst expectations with revenue growth of 75% and higher profit margins. But the stock plummeted 15% the following day as analysts raced to lower price targets. Why? GoPro’s outlook was seen as too weak to support its lofty valuation and its chief operating officer was leaving.

That pattern played out in other smaller tech companies. Yelp slid 20% after its own earnings report that beat forecasts but that showed worrisome signs of slower growth and slimmer profits this year. Pandora fell 17% to a 19-month low after disappointing revenue from the holiday quarter. Zynga finished last week down 18% after warning this quarter will be much slower than expected.

What all of these companies also have in common are uncomfortably high valuations. Even after the post-earning selloff, GoPro is trading at 37 times its estimated 2015 earnings. Pandora is trading at 75 times its estimated earnings, while Yelp is trading at an ethereal 371 times. The S&P 500 has an average PE of just below 20.

So which companies did the best this earnings season? As a rule, it was big cap names serving the consumer market: Apple, Twitter, Amazon and Netflix. What these four companies have in common beyond strong earnings last quarter is that all were seen as struggling by investors during some or all of 2014.

Compare them to big-cap tech names that posted decent financials in the fourth quarter but that weren’t seen as struggling before, but instead were seen as thriving tech giants. Google, for example, is up 6% over the past month, while Facebook is up 1%. Both are enjoying steady growth that was so consistent with their past performance it has a ho-hum quality to it.

By contrast, Apple, which had been portrayed by critics as a gadget giant past its prime, has seen its stock rally 21% in the past month to a $740 million market cap, the first US company to be worth more than $700 billion. Amazon, which investors feared would suffer prolonged losses because of its expansion plans, is up 29%. So is Twitter, another object of investor worry in 2014. Netflix, a perennial target of bears, is up 40%.

So what have we learned about the technology sector so far this year? On the whole, investors are favoring tech stocks in a world of uncertainty – where negative interest rates have become bizarrely commonplace, and where the next market crisis could come from a crisis involving the Euro’s value, or China’s economy, or oil’s volatility, or Russia’s military aggression.

But at the same time, investors have grown more selective about the tech names they invest in. They might snap up hot tech IPOs, but they’ll drop them quickly if those companies can’t deliver over time. They prefer big tech, especially companies that cater to consumers. And if those tech giants can engineer a turnaround, they’re golden.

TIME Companies

This Brilliant 29-Year-Old Has the Hardest Job in Silicon Valley

Box, Inc. Chairman, CEO & co-founder Aaron Levie, second from right, gets a high-five during opening bell ceremonies to mark the company's IPO at the New York Stock Exchange on Jan. 23, 2015.
Richard Drew—AP Box, Inc. Chairman, CEO & co-founder Aaron Levie, second from right, gets a high-five during opening bell ceremonies to mark the company's IPO at the New York Stock Exchange on Jan. 23, 2015.

Well, one of the hardest. The CEO of recently IPO'ed Box faces tough competitors and a quickly changing market

Well, so much for that first-day pop. After pricing at $14 a share on Jan. 22, Box saw it stock rise as much as 77% on its first day of trading. In the six trading days since then, it’s lost more than a quarter of its peak value, closing just above $18 a share on Monday.

The first-day pop is both an honored Wall Street tradition and a sucker’s bet that individual investors keep falling for. Most tech IPOs that start out the gate overvalued yet with momentum behind them are as a rule trading significantly below those initial highs several months later. It only took Box a matter of days, not months.

The success of Box’s IPO isn’t important just for the company’s shareholders, buy for other tech companies – especially those in the enterprise market – planning on going public in coming months. The thing is, the outlook for Box is devilishly hard to predict because it’s a grab bag of challenges and opportunities, of promise and peril alike.

Box is a company growing revenue by 80% a year but it’s lost in aggregate nearly half a billion dollars, mostly on sales and marketing costs to win customers. It has one of the most respected young CEOs in Silicon Valley, influential partners and blue-chip customers but it’s toiling in a market that’s fragmented, changing quickly and growing more competitive by the week.

The bear case on Box is easier to articulate and so it may be gaining the upper hand among investors right now. First there are the losses, shrinking but still substantial. Net loss totaled $129 million in the nine months through October, down from $125 million in the year-ago period.

The hope is that as Box grows, losses will keep declining and eventually disappear as the company pushes into the black. But that may not happen as quickly as some expect. In the most recent quarter, net loss grew by 21% from the previous quarter, nearly double the 10% growth in revenue for the same period.

Then, there’s the valuation. Without profits, defenders point to the price-to-sales ratio but even here Box’s valuation is high. Box’s market value of $2.2 billion is equal to 11 times its revenue over the past 12 months. Even at its $14 a share offering price, Box was priced at 9 times its revenue.

Finally, in a stock market where the most coveted private tech companies are delaying IPOs, Box’s approach to the public market had more than its share of glitches. The company disclosed its IPO plans last March then delayed the offering until this year. Box initially planned to raise $250 million in the offering, then lowered the take to $175 million.

And yet there is reason to think that, if enough goes right for Box in the next year or so, Box could still have a bright future ahead of it. That’s because – unlike IBM, Oracle and other enterprise software giants – Box is well positioned to benefit from the inevitable shift from bloated, aging old business productivity software to an era where content is not just stored securely in the cloud but is created and collaborated there.

One unusual twist about Box’s long journey to its IPO is that, even while people disparaged the company’s worrisome financials, few if any had bad things to say about its CEO. Aaron Levie has a knack for seeing market shifts in advance. He founded Box in 2005 after seeing that online storage was finally ready to take off.

As Box competed with popular startups like Dropbox and, increasingly, with giants like Microsoft, Levie pushed Box away from simple online storage to areas of the enterprise cloud that will grow. Lower costs and stronger security are enticing companies in most industries to conduct more internal communications on the cloud as opposed to local networks that have been vulnerable to outside hackers.

Of course, Dropbox, Microsoft and others are also gunning toward this online-collaboration market. So rather than a generalized service like Office 365, Box is pushing to tailer its offerings to individual industries. In October, it bought MedXT, a startup working to allow sharing of radiology and medical imaging with doctors and patients. Box is also working on other industry-specific software for retail, advertising and entertainment.

To move quickly and reach out to customers in these industries, Box has had to spend more on sales and marketing than it was bringing in in revenue. That meant burning through about $23 million a quarter, which meant tapping public and private markets quickly to finance the sales push.

So Box, as ugly as the financials look now, is also an bet that the company is sitting on the edge of a big shift in the way companies communicate internally and externally -from desktops to mobile, from LANs to the cloud – and can provide a platform that helps them do it privately and securely. That bet is expensive and risky, but the payoff is possible.

That first-day pop was meaningless, as they so often are. Box will need time to prove its mettle, but it may well do so. For now, the uncertainty surrounding its prospects is likely to bring its stock price lower over the coming months. But for investors who are inclined to believe Box can execute on its vision, a cheaper stock may make taking the risk more worthwhile.

Read next: Amazon’s Plan to Buy Old RadioShacks Is a Brilliant Master Stroke—If It Happens

Listen to the most important stories of the day.

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.
Hannelore Foerster—Getty Images The symbol of the euro, the currency of the eurozone, outside the European Central Bank in Frankfurt, Germany.

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.

Your browser is out of date. Please update your browser at http://update.microsoft.com