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).
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.
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.
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.
The stock market is projected to continue its upward climb as the U.S. economy grows in 2015.+ READ ARTICLE
The U.S. shines amid global worries. Here are five strategies for profiting from the economy's relative health in your investing, spending, and saving.
The pace of U.S. growth may be more minivan than Ferrari, but the economy is nonetheless motoring along. Gross domestic product is forecast by the International Monetary Fund to grow 3.1% in 2015. That will put the U.S. ahead of most of its peers, which are facing serious headwinds: Europe may slip into its third recession since the financial crisis, and Japan’s stimulus effort hasn’t revved up its economic engines. China, meanwhile, is trying to maneuver slowing growth into a soft landing.
To make sure growth here doesn’t stall out, the Fed will likely wait till late 2015 to raise rates, and any increase is expected to be small and gradual. That’s still good news, though. “The U.S. economy is in a position to withstand the beginning of interest rates rising—something our trade partners can’t do yet,” says Chun Wang, senior analyst at the Leuthold Group.
Our relative health should continue to lure global investors to U.S. stocks and bonds. That in turn should support the almighty buck. After rising about 5% against a basket of currencies of our major trade partners this year, the dollar could gain another 5% in 2015, Wang says.
A stronger dollar means cheaper overseas travel and cheaper imports—and the latter should keep inflation from picking up momentum as well.
Here’a five-step action plan for profiting off U.S. versus them.
Move to the middle on bonds. While bonds that mature in less than three years are usually considered the safest, “short-term high-grade bonds could be the most vulnerable in 2015 if the Fed starts raising rates as expected,” says Lisa Black, interim chief investment officer for the TIAA General Account. Because the recovery here has been so much stronger than in the rest of the world, global investors will continue to favor 10-year Treasuries, putting upward pressure on prices and keeping a lid on yields. Thus short-term rates, over which the Fed has more influence, are likely to see a much bigger rise relative to their current level.
If you’ve kept a big chunk of bond money in short-term mutual or exchange-traded funds recently—either to hedge inflation risk or to get more yield on cash—get back to an intermediate strategy in 2015. MONEY 50 fund Dodge & Cox Income DODGE & COX INCOME COM NPV DODIX -0.7931% yields 2.5%, vs. less than 0.8% for Vanguard’s Short-Term Bond Fund.
Bet on cyclical stocks. LPL chief investment strategist Burt White—who forecasts a mid- to high-single-digit return for the U.S. stock market in 2015—expects to see above-average performance in sectors that do better when consumers and businesses have more money to spend. In particular, he says, industrial and technology stocks should benefit if the strong economy motivates corporations to invest in systems upgrades. He recommends Industrial Select SPDR ETF INDUSTRIAL SELECT SECTOR SPDR ETF XLI 0.5608% , as well as PowerShares QQQ ETF POWERSHARES QQQ NASDAQ 100 QQQ 0.4398% , which tracks the tech-heavy Nasdaq 100.
Eke more out of your cash. In 2014 the average money-market account paid a mere 0.08%, and that yield isn’t likely to grow in any meaningful way in 2015. But don’t just give up on your savings.
Move cash you need accessible—like emergency funds—to an online bank such as MySavingsDirect, which yielded 1.05% recently, suggests Ken Tumin of DepositAccounts.com. If you have $25,000-plus to deposit, you can earn 1.25% at UFB Direct. Use the rest of your savings to build a CD ladder. Divide the sum into five buckets and deposit equal amounts in one- to five-year CDs. As each comes due, roll it into a five-year to benefit from rising rates. Based on current yields, you’ll earn an average 1.6%.
Head south. The dollar now buys nearly 8% more euros and 13% more yen than a year ago. That will make travel to Europe and Japan less expensive, but it still won’t be cheap. For great value—and some stunning photos besides—consider Costa Rica, says Anne Banas, editor of SmarterTravel.com.
The dollar is up 7% against the colon in the past year, making the country more of a bargain than it already was. Located in the rainforests of Arenal Volcano National Park on the Pacific Coast, the five-star Tabacon Grand Spa Thermal Resort—one of TripAdvisor’s 2014 winners for luxury—starts at $260 a night, for example. And flights from major U.S. cities can be found for $400.
Expect the unexpected. When stocks were spooked in September by Ebola reaching U.S. shores and increased U.S. airstrikes against ISIS, the S&P 500 fell 7% but European shares sunk 13%. U.S. stocks continued to lead when investors returned to focusing on economic growth.
While it’s impossible to predict what will rattle the markets in 2015, what you can do is take stock of your fortitude. If you persevered and profited from this recent snap back, plan for another in 2015 and bet on U.S. outperformance.
On the other hand, if you panicked and sold stocks, dial back your equity exposure by, say, five percentage points if it will keep you hanging on to your allocation in rough seas. Redirect that money to U.S. Treasuries. Jack Ablin, chief investment officer for BMO Private Bank, says that these should benefit from a crisis: “It’s remarkable how Treasuries and the U.S. dollar are the newly appointed safe-haven vehicles for the world.”
Steady Eddies and dividend payers may be too inflated to keep you afloat if the market sinks.
In early fall, you got a reminder of how risky stocks can be. The market sank more than 7% from Sept. 18 to Oct. 15, on fears that the global economic recovery was losing steam. Stocks eventually rebounded, with the S&P 500 and Dow back to setting record highs by early November. Even so, spooked investors did what you’d expect: They pulled $17 billion from equity funds and ETFs from late September to late October, while seeking shelter from the storm in the market’s usual hiding spots.
This flight to safety, which comes on the heels of several similar bouts of anxiety in recent years, has driven up valuations on conservative fare. This includes dividend-paying equities and “low volatility” stocks—you know, boring but stable giants such as Clorox or 3M.
Over the past half-century, low-volatility stocks have traded at about a 25% discount to the broad market, according to the investment firm Research Affiliates. Yet today many of these shares sport higher price/earnings ratios than the S&P 500. The same goes for dividend-paying stocks.
Why is this important? It means the market’s safe havens don’t offer as much protection as you think. Here’s what defensive-minded investors need to know:
If You’ve Been Loading Up On Safe Havens, Stop
It’s easy to see why dividend and low-vol stocks have been popular. Both strategies have beaten the market in downturns—as was the case in this pullback (see chart)—as well as over the long run.
Alas, rising valuations change the calculus. For starters, there’s no guarantee defensive stocks will hold up better in the next slide. In the October 2007–March 2009 bear market, the iShares Dow Jones Select Dividend ETF plunged 61%, vs. 55% for the S&P 500, owing to the fund’s large stake in financial stocks that were pricey at the time. “The higher the valuation, the greater the risk of a steep drop in a bad market,” says Chris Brightman, chief investment officer of Research Affiliates.
Meanwhile, there’s a simple reason why these stocks have traditionally beaten the market: “You’re really buying value investments, since they’re lower-priced stocks,” says Gregg Fisher, head of investment company Gerstein Fisher. Yet you can’t really make the case now that these shares are undervalued and therefore likely to outperform.
Focus on Real Value
If what you’re really seeking is the protection that low-priced stocks can sometimes provide, go with a traditional “value” fund that focuses on shares with cheaper-than-average P/E ratios.
Over the past 15 years, American Century Value has outpaced the S&P 500 by more than three percentage points annually. Yet in months when the market fell, the fund lost only around three-quarters as much, according to Morningstar. Prefer a passively managed option? Vanguard Value Index has also beaten the S&P over the past 15 years while falling less in down months.
And Don’t Forget Bonds
Say you held a 60% stock/40% bond portfolio in 2009 and haven’t reset that mix since. You’re now sitting on a 73/27 portfolio, as stocks have outpaced fixed income. If you’re in your thirties or forties you may not have to worry, as your lengthy time horizon warrants a big stake in equities.
If you’re older and your tolerance for risk has changed, then you may choose to dial back that stock allocation, perhaps even shifting more to high-quality bonds, says Vanguard senior analyst Chris Philips.
Aren’t bonds themselves frothy? Yes. And they grew more expensive in this pullback, as yields on 10-year Treasuries sank from an already low 2.63% to an even lower 2.09% before recovering. But here’s the thing: When bonds lose, they lose a lot less. The worst year for equities was a drop of 43%. For fixed income, it was only an 8% slide.
In fact, bonds made you money in the 2007–’09 bear. And isn’t that the ultimate defense—something that zigs when stocks zag?
If a financial adviser tries to sell you on one of these investment vehicles, don't take the bait.
You’re probably already wise to many schemes designed to separate you from your money—emails from Nigerian princes, phishing scams, and the like. But does your BS detector go off when confronted with slick come-ons for perfectly legal but dubious investments? To see, check out these five pitches that are often targeted to people investing for retirement.
1. “What you need is a self-directed IRA.” If the people pushing self-directed IRAs recommended that you self-direct your IRA dough into low-cost index funds, I’d urge you to sign on. But the companies and advisers pushing self-directed IRAs typically tout them as a way to invest your retirement dollars in “alternative” or “nontraditional” investments that can range from cattle and fishing rights to restaurant franchises and bankruptcy claims, all in the name of diversification. “Di-worse-ification” is more likely. State securities regulators even warn that some promoters may step over the line into illicit investments or activities.
If you’ve got a huge retirement stash and want to take a flier with a teensy-weensy percentage of it in legal-but-exotic alternatives, fine. Good luck with it. But if you’re dealing with money you’ll be relying on to get you through retirement, stick with a good old, if slightly boring, diversified portfolio of stocks and bonds.
2. “I can get you high yields safely!” Given today’s low interest rates, who wouldn’t take this bait? Problem is, the combination of high yields and low risk is an oxymoron. Fatter yields and higher returns always come with greater risk, even if that risk isn’t apparent or is being downplayed by the person peddling the investment. Which means pushing the envelope for more yield can backfire. Just think back to 2008, when investors got burned in auction-rate securities, bank loan funds. and other investments that were marketed as cash equivalents.
When it comes to the portion of your savings that you must have ready access to and don’t want to put at risk, you need to play it safe. So resist the siren song of tempting yields offered by private investment notes, promissory notes, commercial mortgage notes, and the like and limit yourself to top-paying FDIC-insured savings accounts and short-term CDs. Granted, they’re not yielding much, but at least you won’t be in for any nasty surprises.
3. “Don’t risk your money on the volatile stock market—buy gold.” The gold fanatics haven’t been out in force lately because the stock market has been doing so well, up an annualized 20% or so for the past three years. But the gold bugs will resurface big time once stocks hit an extended period of turbulence or experience a major 2008-style meltdown. That’s when you’ll hear phrases like “nothing holds its value like gold” and “gold provides a safe haven against stock market volatility.”
When you hear those lines, remember this. Gold can fluctuate just as wildly as stocks. Gold recently traded at around $1,200 an ounce. Which means anyone who bought gold three years ago at a price of $1,700 an ounce is sitting on a loss of almost 30%. There may be other reasons to put a bit of your savings in gold—diversification, a hedge against inflation, or a weak dollar (although I’m not a big gold fan even for these reasons). But if it’s stability of principal you seek, gold is not where you’ll find it.
4. “For retirement peace of mind, buy yourself guaranteed income.” There’s actually a lot of truth to this statement. Research shows that retirees who get a monthly check for life from a traditional pension are more content than those who have the same level of wealth but only a 401(k). The problem is that many of the people touting the virtues of guaranteed income are often peddling variable annuities with income riders that can carry bloated fees of 2% to 3% a year, and are devilishly complicated to boot.
If you would like more guaranteed lifetime income than Social Security alone will provide, consider putting a portion of your savings into a type of annuity that’s easier to understand, less costly, and that you can comparison shop for on your own: an immediate annuity. Then invest the remainder of your nest egg in a mix of stocks and bonds that can provide additional income, plus long-term growth.
5. Forget bonds—you can live off stock dividends! Unfortunately, it’s not just wrong-headed advisers who spout the line that dividend-paying stocks are a reasonable substitute these days to bonds. Many of my compadres in the financial press also create the impression that putting more money into dividend stocks is an acceptable way to generate extra income now that bond yields are so low. Granted, bond yields are anemic. And when interest rates rise (whenever that may be), bond prices will take a hit, with longer-maturity bonds getting whacked more than short- to intermediate-term issues.
But none of that means that dividend-paying stocks are less risky than bonds. Stocks that pay dividends are still stocks, and thus far more volatile than bonds. If you doubt that, consider this: From its high in May 2007 to its low in March 2009, the iShares Select Dividend ETF lost more than 60% of its value compared to just over 50% for the broad stock market. That’s an extreme case. But the point is that dividends or no, stocks have a much bigger downside potential than bonds.
So by all means include dividend stocks as part of the stock allocation in your portfolio. But don’t let anyone sell you on the idea that dividend stocks can be a substitute for bonds.
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It was the fifth-straight week of gains for the U.S. market, reversing a big dip earlier in the year
The U.S. stock market closed out its fifth-straight week of gains with new highs Friday, buoyed by positive economic news from China and Europe.
The People’s Bank of China announced a surprising interest rate cut on Friday — the bank’s first in two years and one that sent international markets higher. Meanwhile, Mario Draghi, the president of the European Central Bank, further boosted global investors’ confidence by saying the central bank is prepared to step up efforts to give the struggling eurozone economy a much-needed shot in the arm.
The Dow Jones Industrial Average jumped 91 points, or 0.5%, to finish at a new record close of 17,810. The blue-chip index, which also set a new intraday high by flirting with the 17,900-point mark, hit a record close two out of five days this week after recording new all-time high finishes three times last week.
The S&P 500 also posted another record close Friday by rising almost 11 points, or 0.5%, to 2,064. It was the closely-watched index’s third record finish of the week after posting three new records last week, as well.
Meanwhile, the Nasdaq composite was up slightly, gaining 11 points, or 0.2%, to finish at 4,713. The tech-heavy index continues to climb to its highest levels since 2000.
One of Friday’s best-performing stocks was auction house Sotheby’s, which jumped nearly 7% following news of its CEO’s departure after a long battle with activist investors.
For the most part, it was a week of moderate gains for the U.S. market. But it did mark the fifth-straight week of positive performance coming on the heels of the best four-week stretch since 2011. Earlier this week, the markets improved on news that Japan’s prime minister would delay tax hikes for 18 months in the hopes of stimulating that country’s sluggish economy.
The Dow Jones and S&P 500 were both up by about 1% on the week, while the Nasdaq gained just 0.5% over the past five days.
Each of the major indices has rebounded sharply after a series of market-wide sell-offs in early October nearly erased all of the year’s gains as investors showed their concerns over the global economy and the possibility of a sooner-than-expected interest rate hike in the U.S.
The best tool for addressing anxiety about the stock market is information. Unfortunately, that isn't always enough.
Like some of our investment advisory clients, I fear the market sometimes. The way I combat that fear is with information. Markets go up, markets go down. Here’s what’s normal. Here’s where we are.
Last month, in conversation with one of my more nervous clients — when I had finished my list of market facts and cycles, when I had emailed my short and long-term charts — she replied, “And I’m supposed to be content with that?”
Essentially, yes. That’s the answer most financial professionals would have, if they’re honest.
I suppose you may find it strange, but that’s the kind of challenge I’m up for. It’s a challenge to try to keep clients calm when markets are anything but calm.
In 2008, many of my friends who are financial advisers were deeply affected by the trauma that clients experienced as markets worldwide experienced the worst decline since the Great Depression. They remain affected by it. Trauma is not too big of a word.
Today, I don’t fear the downturn. I speak.
In a downturn, people’s attention is most focused on sliding markets. They may hear what you have to say, but they may not listen to your various messages: Markets are risky. They go up and down. If you don’t take market risk, you limit your potential for capturing the gains when they do come. If you do take market risk, you’ve got to be able to see that downturns are a part of the deal. Shall I get out my trusty charts now and show you just how common it is for markets to fluctuate?
Probably I’d bore you if I did. What you probably want to know is what’s a good strategy for dealing with a volatile market.
You could move some money out of equities, of course. Or we could layer into the portfolio some exchange-traded funds that continuously move out of the most volatile stocks and into the less volatile ones. Both these moves will limit returns, but will also make the trends less upsetting.
But even if we lessen the throbbing uncertainty, we cannot eliminate it.
No one has overcome market cycles yet, no matter what they promise. Cue the charts.
And here’s the flip side: For all the confidence the clients might have in us, we can’t tell them when the markets will tumble. We can’t tell them when to run for the hills. Because no one can.
I feel I have gone down this road to every end I can find, looking for the analytics, the portfolio theory, the guru, the portfolio construction expertise, the economic underpinning, the macro-down and the bottom-up way of selecting exactly what would be the best globally diversified portfolio. I’ve made my own deal with risk and return. But none of that work changes the simple fact markets do go down periodically. Personally, I am content with that.
But for that client, this is not a comfortable fact.
It’s humbling, really, to have a discussion in which you cannot provide something which is very much wanted.
But it’s a smart discussion to have.
The client told me that when the market goes up again, I have permission to say, “I told you so.”
The market is up nearly 10% since we had that conversation, so I might. But when times are good in the markets, it’s the same as when times are bad: Clients don’t listen.
Harriet J. Brackey, CFP, is the co-chief investment officer of KR Financial Services, a South Florida registered investment advisory firm that manages more than $330 million. She does financial planning for clients and manages their portfolios. Before going into the financial services industry, she was an award-winning journalist who covered Wall Street. Her background includes stints at Business Week, USA Today, The Miami Herald and Nightly Business Report.
Media pundits love to make a big deal of new stock market peaks—but they are actually surprisingly common.
The stock market reached new record highs on Monday, with the Dow and S&P 500 indexes closing above 17,613 and 2038, respectively.
As usual, the occasion was cause for skeptics to raise concerns that we are in the midst of a market bubble.
But the headline numbers obscure a simple point: Record market highs are not unusual during a bull market—at all. As shown by the chart below, courtesy of my colleague Pat Regnier, record highs can occur again and again for years before the market tumbles.
That’s not to say that another market tumble is completely out of the question. After all, even at the lowest point of the October market slump, stock valuations were at or near historic highs.
But the simple fact of new nominal highs in the market’s major indexes is not by itself reason for concern. As investment adviser and blogger Josh Brown points out in the video below, the market has been hitting new highs about once a month on average over the past 65 years.
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