MONEY Tech

Why Won’t Google Just Let Google Glass Die?

150326_INV_DIEGOOGLEGLASS
Phillip Bond—Alamy

Despite heavy criticism and disappointing sales, the search king is sticking with its Glass initiative.

Google GOOGLE INC. GOOG -1.23% board Chairman Eric Schmidt has never been shy about pushing the envelope in the company’s penchant for innovation. Its ongoing experiments with a self-driving car and those odd-shaped balloons in Project Loon (Google’s effort to beam Internet connectivity to remote regions of the world) are just a couple examples.

However, Google didn’t stop with the cars and balloons. Word has it Google is also working on nanotechnology that would seek out and diagnose cancer and heart disease, among other ailments. That’s heady stuff, and supports the notion that Google is one of the most innovative companies on the planet.

Then there’s Glass. Google’s wearable initiative might have topped the innovation list; instead, after lackluster sales and consumer angst, Google shut down its “Explorer” program, which seemingly put an end to an unsuccessful bid to bring Jetsons-like devices to the world. But according to a recent interview, Schmidt simply won’t let Glass die. And that’s a mistake.

Knowing when to say when

Conceptualizing, let alone developing, the aforementioned innovative technologies speaks volumes about Google. But as with any company willing to take calculated risks that result in fundamental changes in the way consumers live, there are misses along the way.

Longtime Google nemesis Apple APPLE INC. AAPL -0.82% didn’t become the largest company in the world thanks to its digital assistant Newton or the wildly unpopular Pippin gaming console. And those are not even in the same innovation ballpark as nanotechnology pills, let alone Google Glass. But from a business perspective there sometimes comes a time to cut the cord — when did you last see a Newton? — and for Google Glass, that time has come and gone.

What’s the problem?

A big concern, certainly from an investor’s perspective, is there’s no mass market for Glass. While the notion of a fully connected, powerful computer wearable device — which Glass was intended to be — has potential, continuing to pour resources into something consumers aren’t interested in isn’t warranted.

Although Google hasn’t revealed the cost of developing Glass, let alone its ongoing overhead to build a new version with longer battery life, better sound, and improved display, it certainly hasn’t been cheap. For shareholders to get a return on that investment, Glass will need to become a mainstream success, and that’s not going to happen.

It could be argued there is a niche business case for Glass. It could make sense for engineers who want to view detailed 3D specs of a building while it’s being built, or for doctors and other professionals needing to access reference data and communicate on the fly. But Google has put too much money and time into Glass for it to simply meet a few, specific needs. And Schmidt has made it clear: Google intends to bring Glass to the masses.

But according to IDC, by 2018 the entire wearable device market will total a (relatively) paltry 112 million units. To put that in perspective, that same year 1.9 billion smartphones are expected to be shipped globally.

The insurmountable problem

Why is there no market for Glass? After all, Glass is actually a stand-alone, Internet-connected device, unlike the new Apple Watch that has garnered so much press. Apple Watch is like virtually every other device of its ilk: It requires a smartphone to utilize most features, which include what amount to a pager and health monitor. Meanwhile, Glass has actual computing functions, including pictures, audio, and surfing the Internet.

The problems began with poor aesthetics. The first versions of Glass were simply not something most consumers would wear. Google is rumored to be working with designers to remedy the appearance problem, but the poor looks pale in comparison to the biggest concern: privacy. Nearly two years ago, even as Glass was in its earliest stages, a laundry list of industries, including banks, sports arenas, and hospitals, banned Glass.

In some instances the concerns were safety-related, but many restaurants and other public businesses banned Glass because of how uncomfortable it makes their patrons. The notion of Glass owners surreptitiously taking pictures of complete strangers and recording their conversations leaves a lot of people — understandably — uncomfortable.

With privacy becoming more of a concern with each passing day, overcoming that challenge could prove impossible for Glass, rendering it unmarketable. Speaking of Glass, Schmidt said, “These things take time.” True, cutting-edge innovations do take time to develop, and sometimes even to catch on. But all the time in the world won’t help Glass. Sometimes, Google, you have to know when to say when.

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TIME

The Market Mirage

What stock prices do--and don't--tell us about the actual value of a company

One of the hardest-dying ideas in economics is that stock price accurately reflects the fundamental value of a given firm. It’s easy to understand why this misunderstanding persists: price equals value is a simple idea in a complex world. But the truth is that the value of firms in the market and their value within the real economy are, as often as not, disconnected. In fact, the Street regularly punishes firms hardest when they are making the decisions that most enhance their real economic value, causing their stock price to sink.

There are thousands of examples I could cite, but here’s a particularly striking one: the price of Apple stock fell roughly 25% the year it introduced the iPod. The technology that would kick-start the greatest corporate turnaround in the history of capitalism initially disappointed, selling only 400,000 units in its debut year, and the company’s stock reflected that. Thankfully, Steve Jobs didn’t give a fig. He stuck with the idea, and today nine Apple iDevices are sold somewhere in the world every second.

This story illustrates the truth: Stock prices are usually short-term distractions, while true value is built up over time. According to McKinsey, 70% to 90% of a company’s value is related to its likely cash flow three or more years from the present. That makes sense–making money from new inventions takes time. Yet Wall Street analysts, whose opinions help set stock prices, typically base their assessments of a firm on one-year cash-flow projections. What’s more, like all individuals, they have their biases; during boom periods, they tend to believe that corporate earnings will be higher than during bear markets, regardless of the underlying corporate story.

CEOs, who are paid mostly in stock and live in fear of being punished by the markets, race to hit the numbers rather than simply making the best decisions for their businesses long term. One National Bureau of Economic Research study found that 80% of executives would forgo innovation-generating spending if it meant missing their quarterly earnings figures. It’s a system that, as behavior economist and Nobel laureate Robert Shiller puts it, has emerged from “convenience rather than logic.”

That’s not to say that stock prices don’t give valuable insight into what’s driving corporate America. A recent report from the Office of Financial Research (OFR), a government body that monitors financial stability, dug into why U.S. stocks have tripled over the past six years. While the gains in the market have indeed been driven by rising corporate earnings, that fact obscures a more troubling truth beneath–sales growth is trailing well behind earnings growth. Companies have higher profit margins (and thus higher stock prices) not because the economy is booming and they are selling more stuff but because they have cut costs, kept salaries flat and not invested in new factories or research and development.

Share prices have also been driven up by low interest rates that have allowed companies to borrow money on the cheap and use it for short-term gain. Corporate debt (not including debt held by banks) has risen from $5.7 trillion in 2006 to $7.4 trillion today. Much of that money has been used for stock buybacks, dividend increases and mergers and acquisitions. The OFR believes that “although this financial engineering has contributed to higher stock prices in the short run, it detracts from opportunities to invest capital to support longer-term organic growth.” As William Lazonick, an economics professor at the University of Massachusetts at Lowell who does research on the topic, puts it, “We’ve moved from a world in which companies retain and reinvest their earnings to one in which they downsize and distribute them.”

Nobody–not Economists, not CEOs and not policymakers–thinks that’s good for real economic growth. Yet the markets stay up because of the dysfunctional feedback loops. Eventually, of course, interest rates will rise, money won’t be cheap anymore, and markets will go back down. None of it will reflect the reality on the ground, for companies or consumers, any more than it did during the boom times. For individual investors, there’s no clever strategy to get around any of this–you simply buy an index fund and hold it as long as you can before moving into T-bills or cash.

But there’s a deeper conversation to be had about how we might fix our system to bridge this gap between markets and reality. There are plenty of ideas out there, from a sliding capital gains tax based on how long you hold a stock to big limits on buybacks and corporate options pay. Any or all of these might help stock prices reflect what they should–the real value of a corporation.

MONEY stocks

3 Ways to Profit by Going Against the Crowd

fish jumping from crowded fishbowl to empty one
Yasu+Junko—Prop Styling by Shane Klein

Though it's scary, your best move in today's choppy market is to do what others fear.

Take a deep breath. After a whirlwind start to the year, you can be forgiven for feeling nervous about the state of the financial markets.

Yes, the Dow and the S&P 500 are back up after sharp declines earlier this year. But stocks are still on pace for their most volatile year since 2011. Sure, plunging prices at the pump are good for consumers, but they’ve taken a hammer to energy stocks. And interest rates around the world keep sinking. While falling yields boost the value of older bonds in your fixed-income funds, they sure make it hard to generate any income.

Rather than following the crowd that’s selling on today’s fears, take advantage of falling prices and do a little bargain hunting. Here are three places where that’s possible.

THE ROCKY STOCK MARKET

The worry: In 2013 and 2014, the S&P 500 experienced daily swings of 1% or more about once every six trading days. So far this year, it’s been one in three.

What the crowd is doing: Racing into low-volatility funds that focus on boring Steady Eddie companies like Procter & Gamble. As a result, the price/earnings ratio for stocks in the PowerShares S&P 500 Low Volatility ETF is 12% higher than the broad market. Yet “low vol” shares have historically traded at a 25% discount.

The smarter move: Look to an industry that’s not particularly thought of as a safe harbor in a storm: technology. Mature tech anyway. “On a relative basis, older, established tech firms look really attractive,” says BlackRock global investment strategist Heidi Richardson. Many tech giants, such as Apple APPLE INC. AAPL -0.82% , trade at P/E ratios of around 15 or less.

They also have a ton of cash, which lets them invest in research and development while still paying dividends. Moreover, the recent volatility in stocks has stemmed from fears that the Federal Reserve may start hiking rates this year. Well, tech has historically outpaced the S&P 500 in the six months following rate hikes. Lean into this group through iShares U.S. Technology ISHARES TRUST REG. SHS OF DJ US TECH.SEC.IDX IYW 0.22% . Apple, Microsoft, and Intel make up more than a third of this ETF’s holdings.

THE ENERGY CRISIS

The worry: Oil prices may not be done falling. UBS, in fact, believes that the price of a barrel of crude may not return to recent highs for another 60 months.

What the crowd is doing: Ditching blue-chip energy stocks, including giants such as Conoco-Phillips and Halliburton, which have sunk 20% to 40% lately.

The smarter move: Play the odds. The Leuthold Group found that a simple strategy of buying the market’s cheapest sector—now energy, based on median P/E ratios—and holding on for a year has trounced the broad market. “Value surfaces without even needing a catalyst,” says Doug Ramsey, Leuthold’s chief investment officer.

You can gain broad exposure through Energy Select Sector SPDR ETF ENERGY SELECT SECTOR SPDR ETF XLE -0.82% , which beat 99% of its peers over the past decade and charges fees of just 0.15% a year.

THE THREAT OF DEFLATION

The worry: Rates around the world will keep sinking, as conventional wisdom says deflation is a bigger threat than inflation.

What the crowd is doing: Pulling billions from products such as Treasury Inflation-Protected Securities that are meant to guard against rising prices—investments now yielding even less than regular bonds.

The smarter move: Embrace that lower-yielding debt, at least with a small part of your portfolio. Joe Davis, head of Vanguard’s investment strategy group, says inflation may not spike soon. But the time to buy inflation insurance is when no one is scared, and it’s cheap. Consumer prices would only have to rise more than 1.8% annually over the next decade for 10-year TIPS to outperform.

Conservative investors should look to short-term TIPS, which are less sensitive to rate hikes, says Davis. Vanguard Target Retirement 2015, for instance, allocates about 8% of its portfolio to the Vanguard Short-Term Inflation-Protected Fund VANGUARD SH-TRM INF-PRTC SEC IDX IV VTIPX -0.08% .

This won’t seem fruitful—until, that is, inflation finally rears up.

MONEY stocks

Are Your Stocks Too Popular?

Experts have long argued that popular stocks tend to be too expensive—but they may be wrong

Having neither the time nor the accounting skills to scrutinize balance sheets, I tend to leave stock picking to mutual fund managers or simply invest in index funds for my retirement savings. But way back in the 1990s I decided to open a cheap online trading account with National Discount Brokers (since bought by TD Ameritrade,) and deposited a tiny bit of “play money” to experiment with.

I’m not sure how much I’ve learned about the markets, but I’ve learned a lot about myself as an investor. I tend to like consumer stocks such as Apple and Dunkin’ Donuts, since they sell products that I personally use or consume. I am attracted to stocks that have a compelling story, a loyal and growing following, and big expansion plans. I also like media and entertainment companies, and tend to steer clear of companies in industries I don’t know much about, like airlines, energy, industrials, and health care. I’m not totally susceptible to fads and still care about “fundamentals” like price-to-earnings ratios, but my decisions are too-often based on what’s known to experts as “heuristics”—mental short cuts like extrapolating from anecdotal evidence, or sticking with the familiar.

In other words, I am attracted to the popular stocks, which means that I might be missing out on a lot of buying opportunities of more obscure, less glamorous companies that I’ve never heard of.

In a recent presentation at the Morningstar Institutional Conference, Roger Ibbotson of Yale School of Management and Zebra Capital called this tradeoff the “popularity premium,” which is the excess returns investors expect and demand from buying stocks that are unfamiliar and unexciting.

According to Ibbotson, it is the popularity of stocks that leads them to be priced higher relative to their less admired peers, an aspect of risk that is frequently ignored. (You can read more about his theory in this Journal of Portfolio Management article.) In his analysis of popular versus unpopular stocks, the least popular stocks outperformed the most popular stocks.

This would suggest that, for example, instead of flocking towards the cool crowd (Alibaba, say) I might have been wiser to buy that ball bearing company in Ohio that just completed a spin-off (Timken). “The stock that you’re going to be talking about this year at a cocktail party is not the same stock you’re going to be talking about next year,” says Ibbotson. “There is no such thing as a permanently popular stock.”

But what if, as some behavioral economists believe, the market is actually being dominated by investors who are drawn to justly well-known and admired stocks but not “fad” stocks that just happen to be the flavor of the week and lack genuine intrinsic value?

And further, what if, as C. Thomas Howard of the University of Denver and AthenaInvest proposed in his recent book Behavioral Portfolio Management, professional investors such as mutual fund managers recognize that tendency and wind up buying those same well-known and admired stocks as a result? After all, Howard explains, “funds must attract and retain emotional investors, which means catering to client emotions and taking on the features of the crowd. As the fund grows in size, it increasingly invests in those stocks favored by the crowd, since it is easier to attract and retain clients by investing in stocks to which clients are emotionally attached.”

If that’s true, then just as popularity can create inflated prices that will quickly be corrected by the market, it can also create market darlings whose popularity, while not necessarily invulnerable, certainly has some longer-term staying power. In other words, popularity in and of itself is not always a bad thing. The trick, of course, is knowing how long it might last, and a balance sheet won’t necessarily tell you that.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

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

How Kraft’s Mac and Cheese Recall Will Affect Its Stock Price

Kraft macaroni & cheese
Richard Levine—Alamy

A look back at history shows that stocks can often bounce back from a recall in short order. Of course, not all product recalls are created equal.

Busy parents aren’t the only ones concerned about Kraft’s KRAFT FOODS GROUP INC. KRFT 5.58% recall of about 242,000 cases of Macaroni & Cheese Dinner because some boxes may contain shards of metal.

Investors may fear the mistake, which has not caused any reported injuries to date, could take a toll on Kraft’s stock. The share price has dropped about 2% since the announcement, but the big question is whether any damage will be lasting.

Based on history, that’s fairly unlikely.

Less than four years ago, Kraft faced a similar recall of about 137,000 cases of its Velveeta Shells & Cheese single-serve cups because a few were discovered to contain wire bristle pieces. The stock (Kraft back then was part of a larger company that has since been renamed Mondelez International) dipped for just a couple of days and then bounced back within weeks.

MDLZ Chart

Further back in February 2007, Kraft had to recall Oscar Mayer chicken strips believed to be contaminated with Listeria, leading to nearly 3 million pounds of meat being pulled from shelves. That big recall hurt the stock for longer, but shares came back to previous prices by summertime.

MDLZ Chart

Other companies have also experienced fairly quick stock price recoveries after product recalls. In 2006, a recall of more than 4 million Dell notebook batteries due to fire risk caused the tech company’s stock to dip, though it rebounded after just a few months.

In general, it’s unlikely for product recalls to have a long-term effect on company stock prices (or sales, for that matter).

Then again, there are always exceptions. After Hasbro had to recall a million Easy-Bake Ovens in 2007, following serious safety problems causing burns and other injuries, the share price sank progressively over the course of months—taking about a year to fully recover.

HAS Chart

HAS data by YCharts

MONEY

This One (Missing) Word From Yellen Could Change Your Finances

Federal Reserve Board Chair Janet Yellen
Alex Wong—Getty Images Federal Reserve Board Chair Janet Yellen

How less "patience" could change everything.

The news is in: The Fed dropped “patient” from its most recent statement, and that’s got financial pundits talking. Why is that one word so important?

Well, contrary to the impression you might be getting from the headlines, the Federal Reserve didn’t actually do much of anything today. Instead, the world is excited because the word “patient”—or in this case, the lack thereof—is being read as a coded signal about what the Fed will do some months down the road.

Specifically, everyone wants to know how patient Janet Yellen and her Fed colleagues will be before raising interest rates in the face of mounting positive economic reports. The conventional wisdom said that if the Fed dropped that word from today’s statement, it would mean that a rate hike could come as soon as June. And, indeed, “patient” was conspicuously absent from today’s statement.

Why does that matter to the average Joe? Because an interest rate hike is likely to have wide-reaching effects on your finances—some good, some bad. And even though the Fed won’t raise rates today, the market is likely to respond if it thinks an increase is incoming. So far the market has reacted positively because, while the Fed did remove the patient language, it also appeared more dovish about the economy, and signalled any rate change would be more gradual than previously expected. That said, higher rates are still really a matter of time, and it’s worth thinking about effect that would have.

Here’s what higher rates could mean for you:

  • Bond prices will go down and yields will go up. Higher interest rates mean higher bond yields, and a corresponding drop in bond prices. That’s good for anyone who is about to buy bonds and for those living on savings, who want their investments start throwing off more income. On the other hand, higher interest rates will decrease the value of current bond holdings.
  • The stock market may take a hit. Interest rates near zero have meant easy money for investors, and some argue this has inflated the stock market beyond justifiable levels. A rate hike would signal loose monetary policy is coming to a close, and that could put a chill on equities.
  • Savings and CDs will look better. If more risky investments are hurt by higher rates, the opposite is true with the really safe stuff. Savings accounts and CDs should start giving higher returns, and the difference between a checking and savings account may start to actually matter again.
  • Mortgage rates. Because the federal funds rate affects the price banks can borrow at, higher rates mean it’s more expensive for you to borrow as well. With interest rates near zero, mortgage rates are currently close to a historic low. If the Fed decides it’s feeling less patient, expect buying a home to get more expensive. And if you have an adjustable rate mortgage, you could see the size of your monthly payments start to increase.

One could be forgiven for wondering why the Fed would ever raise rates if it could cause this much turbulence. The truth is the Fed can’t let things run hot forever without causing even more problems. Low interest rates combined with a strong economy is a recipe for inflation.

The Fed also wants to make build up some ammunition to fight future economic battles: If interest rates remain are close to zero, they can’t be easily be lowered to spur a recovery if another crisis comes along. That’s why, ultimately, rates will have to go up at some point, and that will certainly require some getting used to. And when that does happen, patience will be a virtue.

MONEY Tech

How Apple Could Move the Price of Gold

An Apple Watch Edition, which is made from 18-carat solid gold, on display
Martyn Landi—PA Wire An Apple Watch Edition, which is made from 18-carat solid gold, on display

Depending on how many Apple Watch Edition units Apple sells, it could easily become one of the single largest buyers of gold, if not the largest, in the world.

When Apple APPLE INC. AAPL -0.82% steps into a market, it steps in. The latest market that Apple is preparing to jump headfirst into is the nascent smartwatch market. But with Apple Watch Edition, the 18-karat gold models that start at $10,000, that also entails entering the gold commodity market.

Given Apple’s sheer global scale when it comes to producing gadgets that consumers line up around the block for, Apple will inevitably become a very large player in the gold market. Apple has long been the single largest buyer of NAND flash memory in the world, so it carries disproportionate weight in that market. Could the same thing be about to happen for Apple in the gold market?

A numbers game

Last month, The Wall Street Journal reported that Apple was preparing to order 1 million Apple Watch Edition units per month during the second quarter. Apple says that each Apple Watch Edition case will weigh between 54 grams and 69 grams.

Size Rose Gold Yellow Gold
38 mm 54 grams 55 grams
42 mm 67 grams 69 grams

Without knowing what Apple Watch Edition’s product mix will look like, let’s just use 61.5 grams as the average. Apple Watch Edition will be 18-karat gold, or 75% purity, which implies approximately 46.1 grams of gold per case on average. That would be just about 1.5 troy ounces (which is 46.65 grams) of gold per case.

At 12 million units per year, that translates into 560 metric tons of gold that Apple would need. That would be nearly a fifth of the record 3,114 metric tons of gold that was mined globally in 2014, according to the World Gold Council.

12 million units is too much

Fellow Fool Adam Levine-Weinberg points out that 1 million units per month is clearly unrealistic when annualized, since 12 million units per year would translate into at least $120 billion in revenue in the first year. That would be compared to the current trailing-12-month revenue base of nearly $200 billion. As much as Apple investors would love to see that type of immediate growth from Apple Watch, it’s simply not happening.

Rather, the more likely explanation is that Apple may be ordering 1 million per month only in the second quarter for some early channel fill, and that production rate will decline as it reaches its target range for channel inventory. Apple won’t even know what its target range will be until it reaches supply/demand balance.

Additionally, Apple is using a custom alloy utilizing adjusted quantities of silver, copper, and palladium in order to strengthen the metal.

For these reasons, it’s difficult to accurately estimate how much gold Apple would actually consume each year. But even using conservative figures — for example, 5 million Apple Watch Edition units per year using 1 troy ounce each would still require 5% of the world’s annual gold production — Apple will undoubtedly become a major player in the gold market.

Living on the hedge

Gold is a particularly volatile commodity to purchase. Just look at how the spot price of gold has fluctuated over the past year.

The spot price of gold is currently around $1,160, quite a bit lower than the all-time high of over $1,900 set in 2011. Component cost volatility is easily the largest contributor to Apple’s gross margin volatility, and entering the gold commodity market could take Apple’s gross margin volatility to a whole new level.

Of course, it’s not as if Apple just walks into the gold market and pays spot prices. Much like how it procures other components, it will likely utilize a wide range of forward contracts and supplier prepayments as a way to hedge against volatility. But hedging is not without risks, and hedges can become quite costly if you misjudge market movements. Just ask Delta Air Lines about how its fuel hedges performed last quarter. At times, gold can be even more volatile than crude oil.

Apple has already been increasing its hedging activity recently to accommodate for currency volatility, since foreign exchange movements have been hurting profitability in international markets. Adding gold to its hedging strategy isn’t a stretch of the imagination.

Just like the NAND flash memory market, Apple will likely soon have a big say in the price of gold.

MONEY mutual funds

The Easy Way Even Newbies Beat 86% of Professional Money Managers This Year

150313_INV_SmartMoney_1
Hiroshi Watanab/Getty Images

And there's an easy way to be on the winning side.

Mutual funds generally fall into one of two camps: On the one hand, there are actively managed portfolios that are run by stock pickers who attempt to beat the broad market through skill and strategy. Then there are passive funds, which are low-cost portfolios that simply mimic a market benchmark like the S&P 500 by owning all the stocks in that index.

The question for individual investor is, which one to go with.

On Thursday, yet more evidence surfaced demonstrating just how hard it is for actively-managed funds to win.

S&P Dow Jones Indices releases a report every six months which keeps track of how well actively-managed funds in various categories perform against their particular benchmark. The “U.S. S&P Indices Versus Active Funds (SPIVA) Scorecard” came out yesterday and told a familiar tale: active fund managers struggled mightily.

Last year only 14% of managers running funds that invest in large U.S. companies beat their benchmark. That means 86% of professionals who get paid to beat the market lost out to novices who simply put their money in a fund that owned all the stocks in the market.

It’s further proof that the genius you invest your money with isn’t that smart — or isn’t smart enough.

It’s not that professional stock pickers don’t have skills. The problem is, actively managed funds come with higher fees than index funds, often charging 1% or more of assets annually. And those fees come straight out of your total returns.

What this means is that even if your fund manager is talented enough to beat the market, he or she would have to consistently beat the market by at least one to two percentage points — depending on how much the fund charges.

A similar rate of futility appeared even if you extend the investing horizon to five or ten years. If you look at all U.S. stock funds, 77% of them lost out to their index.

International funds fared no differently. Only 21% of global active managers enjoyed above-index returns over ten years. Active managers also fell short in most fixed-income categories, for instance 92% underperformed in high-yield bonds.

One area where active managers have outperformed over the past one, three, five, and 10 years is in investment-grade intermediate-term bonds.

MONEY has warned investors against indexing the entire U.S. bond market because so much of such fixed-income indexes are made up of government-related debt, which happens to be very expensive right now.

So where should you put your money?

Look to MONEY’s recommended list of 50 mutual and exchange-traded funds. With a few of our “building block” funds you can cover achieve broad diversification in domestic and foreign stocks and bonds.

To be fair, our list also includes several actively managed funds, which can help you customize your portfolio by tilting toward certain factors that tend to outperform over time, such as value stocks.

Still, the bulk of your portfolio belongs in low-cost index funds.

MONEY Ask the Expert

When Selling Winning Stocks Makes Sense

Investing illustration
Robert A. Di Ieso, Jr.

Q: Is there a benefit to taking profit on a stock that has done well over several years? It was $24 when we bought it and is $64 now. We will be in the lowest tax bracket this year and should be in a higher bracket in a later year. A planner suggested selling some, paying taxes on the profit, and repurchasing it. — Viola C.

A: “Taxes should never be the sole reason to trade a stock,” says Scott Bishop, director of financial planning at STA Wealth Management in Houston. Likewise, you can get into trouble holding a security longer than you should simply for the sake of saving a bit on taxes.

That said, there are times when selling in one year may be more opportune than selling in another.

First, you need to understand how any gains from the sale of stock will be taxed.

If you had held the shares for less than a year, they would be taxed at your marginal tax bracket, in which case an early sale would probably do nothing to improve your tax situation.

Since you’ve owned these shares for several years they will be taxed at your long-term capital gains rate. “Currently the tax rates on long-term capital gains vary depending on your income level,” says Bishop.

If you’re in the 10% or 15% marginal bracket, your long-term capital gains will be nothing. Obviously, there would be a benefit to selling before the end of this year if you expect to be in either of those brackets in 2015.

If you’re in the 25% to 35% bracket, your rate will be 15%. And if you’re in the 39.6% bracket, you’ll be taxed 20% on the gains; plus you may owe an additional 3.8% of net investment income tax stemming from the Affordable Care Act.

It’s probably helpful to do the math and see how the decision translates to dollars.

Say you own 100 shares of stock that has appreciated $40 a share. If you’re in the lowest brackets this year, selling will save you $600 versus waiting until the following year and paying at the 15% rate. If your long-term rate is 15% and you think it will be 20% next year, the difference is only $200.

“Some people get stuck in this analysis when they are talking about a pretty small dollar amount,” says Bishop, noting that you should be sure to factor for the transaction costs of a sale.

If you decide to sell, there are no rules preventing you from buying the very same stock the next day. (The only time you need to worry about this is when you sell a stock at a loss and hope to write that off against a gain.)

That said, if you wouldn’t buy the stock again at today’s prices, says Bishop, consider putting the proceeds to work somewhere else. “Don’t let biases drive the decision to buy the stock again,” he says. Just because the stock has done well so far doesn’t mean it will continue to do so.

Finally, if you’re looking at taking advantage of a lower tax bracket to sell a single stock, ask yourself if you should use this window to make more substantial changes to your portfolio. For example, maybe you’d benefit from converting some of your IRA holdings to a Roth IRA.

In doing so, you’ll owe income taxes now but have the benefit of tax-free withdrawals later. Over time, that could translate not just to hundreds of dollars in savings but possibly thousands.

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