MONEY stocks

Why You Should Invest in Europe—Now

St. Petri's church, Bremen, Germany
JTB Photo—UIG via Getty Images St. Petri's church, Bremen, Germany

What the turning tide overseas means for your portfolio.

The last couple of years have proven to be rather miserable for international stocks.

From the beginning of 2013 to the end of 2014, equities around the world trailed the S&P 500 badly. One index that focuses just on European stocks lagged its U.S. counterpart by more than 13 percentage points annually.

This year, however, the rolls have reversed.

Despite ongoing fears over recessions and deflation in many parts of the world, total returns this year for both the MSCI EAFE index of developed-market stocks and the MSCI Emerging Markets Index have quadrupled the gains for the S&P 500.

What’s going on? And what should you do about it?

Viewed from one perspective, it may seem odd that European equities have performed so well. After all, Europe and Japan aren’t out of the economic woods just yet, and the U.S. has beaten its developed market peers in the last few years with regard to economic growth. Absolute levels, though, matter less than the trend.

“Remember that stock market performance does not closely track economic performance,” per Gregg Fisher of GersteinFisher. “Rather it is often more sensitive to the direction of economic change, shifting market sentiment and valuations.”

On that front, things are looking up abroad.

The massive $1.1 trillion bond-buying program undertaken by European Central Bank President Mario Draghi has started to bear fruit. Gross domestic product grew by 0.3% in the last three months of 2014, boosted by Germany and Spain, as commercial banks are starting to increase lending.

The slide in the euro’s value against the dollar has also made European exports more competitive, while low energy prices globally have put more money in consumers’ pockets. While consumer prices fell again in March, the fourth consecutive drop, the decline was smaller than previous months, while the unemployment rate slightly improved.

Risks still remain (see: Greece leaving the euro), but a slight glimmer of optimism has returned the eurozone. And this is a good thing for globally minded investors, especially those looking to buy inexpensive fare.

“As Europe begins its recovery, its stock valuations appear attractive compared to U.S. equities,” per BlackRock’s Heidi Richardson. The price/earnings ratio for U.S. stocks trades at 17.7, compared to 13.8 for Euro-focused MONEY 50 fund Oakmark International OAKMARK INTERNATIONAL I OAKIX 0.43% .

Look to Oakmark or another MONEY 50 selection Fidelity Spartan International FIDELITY SPARTAN INTL INDEX INV FSIIX 0.64% to gain exposure to Europe. A good rule of thumb is to allocate about one-third of your stock portfolio to international equities.

With Draghi committed to quantitative easing until fall of next year, and stocks still available at value prices, now’s the time for investors to truly embrace diversification.

MONEY stocks

How to Beat the Summer Market Doldrums

Matt Harrison Clough

Contrary to market lore, summer is no time to sell stocks and sit on cash, but it is a chance to adjust.

There’s an old Wall Street saying: “Sell in May and go away,” because stocks tend to do poorly in the summer. That’s been attributed to traders going on vacation, or the notion that spring bonuses on the Street stoke a buying euphoria that wears off by June. It may just be that the old saying itself creates a self-fulfilling prophecy. Because, surprisingly, there’s something to it. Since 1926 stocks have returned only around half as much from May through October as they have in the rest of the year.

The summer doldrums are nearly here. Plus, the Federal Reserve is threatening to hike interest rates, and the bull market is feeling old. So you’re probably already hearing the drumbeat telling you to sell.

Yet there’s one thing proponents of sell-in-May leave out. For practical purposes, it still doesn’t beat buying and holding. “It makes sense only if you have an alternative investment,” says Steve LeCompte, editor of CXOadvisory.com. And you really don’t: Even during the May–October stretch, stocks on average outpace cash and bonds. Factor in trading costs, and sell-in-May looks even worse.

Since 1871, finds LeCompte, buy-and-hold produced an annual rate of return of 8.9%, vs. 4.8% for the seasonal strategy. That doesn’t mean you must totally ignore stocks’ summer blahs, though. There are two ways to take advantage of the pattern without betting big on timing the market.

Make that “rebalance in May”

You may already be rebalancing every year or two. The logic of rebalancing is that by resetting your assets back to their original mix, you often are selling a faster-growing investment that’s gotten expensive. You don’t need to do this often when you are young and mostly in stocks anyway, but later on rebalancing helps keep a conservative portfolio conservative.

Yet if you do this near the end of the year, as many do, you may be selling stocks when they still have some pep. Rebalance in May, and you’ll give up less return in the short run. From May through October, the annualized growth rate for stocks is just 0.7 percentage points more than for bonds.

Stay away from riskier plays

While there’s no reason to bail in May, it isn’t the best time to add new risks. Sam Stovall, U.S. equity strategist for S&P Capital IQ, says the summer effect is particularly strong in economically sensitive areas like consumer discretionary stocks and small-caps. If you set aside part of your portfolio for more-speculative bets, consider coming back to it in autumn. You may find you have more bargain-priced choices. And your beach days will have been less stressful.

Read Next: How to Tame the (Inevitable) Bear Market

MONEY Airlines

JetBlue’s Surprising Upscale Gambit Is Working

JetBlue Mint suites
JetBlue

JetBlue's Mint premium seats are getting more expensive -- and they're still in high demand.

Last June, JetBlue JETBLUE AIRWAYS JBLU 0.71% began a new chapter of its history with the introduction of its Mint premium service. Instead of using its standard all-coach configuration, JetBlue added a 16-seat premium cabin with full flat-bed seats for some of its new A321s. (Four of the seats even come as private mini-suites!)

JetBlue opted to make this change in order to boost its profitability on the ultra-competitive New York-Los Angeles and New York-San Francisco routes. Less than a year in, it’s pretty clear that this move is paying off even more handsomely than originally expected.

Mint ramps up

The routes from New York’s JFK Airport to Los Angeles and San Francisco are highly contested — JetBlue competes with all three legacy carriers as well as Virgin America VIRGIN AMERICA INC VA 6.52% . Until last June, JetBlue had been the only one not offering a swanky premium section on these flights. Not surprisingly, this took it out of the running for attracting the most lucrative travelers.

JetBlue created Mint in order to narrow the revenue gap with its rivals. The idea was to offer a lie-flat seat at a much lower price than the prevailing fares in order to court the small/medium business and upscale leisure markets: i.e., people who were priced out of the premium cabin on other airlines.

JetBlue has been phasing in Mint flights since last June as the specially configured Airbus A321 planes have arrived. It is finally reaching a full schedule of eight daily round-trips to Los Angeles and five daily round-trips to San Francisco this spring.

Strong demand across the board

Ever since JetBlue launched its Mint service, company executives have noted that they were pleasantly surprised by the level of demand for its premium seats. As expected, Mint has been popular with small/medium businesses and well-to-do leisure travelers.

More surprisingly, Mint has also generated strong interest among large corporations. JetBlue had assumed that its rivals — mainly the legacy carriers, but also Virgin America to some extent — had that business locked up. Instead, JetBlue’s entry into the market has disrupted the status quo.

Virgin America CEO David Cush noted in February that JetBlue’s entry into the market had driven average premium fares down by 30%-40% on the Mint routes. This indicates competitors have had to at least meet JetBlue halfway in terms of pricing in order to prevent customers from bolting.

Fares strengthen

In the first few months of Mint’s existence, JetBlue was offering a starting non-refundable fare of $599 one-way. There were two higher fare “buckets”: $799 and $999. Depending on the level of demand for a particular flight, JetBlue’s revenue management system would determine how many seats to sell at each price point in order to maximize revenue.

Because of the strength of demand, JetBlue’s Mint cabin was frequently sold out last summer. As a result, in the fall, the company revised its Mint pricing tiers. In October, JetBlue’s then-president — and current CEO — Robin Hayes explained that JetBlue had moved the refundable fare up to $1,199 and then to $1,209. Meanwhile, it had made the $999 price point a third non-refundable fare.

More recently, JetBlue has apparently determined that the market can support even higher fares. There’s still an introductory fare of $599, but there seem to be fewer of these tickets available, especially on busy travel days.

Furthermore, on the San Francisco route, the refundable fare has moved up to $1,249, while the intermediate non-refundable fares have risen to $809 and $1,049. Fares are even higher for New York-Los Angeles flights. The refundable fare there is now set at $1,299, with the intermediate non-refundable fares at $899 and $1,149.

A big profit tailwind

JetBlue has been posting by far the best unit revenue growth in the industry recently. It would be naive to attribute this performance to a single factor, but the strong reception of its Mint premium offering is clearly having a big impact. JetBlue is regularly pulling in one-way fares of more than $800 — and, increasingly, more than $1,000 — on routes where just two years ago, its average one-way fares were less than $250.

Late last year, JetBlue told investors that for the month of September, its profit margin on the Mint route to Los Angeles had risen by 17 percentage points year over year. Given that it has raised prices several times since then, its Mint routes are surely even more profitable now.

For competitors like Virgin America, this is mixed news. In the short run, it’s better if JetBlue is commanding higher prices, because it limits the need for other airlines to discount their fares to match JetBlue. But in the long run, JetBlue’s massive success on the New York-Los Angeles and New York-San Francisco routes could encourage it to add flights, putting even more pressure on the competition.

MONEY stocks

My $505,845 Mistake

Netflix on phone and envelopes
Andrew Harrer—Bloomberg via Getty Images

This is why you have to "buy and hold."

Pull up a stool, and let me tell you a bittersweet tale about the one that mostly got away. It was 2002, and I finally got Netflix NETFLIX INC. NFLX -0.16% . I was skeptical when it went public in May of that year. I bashed it — viciously — a few weeks later, but my tune changed a few months later when I became a subscriber and an investor.

Netflix was starting to build out its network of distribution centers, and that means that the laughable weeklong roundtrip delivery cycle for someone on the East Coast between disc rentals could be shortened to as little as two days.

It also didn’t hurt that the same stock that I blasted when it was in the high teens in June had fallen into the mid-single digits by October. I bought in, wagering roughly $2,500 to pick up 500 shares. For once in my life I had actually nailed the bottom on a stock.

By the time that Netflix declared a 2-for-1 stock split two years later, my cost basis on what would have been 1,000 shares dropped to about $2.50 a share. The key nugget in that lesson is “would have been” because I had unfortunately sold most of my shares well before the split.

Ouch.

Hurts so good

Identifying great growth stocks is sometimes easier than mustering the patience to see that greatness play out. In my case, I got trigger happy when Netflix began to bounce back. I sold 80% of my stake too soon. It felt right at the time. It always does.

The only thing that makes this tale bearable is that I kept 100 of my original 500 shares. It didn’t seem right to punch out entirely, especially when Netflix was disrupting what was then a thriving DVD rentals market. Those 100 shares became 200 after the stock split in 2004.

However, I sold half of my remaining shares a few years later. Netflix was the biggest winner in my portfolio, but I wanted to raise some money to join a luxury destination club. That was another bad call, of course. The vacation club I went on to join would go on to file for bankruptcy, but seeing that get wiped out was no match for the regret that I have for cashing out in the first place.

The glass is a tenth full

One can argue that I shouldn’t complain. I still have 100 shares at a cost basis of $2.50. Some folks are lucky to see a 10-bagger or a 20-bagger in their investing tenures, and here I am as the proud owner of a 200-bagger following Thursday’s pop.

It’s hard to be resentful in knowing that I turned $250 — a tenth of my initial $2,500 investment — into more than the average person makes in a year. However, I can’t lie and say that there isn’t a bittersweet twinge whenever my stock moves higher the way it did on Thursday afteranother blowout quarter. The split-adjusted 900 shares that I sold along the way would be worth $505,845 as of Thursday’s close, and that obviously would’ve gone a long way toward retirement, dreaming, or giving my kids one less reason to be resentful.

MONEY Ask the Expert

Rental Properties vs. Stocks and Bonds

Investing illustration
Robert A. Di Ieso, Jr.

Q: I bought a rental property that has increased in value considerably. The cash is great, but I’m wondering if I should sell high and invest in a different asset.
– Russell in Portland, Ore.

A: “This is a situation where there really is no one-size-fits-all answer,” says David Walters, a certified public accountant and certified financial planner with Palisades Hudson Financial Group.

To tackle this question, you’ll want to first get a handle on just how well this investment is performing relative to other assets.

For a simple apples-to-apples comparison, take the property’s annual net cash flow (income minus expenses) and divide it by the equity in the home, he says. You can use this yield to see how the income generated by this property stacks up against that of other investments, such as dividend-paying stocks.

To calculate your total return, take that yield and add it to your expected annual long-term price gains. If your yield is 5%, for example, and you expect the value of the property to appreciate 2% a year on average, your annual total return would be 7%.

Next, you’ll want to figure out just how much you would have left to reinvest after you pay the real estate broker (typical commissions are 6% of the sale price) and the taxes. “In this case, taxes could be a big factor,” says Walters.

Remember, because this is an investment property, you are not eligible for the capital gains exclusions ($250,000 for individuals and $500,000 for couples) available when you sell a primary residence.

Assuming you’ve owned the house for more than a year, you’ll owe the long-term capital gains rate, which is 0% to 20% depending on your tax bracket; for most people that rate is 15% for federal taxes. Your state will also want its share, and in Oregon it’s a pretty big one – 9.9%.

There’s more to it. If you depreciated the property – odds are you did – you’ll need to “recapture” some of that write off when you sell, and at your marginal income tax rate. Here too you’ll owe both federal and state taxes.

One way to avoid paying a big tax bill now is to do a 1031 exchange, in which you effectively swap this property for another investment property in another neighborhood or a different market — though there are plenty of caveats.

Assuming you don’t want to re-invest in actual real estate, the big question is where you should invest the proceeds of the sale – and is it better than what you already have?

You could look at alternative assets that have a similar risk and reward profile — dividend-paying stocks, real estate investment trusts or master limited partnerships.

A better approach, however, may be a more holistic one. “You want to know where this fits in the big picture,” says Walters. Rather than try to pick and choose an alternative investment, you may just roll the proceeds into your overall portfolio – assuming it’s appropriately diversified. If you can max out on tax-deferred options such as an IRA or, if you’re self-employed, a SEP IRA, even better.

Depending on how much other real estate you own, you could allocate up to 10% of your overall portfolio to a real estate mutual fund, such as the T. Rowe Price Real Estate Fund (TRREX) or Cohen & Steers Realty Shares (CSRSX).

The tradeoff: “Most of these funds own commercial real estate,” says Walters. “There aren’t a lot of options to get passive exposure to residential real estate.”

Then again, investing in actual real estate takes time, lacks liquidity, and comes with some big strings attached. On paper, your investment property might seem like a better deal than any of the alternatives, says Walters, “but there are 50 other things you have to think about.”

With real property there’s always the risk that you’ll have to pay in money for, say, a new roof or heating and cooling system. That’s one thing you don’t have to worry about with a mutual fund.

MONEY stocks

Why Netflix Is Splitting Its Stock

Headquarters of Netflix, Inc., in Los Gatos, California
Tripplaar Kristoffer—Sipa USA Headquarters of Netflix, Inc., in Los Gatos, California

Netflix is asking shareholders to pave the way toward a drastic stock split. But it really doesn't matter -- with a few notable exceptions.

Netflix NETFLIX INC. NFLX -0.16% shares are about to split, probably in a drastic manner. The company is asking shareholders for permission to go as far as a 30-for-1 share exchange. It sounds very dramatic, but most investors really shouldn’t care at all.

Here’s why.

What’s new?

Netflix just filed a preliminary version of its 2015 proxy statement, asking shareholders to vote on seven proposed actions before the June 9 annual meeting. Among the typical issues, including approving Netflix’s chosen auditing firm and reelecting a tranche of directors for the next three years, is a more unusual request straight from the board of directors.

In Proposal Four, Netflix asks for a simple majority vote to approve a vastly expanded reserve of capital stock. This is an important first step toward splitting Netflix shares, which have looked rather pricey in recent years.

The board is currently authorized to issue as many as 160 million common shares. If the fourth proposal is approved, that limit will soar to 5 billion potential certificates.

This move could lead in many directions:

  • Some companies raise their share counts before selling a heap of additional certificates back to shareholders. That’s one way to raise capital — and dilute the stock’s value for current shareholders.
  • It could also go toward a generous stock-based compensation program, which would artificially boost bottom-line earnings, but with another helping of share dilution.
  • Netflix even said the extra shares could be used for share-based buyouts, paying off the target company’s current owners with fresh Netflix stock instead of cash. Again, dilution follows.

Netflix made no bones about the intended purpose, though. The company said it “does not have any current intention” to explore any of the activities I just listed, other than supporting the share-based compensation strategy that is already in place.

Sure, the board reserved the right to issue additional shares for these purposes at a later date, without asking stockholders for another share count expansion. But there’s no reason to expect any of these things to happen anytime soon.

No, this is all about powering “a stock split in the form of a dividend.”

Simmer down now

Now, just because Netflix is likely to get its wish doesn’t mean you should expect the entire 5 billion shares to hit the market right away.

For example, Netflix doesn’t use its entire 160 million share allotment today. The company only has 60 million shares on the market at this time, and could do a simple 2-for-1 split without even asking for shareholder permission.

In fact, it’s absolutely normal to have a large reserve of approved but unprinted shares. Netflix said it set the 5 billion share count to be “consistent with the number of shares authorized by other major technology companies.”

Following that trail of cookie crumbs, you’ll find IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM -0.27% has 988 million shares on the open market but a shareholder-approved maximum allotment at 4.7 billion stubs. Microsoft MICROSOFT CORP. MSFT 10.22% is allowed 24 billion shares but has only issued 8.2 billion. Apple APPLE INC. AAPL 0.52% lifted its approved share count from 1.8 billion shares to 12.6 billion just before running through a 7-for-1 split last year, but has only issued 5.8 billion tickets so far.

All of these major tech stocks sit on approved share counts somewhere in the same ZIP code as the proposed Netflix target. They also have the power to execute a modest stock split anytime they like, or to put their share reserves to work in any of the other actions I mentioned earlier.

It’s just a nice buffer to have, and I expect the Netflix split to stop far short of the maximal 30-for-1 ratio. Something like a 10-for-1 split would leave plenty of future wiggle room while lowering Netflix’s share prices well below the psychological $100 barrier.

What’s the big deal?

In most cases, stock splits are nothing but a massive play on investor psychology. Buying 10 Netflix shares at $470 each serves exactly the same purpose as picking up 100 stubs for $47 each. In both cases, you built a $4,700 position with a single commission-spawning transaction.

But a $47 stock certainly looks more affordable than a $470 version, even if all the usual valuation ratios stay unchanged. And the move actually does make a difference every once in a while.

For example, Apple would not be a member of the Dow Jones Industrial Average today if it hadn’t performed a radical stock split first. On the price-weighted Dow, the pre-split Apple ticker would have overshadowed the daily moves of the other 29 members, and the Dow was never meant as a proxy for Apple investments.

Netflix isn’t exactly in position to snag a Dow spot anytime soon, but you never know. Extreme share prices can make for some strange and interesting situations. Keeping share prices low (but not too low!) can save Netflix some sweat if the company ever gets close to a Dow Jones seat — or any other price-based honor that could boost the company’s market status.

Finally, the single-share price might matter to very modest investors who could afford a couple of $47 Netflix shares but would have to save their pennies to get a single $470 stub. Options contracts also become more affordable at lower prices, since they often represent 10 or 100 shares each.

So when capital is tight, lower share prices actually matter. From that perspective, stock splits are shareholder-friendly moves.

NFLX Shares Outstanding Chart

Final words

I expect this proposal to pass, because such plans rarely meet much resistance. Investors tend to like stock splits, and it doesn’t hurt to give the company’s board and management some extra financial flexibility.

Then, we’ll see Netflix pay out a special dividend. For each current share, Netflix owners will receive another four to nine additional shares for a final split ratio between 5-for-1 and 10-for-1.

The move won’t change Netflix’s total market value. Nor will it affect the direct value of your current Netflix holdings. We’ll all get more granular access to the stock. So we can make smaller trades and have more control over the size of our Netflix investments.

This is a fairly nice move with no real downside. But it’s also no reason to break out the champagne bottles and order up fireworks.

It’s ultimately just another housekeeping item that won’t move Netflix stock at all. Or if it does, the change will be based on nothing but day-trader psychology and will fade quickly.

Feel free to buy or sell Netflix shares based on whatever happens in Wednesday afternoon’s first-quarter earnings report. But for all intents and purposes, you can ignore the upcoming stock split.

MONEY stocks

How to Tame the (Inevitable) Bear Market

baby bear in front of scary bear shadow
Claire Benoist

Stocks will eventually suffer a downturn, but don't assume it has to be a grisly one. Here's what you need to do now to get your portfolio ready.

The current bull market is looking almost old enough to qualify for Social Security. Now in its seventh year, this rally is nearly twice the length of the typical bull and is the fourth-oldest since 1900. Meanwhile stocks are getting expensive, profits are slowing, and equities will soon face another headwind in the form of Federal Reserve interest-rate hikes, possibly starting as soon as summer.

Yet this is not a call to hightail it out of the market. Few suggest a bear attack is around the very next corner. And even if a selloff is coming soon, two-thirds of bull markets over the past 60 years have added gains of at least 20% in their final stage, according to InvesTech Research. So there’s a risk to overreacting.

Money

That said, “how you invest in the seventh year of a bull market is not the same as at the start of a bull market,” says InvesTech president James Stack. And the next bear market is probably going to look a lot different from the ones you’ve grown used to.

So here’s a playbook for getting your portfolio ready:

Expect a less grisly bear

The last two downturns you recall happen to be among the worst in history, so it’s understandable if you’re concerned about getting mauled. But this time “we don’t see any bubbles or concerns that would suggest we’re heading for a repeat of 2000 or 2007,” says Doug Ramsey, chief investment officer at the Leuthold Group.

Ramsey expects a “garden variety” downdraft of around 27.5% (see chart). After a six-year rally in which the market has soared more than 200%, that’s not catastrophic. Also, it’s psychologically difficult to buy on the dips in a megabear that might drag on for years. But a run-of-the-mill bear market can be viewed as “an opportunity,” says Kate Warne, investment strategist at Edward Jones.

Warne’s advice: Plan to rebalance your portfolio to your target stock allocation in the next bear. Get ready to do so once your mix changes by around five percentage points. A 70% stock/30% bond portfolio will hit that point as equity losses approach 20%. Selling bonds to replenish your equities will set you up for the next bull.

Stay committed abroad

In the last bear, global economies tumbled in sync. Not so this time. In the U.S., the Fed is on the verge of lifting rates on the strength of our economy. Yet the eurozone and Japan are stuck in neutral, and their central banks are trying to stimulate growth. “Their stocks reflect that weakness, making them more attractive right now compared to the U.S.,” says Warne.

The broad U.S. market trades at a price/earnings ratio of 17.7 based on profit forecasts. Yet stocks held by Fidelity Spartan International IndexFIDELITY SPARTAN INTL INDEX INV FSIIX 0.64% and Dodge & Cox International DODGE & COX INTERNATIONAL STOCK DODFX 0.24% —both in the MONEY 50—trade at about 15 times earnings. Warne suggests keeping up to a third of your stocks in developed foreign markets.

Don’t overlook late-stage bull leaders

While the S&P 500 is trading modestly above its long-term average, the median P/E of all U.S. stocks is at an all-time high. “That tells you that small- and midcap stocks have higher P/Es, and they will be the ones to fall the furthest in a bear market,” says Stack.

That makes blue chips more compelling. InvesTech also studied the final stage of bull markets and found that the energy, technology, health care, and industrial sectors tend to outperform. Energy is obviously a tricky case given the recent volatility in oil prices, but Stack says it should not be shunned. MONEY 50 pick Primecap Odyssey Growth PRIMECAP ODYSSEY GROWTH FUND POGRX -0.22% has nearly 80% of its assets in those sectors.

Dial back on alternatives

If you’ve been using high-yielding utility stocks as bond stand-ins, now is the time to take some profits. Along with financial and consumer discretionary stocks, utilities are late-stage laggards.

And if you’ve reduced your fixed-income allocation in favor of higher-yielding alternatives such as REITs or master limited partnerships, it’s time to shift back to core bonds. Such income alternatives are more highly correlated with stocks than are basic bonds. Fixed-income returns may be muted once rates start rising. But that doesn’t change the role of high-quality bonds: shock absorbers when stocks are falling.

TIME Economy

Low Wage Workers Are Storming the Barricades

Activists Hold Protest In Favor Of Raising Minimum Wage
Alex Wong—Getty Images Activists hold protest In favor of raising minimum wage on April 29, 2014 in Washington, DC.

A few weeks back, when Walmart announced plans to raise its starting pay to $9 per hour, I wrote a column saying this was just the beginning of what would be a growing movement around raising wages in America. Today marks a new high point in this struggle, with tens of thousands of workers set to join walkouts and protests in dozens of cities including New York, Chicago, LA, Oakland, Raleigh, Atlanta, Tampa and Boston, as part of the “Fight for $15” movement to raise the federal minimum wage.

This is big shakes in a country where people don’t take to the streets easily, even when they are toiling full-time for pay so low it forces them to take government subsidies to make ends meet, as is the case with many of the employees from fast food retail outlets like McDonalds and Walmart, as well as the home care aids, child caregivers, launderers, car washers and others who’ll be joining the protests.

It’s always been amazing to me that in a country where 42% of the population makes roughly $15 per hour, that more people weren’t already holding bullhorns, and I don’t mean just low-income workers. There’s something fundamentally off about the fact that corporate profits are at record highs in large part because labor’s share is so low, yet when low-income workers have to then apply for federal benefits, the true cost of those profits gets pushed back not to companies, but onto taxpayers, at a time when state debt levels are at record highs. Talk about an imbalanced economic model.

A higher federal minimum wage is inevitable, given that numerous states have already raised theirs and most economists and even many Right Wing politicos are increasingly in agreement that potential job destruction from a moderate increase in minimum wages is negligible. (See a good New York Times summary of that here.) Indeed, the pressure is now on presidential hopeful Hillary Clinton to come out in favor of a higher wage, given her pronouncement that she wants to be a “champion” for the average Joe.

But how will all this influence the inequality debate that will be front and center in the 2016 elections? And what will any of it really do for overall economic growth?

As much as wage hikes are needed to help people avoid working in poverty, the truth is that they won’t do much to move the needle on inequality, since most of the wealth divide has happened at the top end of the labor spectrum. There’s been a $9 trillion increase in household stock market wealth since 2008, most of which has accrued to the top quarter or so of the population that owns the majority of stocks. C-suite America in particular has benefitted, since executives take home the majority of their pay in stock (and thus have reason to do whatever it takes to manipulate stock price.)

Higher federal minimum wages are a good start, but it’s only one piece of the inequality puzzle. Boosting wages in a bigger way will also requiring changing the corporate model to reflect the fact that companies don’t exist only to enrich shareholders, but also workers and society at large, which is the way capitalism works in many other countries. German style worker councils would help balance things, as would a sliding capital gains tax for long versus short-term stock holdings, limits on corporate share buybacks and fiscal stimulus that boosted demand, and hopefully, wages. (For a fascinating back and forth on that topic between Larry Summers and Ben Bernanke, see Brookings’ website.)

Politicians are going to have to grapple with this in the election cycle, because as the latest round of wage protests makes clear, the issue isn’t going away anytime soon.

Read next: Target, Gap and Other Major Retailers Face Staffing Probe

Listen to the most important stories of the day.

MONEY stocks

The Hidden Danger in Apple Stock

150409_INV_AppleDanger
China Stringer Network—Reuters

Apple's mountain of cash—which is generally considered a safety net—actually comes with risks.

Investing in Apple APPLE INC. AAPL 0.52% today seems like a smart bet by many measures.

The company broke records for the most profits for any business in a single quarter—ever—earlier this year. With nearly $180 billion in cash, management has plenty of cushion against setbacks—like, say, if the new Apple Watch doesn’t sell as well as projected. And while Apple has been criticized for not sharing that cash with shareholders as much as peers like Microsoft do, recent signals from company leaders suggest they may announce a hefty dividend hike as early as this month.

Certainly, there’s plenty of cause for investors to favor cash-rich companies like Apple, says Thomas McConville, co-portfolio manager of the Becker Value Equity fund, which holds Apple stock.

“A company having lots of cash is like a person having lots of savings,” McConville says. “If a person loses a job, savings help to weather the storm. Cash helps a company protect itself from shocks and keep investing in value-creating activities.”

But, he says, the devil is in the details of how exactly a company invests in activities—and whether those enterprises actually add value.

New projects and products can make or break a company, and it can be especially risky for a business to step out of its wheelhouse. Apple’s wheelhouse is making the best-looking and best-functioning advanced consumer tech products, says McConville.

That’s at least partly why some critics are skeptical about whether the rumored Apple car is the right new venture for the company.

“As an investor, I want to see that any product extension they announce fits under their umbrella,” McConville says. “If they get into vehicles, creating onboard technology and displays is a good fit, since visual appeal and functionality are top concerns. But if they were going to try to design seat brackets? Well, that’s probably not the perfect fit.”

That makes sense. Then again, traditional automakers already seem enthusiastic to team up with Apple—and with all that cash, the tech giant could easily just buy a company with more experience creating car parts like seat brackets. So what could go wrong?

Well, cash-rich companies have lots of buying power, says Don Wordell, portfolio manager of the RidgeWorth Mid Cap Value fund. And, as the saying goes, with power comes responsibility.

“Companies that are simply too big to grow organically can grow inorganically by buying others,” he says. “But that creates risk. Cash can be as much of a liability as an asset.”

So, for example, it worked out well when Disney bought Pixar for $7.4 billion nine years ago. That acquisition led to a spate of successful movies, a stronger brand, and happy investors who have seen total returns of more than 300% since 2006.

But when Quaker bought Snapple for $1.7 billion in 1994, it bungled the brand’s marketing campaigns and relationships with distributors; after just 27 months, Quaker sold Snapple to a holding company for about $300 million—less than a fifth of its purchase price. The whole affair left Quaker with a damaged credit rating and dragged its stock price flat during a period when the rest of the market was on fire.

Hindsight is, of course, 20/20. But a key quality investors should watch for is how patient and thoughtful a company’s leaders seem to be before deploying resources.

“Too much cash can burn a hole in management’s pocket and cause them to make a bad acquisition,” says McConville.

Apple’s record of acquisitions and product launches is not without flops. Among other failed products, there was Apple’s 2007 Bluetooth headset, which was discontinued after two years because it couldn’t compete with third-party devices. And although the company has invested millions over the years in acquiring mapping companies, like Placebase and Poly 9, Apple has still not succeeded in creating a mapping application that competes with the likes of Google Maps.

Of course, Apple’s top executives have made plenty of successful moves on behalf of the company in recent years, and sales of core products like the iPhone are still breaking records. But strong is not invincible, and if its new wristwatch doesn’t take off, Apple will soon be looking to throw cash at developing its next big product.

Investors would be wise to keep an eye on how, exactly, that cash is spent.

 

MONEY Ask the Expert

When Going All In Is Not A Risky Bet

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Q: I’m 33 and recently received a $200,000 windfall. But I’m lost on how I should put it to work. Should I invest in phases or all at once? I’m nervous about investing at all-time market highs. – Rod in Los Angeles

A: Assuming you’re investing this money for the long term — and you have sufficient cash set aside to meet short-term needs and emergencies — go ahead and invest it all at once, says Jerry Miccolis, founding principal of Giralda Advisors, a Madison, N.J. firm that specializes in risk management. “Don’t let headlines about the market hitting new highs make your nervous because, if the market does what it’s supposed to do, that should be the norm,” says Miccolis.

Now, you may have heard the term “dollar-cost averaging.” This notion of automatically investing small amounts at regular intervals, as you do in a 401(k) retirement plan, does tend to smooth out the natural ups and downs of the market. It’s one of many perks of investing consistently, come what may.

Still, if you have cash at the ready to put to long-term use, says Miccolis, it’s just as well to invest all at once – and given your age primarily in equities.

This isn’t to say that short-term market corrections – even sizable ones – won’t happen again. “You’ll probably see many in your lifetime,” says Miccolis. “But you risk losing a lot more waiting around for something to change before you invest.”

In fact, investors who’ve had the bad luck of getting in at the very top of a market have ultimately come out ahead – provided they stayed the course. Consider this analysis from wealth management tech company CircleBlack: An investor who put $1,000 in the Standard & Poor’s 500 index of U.S. stocks at the beginning of 2008 (when stocks fell 37%) and again in early 2009 would have been back in positive territory by the end of 2009.

A critical caveat: This advice assumes that you actually keep your savings invested, and not panic sell when things look ugly. Hence, before you make your decision, try to gauge your tolerance for risk – here’s a quick survey to understand your comfort level – as well as your capacity for risk.

While tolerance generally refers to how risk affects you emotionally, capacity refers to how much risk you can actually afford. (You may have a high tolerance for risk but low capacity, or vice versa.)

If you have a steady income, little debt, and several months of emergency savings, the odds that you’d be forced to tap your long-term savings should be low, meaning that your capacity for risk is adequate. If the rest of your financial advice is a bit of a mess, however, you’ll want to use some of this windfall to tighten your ship before you commit to investing it.

Another exception to the advice to invest in one-fell swoop: If you can’t afford to max out on your 401(k) plan, earmark some of this money for living expenses so you can divert a bigger chunk of your salary to these tax-deferred contributions.

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