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BL U O D

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TRAVEL: THIS YEAR’S CAN’T-MISS DEALS

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HOW TO GET A 5% RAISE THIS YEAR P. 25

THE RIGHT TIME TO BUY ALMOST EVERYTHING P. 36

THE BEST INVESTING MOVES FOR 2O16 WHAT’S AHEAD FOR APPLE, CHINA, OIL, AND MORE

THE TOP 50 FUNDS FOR THE LONG RUN

MAKE YOUR MONEY LAST A LIFETIME

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P. 1O4

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This is what beating 100%* of your peers looks like. The Fidelity® Capital & Income Fund has beaten an impressive number of its peers over the 10-year period, ranking #1 out of 361 in the High Yield Bond Peer Group.* Portfolio Manager Mark Notkin and the deep bench of Fidelity analysts have the ﬂexibility to invest across the entire capital structure, from bank loans to common stocks, which has created an attractive combination of income and capital appreciation. Yet another example of the power of active management. Mark Notkin Portfolio Manager Fidelity® Capital & Income Fund

M O R N I N G S T A R® R A T I N G S AS OF 09/30/2015, MORNINGSTAR CATEGORY: HIGH YIELD BOND

OVERALL

OUT OF 625 FUNDS

3 YEAR

#9 OUT OF 625 FUNDS

5 YEAR

#30 OUT OF 532 FUNDS

10 Y E A R

#1 OUT OF 361 FUNDS*

Past performance is no guarantee of future results.

Before investing in any mutual fund, consider the investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Life of fund figures are reported as of the commencement date to the period indicated. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal. The securities of smaller, less well-known companies can be more volatile than those of larger companies. Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Interest rate increases can cause the price of a debt security to decrease. *Percent Rank in Category is the fund’s total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1. Percent Rank in Category is based on total returns, which include reinvested dividends and capital gains, if any, and exclude sales charges. The Overall Morningstar RatingTM for a fund is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of the funds in an investment category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Fidelity® Capital & Income Fund (FAGIX) vs. High Yield Bond Peer Group Hypothetical growth of $10,000 during manager’s tenure (07/15/2003–09/30/2015)1

$30,000

$25,000

Fidelity® Capital & Income Fund ($27,179) High Yield Bond Peer Group ($20,501) $20,000

$15,000

$10,000

$5,000

$0 2003

2004

2005

2006

2007

2008

2009

2010

2011

Fidelity Capital & Income Fund High Yield Bond Peer Group

2013

2014

2015

Manager Tenure Expense Ratio 2

Average Annual Total Returns as of 09/30/2015

2012

1 year

3 year

5 year

10 year

07/15/2003

–0.50%

6.06% 6.98%

7.94%

8.53%

–3.64%

2.89%

5.87%

6.10%

5.21%

0.72%

Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will ﬂuctuate, so investors may have a gain or loss when shares are sold. Current performance may be higher or lower than what is quoted, and investors should visit Fidelity.com/performance for most recent month-end performance.

800.FIDELITY | Fidelity.com/CapIncome Or call your Advisor.

© 2015 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund’s current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. 1 The chart above illustrates the performance of a hypothetical $10,000 investment made in the fund and a benchmark since the inception date of the product. Benchmark returns include reinvestment of capital gains and dividends, if any, but do not reﬂect any fees or expenses. It is not possible to invest in an index. This chart is not intended to imply any future performance of the investment product. 2 Expense Ratio is the total annual fund operating expense ratio from the fund’s most recent prospectus. 3 The Morningstar category average is the average return for the peer group based on the returns of each individual fund within the group, for the period shown. This average assumes reinvestment of dividends. Past performance is no guarantee of future results. Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2015 FMR LLC. All rights reserved. 726062.4.0

Just because you don’t see it, doesn’t mean it isn’t there. Introducing the newly redesigned Volkswagen Passat with Blind Spot Monitor, one of seven available Driver Assistance features.* Passat. Where family happens.

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JANUARY/FEBRUARY 2016 VOLUME 45, NUMBER 1

F E AT U R E S

I N V E S T O R ’ S

G U I D E

2 0 1 6 PART 2: TOOLS »

Picks From the Pros These fund managers place big bets on a handful of companies—and win. by Carolyn Bigda

The MONEY 50 The best mutual and exchange-traded funds for long-term gains. by Taylor Tepper

The Right Way to Invest for College To fund the kids’ education, create a smart mix of risk and reward. by Ian Salisbury

Funds That Can Beat the Market Six rules for adding these “strategic” ETFs to your portfolio. by Paul J. Lim

The Fu Report 2n0d 15

A score top-perfo card for the rmin mutual fu g and biggest nds and E TFs. Page 124

Photograph by t h e

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401(k) ROLLOVER

100% OF OUR RETIREMENT FUNDS BEAT THEIR 10-YEAR LIPPER AVERAGE In a variety of markets, 100% of our Retirement Funds beat their 10-year Lipper average.* So when you choose a T. Rowe Price Retirement Fund, you can feel conﬁdent in our experience and expertise. Past performance cannot guarantee future results. Roll over your old 401(k)** to a ﬁrm with proven performance. CALL 1-888-744-5410 OR GO TO TROWEPRICE.COM/ROLLOVER.

Request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate year an investor plans to retire (assumed to be age 65) and likely stop making new investments in the fund. If an investor plans to retire signiﬁcantly earlier or later than age 65, the funds may not be an appropriate investment even if the investor is retiring on or near the target date. The funds’ allocations among a broad range of underlying T. Rowe Price stock and bond funds will change over time. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus on supporting an income stream over a long-term postretirement withdrawal horizon. The funds are not designed for a lump-sum redemption at the target date and do not guarantee a particular level of income. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility over shorter time horizons. *Based on cumulative total return, 21 of 36 (58%), 36 of 36, 36 of 36, and 20 of 20 of the Retirement Funds (including all share classes) outperformed their Lipper average for the 1-, 3-, 5-, and 10-year periods ended 9/30/15, respectively. Not all funds outperformed for all periods. (Source for data: Lipper Inc.) **Consider all available options, including remaining with your current retirement plan, rolling over into a new employer’s plan or IRA, or cashing out the account value. T. Rowe Price Investment Services, Inc., Distributor. IRAR082861

JANUARY/FEBRUARY 2016 VOLUME 45, NUMBER 1

Plan 25 / SNAG A BIG RAISE NOW These moves will help you make the case for more money.

29 / ASK THE EXPERT Worried you won’t keep your resolutions past January? Here’s some help.

34 / GET YOUR HEALTH CARE FREEBIES You won’t need to pay for many checkups and exams, if you stay in your network.

FIRST 19 / THE BIG NUMBER 20 / FAST TAKES 21 / SOCIAL CURRENCY 22 / THE STATS 23 / TECH

134

Where to Go in 2016 Our month-by-month guide will help you ﬁnd this year’s best travel deals. by Stirling Kelso and Sara Morrow

MONEY HACKS

P H O TO G R A P H B Y D I A N A M AY F I E L D/G E T T Y I M A G E S

IN THIS ISSUE

8 / Money.com 11 / Letters & Comments

13 / Editor’s Note

Cover photograph by THE VOORHES Arrow fabricated by Rich Schiller

Think Small to Win Big Shoring up your ﬁnances can be hard. These clever tactics can trick you into better ﬁnancial behavior. by Alexa von Tobel

EVERYTHING The sweetest deals go to shoppers with a calendardriven plan.

41 / YOUR TICKET TO FINANCIAL AID

COLUMNS 32

36 / WHEN TO BUY

Even wealthier families can get help if they ﬁll out this form.

146

INCOME ADVISER

MONEY WELL SPENT

Don’t Miss Out Chickens on This Social Come Home Security Perk to Roost There’s still time to take advantage of this lucrative claiming strategy before it’s gone. by Philip Moeller

A mini-farm and feathered friends are this family’s best investment. by Lisa Burkhardt

Retire 43 / HAPPY 70TH, BOOMERS! After you blow out the candles, check off these ﬁnancial to-dos from your list.

45 / RETHINK REVERSE MORTGAGES Tap your equity safely if you need emergency cash.

MONEY (ISSN 0149-4653) is published monthly (except one in January/February) by Time Inc. PRINCIPAL OFFICE: 225 Liberty Street, New York, N.Y. 10281-1008. Periodicals postage paid at New York, N.Y. and additional mailing offices. POSTMASTER: Send all UAA to CFS. (See DMM 507.1.5.2). NON-POSTAL AND MILITARY FACILITIES: Send address corrections to MONEY Magazine, P.O. Box 62120, Tampa, FL 33662-2120. Canada Post Publications Mail Agreement No. 40110178. Return undeliverable Canadian addresses to: Postal Station A, P.O. Box 4326, Toronto, Ontario M5W 3H4. GST No. 888381621RT0001. © 2015 2016 Time Inc. All rights reserved. Reproduction in whole or in part without written permission is prohibited. MONEY is a registered trademark of Time Inc. U.S. subscriptions: $15 for one year. SUBSCRIBERS: If the Postal Service alerts us that your magazine is undeliverable, we have no further obligation unless we receive a corrected address within two years. Your bank may provide updates to the card information we have on ﬁle. You may opt out of this service at any time. CUSTOMER SERVICE AND SUBSCRIPTIONS: For 24/7 service, go to MONEY.COM/CUSTOMERSERVICE. You can also call 800-633-9970; write MONEY, P.O. Box 62120, Tampa, FL, 33662-2120; or email help@money.customersvc.com. MAILING LIST: We make a portion of our mailing list available to reputable ﬁrms. If you would prefer that we not include your name, please call or write us. PRINTED IN THE U.S.

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EVERYTHING YOU NEED TO KNOW ABOUT FAFSA MONEY 101 Answers to your questions about investing, saving, debt, taxes, real estate, and more.

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MARK GIMEIN keeps an eye on what the presidential race means for your money. @markgimein

G E T T Y I M A G E S ( 2 ) ; U W E — A G E F OTO STO C K ( B L O C K S ) ; C O U R T E S Y O F M A R K G I M E I N

Hoping to take your career to new heights in the new year? We lay out the best moves to make in your twenties, thirties, forties, ﬁfties, and beyond. Plus, the scoop on the ﬁelds that are hiring, what a résumé should look like in 2016, and networking advice for introverts. money.com/careers

MONEY IN YOUR IN-BOX!

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CHIEF CONTENT OFFICER Norman Pearlstine CHIEF EXECUTIVE OFFICER Joseph Ripp

EDITOR Diane Harris DEPUTY EDITOR Ellen Stark ASSISTANT MANAGING EDITORS Rachel F. Elson, Paul J. Lim, Pat Regnier EDITORS-AT-LARGE Marc Peyser, Penelope Wang EDUCATION EDITOR Greg Daugherty SENIOR EDITOR George Mannes SENIOR WRITERS Kim Clark, Donna Rosato WRITERS Ian Salisbury, Taylor Tepper REPORTER Kara Brandeisky EDITORIAL ASSISTANT Alexandra Mondalek OFFICE MANAGER Melanie Birdsong-Ballew

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CONTRIBUTING EDITOR Hank Gilman CONTRIBUTING COLUMNIST Alexa von Tobel CONTRIBUTING WRITERS Doug Aamoth, Kate Ashford, Daniel Bortz, Joan Caplin, Karen Cheney, Carla Fried, Josh Garskof,

Kerry Hannon, Paul Keegan, Stirling Kelso, Sarah Max, Elaine Pofeldt, John Waggoner, Cybele Weisser, Clint Willis COPY ROOM Ben Ake (COPY CHIEF), Jonathan Brown, Maria Carmicino, Judith Ferbel, Lauren Goldstein, Edward Karam, Kathleen Kent

MONEY.COM EDITOR Scott Medintz DEPUTY EDITOR Laura Goldstein SENIOR WRITER Brad Tuttle SPECIAL PROJECTS EDITOR Susie Poppick SYNDICATION EDITOR Anita Hamilton REPORTERS/PRODUCERS Kaitlin Mulhere,

Kerri Anne Renzulli, Ethan Wolff-Mann PRODUCT MANAGER Marissa Zanetti-Crume

AUDIENCE ENGAGEMENT EDITOR Matt Bemer SOCIAL MEDIA WRITER Alicia Adamczyk PHOTO EDITOR Sarina Finkelstein SENIOR VIDEO PRODUCER Kate Santichen ASSOCIATE VIDEO PRODUCER Tom Vollkommer CONTRIBUTORS Caroline Ceniza-Levine, Dan Kadlec,

Darrow Kirkpatrick, Ruth Davis Konigsberg, Philip Moeller, Jill Schlesinger, Walter Updegrave, Martha C. White

THE FORTUNE | MONEY GROUP GROUP PUBLISHER Eric Danetz PUBLISHER, MONEY Tony Haskel VICE PRESIDENT, MARKETING Michael Joseloff VICE PRESIDENT, DIGITAL PLANNING AND CLIENT SERVICES Brian Maher VP, GENERAL MANAGER, DIGITAL Howard Manus

ADVERTISING SALES Atlanta/Washington, D.C.: Greg Bowerman (EXECUTIVE DIRECTOR, MULTIMEDIA), Danielle Pickett (ACCOUNT DIRECTOR), Vornida Seng Boston: Melissa More (EXECUTIVE DIRECTOR), Kristen Quinn, Cailin Travers Chicago: Jacie Brandes (EXECUTIVE DIRECTOR, MULTIMEDIA), Ryan Baise, Sarah Matteson, Laurie Minor, John Winterhalder Detroit: Melissa Homant (EXECUTIVE DIRECTOR, MULTIMEDIA), John Wattles (SALES MANAGER), Amy Simer Los Angeles: Brad Souva (DIRECTOR), Lexie Adams New York: Ashley Healy (EXECUTIVE SALES DIRECTOR), Barbara Behrins, Casey Tatum (ACCOUNT DIRECTORS), Adriana Schwarz San Francisco: Doug Harrison (DIRECTOR), Lindsey Lee Texas: Julie Lee (Neese & Lee Media Sales) Singapore: Karen Mong Hong Kong: Elizabeth Kwong Japan: Kotaro Aikawa

INTEGRATED MARKETING Sheyna Bruckner (DIRECTOR), Stephanie Andersen (ASSOCIATE DIRECTOR), Veronica Clerkin, Christine Fulgieri, Tess Konter (SENIOR MANAGERS), Brittany MacWright (MANAGER), Jourdan Cohen (ASSOCIATE MANAGER), Asia: Judy Fong (SENIOR DIGITAL SALES MANAGER), Florence Thote (SALES DEVELOPMENT MANAGER), Rosa Chow (SENIOR RESEARCH MANAGER) Europe: Mike Jeannes DIGITAL PLANNING AND CLIENT SERVICES Karen Szeto, Colleen Tully (DIRECTORS), Fabian Fondriest, Courtney Kern, Melissa Tacchi CREATIVE SERVICES Joe Alesi (EXECUTIVE DIRECTOR), Natalie Ryan (DIRECTOR), Clarice Lorenzo

LIVE MEDIA Delwyn Gray (SENIOR EXECUTIVE PRODUCER), Kristen Leoce (EXECUTIVE DIRECTOR), Jennifer Current, Emily Kinney, Janine Lind, Megan Marcel, Cindy Shieh, Virginia Slattery

COMMUNICATIONS Kerri Chyka (VICE PRESIDENT), Erin Clinton (DIRECTOR), Daniel Leonard (SENIOR MANAGER), Ashley Calame (MANAGER), Kelsey Rohwer (SENIOR PUBLICIST), Raina Dembner (COORDINATOR)

CONSUMER INSIGHT Joel Kaji (EXECUTIVE DIRECTOR), Rachel Lazarus (RESEARCH MANAGER)

CONSUMER MARKETING AND REVENUE Ann Marie Doherty, Lydia Morris, Stephanie Solomon (VICE PRESIDENTS), Eric Szegda (VICE PRESIDENT, RETAIL), Andrejs Lazda, Steven Mastrocola, Randi Erber, Nicole Padovano, Christina Mejia, Nicole Zingaro

FINANCE Wajeeha Ahmed (VICE PRESIDENT), Wynne Wong (EXECUTIVE DIRECTOR), Arbena Bal (ASSOCIATE DIRECTOR), Paula Esposito, Catherine Keenan, Daniel Seon, Dan Torockio (MANAGERS), Robert McKee, Paul Yoo

CONTENT MARKETING AND STRATEGIES Jamie Waugh Luke (DIRECTOR OF CONTENT), Alec Morrison (EDITOR), Gregory Leeds, Ron Moss, Cindy Murphy, Christiaan Rizy (DIRECTORS), Joel Baboolal, J. Thomas Lewis, Blair Stelle, Melissa Brice

PRODUCTION Carrie Mallie (SENIOR DIRECTOR), Valerie Langston (DIRECTOR), Mieko Calugay, Elizabeth Mata (MANAGERS), Annmarie Avila, Drew Carlos, Bharath Medehal (ASSISTANT MANAGERS), Vishal Prasad (AD PRODUCTION SPECIALIST)

SVPs, CONSUMER MARKETING Jeff Blatt, JT Kostman, Stephen Selwood SVP, COMMUNICATIONS Daniel Kile VP, FINANCE Maria Beckett VP, LIVE MEDIA Lisa Cline VP, OPERATIONS Robert Kanell VP, CONTENT MARKETING AND STRATEGIES Newell Thompson VP, HUMAN RESOURCES Roxanne Flores DEPUTY GENERAL COUNSEL Amy Glickman

TIME INC. EXECUTIVE VICE PRESIDENTS Jeff Bairstow, Rich Battista, Lynne Biggar, Colin Bodell, Greg Giangrande, Lawrence A. Jacobs, Erik Moreno, Evelyn Webster EXECUTIVE VP, GLOBAL ADVERTISING SALES Mark Ford SENIOR VP, ADVERTISING SALES & MARKETING Andy Blau (FINANCE) SENIOR VP, ADVERTISING SALES & MARKETING Priya Narang (MARKETING) SENIOR VP, CORPORATE SALES Mark Ellis SENIOR VP, EDITORIAL INNOVATION Matt Bean VP, SALES Lauren Newman VP, DIGITAL Dan Realson VP, CREATIVE DIRECTOR Cara Deoul Perl VP, MARKETING AND SALES DEVELOPMENT Cheryl DiMartino VP, DATABASE MARKETING Mary Wojciechowski VP, MARKETING AD SOLUTIONS Steve Cambron VP, RESEARCH & INSIGHT Caryn Klein VP, CONSUMER INSIGHT Barry Martin VP, DIGITAL AD OPERATIONS Nancy Mynio VP, YIELD AND PROGRAMMATIC Kavata Mbondo VIDEO J.R. McCabe (SVP) TECHNOLOGY AND PRODUCT ENGINEERING Colin Bodell (CTO), Alam Ali, Linda Apsley, Adam Days, Robert Duffy, Amanda Hanes,

Hugues Hervouet, Simon Loxham, Leon Misiukiewicz, Keith Oâ&#x20AC;&#x2122;Sullivan, Ben Ramadan, Ashis Roy, Eric Schoonover, Vita Sheehy, Jimmie Tomei (VPs)

How to Reach MONEY LETTERS TO THE EDITOR Write to us at MONEY 225 Liberty Street, New York, N.Y. 10281-1008, or letters@moneymail.com. Include your name, address, and phone number. Letters may be edited for clarity and space.

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BACK ISSUES Back issues are available for $5.95 for the current year and $6.95 for prior years (or at quantity rates for more than 10 copies). Call 800-633-9970 or visit backissues.money.com

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LETTERS & COMMENTS

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ONLINE COMMENTS ABOUT RECENT MONEY STORIES

Shorting tomorrow. shomron david Re: “Warren Buffett’s Best Performing Stocks of 2015” Remember, discounts are all relative to inflated prices. @mycustomersays Re: “These Stores Have the Biggest Black Friday Discounts”

Gotta walk around in your underwear in winter though. joe soja Re: “How Time Square’s Naked Cowboy Makes $150,000 a Year”

CORRECTIONS

I L L U ST R AT I O N B Y B E N M O U N S E Y

In “Test Your Retirement IQ” [November], question No. 1 was unclear. It should have said, “The money you invest today in an IRA has a return of 6% per year over the next 10 years.” The chart in “How the Budget Deal Will Affect Social Security” [Fast Takes, December] misstated the rise in 2016 Medicare deductibles. The increases are per year, not per month. “When to Pick a Charity’s Perks” [December] suggested that the Sierra Club was a charity; in fact, donations support its lobbying and advocacy efforts and so are not tax-deductible.

RE: 17 SMART WAYS TO PROSPER IN 2016 [DECEMBER]

I have received immeasurable value from your magazine over the years, but instead of recommending how to prosper next year, why not just give unimpeachable investment advice good for any year. Namely, create a strategic investment plan appropriate for your risk tolerance and time horizon and stick with it through thick and thin, with an occasional asset rebalancing. Simple enough. ken derow, Swarthmore, Pa.

AFFORDING HEALTH CARE “7 Moves for a WorryFree Retirement” [November] notes that a couple retiring this year should expect to pay $245,000 for health care expenses throughout retirement. When I ask clients where this money will come from, they generally say distributions from 401(k), IRA, or other pretax savings. Unfortunately, this same couple would need about $350,000 in savings to access the $245,000

necessary to fund their health care expenses (assuming a combined state and federal tax rate of 30%). mark deters Sentinel Beneﬁts & Financial Group, New York City

DON’T FORGET TO FLOSS If readers want to save money at the dentist, they just need to brush and ﬂoss every day [“How to Talk Back to Your Dentist,” December]. Or as the saying goes, “Dentistry isn’t

O U R FA V O R I T E C O M M E N T

I am a 24/7 caregiver for my husband. I barely have time to read. When I received the December MONEY with a “This is your last issue” notice, I decided, Okay, I’ll peruse this quickly. In two hours I found a dozen articles important to me. So I have renewed. candy kaloger, Lake Stevens, Wash.

expensive. Neglect is.” susan jaques, dds Holly Hill, S.C.

RETURN ENGAGEMENTS I enjoyed your article on employees who return to former employers [The Big Number, December]. In my 29-year career I’ve gone back to the same company twice. Hoping to stay where I’m at now. kristeen kohrs Branchburg, N.J.

MEN AND MONEY You’re right: Men and women do face different challenges [“Should Men and Women Manage Money Differently?” December]. However, you have all females on this panel, including the editor of MONEY. Who speaks for the men? lyle tuttle Surprise, Ariz.

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EDITOR’S NOTE

Make the New Year Pay Off for You S HOLIDAYS GO, New Year’s may not be everyone’s cup of tea. But I’m a fan. I’m a sucker for symbolic fresh starts and the opportunity they give us to take stock, commit to positive change, and feel as if we have a clean slate. Can’t beat Jan. 1 for that. In fact, there’s evidence that when it comes to your money at least, resolutions have real benefits. Exhibit A: More than half of Americans who pledged to improve their finances last year report they ended 2015 in better shape, vs. just over a third who hadn’t made a resolution, according to a recent Fidelity survey. An informal poll of the MONEY staff shows that our financial resolutions tend to mirror those of our readers (see page 29). We want to save more, spend less, and not sweat the small stuff. Here’s how we plan to make good on those pledges: Go public. Many staffers have shared their goals with others, whether it’s to invest more (social media writer Alicia Adamczyk), stop letting a gym membership go unused (special projects editor Susie Poppick), or consolidate

P H O TO G R A P H B Y J E N N I F E R K . R A K O W S K I /G E T T Y I M A G E S

401(k) plans (audience engagement editor Matt Bemer). “If I don’t do it, my co-workers will call me out,” says Bemer. “Shame motivates me.” Be mindful. Reporter Kara Brandeisky is relying on Mint.com to help her “be more cognizant of

where my money is going.” Senior editor George Mannes, who wants to focus on big goals instead of, say, whether to spring for a tea from Starbucks, plans to ask himself two questions: “Is the money at issue really worth the time I’m occupied thinking about it? And, in 20 years, will I regret buying the large tea?” Turn down the volume. Editorat-large Marc Peyser plans to unsubscribe from shopping email lists to avoid being constantly tempted by a “deal.” He adds: “My decluttered

in-box will save me something just as precious as money: time.” Time is also at the heart of my New Year’s resolution, which is to better balance my work and personal life. Becoming the editor of MONEY this year has been an exhilarating but allconsuming ride. In 2016, I want to continue serving readers, both in print and at Money.com, with great content— starting with this Investor’s Guide, which is filled with smart recommendations to help you prosper in the New Year. But I’d like to think I can deliver on that promise without sacrificing quite so much time away from family and friends. Here’s hoping your 2016 is similarly filled with the perfect blend of profitable endeavors and time well spent with the people you love. Happy New Year.

DIANE HARRIS EDITOR twitter.com/dianeharris

m o n e y. c o m

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JA N U A R Y/FE B R U A R Y 2 0 1 6

MODEL MAKING BY MILLAR MODELS

THE BIG NUMBER + FAST TAKES + SOCIAL CURRENCY + THE STATS + TECH

Photograph by ja s o n

h i n d l ey

J A N U A R Y/ F E B R U A R Y 2 0 1 6

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FIRST For advice on finding an affordable school, check out the MONEY College Planner at money.com/colleges.

FAST TAKES

TRAVEL

AIRLINES: HANDLE WITH CARE—OR PAY

COLLEGE

How to Scale the Cost of Higher Ed

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Illustration by matt

Parents expect lots of sacriﬁces to afford college.

64% want their kids to work part- or even full-time

doesn’t cover damage due to normal wear and tear but makes it clear that many current baggage policies—in which carriers deny liability for damages and won’t even accept customer reports of mishandled baggage— won’t (ahem) ﬂy. Airlines that don’t update their policies and accept responsibility for damaged baggage by Jan. 9 will face enforcement action from the Department’s Aviation Enforcement Office. —MARTHA C. WHITE

62% say they would cut back on their own vacations

27% plan to get a second job SOURCE: MONEY/Kaplan Test Prep Survey

h a r r i s o n cl oug h

QUOTED

“Make a two-year contract—and each have an out after one year.” Author Christine Romans, on what parents should do before their grown kids move back in

P H O TO G R A P H B Y I STO C K P H O TO

PARENTS OF TEENAGERS EXPECT THAT the high cost of college will require them to sacrifice early retirement, big expenditures like cars, and even fun, a new survey conducted by MONEY and Kaplan Test Prep has found. In the survey, of 445 parents of students ages 15 to 18, 62% said paying tuition would mean “significant financial sacrifices.” “Parents are willing to do a lot for their kids,” says Andrew Belasco, an independent college counselor in Atlanta. “They are delaying vacations, downsizing their homes, taking second jobs.” Parents would like the students to pitch in as well: 64% want their kids to work at least part-time. A student working the recommended 10 hours a week for two 13week semesters can expect to earn about $2,500 a year. Most families have little choice: The typical out-ofpocket cost per child for a bachelor’s degree at an instate public college is more than $72,000, according to the College Board. For a degree from a private college, the net price rises to about $120,000. —KIM CLARK

PAYMENT PLANS

Good news, ﬂiers: Airlines will have to reimburse you if their employees throw your bag across the tarmac—or otherwise damage it—the Department of Transportation warned carriers recently. The agency investigated foreign and domestic airlines at 16 different airports in September and issued a reminder that the airlines are responsible for paying for damage to “wheels, straps, zippers, handles, and other protruding parts” that occurs under the airline’s watch. The notice

FIRST Join the conversation: twitter.com/money facebook.com/moneymagazine • pinterest.com/moneymagazine

SOCIAL CURRENCY

READERS TO THE RESCUE

“The recruiter I used to ﬁnd my job said I would get an annual bonus, but that’s not true. What can I do now?” SEE IG AB “GET NOW” RAISE E 25) (PAG

FACEBOOK QUESTION OF THE MONTH

WHAT IS YOUR BEST SALARYNEGOTIATING TIP?

“Be educated. With the amount of information on glassdoor.com or salary.com, it’s easy to see the pay ranges for that job and sometimes even that company.” —dominic midkiff “Determine your final number and be willing to graciously walk away if you don’t get it.” —domini bryant “Give examples of what makes you invaluable and irreplaceable.” —fredie pacudan

“Just ask! 99% of the people I have hired take what I offer. Very few even negotiate.”

You have no recourse with the company. It didn’t promise anything. You have little recourse with the recruiter. The company you are working for now might like to know that he misrepresented it, but there is no beneﬁt to you except satisfaction.

herb worthington Grand Island, Neb.

Ask the recruiter what he would recommend be done to resolve the issue. Lesson to be learned: When recruiters present data relating to potential opportunity, get all of it in writing.

john phillips Bend, Ore.

—david nation

P H O TO G R A P H B Y G E T T Y I M A G E S

“Talk about the value that you bring, rather than the skills that you have.” —inder sehgal “Say, ‘I’m looking for a long-term career with you. I don’t want to come for a lower salary and leave short-term for a better salary.’ ” —natasha uduwara “Be as nice as possible and as sweet as possible.” —eva tortora

It’s possible the recruiter was provided with wrong or outdated information. The best bet is to try to negotiate a higher

salary when you’ve been with the company for a while and can document your contributions and rationale for a raise.

marlene kurban Bristol, Conn.

Nothing. Asking for a bonus now would conﬁrm that you were ill-prepared when you were applying for the position and, in addition, that you expect the company to make an

exception for you.

wanda willow Pomfret, Conn.

Go the recruiter and ﬁnd out where he got his information. He may be able to negotiate a bonus if he had it in writing from the company. If not, go to the ﬁnance director and explain. If you can’t get a bonus, you might get a raise.

jayne hogan Bradfordsville, Ky.

THE EXPERT SAYS

Ask the recruiter what happened. If he insists he never promised anything, you might have a breach-of-contract case, but make sure you have slam-dunk evidence. A lot of lawyers won’t touch anything under six figures without solid proof. Emails or other documents that prove your case might help. nancy l. hendrickson Managing partner, Hendrickson Law Firm, Chicago

Want solutions to a financial dilemma in your life? Email your question to social@moneymail.com. To join our reader panel, go to moneymatterspanel.com.

J A N U A R Y/ F E B R U A R Y 2 0 1 6

m o n e y. c o m

FIRST Next month’s question: Have you ever called in sick after a bad night’s sleep? Cast your vote at Money.com.

THE STATS

MONEY READERS WEIGH IN

The Price of Keeping Fit EARNINGS BOOST IF YOU EXERCISE 3+ HOURS A WEEK

Men +6%

THREE WAYS TO LOWER YOUR GYM COSTS Negotiate. Don’t settle for the sticker price. Check your insurance. Some wellness plans cover part of your dues. Join Costco. Members get deals at 24 Hour Fitness.

Women +10%

HOW OFTEN DO YOU WEAR YOUR FITNESS DEVICE?

MEDIAN ANNUAL HEALTH CLUB DUES

THAT’S $69 PER MONTH

$828

67% NEVER USE THEIR CLUB

11%

MOST DOWNLOADED FREE HEALTH & FITNESS APPS iOS and Android combined MyFitnessPal Fitbit Runtastic Lose It! Sworkit Lite

1. Fairfax, Va. 2. Park, Mont. 3. Bianco, Texas 4. Jasper, Ga.

$10 Jump rope

$60

Top 10 ﬁtness DVDs on Amazon

$25

Resistanceband set

$40

One medicine ball

$150

Set of free weights and dumbbells

$950

Treadmill

TOTAL

$1,235

NOTES: Online poll conducted in November; 1,306 votes. Home gym prices based on product average costs from major retailers. SOURCES: Journal of Labor Research, Cleveland State

University, International Health, Racquet & Sportsclub Association, Mint.com, Consumer Electronics Association, PricewaterhouseCoopers, Fidelity, AggData, AppCrawlr, Amazon

I L L U ST R AT I O N B Y T H E W O R K S

WANT UNLIMITED GYM ACCESS? MAKE YOUR OWN AT HOME AND SAVE

10%

A few times a Once a week month or less

2014

2015

32%

A few times a week AVG. WEARABLE PRICE: $120

LOCALES WITH THE MOST GYMS PER 10,000 RESIDENTS

AVERAGE MAXIMUM COMPANY HEALTH-ANDWELLNESS INCENTIVE

47%

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BEARTEK SNOW BLUETOOTH GLOVES Weighs just 1.7 ounces

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P R O P ST Y L I N G B Y L I N D E N E L ST R A N , D E S K C O U R T E S Y O F T H E G R E AT A M E R I C A N D O L L H O U S E M U S E U M

S O NE W LU T YE IO N A R’ SS S PEC IA

IF BOOSTING YOUR SALARY is one of your financial resolutions for 2016, your timing is good. The unemployment rate is the lowest it’s been in seven years, and many employers are having a hard time finding qualified candidates for jobs. That should give workers the upper hand. Still, getting paid more is one thing; getting paid a lot more is another. On average, salaries are expected to rise 3.1% in 2016, about the same as last year, according to WorldatWork, a nonprofit association for human resources professionals. “It’s not that wages aren’t going Photograph by g r e g o ry

reid

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Plan

up,” says Kerry Chou, a compensation expert at WorldatWork. “They’re just not rising as fast as workers would like.” First off: To get a big raise, you have to speak up. As more companies implement pay-forperformance compensation and reserve the biggest bumps for top performers, you’ll have to make a solid case that you deserve a generous slice of the salary pie. Indeed, three-quarters of workers who asked for better compensation saw paychecks go up, and 44% got what they requested, according to a recent PayScale survey. (The rest got something but less than what they wanted.) Yet PayScale also found that 57% of workers had never asked for a raise—and half of those who hadn’t said it was because they were uncomfortable negotiating salary or didn’t want to be seen as pushy. You don’t have to be a hardball negotiator, though. A few recent studies suggest some simple, surprising ways to get the pay you want. Put it in email. You’ll have a better chance of success if you begin negotiations via email rather than in person, suggests a 2013 study by Michael Taylor at Imperial College London. Face-to-face interactions beneﬁt the more powerful person in a negotiation, Taylor found—here, your boss. So if you think it’s going to be a tough ask, start the conversation online. It’s easier to spell out your accomplishments, and you don’t have to worry about forgetting important points. “This is a good strategy if you’re nervous or your boss intimidates you,” says Chou. Email also gives your manager a heads-up, giving him or her time

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to consult with HR or someone higher up. “The more prepared the manager is, the less he or she will be taken aback, and the higher the probability you’ll have success,” says Adam Ochstein, CEO of HR consulting ﬁrm StratEx. It’s also harder for your boss to brush you off when you have the communication on record. Keep it conversational. Once you advance to a meeting, use chitchat to establish rapport. In a Stanford University study published last spring, students who made small talk before a negotiation were much more likely to reach an agreement than those who got right down to business. There are a couple of caveats. For one thing, small talk seems to pay off for men more than women. Both sexes beneﬁted from casual chat when negotiating salary, a June 2015 study by American University

Top Marks, Top Pay To get the greatest raise, become a star performer. 2016 PROJECTED PAY INCREASE

5.0% 3.8% 2.8% 1.1% 0.2% Highest High Middle

Low Lowest

PERFORMANCE RATING SOURCE: Mercer

J A N U A R Y/ F E B R U A R Y 2 0 1 6

management professor Alexandra Mislin found, but men got better deals. Women are expected to be more communicative, Mislin suggests, so they may not earn extra social capital from chatting. Also, mind your boss’s schedule. “It’s always helpful to establish common ground,” says Deborah Kolb, author of Negotiating at Work—but if you can get only five minutes on someone’s calendar, she says, don’t spend it asking about weekend plans. Know your target. Do enough homework that you can ask for a specific amount. Such concrete requests show that you’ve done your research, according to a study by Malia Mason at Columbia Business School, leading the person you’re negotiating with to take you seriously. Keep in mind, however, that an ask that’s wildly off base could shut down the conversation altogether. Use sites like PayScale and Glassdoor to find salary ranges for your position. Then talk to colleagues about whether people are getting raises, and try to find out—discreetly—where your pay stands compared with that of others in similar positions. Ask for a range. Using specific numbers doesn’t mean you should cite a single figure. A separate study by Mason and her colleague Daniel Ames found that presenting a range, starting with the number you really want, often produced better results. For example, if you want to earn $5,000 more, ask for a $5,000 to $7,000 increase. According to Mason and Ames, a range makes you look more flexible than if you propose a single number.

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Make Your Resolutions Stick IF YOU’VE WRITTEN OFF

New Year’s goals as ineffective gimmicks, reconsider. People who made money resolutions last January felt more ﬁnancially optimistic and secure by year-end than those who skipped a resolution, a new Fidelity survey ﬁnds. But committing to a big goal is one thing; devising a smart strategy to see it through is another. So for several popular resolutions, we asked experts for tactical advice. Here’s what they said.

RESOLUTION: SAVE MORE FOR RETIREMENT

I’m saving enough to get my 401(k) match. What more should I do to save for retirement?

“Maxing out the match is a great start, but it’s not enough,” says Timothy J. LaPean, a ﬁnancial planner in Minneapolis. Boston College’s Center for Retirement Research recommends aiming for about 15% of income. Having trouble putting more aside? See if your plan will raise your savings rate automatically each year; 48% of

Readers making 2016 financial resolutions say their priorities are spending less, saving for retirement, and cutting debt. MONEY READERS’ TOP RESOLUTIONS Spend less money

Save more for retirement

Pay down debt

22%

28%

22% 9%

Buy a new home

10%

Save more for emergencies

SOURCE: MONEY online poll conducted in November; 366 responses

Use our interactive Resolution Generator at money.com/resolutions to figure out the money moves you should be making for 2016.

Get a raise, promotion, or new job

Plan

large 401(k) plans offer auto escalation, the retirement plan industry group DCIIA reports. What if your employer doesn’t? Pledge to hike your contribution by a point whenever you get a raise—you won’t even feel the pinch—or on an easy-to-remember date, such as your birthday, until you max out. And remember that your 401(k) is not the only place to save. Is it riddled with expensive funds and high fees? “If yes, let’s not give them any more money,” says LaPean. (You can check on Brightscope.com.) Instead, have part of your paycheck deposited into other savings vehicles. A mix of accounts will give you more tax ﬂexibility later. “Not all of your money should be in tax-deferred accounts when you head into retirement,” says Judith McGee, a ﬁnancial planner in Portland, Ore. That means investing after-tax money in a Roth IRA or taxable accounts now. Roths have better tax treatment, but you can’t contribute once you make $194,000 or more as a married couple in 2016 ($132,000 for singles).

J A N U A R Y/ F E B R U A R Y 2 0 1 6

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Plan

RESOLUTION: SPEND LESS

I need help sticking to a budget. What can I do to get my spending under control?

In a study, people were more frugal after being asked to recall times they had resisted a temptation to splurge. SOURCE: Journal of Consumer Psychology, 2015

One proven method: Pay in cash. “It hurts more than plastic, and there is a limit to how much is in your wallet,” says Manhattan Beach, Calif., ﬁnancial planner Jana Davis. One MIT study found that people were willing to pay

nearly 65% more for a basketball ticket when using a credit card rather than cash. To curb frivolous spending, Covington, La., ﬁnancial planner Lauren G. Lindsay recommends setting aside a weekly amount in an envelope for discretionary “hot button” items like

RESOLUTION: SAVE FOR AN EMERGENCY

How can I put aside more money for emergencies?

To make building a rainy-day fund easier, automate it, ou do with retirevings, says Kansas ., ﬁnancial planner yler Landes. Have HR or our bank direct a portion ch paycheck—say,

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When they recalled having INDULGED:

$29.51

$37.63

eating out. “When the envelope runs out, you are done,” she says. Don’t like carrying cash? Psych yourself out. A study published in the Journal of Consumer Psychology in 2015 found that people were willing to incur 28% more credit

card debt when they recalled two times they indulged in spendthrift behavior, compared with when they recalled times they abstained. So if you ﬁnd yourself tempted by a splurge, think about a few times you successfully avoided budget busters.

5%—into a savings account. That way, says Landes, “you never see it.” Shore up your fund with windfalls: gifts, tax refunds, and at least part of any bonuses. If you get a raise or ﬁnish paying off a loan, add that money too.

Aim to build up three to six months’ income. Need extra help? Tell a friend. Research from the Dominican University of California found that those who shared their goals were 33% more successful than those who didn’t.

R E S O L U T I O N : PA Y D O W N D E BT

I have student loans, credit card debt, and a car loan. Whatâ&#x20AC;&#x2122;s the best strategy for paying them all off? Paying off a $5,000 balance in 15 months is easier with a 0% balance transfer offer.

Rather than making payments at random, be strategic: Pick one debt to focus on, and pay just the minimum on everything else. With 18% average rates, credit card debt should be your top priority. You have two choices here. Youâ&#x20AC;&#x2122;ll save the most in the long run if you focus ďŹ rst on the card with the highest interest rate. Credit expert John Ulzheimer suggests you get a new card with a 0% intro rate and no balance-transfer fee. Be sure that it has a high enough limit to capture your debt and that you can pay it off before

MONTHLY PAYMENT

$333

0% intro rate

$375

Average rate

NOTES: Average credit card rate is 18%; Chase Slate offers 0% intro rate for 15 months. SOURCES: NerdWallet; Credit Karma calculator

the promotion ends. But if you feel overwhelmed, says NerdWallet expert Sean McQuay, tackle the card with the lowest balance so â&#x20AC;&#x153;youâ&#x20AC;&#x2122;ll have a victory under

your belt.â&#x20AC;? A Kellogg School of Management study found people were more likely to pay off their entire credit card debt if they paid the smallest balances ďŹ rst. â&#x20AC;&#x153;Go with what motivates you,â&#x20AC;? says New York City ďŹ nancial planner Martin Poole. He suggests testing out both scenarios at PowerPay.org to see how the savings and payment timelines change. Whichever route you pick, raise the stakes with StickK.com, a site developed by Yale economists that provides commitment tools to help you meet your goals. Users who have vowed to pay money if they fall short have been successful 72% of the time, vs. 29% for those who donâ&#x20AC;&#x2122;t pledge any money.

RESOLUTION: GET MORE BALANCE

Since I got promoted, the extra work has been a strain. How do I balance my time?

Find ways to claw back some time, says Laura Vanderkam, a time-use expert in Philadelphia. â&#x20AC;&#x153;If you can work from home one day a week, youâ&#x20AC;&#x2122;ll still have lots of time to see and interact with your colleagues, and skipping the commute gives you back that time,â&#x20AC;? she says. Delegating a few work tasks to junior staffers can also help. Itâ&#x20AC;&#x2122;s a classic win-win: Your employees get a chance to gain experience and prove their mettle while you get some precious free time back. By Ingrid Case and Kerri Anne Renzulli

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Small Tweaks With Big Payoffs TO DO THE RIGHT THING, YOU MAY NEED TO TRICK YOURSELF INTO BETTER BEHAVIOR. TRY THESE TACTICS.

by Alexa von Tobel BEHAVIORAL CHANGE is hard. You may have resolved to adjust your approach to spending, saving, or investing this year—but just because you know a new habit would be good for you doesn’t mean it will be easy to adopt. Small tweaks can have significant impact, though, so I’m always looking for easy, repeatable tricks and tactics that anyone can use to take control of his or her finances. Here are a few of my favorites. Give it a minute. Spend one minute each day—ideally, at the same time—to check in on your finances. The best way to do this is with an account-aggregation app, which pulls together your credit

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card and bank accounts and lets you scroll through all your recent transactions. (You can also use this to catch incorrect charges; I’ve found restaurants changing my tip or double billing me.) You could also use individual bank or credit card apps on your phone or even scan the cash and receipts in your wallet each morning. The key is to see whether you’re spending money faster than you want to. Get in your face. Inclined to duck ﬁnancial tasks? Use visual cues to make avoidance harder. On my phone, for instance, I place my own ﬁnancial app right next to my other favorite app, Instagram. Not every habit needs tech tools. I love using sticky notes as reminders and goal reinforcement. Planning to redo your kitchen next year, or saving up for a new car?

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Write that on a note and stick it to your mirror so you see it every morning. Better yet, tape up an image that will remind you of your goal. Visual cues are powerful, and it’s easier to skip small, unnecessary purchases if your eyes are literally on the longer-term prize. Ping yourself. How do I remember friends’ birthdays and anniversaries? I put them on my Google Calendar. So I do the same for AmEx bill deadlines. Set up recurring alerts for all your ﬁnancial tasks, whether it’s paying bills, organizing tax documents, bumping up 401(k) contributions, or checking to see if your portfolio needs rebalancing. Go ﬁrst. When I ask people how they approach saving for a big goal, they often tell me that they spend what they need to each month, and then save anything left over. But if you’re not an instinctive saver, that’s unlikely to be effective. A better technique is to fund a “new kitchen” account, say, just as you’d pay a mortgage or utility bill. Determine how much you can realistically put aside each month, and then transfer that into savings before you spend any discretionary cash. Take victory laps. It’s tough to stay motivated while tackling long-term goals. To keep myself on track, I set smaller interim goals— tangible signs of progress that I can hit at shorter intervals. Then I give myself a modest treat, like a manicure or 10-minute neck massage, once I’ve reached each mini milestone. Columnist Alexa von Tobel is the founder of LearnVest. Catch more from her at Money.com.

Illustration by ja s o n

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Plan

Don’t Miss Out on Health Freebies YOU DON’T HAVE TO PAY FOR MOST CHECKUPS AND SCREENINGS. BE SURE YOU CASH IN. by Lisa Zamosky THANKS TO OBAMACARE, most

insurers must now cover the full cost of preventive care—checkups, vaccinations, screenings, and the like. Yet many people still don’t take advantage. A recent survey by online broker eHealth found that 53% of insured respondents didn’t use their coverage at all, even for free preventive services. That could be a health risk, but it’s deﬁnitely a ﬁnancial fail: You’re giving up a service that you’ve already paid for. Here’s how to make sure you’re getting full value.

KNOW WHAT’S ELIGIBLE Coverage rules are governed by recommendations from medical and scientiﬁc authorities. The free-stuff list includes 18 services for adults, plus 26 just for women and another 27 for kids. Contraception is covered; so are tests for blood pressure, obesity, and, depending on risk factors, cholesterol, diabetes, and some cancers. Vaccines vary by age but include diphtheria, tetanus, HPV, measles, and mumps, plus a ﬂu shot. (Kaiser Family Foundation’s Preventive Services Tracker has a full list.) Yet insurers do have some leeway. “Plans are allowed to use

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reasonable medical management” to determine coverage, says Alina Salganicoff of the Kaiser Family Foundation. When guidelines don’t say how frequently a test should be given, your insurer can set its own rules. So while colonoscopy coverage is required for people age 50 and older, your plan may pay up only once a decade unless your

Stay in Network Free services aren’t free if you go outside your plan’s network. Here’s what you could be billed. AVERAGE OUT-OF-NETWORK CHARGE

$57 $85 $88 $319 $923

Diabetes (Type 2) screening Lipid disorders screening MMR vaccine

Mammogram Colonoscopy

NOTES: National averages derived from 2014–15 claims

data for relevant procedures; insurance may cover a portion. SOURCE: FAIR Health

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doctor cites a medical reason for more frequent screenings. “Discuss it with your insurer” before your appointment, Salganicoff says.

WATCH FOR LOOPHOLES Naturally, there are a few key exceptions to watch for. First off: Free services aren’t free when you go outside your plan’s network (see chart), so make sure everyone involved in a screening—from the radiologist to the lab—is in your network. Grandfathered health plans— those in place when the law took effect on March 23, 2010—are exempt from having to cover preventive care in full. If you have one of those policies, you may have to pay. (Unsure if your plan is grandfathered? Ask the beneﬁts staff at work or call your plan.) Another wrinkle: If you use a checkup to discuss other health issues, the conversation could trigger a separate bill. “Where folks get tripped up is when they go for a screening and also tell the doctor, ‘I have this back pain,’ ” says Nate Purpura, a spokesman for eHealth. “The minute you deviate from preventive care, you’ve entered a different type of medical visit.”

CHALLENGE SURPRISE BILLS Billing mistakes are common, so be sure to question any charge for care you thought was preventive. Sometimes your doctor’s staff may have used an incorrect code or failed to cite a medical justification, Purpura says. Call the office to see if the bill can be resubmitted to fix the problem. And remember that you have the right to file an appeal with your health plan if they don’t pay up.

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The Best Time to Buy Everything WANT A GREAT DEAL? YOU NEED A PLAN. THESE TIMELY TIPS TELL YOU EXACTLY WHEN TO GET SHOPPING. by Liz Weston THANKS TO THE EASE of comparison shopping online, almost anyone can suss out a 10% discount these days, and 20% isn’t all that tough either. But if you’re looking for major-league savings—the kind that can reach 30% to 50% off or more—then you need a special weapon. You need intel. Sometimes that just means knowing when a product’s “season” ends and therefore goes on super sale. That’s obvious for some purchases. Outdoor furniture is half off in September, once summer is fading. But TVs get discounted by as much as 30% in late January. Why? Because once the Super Bowl is over, demand drops faster than another Peyton Manning misﬁre. Then there are the sales that pop

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up when you’d least expect—when demand is still strong. It may be counterintuitive to discount tools in time for Father’s Day, but June is when they go for up to 60% off. “High demand should lead to high prices,” says University of Rochester’s Avery Haviv. But brick-and-mortar companies know they have to work harder to win a sale. “It’s all a way to drive you into the store,” Haviv says. Keeping track of all these shopping sweet spots can be a job of its own. That’s why MONEY created the following month-by-month guide. It’s based on data from DealNews and FatWallet, sites that track prices all year long. Paired with the strategies that follow, they should make ﬁnding a steal an everyday event.

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BUY AT PEAK DEMAND Clearly the juiciest sales are the ones that, like Father’s Day tools, arrive in high season—not only because they come just in time to save your gift-buying budget, but because there’s plenty of inventory still available. “The chances of getting savings on higher-quality items are better,” says FatWallet shopping expert Brent Shelton. Among the products that fall into this category: home fitness equipment, which retailers typically discount by up to 50% in January, in time for those New Year’s workout resolutions. Cookware, kitchenware, and gardening supplies are 40% off in May, for Mother’s Day, says Shelton. Perhaps the biggest shocker: toys. You’ll find prices up to 75% off in the first part of December, just as the holiday-shopping frenzy commences.

WAIT FOR THE POST-SEASON There are plenty of items that don’t go on sale until after their prime time, but the discounts are often bigger. You can ﬁnd winter clothes for as much as 80% off in January, and even more than that come February.

Illustration by m i k ey

bu rt o n

The Month-by-Month Shopping Plan Outdoor equipment, such as grills, go for half off or more if you wait until those Labor Day sales. The downside: By then the inventory will be picked over, so you’ll have to take what’s left. If you don’t want to get stuck with the dregs, you can cheat a bit by starting to look about two months after the season has begun. By then retailers may have begun to drop prices on slow-moving items, says Benjamin Glaser, features editor at DealNews.

FOLLOW THE TECH CALENDAR Electronics follow their own seasons. Samsung and other non-Apple companies unveil their new models in October, which is when you’ll see prices on older versions dip, typically by 50%. The hype around the shiny new things at the Consumer Electronics Show (January) and the Mobile World Congress (February) will also drive down prices on older lines. Apple typically introduces its new iPhone in September, which is when the prices of last-generation models start to drop. And while the company rarely discounts new products, retailers ﬁnd ways to sweeten the deal. Because Apple gadgets are such magnets for shoppers, stores offer their own gift cards along with an Apple purchase. Last year, Target gave a $250 card with the purchase of an iPhone 6s. “It’s fascinating that people will pay full price for a new iPhone out of the gate,” Shelton says, “when they could just wait two months” and score a Black Friday deal. Alexandra Mondalek contributed additional reporting.

You can set a whole bunch of calendar alerts, or you can clip out this handy chart, which highlights when to make all your purchases.

MONTH

WHAT TO BUY

GREAT 2015 DEALS

JANUARY

TVs and electronics, bedding, linens, cookware, fitness equipment

35% off brand-name HDTVs at Best Buy

FEBRUARY

Winter apparel and accessories, appliances, furniture, housewares

60% off mattresses at J.C. Penney

MARCH

Non-Apple smartphones, running shoes, team apparel

53% off running shoes at joesnewbalance outlet.com

APRIL

Home, garden, and auto supplies; spring clothing

40% off Craftsman tools at Sears

MAY

Home furnishings, home goods

60% off clearance at Williams-Sonoma decor

JUNE

Tools and home improvement

57% off tools at Home Depot

JULY

Swimwear, summer entertaining, air conditioners

37% off LG air conditioners at Amazon

AUGUST

Laptops, summer clothing

$100 off Apple laptops

SEPTEMBER

Home furnishings, outdoor and patio goods, lastgeneration iPhones/iPads

50% off Strathmore patio furniture at Amazon

OCTOBER

Denim and fall fashion, camping gear, sports equipment

50% off Levi’s jeans at Macy’s

NOVEMBER

Videogames, consumer electronics

Two-for-one PS4 and Xbox games at Best Buy

DECEMBER

Gift cards, toys

73% off close-out toys at Target

SOURCES: DealNews, FatWallet

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Your Ticket to More College Aid EVEN FAMILIES WITH HIGH INCOMES SHOULD PLAN TO FILL OUT THE FAFSA—AND SOON. by Kim Clark YOU MAY THINK your family is too well-off to qualify for financial aid, but if you have a child who’s in college or going soon, it’s still worth completing the Free Application for Federal Student Aid, or FAFSA, this winter. Just submitting a FAFSA automatically qualifies your student for a low-cost federal loan. It’s also a requirement for many other kinds of aid available to middle-class families, including federal parent PLUS loans and scholarships from state agencies, private foundations, and colleges. Some private colleges even give “need based” aid to families earning as much as $200,000, says Joe Orsolini, a private financial aid counselor in Chicago. To get all the financial aid you’re entitled to, follow this three-step FAFSA process: Before you fill out your FAFSA: The application asks about both your income and your assets. The 2016–17 form, which is available online starting Jan. 1, will be based on the income you report on your 2015 tax return. Your assets, however, will be counted as

of the date you apply. That means you may still have time to shelter some assets so they don’t work against you for ﬁnancial aid purposes. For example, any money you’ve saved in a child’s name reduces the need-based aid you’re eligible for by 20%, while cash in parents’ accounts (including 529 college plans that beneﬁt the child)

Act Fast If You Live Here Eight states have first-come, first-served scholarship programs, so plan to file your FAFSA as early as possible. Washington

Illinois

Vermont Kentucky

Tennessee

11%

Alaska

South Carolina

North Carolina

NOTES: Other states have deadlines as early as Feb. 15. To ﬁnd your state’s deadline, visit fafsa.ed.gov.

MORE ONLINE For advice and tools for picking the right college, visit the new MONEY College Planner at money.com/colleges.

Plan

reduce it by only 5.6%. So if you have money in a Uniform Gift to Minors Act or similar account, move it to a 529 plan, advises financial aid expert Mark Kantrowitz. He also suggests that families use any nonretirement savings they can spare to pay down car loans or other debts before filling out the form. When you fill it out: Take time to read the instructions. Many of the simplest-sounding questions are surprisingly easy to misinterpret in ways that can reduce your odds of getting aid, says Kal Chany, author of Paying for College Without Going Broke. For example, when you’re asked about your net worth, don’t include your IRAs or retirement plans, which are not supposed to be counted. After you fill it out: Because some aid is awarded on a firstcome, first-served basis (see the box at left), the sooner you file your FAFSA, the better. Kantrowitz says his research indicates that families who file before March 30 typically get more than twice as much aid as those who do it later. If you haven’t filed your taxes for 2015 yet, you can fill out the FAFSA with estimates based on your 2014 tax forms and update your FAFSA once you’ve finished your 2015 return. While completing the FAFSA can be time consuming, relief is on the way. Next year’s FAFSA (available on Oct. 1 because of a change in timing) should be much easier to complete. As with this January’s FAFSA, the income you report will be based on your 2015 tax return, and you’ll be able to import all of your tax data with just a simple click.

J A N U A R Y/ F E B R U A R Y 2 0 1 6

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P R O P ST Y L I N G B Y L I N D E N E L ST R A N

IF YOU’RE ON THE leading edge of baby boomers— Americans born from 1946 through 1964—you’re probably not feeling old. And your instincts are right: When researchers are talking about your g-g-generation, which came of age in the 1960s, they say you’re healthier and more mentally agile than previous cohorts were at your age. That good fortune carries some ﬁnancial implications for you. The oldest boomers, who are turning 70 this year, will more likely than not be able to celebrate their 85th birthdays, according to the Centers for Disease Control and Photograph by g r e g o ry

reid

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BABY BOOMERS | YOUR HOME | INCOME ADVISER

Prevention; their grandparents at 70 had only a 28% chance. And more than one in 10 of the oldest boomers will reach age 95, compared with fewer than three in 100 of their grandparents. You have plenty of time left, then, to invest your money, protect it—and enjoy it. So now that the generation that grew up on 45s and 33s has hit its seventies, here’s a ﬁnancial to-do list that rocks.

BILLION-DOLLAR BABIES A milestone birthday is a good opportunity to take stock of your life, both figuratively and, when it comes to your investments, literally. That’s especially important given that we’re now in a bull market that may be on its last legs. So that you won’t have to pull money out of a declining market for living expenses, be sure to have at least 12 months of cash on hand to cover day-to-day costs. Since you should definitely be taking Social Security now—there’s no advantage to not collecting once you hit 70—include those checks in the total. But don’t assume you need less risk in the rest of your portfolio, says Evelyn Zohlen, a certified financial planner in Huntington Beach, Calif. If most of your everyday costs are covered by Social Security and other guaranteed income, you can stay largely in stocks, particularly if you hope to leave an inheritance, says Zohlen. If you need your portfolio for living expenses, dial back, but don’t bow out. A reasonable stock allocation for most people 70 and over ranges from 40% to 60%, says Dan Keady, senior director of financial planning for TIAA-CREF.

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TAKE THE MONEY AND RUN Coming soon after you turn 70 are your ﬁrst mandatory withdrawals, formally known as required minimum distributions, from certain retirement accounts, like 401(k)s and traditional IRAs. (You don’t have to take RMDs from Roth IRAs, or from your current 401(k) if you’re still working.) The clock starts ticking on these annual withdrawals the year you turn 70½. You must take each distribution by Dec. 31, except for the RMD for the year you turn 70½, which can wait until April 1 of the next year.

Distributions 101 Missing the deadline for your first-year payout will hurt. REQUIRED DISTRIBUTION FROM A $500K IRA AT AGE 70

$18,248

RMD

$9,124

Penalty

Each year, you’ll have to take more from your accounts. SIZE OF REQUIRED WITHDRAWAL BY AGE

3.6%

75 80 85 90

4.4% 5.3% 6.8% 8.8%

NOTES: Figures may be different if your spouse is more than 10 years younger than you. SOURCES: IRS, MONEY calculations

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Miss a deadline and you’ll pay a painful 50% of the money you were supposed to pull (see the chart). Don’t procrastinate, says Maura Cassidy, Fidelity Investments’ director of retirement products. Instead, have your brokerage or 401(k) plan automate your RMDs.

I FEEL FINE A couple, both age 65, will spend $245,000 on health care in retirement, estimates Fidelity. Try to beat that average by staying active. A 2014 study of 229 healthy seniors linked better cardio health to lower costs for medication. And after studying 51,000 adults of all ages, researchers at Emory University and the CDC reported that annual health care costs for inactive people averaged 30% more than for those engaging in 2½ hours of moderate physical activity per week. “It doesn’t take a lot,” says Jacksonville physician and ﬁnancial planner Carolyn McClanahan. “Lifting weights for 10 to 20 minutes in the morning and just staying active is enough.”

YOU’LL NEVER WALK ALONE This is tough to face, but vital: If you haven’t already, prepare for the possibility that you become incapacitated, advises elder-law attorney Carolyn Rosenblatt of San Rafael, Calif. Have a lawyer draw up durable powers of attorney letting someone you trust make ﬁnancial and medical decisions for you. (Your cost: roughly $100 to $200.) Your spouse could become disabled when you do, Rosenblatt says, so look for someone younger, and put “trigger points” in writing for making the handoff, like a doctor’s ﬁnding of eroded mental abilities. And now that you have all those bases covered? It’s time to relax and let the sun shine in.

BABY BOOMERS | YOUR HOME | INCOME ADVISER

A Safer Way to Tap Home Equity REVERSE MORTGAGES, ONCE SUSPECT, CAN BE A USEFUL SOURCE OF CASH IN RETIREMENT. by Donna Rosato FINANCIAL PLANNERS have long regarded reverse mortgages as an option of last resort for cashstrapped homeowners in retirement. The loans—which let you borrow against the value of your home but don’t require repayment while you’re still living in it—have had a reputation as costly, complex products that put your family at risk of losing your home. The stigma has lessened lately. Thanks in part to new rules for these government-backed loans, experts such as economics Nobelist Robert Merton have endorsed them, especially as a source of emergency funds. “There’s a totally different way of thinking about these now,” says John Salter, a professor of personal ﬁnancial planning at Texas Tech University.

Illustration by taylor

callery

Here’s what you need to know about a reverse mortgage. Your age is a factor. Your loan, formally known as a Home Equity Conversion Mortgage, can amount to about 50% to 70% of your home’s value, depending on your age and other variables. The older you are and the more equity you have in the house, the more you can get. A 70-year-old in a $300,000 house, for example, might be able to borrow about $173,000 before subtracting upfront costs such as a mortgage insurance premium and any balance owed on a preexisting mortgage. (Estimate your borrowing limit at reversemortgage.org.) You’ll have a safety net. You can take the money as a monthly payment, lump sum, or line of credit to tap as needed. Financial

Retire

planners say the credit line is usually your best option. You’ll pay a floating rate on the withdrawn money, now around 4%—about the same as for a traditional homeequity line of credit. But unlike the case with a HELOC, your borrowing has no set time limit. Your lender can’t reduce your credit line; in fact, it will grow over time. “Maybe you’ll never use it, but if you have a financial shock or health care crisis, it’s there,” says Salter. Costs have dropped. While reverse mortgages are more expensive to set up—upwards of $5,000, vs. a few hundred dollars for a HELOC—they have come down in price. In 2013 the initial insurance premium was cut to 0.5% of a home’s value, down from 2.5%, provided you limit your borrowing in year one. That’s a saving of $6,000 on a $300,000 home. Your spouse is protected. In the past, if only one spouse was listed as a borrower and that spouse either died or moved—say, to a nursing home—the reverse mortgage had to be repaid soon or the other spouse had to move out. A new rule, implemented last June, lets a nonborrowing spouse stay in the home as long as it’s still his or her primary residence. You have to be at least 62 to take out a reverse mortgage, so if your spouse is too young to be a borrower, now he or she can’t be kicked out. You can still get into trouble. If you fail to pay property taxes or home insurance, you can still lose your home. So if you’re already stretched financially, downsizing might be a better option, says Steven Sass of the Center for Retirement Research.

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m o n e y. c o m

BABY BOOMERS | YOUR HOME | INCOME ADVISER

Move Fast to Nab This Filing Trick YOU AND YOUR SPOUSE HAVE ONLY A FEW MONTHS LEFT TO USE A LUCRATIVE SOCIAL SECURITY STRATEGY.

by Philip Moeller YOU CAN THANK A LAW passed in November for blocking a threatened 50% premium hike for many Medicare recipients this year (see the chart for the ﬁnal 2016 rates). Unfortunately, you can blame that same law for eliminating techniques you can use, if married, to boost your Social Security beneﬁts—moves potentially worth tens of thousands of dollars. Before the law completely takes effect, however, you and your spouse might still have access to some rewarding courses of action for claiming Social Security. Here’s what you need to know.

ARE YOU 66? STEP ON IT Disappearing soon is Social Security’s “file and suspend” option, which lets you, if you’re 66 years old, file for retirement benefits and then delay taking payments. The payoff: Your spouse (and possibly other family members) can collect money based on your record while your own eventual monthly payment grows at the rate of 8% a year until you turn 70.

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In many cases, this can be a great way for you and your spouse to get income early in retirement while maxing out what you or your widow will receive later. But you have only until April 29 to file and suspend. After that, if you suspend your benefit, no one will be able to collect benefits based on your record. And you won’t be able to

Retire

collect on someone else’s. Another reason, if you’re at least 66, to file and suspend before the end of April (or to suspend, if you’re already collecting): Currently, if you’ve halted monthly payments to get higher ones later, you can change your mind up until your 70th birthday. That is, instead of taking the high monthly payments you’ve earned, you can ask for a lump sum equal to all money you would have received had you not suspended your benefits. That can be a big help in a financial emergency. If you are diagnosed with a serious illness, for example, you could get a pile of cash for medical costs right away rather than wait for higher monthly payments you might not be around to collect. But if you suspend payments after April, you won’t have the lump-sum option later on.

TRY TO HOLD OUT

Medicare Hikes Get Smaller The Social Security bill reduced Medicare premium increases. 2016 monthly premiums, Medicare Part B FILER’S INCOME

$85,000 or less (already on Social Security)

$85,000 or less (filing in 2016)

$85,001 to $107,000 $107,001 to $160,000 $160,001 to $214,000 Above $214,000

PREMIUM

$105 $122 $171 $244 $317 $390

NOTES: 2016 rates (rounded to nearest dollar) are determined by a person’s 2014 modiﬁed adjusted gross income. Figures are for individual ﬁlers. SOURCE: Medicare.gov

J A N U A R Y/ F E B R U A R Y 2 0 1 6

Also on its way out is the ability to choose the benefit you get. Right now, if you’re at least 66, you can file to collect money based on your spouse’s record but not your own, thus letting your own monthly benefit grow until you’re 70. You’ll still have that choice— but only if you turned 62 before the end of 2015. Younger than that? Once you file, you’ll get only an amount roughly equal to the greater of your retirement or spousal benefit. Bottom line: In most cases, if your own benefit could grow bigger than your spousal benefit, you’re best off waiting as long as you can to file. Philip Moeller is co-author of Get What’s Yours: The Secrets to Maxing Out Your Social Security. He also writes for Money.com.

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INVESTOR’S GUIDE 2016

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Is the aging bull market finally about to fall to the bear? Can Apple keep up its extraordinary success? And what the heck is a unicorn—and why should investors care? MONEY answers your biggest questions about the year ahead. By KIM CLARK, PAUL J. LIM, SUSIE POPPICK, IAN SALISBURY, JOHN WAGGONER, and PENELOPE WANG

Photographs by THE VOORHES

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IG CHANGES ARE UNDERWAY, and investors are heading into 2016 wondering if the rules they’ve been playing by are about to be rewritten. Interest rates have just reversed direction for the ﬁrst time in nearly a decade. The long bull run we’ve enjoyed is showing its age. Cheap energy prices are boosting consumer buying power and some companies’ proﬁts, but they seem to be making the markets strangely anxious. The threat of terrorism has suddenly and shockingly become a factor in our thinking again, and the race for the White House is getting … interesting. Meanwhile, Silicon Valley is throwing itself a ’90s-themed party without inviting the rest of us. You want to know if it’s time to rethink some of your strategies and if there are any new opportunities you can mine to build wealth in 2016. Here are answers to 10 of the most compelling questions on investors’ minds this year.

QUESTION 1

is it time to get ready for a bear market? While there’s some reason to worry, your top priority this year should be to prepare for the increasing rockiness on Wall Street—not to bear-proof your portfolio. Since the market bottomed out in 2009, the Standard & Poor’s 500-stock index has gained a stellar 240%. And in May, if prices continue to rise, the bull will become the second-oldest rally in Wall Street history. That doesn’t necessarily spell doom, but it’s a glaring sign that

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The average number of trading days in which stocks swing up or down by at least 1% in year seven of a bull market, up from 44 days in year six and 37 days in year five.

increasing choppiness lies ahead. By one measure, market volatility jumps 25% at this stage of a bull, according to S&P. And you’ve already seen some of that stomach-churning action. Overall last year there were twice as many days of 1% to 2% swings in the broad market vs. 2014, notes Jim Stack, president of InvesTech Research. “So investors need to be prepared for growing volatility,” he says. Despite these setbacks, there’s little indication that an actual bear is lurking. “Our research suggests a sluggish economic recovery like we’ve seen typically leads to a longer-thanaverage bull market,” says T. Rowe Price portfolio manager Rob Sharps. And broadly speaking, “we don’t see those signs of froth” exhibited in the late-’90s tech bubble, such as record-high valuations, says Liz Ann Sonders, chief investment strategist at Charles Schwab. Economic fundamentals also appear reasonably strong. Most economists are looking for U.S. GDP growth of 2.5% this year, which is in line with last year’s growth rate, according to a survey by Blue Chip Economic Indicators. What to do: Given this backdrop of decent fundamentals but rising jitters, stay invested but focus on funds with a knack for calmly navigating stormy waters. Over the past ﬁve years PowerShares S&P 500 High Quality ETF (SPHQ) has lost 20% less than the market in down months. A new member of our MONEY 50 list of recommended mutual and exchange-traded funds, SPHQ focuses on companies with steady earnings and dividends, like Johnson & Johnson and 3M. (See the full list of funds on page 104.) If you’re near retirement, you may want to go one step further, as the stakes of running into a bear at this stage are so high. “As you’re nearing retirement, it’s a good idea to lighten up on stocks and take some risk off the table, especially if you’ve already got the savings you need,” says adviser William Bernstein, author of The Four Pillars of Investing. That’s especially true when you’re in the last stages of a bull market. Say you were 65 in 2008 with $1 million split 65% in stocks and 35% in bonds. After the crash, you entered retirement with less than $780,000, which fell to $745,000 if you withdrew 4% to live on. Had you switched to a 50% stock/50% bond mix, you’d have started out with $60,000 more.

INVESTORS’ BIGGEST QUESTIONS

QUESTION 2

when will i see 3% savings yields again? After seven years of holding interest rates near zero in order to stimulate the economy, the Federal Reserve is changing course. In December, Fed chair Janet Yellen announced a 0.25% hike in the Federal funds rate—which banks charge one another on overnight loans—marking the ﬁrst rate hike in nearly a decade. While this is welcome news for long-suffering savers, don’t jump for joy just yet. The December move was tiny. You won’t see much impact on the yields being paid by your checking accounts or bond funds. That’s because this move, which has been signaled by the Fed over a period of months, has largely been priced into ﬁxedincome assets, says Marilyn Cohen, head of Envision Capital Management. “Most banks will keep the rates they pay as low as they can for as long as they can,” she says. What’s more, many Fed watchers expect the central bank to move gradually over the coming year, perhaps making just four or five hikes in the Fed funds rate, which could possibly reach 1% by year-end. What does this mean for your cash accounts? Three-month Treasury bills probably won’t pay more than 1% until the fourth quarter, according to a Blue Chip Economic Indicators survey. As for the more traditional 3% cash payouts you last enjoyed nearly a decade ago, don’t expect to see those until at least 2019, economists say. Even yields on 10-year Treasuries, which currently pay 2.2%, are expected to stay in the 3% range for the next couple of years. What to do: With cash, rely on the same game plan from recent years—park short-term dough in money-market accounts or online bank CDs, some of which are already paying more than 1%. If you go with a CD, stick with a one-year term; there’s no reason to lock in low rates for longer if yields are on the rise. For bond investors, be patient. Any move up in rates will probably unsettle the markets (see “Focus on Stability, Not Yields,” on page 78). But with rate hikes expected to be gradual, this won’t be Armageddon. Joe

Davis, global chief economist for Vanguard, reminds investors that any drop in price caused by rising yields will be offset in the long run by higher interest income.

MOST BANKS WILL KEEP THE RATES THEY PAY AS LOW AS THEY CAN FOR AS LONG AS THEY CAN.”

QUESTION 3

how badly could terrorism shake the market?

–MARILYN COHEN, head of Envision Capital Management

The past few months have brought so much shocking and depressing news: the mass shooting in California, coordinated terrorist attacks in Paris, and suicide bombings in Ankara and Beirut. Your investments are not the ﬁrst thing on your mind when these events hit. But it’s natural to wonder if the next attack could set off a panic in the market and if you should prepare your portfolio defensively. History says not to expect a terror-related meltdown. Over the past 35 years, no act of terrorism has ever driven stocks into a bear market (meaning a 20% drop) or even a prolonged

it ’ s been a mighty long time

The last time the Fed raised interest rates, few people browsed the web on their phone, and you’d probably never heard of TV’s most famous family. Fed funds target rate 5%

Last Fed rate hike

Keeping Up With the Kardashians premieres iPhone debuts

China becomes second-biggest economy

Obama reelected

Rate raised by 0.25%

Osama bin Laden killed

Barack Obama elected

Janet Yellen becomes Fed chair

0 ’04 NOTES

’06

’08

’10

’12

’14

After 2008, rate is the lower limit of the target. SOURCES: St. Louis Federal Reserve, MONEY research

’15

INVESTOR’S GUIDE 2016

downturn. “Remarkably, even the tragedy of 9/11 didn’t leave long-lasting damage in the stock market,” notes Jack Ablin, chief investment ofﬁcer at BMO Private Bank. Unfortunately, “we have many terrorist attacks in recent history to look at for a sense of how stocks might react,” notes Burt White, chief investment officer for LPL Financial. But at least “the data are encouraging,” he says. Ned Davis Research studied the market’s reaction to 23 large-scale acts of global terrorism since the late 1970s, including everything from the 1983 attack on Marine barracks in Beirut to the 2005 London train bombings. Three-quarters of the time, the Dow was up within a month. In all but one case in which equities didn’t snap back quickly— a bombing in India during the global ﬁnancial panic—stocks were up within six months. What accounts for the market’s resilience? It’s not that investors have been especially brave. Rather, a terrorist event is one kind of bad news that you can count on the Federal Reserve and other key central banks to respond to. Just days after 9/11, for instance, the Federal Reserve cut short-term borrowing rates from 3.5% to 3% to shore up the economy. As it turned out, the U.S. economy was already in recession, but policymakers did not know that at the time. So the Fed kept cutting rates aggressively for the next 12 months, which may have helped the U.S. exit its recession by the end of 2001. Similarly, weeks after the November terrorist attacks in Paris, the European Central Bank cut interest rates and extended its stimulative bond-buying program. What to do: While the terror risk is not a reason to be scaling back on long-term equity investments, distressing news can set off a wave of short-run volatility. The CBOE Volatility Index shot above 40—double its normal level—just days after 9/11. The same so-called Fear Index also spiked after the U.S. embassy bombings in Africa in the summer of 1998. But if you are already preparing for the greater volatility that comes in the late stage of the bull market (see Question 1), you won’t have to add investments to your worries if or when more trouble comes.

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% 8

The median gain of the Dow Jones industrial average six months after major global terrorist attacks since 1979.

QUESTION 4

has inflation gone away for good? Inflation is the other shoe that never dropped. You wouldn’t have been crazy to think that zero interest rates, plus the Fed’s massive purchases of bonds after 2008 (with money it creates itself), could trigger some inflation. You just would have been wrong. The consumer price index is up 0.5% over one year, vs. a historical average of 3.3%. Even with volatile prices for food and (sharply dropping) energy taken out, so-called core inflation is just 2%. Investments keyed to rising prices have done poorly as a result. Treasury Inflation-Protected Securities, or TIPS, lost 2.5% annually over the past three years; commodity futures fell almost 19% a year. But even if you weren’t betting on inflation, its absence is a mixed blessing.

INVESTORS’ BIGGEST QUESTIONS

Low inflation feels good at the gas pump and the grocery, but University of Oregon economist Timothy Duy says it’s the result of years of underemployment and a slow recovery. (Poky growth makes it tough for companies to raise prices—or for workers to demand higher wages, a key ingredient of inflation.) Those numbers are now improving, but the Fed is already acting to nip inflation in the bud with higher rates. What to do: A sharp rise in consumer prices doesn’t seem to be a big risk now. But if you have expenses you know you must be able to pay a few years down the road, it can make sense to have at least a small stake in TIPS, even if inflation is unlikely. “Yes, the yields are low,” says John Cochrane, an economist at the University of Chicago. “Well, insurance costs money.” The chart at right shows the insurance in action: If inflation surprised almost everyone and rose to 4%, regular 10-year Treasuries would lose money in real terms. TIPS are designed to pay the same real yield as consumer prices rise. Buy individual TIPS at Treasurydirect.gov and you’ll preserve your purchasing power so long as you hold to maturity. Funds that buy TIPS, such as Vanguard Short-Term Inflation Protected Securities (VTIP), will fluctuate in value but should outpace regular government bond funds with similar interest-rate risk if inflation spikes.

QUESTION 5

will china’s slowdown derail everything? On paper China’s market shouldn’t hold much sway over your investments. Chinese shares listed in Hong Kong or on U.S. exchanges account for just 5% of a typical foreign equity fund. But you know better. Last summer, when China’s market crashed, the echo sent U.S. equities down by double digits too. Such is the pull of the world’s second-largest economy. Once the key driver of global growth, China’s GDP rate has declined from 9.5% in 2011 to 7.7% in 2013 to 6.8% last year. This year China’s GDP is likely to grow 6.3%, says the International Monetary Fund. Yet before you panic, keep these three things

I THINK WE’RE REACHING MAXIMUM HATE OF CHINA’S MARKETS.” —ERIC MOFFETT, manager of T. Rowe Price Asia Opportunities

in mind: First, the decelerating economy, like the boom that preceded it, is being engineered by China’s government. “The goal is to transition China from a fast-growing manufacturing economy to a slower-growing but more stable consumer economy,” says Danton Goei, comanager of Davis Global. Currently the portion of GDP generated by consumers is just 35% in China, vs. 65% in the U.S. “There’s a lot of room for China’s consumer economy to grow, but the transition will be tricky,” says Goei. Even now, China’s economy is likely to outpace most developed nations over the next few years. And the Chinese market looks cheap, with a price/earnings ratio of 10, vs. over 17 for U.S. stocks. “I think we’re reaching maximum hate of China’s markets,” says Eric Moffett, manager of T. Rowe Price Asia Opportunities. What to do: Even if you think China is a bargain, it’s a risky one to grab. Better to dedicate a small slice of your portfolio to a diversified emerging-markets play. (Even then, you’ll need patience and a stomach for risk. See “The Case for the Scariest Stocks” on page 68.) T. Rowe Price Emerging Markets Stock (PRMSX) holds more than 21% of its assets in China. That’s in line with the global market and slightly greater than the typical 18% weighting in emerging-market funds.

low yields could be better than they look The interest paid by inflation-protected TIPS is pretty paltry, but it will keep you ahead of the game if inflation is higher than expected. WHAT 10-YEAR BONDS PAY, BEFORE AND AFTER INFLATION

2.2% 0.8%

0.2% –1.8%

Treasury yield

Guaranteed real TIPS yield

Real Treasury yield if inﬂation is 2%

Real Treasury yield if inﬂation is 4%

SOURCE: U.S. Treasury

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INVESTOR’S GUIDE 2016

QUESTION 6

is there a hidden bubble in the market? If you look at the tech-heavy Nasdaq stock index, it hardly looks like 1999. Those stocks trade at 23 times earnings, nowhere near the crazy 100-plus multiples of the dotcom era. Some big tech names almost seem like value stocks, with P/Es in the low teens (see Apple, Question 8). So why are techies like veteran venture capitalist Bill Gurley making noises about a new bubble? “All this stuff … happened in 1999,” he said at a conference, speaking of new companies that drew sky-high valuations before crashing. The difference now is that much of it is happening in the private market. Silicon Valley has coined a name, “unicorns,” for startups (often, money-losing ones) that aren’t publicly traded yet have pulled in so much private investment that they have a theoretical valuation of at least $1 billion. Unicorns are supposed to be rare, but they’re a herd now: CB Insights estimates that there are 144 of them. Famous unicorns include the ride-hailing app Uber and social network Pinterest. About half of more than 500 tech startup founders surveyed recently by First Round Capital said tech was “in a bubble.” In late 2015, mutual funds at BlackRock and Fidelity, which own slices of private companies, cut by about half their estimated value of some unicorns. A culling of the unicorns wouldn’t hit Main Street investors directly. But like 2015’s China crash, it could have ripple effects. Besides the stakes some funds have, college endowments and pension funds have poured money into Silicon Valley. If a run on unicorns hurt institutional investors, the pain might spread to stocks as people try to raise cash. And it could slow economic growth as less investment goes into companies. “This could further weaken already weak productivity growth,” says Mark Zandi, chief economist at Moody’s Analytics.

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144

Number of startups that fit the definition of a “unicorn,” meaning investors value them at $1 billion or more on paper.

What to do: If tech insiders are fretting about a bubble, that’s good reason to be extra skeptical about any glamorous tech IPOs that arrive in 2016. (An object lesson: the online marketplace Etsy, a 2015 IPO that’s down over 60% from its high.) If the unicorn bubble pops and it roils shares of more-established tech companies—or the market in general—don’t rush to sell. It may even prove a chance to pick up relative bargains. Zandi says the impact of such an episode is likely to be short-lived. The really economically scary bubbles are those, like the real estate mania, that are fueled by people going deep into debt. That’s not the case here.

INVESTORS’ BIGGEST QUESTIONS

QUESTION 7

what if oil prices make a big comeback? Normally a drop in oil prices is welcome news, as it means more money in consumers’ pockets and bigger profits in corporate coffers. But when a barrel of West Texas intermediate crude swooned below $40 a barrel late last year, it sent energy stocks to the lowest subbasement of Wall Street’s parking garage. The steep plunge has had a profound impact

WITH CHINESE GROWTH AND U.S. MANUFACTURING SLOWING, AN OIL PLUNGE IS GETTING PEOPLE NERVOUS.” —RUSS KOESTERICH, chief investment officer at BlackRock

on investor psychology, says Russ Koesterich, chief investment officer for the investment management firm BlackRock. “It has revived fears about global growth,” Koesterich says. “With Chinese growth and U.S. manufacturing slowing, an oil plunge is getting people nervous.” Fast-forward to this year. The consensus among members of the National Association for Business Economics is that oil will rebound to $54 by the end of 2016. Normally that type of jump might make people worry about inflation, growth, or both. But in this climate such a rebound may have a positive effect. For starters, it would ease fears about the global economy. It would also revive hopes for corporate earnings. To be sure, low oil prices boost the profits of most industries. But rising prices will help the one sector that’s been weighing on the broad market lately: energy. It reportedly costs oil companies around $36 to produce a barrel of oil in the U.S. If crude shoots back up above $50, it could revive the profits of the sector and possibly the broader market as a result. For instance, earnings for companies in the S&P 500 index fell 0.7% in 2015 vs. 2014, mainly because energy profits fell more than 58%. Without energy stocks, S&P earnings would have risen a respectable 6.6% in 2015. What to do: You already hold an energycompany stake of about 7% if you have a diversified stock index fund. Beyond that, the expected rise in crude prices is no reason to bet more heavily on oil. The commodity’s fortunes are ultimately tied to the volatile geopolitics of the Middle East and the changing business philosophy of OPEC. But a rebound in oil prices could push inflation slightly higher than is forecast by the low yields on TIPS bonds, bolstering the case for those (see Question 4 for specific recommendations).

QUESTION 8

can apple remain the most valuable company? With Apple (AAPL) recently trading at $111 per share, for a total of $609 billion for all shares

apple ’ s giant footprint

INVESTORS’ BIGGEST QUESTIONS

For what the market values all of Apple’s shares, you could buy most of the publicly traded small companies in America. MARKET VALUE (BILLIONS)

outstanding, investors have made the consumer electronics giant the most valuable company on earth. That doesn’t mean they quite believe in it, though. Apple’s share price is only 11 times the earnings analysts expect for next year. That compares with a P/E ratio of over 17 for the S&P 500, and 20 for rival Microsoft. In other words, the “E” in Apple’s P/E is so high that its total value must be similarly stratospheric, but investors are skeptical that Apple’s profits can grow quickly from here. Apple does have enormous strength. The iPhone, which represents two-thirds of the company’s revenues, grew sales 52% over the past year. Continuous upgrades give Apple a regular source of huge cash flow, plus it can still set a premium price “despite a deflationary environment for smartphone prices,” says Motley Fool Asset Management portfolio manager Dave Meier, who holds the stock. On the other hand, smartphones are a maturing business, and it’s hard for new products to move the needle at a company of Apple’s size. “There is no next big thing at Apple that will suddenly dwarf the iPhone,” concedes Michael Sansoterra, portfolio manager of RidgeWorth Large Cap Growth, another Apple owner. Sales of the iPad and digital music have been soft, and the Apple Watch wasn’t the massive hit Apple fans were hoping for. Retailers were offering steep discounts on the watches over the holidays. What to do: The iPhone-driven corporate leap that brought Apple from about $30 a share six years ago to triple digits today won’t be repeated. But the stock could be compelling for investors seeking tech exposure with a bit less drama. Apple’s comparatively modest P/E means it doesn’t have to keep shooting out the light to keep its share price rising. And its enormous cash stake— some $200 billion—means investors can expect to steadily get paid back in dividends and stock buybacks. It’s also a business you can get your arms around conceptually. “It’s not like Microsoft, with lots of different busi-

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$711

All U.S. small-cap stocks Apple

$609

Italian stock market

$450

Residential real estate in Denver

$302

Gold in Fort Knox Every major U.S. sports team

$158 $122

SOURCES: BGR.com, Bloomberg, S&P Dow Jones Indices, U.S. Treasury, Zillow

The price/ earnings ratio of Apple based on estimated profits. The S&P 500 average is over 17.

nesses,” says Lamar Villere of Villere Balanced Fund. “It’s straightforward, high-cash, and high-proﬁt margin, and yet it’s valued as though it’s going to be shrinking.”

QUESTION 9

which candidate is best for my portfolio? The choices are stark enough. On the one hand, you have Democrats trying to encourage long-term investments by penalizing short-term trading. Right now the top capital gains tax rate is 20%, plus a 3.8% investment income surtax for some taxpayers, as long as they wait a year to sell. For investors in the top 39.6% income-tax bracket—and only them—Hillary Clinton now wants a holding period of at least six years to get that beneﬁcial rate. For sales within two years, their gains would be taxed at ordinary income rates, with lower rates then phasing in. Bernie Sanders, to Clinton’s left, has spoken about raising the capital gains tax rate along with dividend taxes. He also wants a “ﬁnancial transaction tax,” equivalent to a sales tax on stock and bond trades. Republicans, on the other hand, seek to boost investment by cutting taxes. Donald Trump and Jeb Bush would eliminate the surtax. Going one step further, Ted Cruz calls for slashing cap gains and dividend taxes to 10%, while Marco Rubio proposes eliminating them altogether. Who wins the presidential race, though,

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INVESTORS’ BIGGEST QUESTIONS

may ultimately matter less to your portfolio than does the overall makeup of Washington. Whoever the President is, “it’s not going to be easy to deliver dramatic legislation,” says Zachary Karabell, head of global strategy at investment ﬁrm Envestnet. That’s in large part due to gridlock. S&P analyzed how equities performed under partial gridlock (the White House is controlled by one party, Congress by the other), total gridlock (Congress is split), and unity (one party wins it all). In general, stocks delivered the best gains with total unity—averaging 11% annual price gains regardless of which party is in the driver’s seat. Total gridlock, on the other hand, was the worst, with the S&P 500 up just 6.9% a year. The most likely unity scenario would be the GOP winning the White House and holding the Senate. (It controls the House by a wide margin.) Should a Democrat win, he or she will probably face a Republican-held Congress. Now here’s the twist: That particular combo produced even better results than total unity, with an average 13.6% gain. What to do: Vote with your head or with

IT’S NOT GOING TO BE EASY (FOR ANY PRESIDENT) TO DELIVER DRAMATIC LEGISLATION.” —ZACHARY KARABELL, head of global strategy at Envestnet

still above the line

If you assume gold prices will just head back to their long-term average, even the recent drop doesn’t make it a bargain. Gold price per ounce

Long-run average price (inﬂation-adjusted)

$2,000

$1,500

$1,000

$500

0 ’90

’95

’00

’05

’10

’15

SOURCES: World Gold Council, Campbell Harvey and Claude Erb

WHAT OTHER BIG QUESTIONS ARE ON YOUR MIND? letters@moneymail.com

your heart, but resist the urge to remake your portfolio based on your politics. History says your investments can generate positive results no matter who the President is.

QUESTION 10

can gold prices drop any further? Whenever people face a scary economic threat, they think of buying gold to protect their wealth. But in fact gold can be a huge money loser for long stretches of time, such as the 1990s, when it went from $400 per ounce to $290. And now it’s on the ropes again. After reaching a peak of $1,895 per ounce in 2011—when worries about the global economy were at a fever pitch—it has dropped by over 40%, to $1,064. So is that cheap or still too much? Since gold doesn’t pay interest or grow profits, it is tough to guess its future value—it’s mainly what someone else will pay later. One approach is to look at the average price over time. Campbell Harvey, a Duke University financial economist, says that since 1975, gold’s inflation-adjusted value has averaged the equivalent of about $830 per ounce today. If what Harvey calls the golden constant holds, gold would eventually revert back to that price, meaning at least a 22% drop. What to do: Harvey emphasizes that there’s no telling when this might happen—so don’t rush to sell your jewelry. Gold’s unpredictability is ironically the best case for having a bit of it in your portfolio: Since it doesn’t move in step with stocks or bonds, it may add some diversification. But if you are using this year’s MONEY 50 list, you’ll already be able to invest in everything from U.S. stocks to real estate to global bonds. You can even get a smattering of gold mining companies via index and international funds. All that should be plenty for whatever 2016 has in store.

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WHY QUALITY STANDS TALL

Companies with low debt and reliable profits don’t make for the trendiest stocks. But when markets get bumpy, investors turn back to this classic strategy for finding growth with less volatility. By CARLA FRIED

Illustrations by SHOUT

AS THE ARCHITECT of your stock portfolio, you are in charge of making key design calls. You might favor large companies or small ones. Or you could decide between bargain-priced value stocks and more expensive growth fare. But there’s another factor that deserves more of your attention: a company’s quality. Stocks with high-quality marks not only deliver superior long-term performance but have also shown less volatility than stocks overall. And as it happens, now is an especially good time to upgrade the caliber of your portfolio. What defines quality? It’s shorthand for a company with strong and dependable profits, not too much debt, and a dominant market position it can defend from the competition. Think of the diversified health care giant Johnson & Johnson (JNJ), with over 25 straight years of rising dividends, or brand-name stalwarts such as Coca-Cola (KO). Quality sounds like something every investor would want—indeed, famed investor Warren Buffett is a longtime quality advocate. Yet it

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can go in and out of style. The bull market that began in 2009 gave a huge boost to low-quality companies, which have returned an annualized 19.6%, compared with 13.7% for the top-shelf ﬁrms (see the graphic at right). During rallies, optimistic investors often take a leap on less proven businesses with blockbuster potential. Consider Regeneron Pharmaceuticals (REGN), a biotech that posted its first year of positive earnings per share in 2012 but has gained 47% annualized in the past three years, vs. 17% for old pharma hand J&J. “High quality” can be a nice way of calling an investment boring. But boring has its virtues. “If you’re willing to give up a little in bull markets, sticking with quality can pay off over the long term,” says Morningstar analyst David Kathman. For example, the Leuthold Group ranks the 1,500 largest companies on a variety of quality measures, including growth and consistency of proﬁts and sales. Since the beginning of 1986, its group of high-quality stocks has generated an annualized return of almost 13%, compared with 9.1% for lower quality. On a $10,000 initial investment, that’s the difference between $366,000 and $134,000 today. Because reaping the rewards of quality takes patience, it’s important to understand exactly why these companies ultimately have an edge. That will help you hold on during fallow periods. And then, of course, you have to know where to find quality, whether in individual stocks or in the funds that specialize in corporate America’s seasoned winners.

why quality is poised to win right now … The playing ﬁeld is starting to look less inviting for the low-quality companies that gained the most from this bull run. The Federal Reserve’s unusual efforts since the financial crisis to create stability—from holding the key Federal funds interest rate at zero to buying up bonds—

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quality is a long-term bet

If you demand it, expect to be out of step from time to time. Low quality has beaten high quality during this bull market so far … GROWTH OF $1,000 INVESTMENT SINCE 2009 High-quality stocks

Low-quality stocks

$3,388

$3,000

$2,400 $2,000

$1,000 2009

2011

2013

2015 YTD

… but stocks with reliable earnings shine in tougher conditions. PERFORMANCE DURING MARKET DECLINES

High-quality stocks

Low-quality stocks

–3%

–9% –17%

–16% –26%

Summer 2010

Summer 2011

–8%

–43% –57% –69% 2000–02

2007–09

Summer 2015

NOTE: Quality based on rankings by S&P and Leuthold. SOURCES: Atlanta Capital Management, Leuthold Group

have fostered low market volatility. That has made investors less interested in paying up for historically stable and resilient companies. Rock-bottom interest rates have also made it easier for ﬁnancially wobbly ﬁrms to borrow and fund growth. But now it’s clear that rates are heading upward, albeit slowly. That will start to shift the advantage to companies with low debt. Moreover, this bull market is just a few months shy of its seventh birthday. After such a long run, market valuations—what investors are willing to pay for a stock per dollar of its earnings—are already above their historical

STOCKS WITH QUALITY

norms, so it’s harder for sentiment alone to keep pushing shares up. Investors will need to see actual earnings. Interestingly, you don’t even have to pay a premium price to get those solid proﬁts. In fact, high-quality stocks are slightly better priced, at 18.5 times earnings per share, compared with 20 for low-quality ones.

the telltale numbers that signal quality

… and why it works in the long run too Quality’s long-term performance edge is all about making lemonade when the market is selling lemons. The dependable profitability of quality stocks helps them lose less when stocks drop, as the bottom chart on the facing page shows. You could see this in action most recently last summer, when China’s economic woes sent the S&P 500 into a (temporary) spin as investors fretted about global economic growth. Leuthold’s group of high-quality stocks lost 2.8%, compared with an 8.1% decline for low-quality stocks. If you find it difficult to stomach the inevitable bear markets that are part of investing, high-quality stocks can be a valuable antacid. “Knowing you will probably lose less in bad markets with high-quality stocks can make it easier to stay invested,” says Sam Stovall, U.S. equity strategist at S&P Capital IQ. Now, there’s a bit of a puzzle here: In theory the only way to capture higher returns is to take more risk. So how can companies with less volatile share prices and more dependable profits actually outperform? Look no further than the appeal of casinos and lotteries. Analysts at GMO, a global investment firm with a taste for quality, theorize that investors trying to get in on the next big thing tend to bid up the price of the lower-quality stocks that might win the lottery. That works sometimes, but on average the higher prices tend to drag down the potential for future returns vs. those of the less frothy high-quality shares.

% 13

The annualized return since 1986 of blue-chip stocks with the hallmarks of high quality.

Ready to lean against the crowd and add some quality shares to your portfolio? The investing pros who seek quality have countless methodologies for finding it, but here are the most intuitive measures that help you spot the financially strong, well-managed companies that are likely to outperform over time: Look for a high return on equity. This is one of the most widely used quality measures. You can find return on equity (ROE) on stock research sites like Yahoo Finance and Morningstar, or grab a company’s financial statement and divide net income by shareholder equity. A consistently high ROE suggests that when a company brings a dollar in—such as when it sells its own shares or retains some profits instead of paying them out in the dividend—the managers know how to put it to good use and turn it into earnings. The average large-cap stock has an ROE of 18%. Companies with even higher scores include PepsiCo (PEP), which has 21 brands with over $1 billion in annual sales each, helping it hit a fat 28% ROE. Nike (NKE) gets 29%, thanks to a leading global market share in footwear and activewear. ROE is a linchpin of the Jensen Quality Growth (JENSX) mutual fund. Its managers consider only stocks that have delivered 15% ROE in each of the past 10 years, which is a higher bar than it looks, considering that it must be an unbroken streak. Its portfolio has an average ROE close to 30% and includes a nearly 5% stake in J&J. Over the past decade the Jensen fund has edged out the S&P 500 by an annualized 0.4%, and fell eight percentage points less than the market during the 2008 selloff. Watch out for debt. A limitation of ROE is that managers can juice it by relying on borrowing instead of equity to grow earnings. Yet debt can eat into future profits. Low debt, on the other hand, gives a company a lot of flexibility to keep churning out earnings, even in tough

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periods. One key to J&J’s long track record of rising proﬁts and dividends is a debt so low that it’s one of only three companies with an AAA credit rating from S&P. The others are Microsoft (MSFT) and Exxon Mobil (XOM). All three stocks are top holdings of MSCI USA Quality Index (QUAL), an exchange-traded index fund. It tracks companies with both low debt and a high ROE. Or keep it simple and look for consistency. The easiest way to get at quality is to trust in a company’s earnings track record. The PowerShares S&P 500 High Quality ETF (SPHQ) follows S&P’s quality screens, including stocks with 10 years of earnings and dividend growth and stability. This by default catches some of the same stocks revealed by more complex quality measures. For example, the portfolio’s 26% ROE is nearly one-third higher than the benchmark S&P 500. Its straightforward approach and expenses below 0.30% a year have earned it a spot on the newest MONEY 50 list of recommended funds (see the story on page 104).

the businesses behind the statistics Numbers aren’t everything. You can bolster the case for buying by understanding a company’s story and the special edge that helps it deliver proﬁts year after year. Or you might even pick up on a business that doesn’t make it through the statistical screens but still has a crucial hallmark of the quality you’re looking for. Identify the moat. Quality maven Buffett coined the idea of an economic “moat” around a company—something that allows it to defend its proﬁtable business. That might be a strong brand name that drives demand, a hard-toreplicate delivery system, or the scale to exert pricing power on the market. “Wide-moat businesses are just the sort of all-weather companies that can continue to create value regardless of market conditions,” says Jensen Quality Growth co-manager Eric Schoenstein.

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IT’S FAR BETTER TO BUY A WONDERFUL COMPANY AT A FAIR PRICE THAN A FAIR COMPANY AT A WONDERFUL PRICE.” —WARREN BUFFETT, chairman of Berkshire Hathaway, in 1990

MasterCard (MA), a new pick in Schoenstein’s portfolio, is a classic example of a wide-moat stock. It’s one of two dominant players in electronic payment systems in a world that is increasingly using credit, not cash, and it would be hard for a new company to build another rival network. Analysts at investment research firm Morningstar assign 1,500 or so stocks a moat rating of wide, narrow, or no moat. Some funds with lots of high-moat stocks include Bridgeway Blue Chip 35 (BRLIX; 77% wide moat), Dreyfus Appreciation Investor (DGAGX; 70% wide moat), and also the Jensen fund (70% wide moat). The Market Vectors Morningstar Wide Moat ETF (MOAT) adds a value twist, holding the 20 wide-moat stocks trading at the steepest discount to Morningstar’s estimate of their fair value. Buffett’s own holding company, Berkshire Hathaway (BRK.B), is itself an attractive widemoat business, says Darren Pollock of Cheviot Value Management. He notes that Berkshire Hathaway owns 10 subsidiaries that would be included in the Fortune 500 if they were independent. Moreover, Berkshire’s financial strength is a big competitive advantage. It is able to finance growth with its impressive freecash flow, along with an unusual source of cheap financing. Its insurance subsidiaries continually collect premiums and then invest some of the “float” before claims are paid. Don’t ignore companies still in a highgrowth mode. Larry Puglia, manager of MONEY 50 fund T. Rowe Price Blue Chip Growth (TRBCX), seeks out quality but allows himself some freedom. The fund’s current top holding, online retailer Amazon (AMZN), is also the largest position in S&P’s low-quality index. S&P’s quality screen focuses on per-share earnings left over after expenses. Amazon generates a ton of money, but it also reinvests just about every penny in growing its operations, so its net earnings don’t look as sharp in S&P’s quality lens. Puglia says he cares more about Amazon’s strong revenue and its dominant market share—in short, the underlying generators of quality over time are all there.

WHAT TOOLS HAVE YOU USED TO SPOT QUALITY? letters@moneymail.com

STOCKS WITH QUALITY

quality makes dividend investing better

The fund also owns large stakes in Google’s parent company, Alphabet (GOOG), purchased when it first went public (and was still called Google), and Facebook (FB), which the fund first owned prior to its IPO. Both would have been too young to pass many quality screens, but like Amazon they are the clear dominant players in huge new businesses. “We are not afraid to draft rookies,” says Puglia, “if we see they have a sustainable competitive advantage and we have confidence in their management.” The fund’s mix of quality and growth potential has led it to a 9.3% annualized gain over the past 10 years, nearly two percentage points better than the S&P 500.

Investors focused on grabbing income from high-dividend-yield stocks should consider a quality bias too. Dividend investing can lead you into a value trap, in which a troubled company has a high dividend yield mainly because its price is dropping. (The yield is the dividend divided by price.) Quality helps you avoid that. Money management firm Research Affiliates looked at the 200 highest-yielding large-cap stocks each year starting in 1963. It then ranked them on profitability, debt level, and sound accounting principles. The 13.4% annualized return for the 100 stocks with the highest quality scores was two percentage points better than the lower-quality highyielders. And the quality slice had stronger dividend growth—the holy grail of dividend investing—over the next five years. Schwab U.S. Dividend Equity ETF (SCHD; 2.9% yield) tracks an index of 100 high-yielders that are also high quality. Stocks must have paid dividends for at least 10 years to make the cut. They are then ranked on quality screens, including ROE, debt, and the fiveyear growth rate for the dividend payout. Nearly three-quarters of the current portfolio is invested in stocks Morningstar deems to have wide moats. Vanguard Dividend Growth (VDIGX; 1.8% yield) has a strong quality bias as well, with 76% of assets invested in widemoat stocks. Over the past 10 years, in months when the S&P rose, the fund captured less than 90% of the index’s gain, meaning it slightly lagged the index in good months. But in months when stocks lost money, the fund fell just 73% as much as the index. That habit of sticking close in good markets and crushing it in bad markets propelled Vanguard Dividend Growth to a 9% annualized gain for the past 10 years, more than 1.5 percentage points ahead of the S&P 500. That’s quality anyone can appreciate.

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THE CASE FOR THE SCARIEST STOCKS

With a recession in Russia, a market meltdown in Latin America, and the economic slowdown in China, no one wants to touch emerging-market stocks with a 10-foot pole. Yet history says times like these are precisely when you want to buy. By CARLA FRIED

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Photographs by BILL DIODATO

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ONVENTIONAL WISDOM and common sense would tell you to steer clear of emerging-market stocks. Not only is the developing world at the epicenter of the global slowdown, but shares of companies based in developing countries like Russia and Brazil have been stuck in a bear market since 2011. Plus, there’s little hope for a quick economic rebound thanks to the ongoing slump in oil and other commodities vital to many emerging economies. And most money managers think the biggest risk in the market is a meltdown in China, which could have a domino effect on other developing countries. There’s also the fact that interest rates are likely to rise this year, which will reduce the world’s appetite for riskier fare like emerging-market shares.

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THERE WAS NO BETTER TIME (THAN AFTER THE ASIAN CRISIS) TO INVEST IN EMERGING MARKETS.” —CHRIS BRIGHTMAN Research Affiliates

next decade, based on factors such as forecasted earnings growth, yields, and valuations. That’s seven points better a year than U.S. stocks are expected to do over the same period. The ﬁrm isn’t alone in thinking that to see any growth in your portfolio over the next decade, you have to be willing to own emergingmarket shares. GMO, another respected contrarian firm—which correctly forecast the 2000 tech wreck—expects emerging markets to beat U.S. blue-chip shares by about six percentage points a year over the next seven years.

ST Y L I N G B Y L I N D E N E L ST R A N

Sounds like disaster. But while it may be hard to see signs of hope here—let alone a catalyst for a turnaround—contrarian radars are on high alert. As Warren Buffett likes to say, you have to be greedy when others are fearful. And there’s no area of the market that spooks investors more today than emerging-market equities. Chris Brightman, chief investment officer at Research Affiliates, says this reminds him of 1997 and 1998, when the developing markets were reviled in the wake of the Asian currency crisis and investors thought the U.S. was the place to be. “What we learned was that there was in fact no better time to invest in emerging markets,” says Brightman. From 1999 through 2003 the MSCI Emerging Markets index gained 66%, vs. a 3% slide for the S&P 500. Research Affiliates believes emerging markets will similarly outperform in inflationadjusted terms over the next decade. The money manager projects emerging-market shares will generate nearly 8% annual real returns over the

EMERGING-MARKETS STOCKS

developing troubles

Despite their potential for faster growth, emerging-market stocks have floundered for four years. STOCK PERFORMANCE SINCE 2011 Emerging-market stocks

S&P 500

60% 40% 20%

Commodity bear market begins

48.7%

–33.0%

–20% 5/11

2012

2013

2014

11/15

NOTES: Emerging-market performance based on MSCI Emerging Market index through Nov. 13. SOURCE: Ycharts.com

What do these money managers know that the rest of the market doesn’t appreciate? For starters, that valuations really matter. The longterm argument for investing in stocks in rapidly developing economies—aside from the potential for faster overall growth—starts with price. After a seven-year bull run in the U.S., marking the third-longest rally in history, valuations for the S&P 500 index are well above norms (see the chart on the next page). That’s likely to be a big headwind for domestic equities in the years to come. “Higher prices today mean lower long-

% 5O

The steep discount at which emerging-market shares are trading relative to U.S. stocks after a four-year bear.

term returns,” says Rick Ferri, founder of Portfolio Solutions. Yet there are no such impediments facing emerging-market equities. In fact, it’s just the opposite. Historically, emerging-market shares have traded at around a 15% discount to U.S. stocks, based on five years of averaged, or “normalized,” earnings. Today developing-market stocks are trading at closer to a 50% discount, with a price/earnings ratio of less than 11. There’s also an important transformation afoot. For years, investing in these stocks meant choosing among companies largely tied to infrastructure—say, a mining firm, a construction company, or even a bank financing the build-out. “Now we’re seeing the next stage of evolution where there is demand for consumer goods and services that a growing middle class wants,” says Chuck Knudsen, a member of the team managing T. Rowe Price Emerging Markets Stock Fund. But remember that this is a long-term investment, not a short-term bet that emergingmarket stocks will bounce back this year. The key is to understand the risks, manage them along with your own expectations, and find smart ways to gain exposure to these stocks in a way that will let you sleep well at night—so you’ll hang on. Here’s what to keep in mind:

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steel yourself for a bumpy ride If you’re seeking higher returns, you have to expect higher risk. The argument for adding to your emerging-market exposure now, as opposed to waiting for these stocks to recover, is simple. For starters, it’s impossible to tell when the rebound will take place, as was the case in late 1998 when emerging-market stocks began to rally while many economies were still in recession and oil prices were weak. Plus buying now is the only way to capture these historically low prices. Admittedly, there are risks, like a potential bear market on Wall Street. Emerging-market shares typically lose more than U.S. equities when a bear strikes. This time, though, developing-market stocks have already been hit, so their decline might be no worse than U.S. stocks. Even if a bear isn’t lurking, whatever prospective reward these stocks will deliver will come with plenty of rockiness. Research Affiliates estimates that over the next 10 years the volatility of these shares will be about 60% higher than that of large U.S. stocks. Also, don’t expect an immediate rebound. Doug Ramsey, chief investment officer at the Leuthold Group, notes that in the late stages of bull markets—like today—stocks that already have momentum typically lead the late charge. So don’t count on out-of-favor emerging markets to go from unloved to sought-after soon.

keep your emergingmarkets stake small You may need only to rebalance to take advantage of this opportunity. Research has shown that investors don’t need to keep more than 30% of their overall stock portfolio in foreign shares to capture the full effects of diversi-

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the bullish case emerges

Emerging-market stocks

U.S. stocks

Developing markets are historically cheap …

… their profits are expected to grow faster …

AVERAGED PRICE/EARNINGS RATIO

ANNUAL GROWTH RATE

21.9 15.9

19.0

12.3% 10.7%

10.6

Now

Median

NOTES: P/E ratios based on ﬁve years of averaged earnings. Dividend forecasts are over the next decade. Earnings forecasts are

ﬁcation. But given the volatility and risk involved, Ferri of Portfolio Solutions recommends holding no more than 30% of that foreign-equity stake in emerging-market shares. This means that if you’re shooting for a portfolio that’s 70% U.S. stocks and 30% foreign, you should have 10 percentage points or so in emerging-market shares. Yet if you started with that exposure three years ago—and didn’t rebalance among your stocks—your emerging-market allocation would have sunk to around 5%. To replenish that stake or simply to boost your exposure, shift assets from overpriced U.S. shares to underpriced developing-market stocks.

SO MUCH HAS GONE WRONG, MAYBE IT’S TIME TO THINK ABOUT WHAT COULD GO RIGHT.” —CHUCK KNUDSEN T. Rowe Price

avoid the commodity trap Bet on consumer-oriented economies, not on those reliant on natural resources. Sluggish economic growth around the globe reduces demand for commodities, especially for crude oil. That’s not good news for resourcerich developing nations. This is why fund managers and market strategists say you should avoid the absolutely cheapest emerging-market stocks that are heavily tied to extracting natural resources. “Just because

TELL US HOW YOU INVEST IN EMERGING MARKETS: letters@moneymail.com

EMERGING-MARKETS STOCKS

… and these stocks are expected to yield more.

This explains why emerging-market stocks are expected to outperform.

DIVIDEND YIELD FORECAST

EXPECTED ANNUAL RETURN OVER NEXT 10 YEARS

7.9% 5.3% 3.1% 2.0%

1.1% Emergingmarket stocks

Foreign stocks

U.S. large-caps

0.4% U.S. small-caps

through 2017. SOURCES: Bloomberg, Leuthold Group, Research Affiliates

stocks in Brazil, South Africa, and Russia are inexpensive doesn’t mean they are bargains,” notes Jeffrey Kleintop, chief global investment strategist for Charles Schwab. Not only are corporate earnings falling in those regions—since so many companies are tied to the energy sector—but these economies are plagued by rising inﬂation brought about by weakening currencies. Value-minded investors are better off focusing on emerging markets with more diverse economies and stronger currencies, Kleintop says. This group includes more consumer-driven economies, such as Mexico, South Korea, India, and Taiwan. The good news is that these four markets make up about 40% of the MSCI Emerging Markets index, which many funds directly or indirectly track.

seek out funds that can adjust to this shifting landscape This asset class may be one of the few in which active managers have an advantage over index funds. Before you add any direct

% 6O

How much more volatile emergingmarket stocks are expected to be vs. U.S. equities over the next decade.

investment in an emerging-market fund or ETF, check to see if your diversified international fund is already doing the job for you. While the typical blue-chip foreign-stock fund holds 5% to 10% of its assets in the developing world, some funds are more adventurous. The managers of Dodge & Cox International (DODFX), for instance, keep more than 20% of their portfolio in emerging-market stocks. And more than 17% of the Vanguard International Growth Fund (VWIGX) is held in shares of companies based in the developing world. Vanguard International Growth is a member of our MONEY 50 list of recommended mutual and exchange-traded funds (see “Great Funds for the Long Run” on page 104). If you’re looking for a fund focused solely on emerging-market shares, go for an actively managed one. Active managers have the freedom to downplay sectors that are most affected by the commodity slump and sluggish economic growth. In recent years this flexibility has worked to their advantage. According to S&P Dow Jones Indices, nearly 30% of actively run emerging-market funds beat their benchmark over the past five years. That’s not exactly a needle in the haystack compared with the 11% success rate for actively run funds focused on U.S. large stocks. Among the better performers over the past five years has been the T. Rowe Price Emerging Markets Stock Fund (PRMSX), which is in our MONEY 50 list. Manager Gonzalo Pangaro invests less than 9% of the fund’s assets in energy, basic materials, and industrial stocks. By comparison, the index-tracking iShares MSCI Emerging Markets Fund recently held 21% of its assets in those sectors. Another active fund that underweights energy and natural resources is Fidelity Emerging Markets (FEMKX), which has beaten at least 70% of its peers over the past one, three, and five years. Whichever fund you choose, patience is a must. “So much has gone wrong, maybe it’s time to think about what could go right,” says T. Rowe Price’s Knudsen. “We wouldn’t need a lot to go right to see a turnaround.”

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Don’t Run Out of Money During Retirement What Investors Should Worry About It’s no secret that the vast majority of Americans entering their retirement years are doing so with vastly underfunded retirement savings. However, even if you have significant financial assets in your retirement savings, assets in excess of $500,000, your hope for a comfortable retirement is hardly assured. In fact, you could be headed for a financial disaster just when you can least afford it. And that’s why you should request a free copy of Fisher Investments’ The 15-Minute Retirement Plan: How to Avoid Running Out of Money When You Need It Most. Unlike most retirement advice, this guide is written for Money readers with investable assets of $500,000 or more. You’ll be surprised at what you might learn and how much you might benefit. The 15-Minute Retirement Plan is loaded with practical information that you can use to help meet your personal financial goals in retirement. Specifically, you’ll learn: • The truth about how long your nest egg can last • How much you can safely take as income each year • How inflation can wreak havoc with your plan and how to deal with it • Why so-called safe investments just might be the most risky approach • How reacting to short-term market movements can hurt your returns • And much, much more!

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will ultimately make you a smarter investor.

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In a 1979 p psy Kahneman Tversky ﬁrs

awing up a financial plan, advisers will ask y how big of an investment loss you can But in his book Rational Expectations, ernstein of Efficient Frontier Advisors uses t like this one to drive home the reality that obably feel braver in good times than you’ll be when it counts. “Take the decline you think an tolerate and divide it in half,” says Bernstein. wing for your emotional fluctuations matters ause if you get spooked into selling your s, you may do so at exactly the worst pos. Panicked tors who dumped tocks in March , after the financial es 7%, missed out et’s 240% WILLIAM BERNSTEIN eturn since then.

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GREGG FISHER

had years to run. Investment manager Gregg Fisher, founder of Gerstein Fisher, made this slightly tongue-in-

model of how investor sentiment egister what’s actually happening in the economy. The upshot: If you know that recent market experience is likely

to color how you see your investments, you can decide not to try to time the market’s twists and turns. Find a strategy that makes sense

illustrat enon, c clever e called los (K later Prize in ec in part f sight.) The relatively toward desp lo pain set when we los in fact, rises when w Behavior mists say los sion helps account for why you may be

for you (see Bernstein, above) and resolve to stick with it, except for rebalancing your portfolio once a year or so.

FIVE BIG IDEAS

P O R T R A I TS B Y D AV I D W I L S O N

. might also be a reason that saving is hard: The

w ss you expect to feel as the money grows over time.

DANIEL KAHNEMAN

CHARLEY ELLIS

Watch Taylor Tepper share more insights about these sketches at money.com/videos.

veys show that a’s young orkers are disinclined wn stocks. But early your career, assuming ’ve already set aside gency savings, DAVID BLANCHETT en risky stocks can afer than they seem. That’s because your tfolio is a comparatively small part our total wealth. “The largest asset you have when you’re er is human capital,” says Morningstar’s vid Blanchett, who created the example below. apital is basically your ability to earn ome, and when you are young you can bet you have lots of years of salary ahead of you. Later, protecting your ﬁnancial portfolio takes precedence as your earning potential falls off. You have to be more conservative with your holdings in retirement, because your nest egg

INVESTOR’S GUIDE 2016

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FOCUS ON STABILITY, NOT YIELDS

Bond investors who fixated solely on income last year took a bit of a spill. That highlights a key lesson for 2016: When it comes to fixed income, steadiness and safety will be just as important as payouts. By JOHN WAGGONER

Illustrations by ANNA PARINI

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IN RECENT YEARS, the main challenge for bond investors seemed clear: How can you squeeze out a tad more income from a market plagued by historically meager yields? Last year, though, showed that there’s another, equally important objective to owning bonds that you can’t lose sight of. That’s the stability that bonds are supposed to offer. “You keep bonds not just for the returns, but for the risk mitigation they provide your portfolio,” says Roger Aliaga-Diaz, senior economist for the Vanguard Group. That lesson was driven home in 2015, when high-yield, long-term,

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INVESTOR’S GUIDE 2016

multisector, foreign, and nontraditional ﬁxedincome funds—which investors have used to “reach” for incrementally higher payouts—all sank in value. Some emerging-market bond funds, in fact, fell by double digits in 2015. There could be more choppiness ahead if the Federal Reserve continues to raise interest rates this year. Bond prices fall when rates rise, and the Fed has stated that it intends to “normalize”—read “raise”—short-term rates, barring an unexpected meltdown in the economy. To be sure, few expect a big spike in rates. The Fed promises to lift short-term borrowing costs slowly. How gradually is hard to say because the Fed could pause for months at a time if it sees signs of economic or geopolitical trouble ahead (see “10 Things Every Investor Must Know Now” on page 50). Meanwhile, market forces should keep somewhat of a lid on long-term interest rates. German 10-year bonds are yielding just 0.59%, and Japan’s bonds are paying 0.33%, so demand for 2.2% U.S. Treasuries from international investors should remain strong. Nevertheless, interest rate hikes have a tendency to unnerve markets. So it’s time to gird your portfolio. This doesn’t mean doing anything drastic. Just stop ﬁxating on yields and focus on the total picture. Here are the key steps to follow:

reset your expectations It’s unlikely that you’ll be bragging about the great performance of your bond portfolio this year, as expectations for the bond market are lower than an ant’s ankles. “In the past 30 years, bonds have averaged about a 7% total return,” says Aliaga-Diaz. Over the next several years, “we’re thinking 2% to 3%, barely beating inﬂation.” Indeed, a surprisingly accurate gauge for forecasting annualized ﬁxed-income total returns over the subsequent decade is to see what 10-year Treasury securities are yielding today. And right now, they’re paying just over 2%.

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% –3 The average loss suffered by global bond funds in 2015, which investors had been attracted to as a source of higher-thanaverage payouts.

YOUR BEST MOVES Stay calm. Since July, fund investors have yanked more than $52 billion out of their fixedincome portfolios as rate-hike fears have heated up. But even if the Fed keeps lifting rates this year, pundits aren’t predicting massive losses, but rather modest gains for fixed income. And as meager as the expectations are for bonds, the outlook for cash—money-market securities and bank CDs and the like—is worse. Even if the Fed raises short rates four times in 2016—a huge if—you’ll earn about 1% or less in cash. Another reason to stay invested: Bonds can be potent tonic for when the equity markets get choppy, as is expected this year. Also, even if fixed income takes a turn for the worse, bond bear markets are rarely as severe as the periodic swoons of the stock market. The worst calendar year for intermediate-term bonds was a loss of 5% in 1994. By contrast, the worst year for blue-chip equities was a drop of 43%, during the Great Depression. Keep your tweaks small. Making big adjustments to your portfolio now because you think rates will rise more could backfire, warns AliagaDiaz. Suppose you move all your bond money into short-term funds to minimize the effects of a rate hike ($2.3 billion has gone into short-term government funds this year as investors have fled longer-maturity bonds). “You could well have a situation in which short yields don’t increase as much as anticipated,” he says, “because the Fed decides to pause—which is very possible. Then you’d be sitting in a portfolio yielding 0.5% and giving up a lot in forgone income.”

think inside and outside the box with treasuries At 2.2%, 10-year Treasuries are paying about what they did at the end of 2014. But that’s likely to change this year. “Assuming a 2% inﬂation rate, fair value for the 10-year Treasury would be around 3.25%,” says Bryan Whalen,

STEADYING YOUR BONDS

You can’t go back to the U.S. Treasury and ask for a higher yield. Instead, you’ll have to reduce your note’s price so that the interest payment divided by the price equals 3%. In the case of a $1,000 bond, you’d need to cut the price to about $914 to sell—a signiﬁcant haircut. (Traders use a more sophisticated calculation, called yield to maturity, which takes into account the time left before the bond matures. But you get the idea.) Mutual funds that invest in Treasuries or other types of bonds must mark their holdings to current prices every day. So your fund’s share price will reﬂect the daily increases or decreases in interest rates, leading to a bouncy ride.

YOUR BEST MOVES

portfolio manager for TCW. Given the sluggish economy and low oil prices, Whalen says he’d be surprised if the 10-year Treasury yield hits that level. But the consensus forecast from the National Association for Business Economics puts the 10-year yield around 3% by the end of 2016. Why does this matter? If you plan to hold on to your Treasury securities until maturity, it doesn’t really. Uncle Sam has such a ﬁne record of paying his obligations that Treasuries are considered virtually risk-free. Hang onto your bonds and you’ll get all your interest payments on time and your principal back when the bond matures. The trouble comes if you have to sell before maturity or if you invest through a fund. In the case of an individual Treasury, suppose you have a 10-year note that pays 2% interest. Now assume market rates rise and new Treasuries start paying 3%. Other investors will look at your 10-year notes as they do a skunk in the cellar.

YOU KEEP BONDS NOT JUST FOR THE RETURNS, BUT FOR THE RISK MITIGATION THEY PROVIDE.” –ROGER ALIAGA-DIAZ, the Vanguard Group

With new money, shorten up ... With rates rising, play it safe when it comes to the interestrate sensitivity of your investments, says Brian Brennan, a portfolio manager for T. Rowe Price. Start by looking at the so-called duration of the funds you’re planning to buy. Duration is a calculation that measures a fund’s reaction to interest rate fluctuations (most funds provide that information on their websites, or you can look up a fund’s duration at Morningstar.com). A broad bond market fund has a duration of about five years, which means that if market rates were to rise one percentage point, the fund’s value would drop 5%. Add back the yield, and you’re looking at a total loss of around 3%. On the other hand, Vanguard ShortTerm Bond (VBISX), which is in our MONEY 50 list of recommended funds, sports a duration of 2.7 years and yields 1.2%. So if rates were to rise one point, losses would be closer to 1.5%. ... and think counterintuitively. In a low-yielding world, few bonds pay less than Treasury-Inflation Protected Securities, making these inflation hedges a hard sell. Yet they could represent a good opportunity, especially if oil prices rise and inflation is back in the discussion (see story on page 50). The paltry 0.6% yields on 10-year TIPS reflect an assumed inflation rate of just 1.6% for the next decade. The government’s consumer price index was unchanged the 12 months ended October, but that’s entirely because of the drop in oil prices, which at the end of last

stretched out

STEADYING YOUR BONDS

The broad bond market yielded about 2.2% last year. Fund investors who reached for higher payouts via riskier debt got hurt. 2015 PERFORMANCE

5.5%

year fell to $40 a barrel. If crude returns to the $60 to $80 level—the consensus estimate from the National Association for Business Economics is $54 by the end of 2016—CPI should rise faster than current TIPS yields reﬂect. “If oil goes up, they’re underpriced,” Brennan says. As always, look for funds with rockbottom expenses. Also check your durations. The average TIPS fund sports a duration of nearly seven years. But MONEY 50 member Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) has a duration of just 2.6 years and charges just 0.10% of assets annually.

Lighten up on junk. The high-yield default rate in October rose to 2.8%, up from 1.7% a year earlier, according to Moody’s Investor Services. While that’s below the historical average default rate of around 4.5%, “it’s on a rising trend,” says John Lonski, managing director and chief economist for Moody’s Capital Markets Research Group. “We expect it to rise another percentage point” in 2016. Why? For starters, tighter monetary pol-

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4.1%

3.6%

High-yield

2.9%

–2.2% –4.0%

–6.4% Emergingmarket bonds

Multisector bonds

Long-term bonds

World bonds

But investors who stuck with higher-quality debt fared better. 2015 PERFORMANCE Yield

Muni national intermediate

1.9%

0.6%

Intm.-term government

1.5%

Return

0.2%

Shortterm

1.4%

0.3%

Short-term government

1.2% 0.6% Muni national short

NOTE: Returns are as of Dec. 14. SOURCE: Morningstar

When you invest in a corporate bond, you expect a higher payout than what you’d get from a Treasury, because there’s always a chance that the issuer will default. While 10-year Treasuries were paying 2.2% at the end of last year, high-quality corporate bonds of similar maturities were yielding 2.6%. And low-quality “junk” bonds—rated BB or below by S&P, or Ba and below by Moody’s—were yielding 8%, up from 5.9% earlier in 2015. That type of payout may seem tempting, but be very careful in 2016. There’s a reason junk bonds have to pay you so much.

YOUR BEST MOVE

Return

–2.6% –4.9%

2.2% 2.2%

favor high quality over high yield

Yield

4.6%

% 8

What low-quality junk bonds must pay to attract investors, up from 5.9% earlier last year.

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icy by the Fed could slow the economy, making it that much harder for weak companies with higher debt levels to thrive. At the moment, the greatest default risk comes from bonds issued by companies in the energy and commodity sectors, which are having miserable years and which account for about 30% of all junk bonds, according to Kevin Kearns, a bond fund manager at Loomis Sayles. Adds Lonski: “While there’s still some upside potential in the high-yield market, I think the downside risks exceed the potential gains.” Instead, think about a high-quality corporate bond fund that dabbles in the lower end of the high-quality pool—such as iShares iBoxx $ Investment Grade Corporate Bond (LQD). The MONEY 50 fund owns no junk, but 40% of its portfolio is rated BBB, the lowest end of the investment-grade universe. This allows the fund to sport a yield of 3.4%. While that’s shy of the 5.5% average yield for junk funds, LQD is about 20% less volatile than high yield.

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STEADYING YOUR BONDS

the case for stability

High-quality core bonds tend to bounce up and down less than the broad bond market, which could turn shaky as rates rise. VOLATILITY RELATIVE TO BROAD MARKET

Short government

0.3x

Short-term bonds

0.5x

Muni national short

Intermediateterm

THE BROAD BOND MARKET

Multisector bonds

World bonds

1.6x

1.8x

0.5x

High-yield junk

2.2x

Emerging market bonds

3.1x

NOTE: Volatility is based on standard deviation over ﬁve years. The lower the reading, the less rocky the funds are. SOURCE: Morningstar

embrace a different government bond Despite some recent high-proﬁle defaults in Stockton, Calif., Detroit, and Puerto Rico— whose debt was held by a surprising number of funds—an area of relative strength is municipal bonds issued by state and local governments. “Overall, the default rate is very low, and given that the U.S. economy will grow at a faster pace than most of the developed world, that bodes well for muni credit for the next 12 to 18 months,” says David Hammer, portfolio manager at Pimco. Plus, muni income is federally—and in some cases, state and locally—tax-free.

YOUR BEST MOVES Bolster your stake before rates rise. Currently, munis yield about 90% of what Treasuries of similar maturities pay, which is in their normal range. Even if you’re in the modest 25% income tax bracket (earning $37,651 to $91,150 for singles), the 2% payout of a 10-year AAA-rated muni is the equivalent of earning nearly 2.7% on a Treasury, which is half a point more than they pay.

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THE DOWNSIDE RISKS OF HIGH-YIELD BONDS EXCEED THE POTENTIAL GAINS.” –JOHN LONSKI, Moody’s Capital Markets Research Group

Munis also tend to fare better in rising rate environments. One reason: As rates rise, tax-free yields become more attractive to investors. At the same time, budget-conscious states and municipalities issue fewer bonds. So demand for munis will probably increase just as the supply of this debt is set to fall. A good way to invest in munis is through a home-state fund to capture state and local tax breaks. But if your state isn’t financially sound, go with a diversified national portfolio like Vanguard Intermediate-Term Tax-Exempt (VWITX), which sports a duration of less than five years. The fund has beaten nearly 80% of its peers over the past decade. Here, too, go with quality. More than 75% of Vanguard Intermediate-Term Tax-Exempt is held in bonds rated AA or higher, which offers added stability if rate hikes hurt the economy. Beyond quality, check funds for potential Puerto Rico holdings. Some Puerto Rican debt is in default, and the situation is unresolved. “Even small exposure can have a big impact on your fund,” Hammer warns. You won’t make a ton of money in munis in 2016. On the other hand, you won’t pay taxes on what you do make. And this year, the point isn’t to make off like a bandit. It’s to strike a balance.

ARE YOU WORRIED ABOUT RISING RATES? LET US KNOW AT letters@moneymail.com

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INVESTOR’S GUIDE 2016

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RETIREMENT INCOME MADE EASY

You can make your nest egg last three or so decades—and even leave something for your heirs—by investing in as few as two index mutual funds. Here’s how to take your best shot at a secure retirement. By JANE BRYANT QUINN

Illustrations by JOHN TOMAC

IT’S ONE OF THE MOST DAUNTING ﬁnancial challenges you’ll ever face: ensuring

that the savings you’ve built during your career will support you through retirement. But it doesn’t have to be that hard, says personal ﬁnance commentator Jane Bryant Quinn. In the following excerpt from her new book, How to Make Your Money Last: The Indispensable Retirement Guide, Quinn lays out a three-step plan for ﬁnancial security after you leave the working world. This is the fourth book for Quinn—including the bestselling Making the Most of Your Money NOW. She was a columnist for Newsweek and, as part of the Washington Post Writers Group, syndicated in more than 250 newspapers. She also spent a decade at CBS News, where she appeared on

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INVESTOR’S GUIDE 2016

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the network’s morning show and the CBS Evening News with Dan Rather. In her latest book, Quinn covers everything baby boomers and their heirs need to know about making a nest egg last: from getting the most out of Social Security to buying yourself a pension. Through it all, Quinn preaches simplicity, which is how she handles her own investments. In this excerpt, Quinn explains how to make your retirement portfolio last three decades or more—and even leave something behind for your family. That will take ﬁguring out how to manage your savings—and choosing the right investments throughout retirement. Here’s how to get started.

pick the right withdrawal rate

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YOU HAVE TO BE ‘PROPERLY INVESTED,’ AND THAT MEANS YOU CAN’T BE AFRAID OF STOCKS.” Jane Bryant Quinn is a leading commentator on personal ﬁnance. Adapted from How to Make Your Money Last: The Indispensable Retirement Guide. Published by arrangement with Simon & Schuster. © 2015 by Quinn Works.

discover the joys of “bucketing” Once you’ve figured out a withdrawal rate you’re comfortable with, you need to implement a system to help keep track of your investments

P H OTO G R A P H B Y S H AY L A H U N T E R

The first thing on the road to retirement security is figuring out the answer to this question: How much can you spend from your nest egg every year without eventually going broke? We’re talking about your portfolio—stocks, bonds, mutual funds, certificates of deposit, and so on. The spending rate is your speed limit. It helps ensure that your money will last as long as you do. Some retirees manage their spending so well that they can live entirely on whatever income they receive from their pensions and Social Security. Most of us, however, will depend partly on our savings to pay our monthly bills. That’s why spending rules are so important, even when you don’t follow them to the letter. They save you from accidentally using up too much of your money when you first retire. The classic spending rate is 4% of your total savings in the first year you retire or start drawing on the money. In each following year, take the same amount plus an increase for inflation. Properly invested (more on that later), your money should last at least 30 years. You can start with 4.5% if your portfolio is well diversified. Those rules have been the gold standard in

financial planning ever since they were developed. They would have carried you through the worst periods the U.S. economy has endured, measured from the mid-1920s. For any period better than “the worst,” your money should last longer than three decades. But what if the next 30 years take a different course? That’s a question I’ve asked myself as my husband and I plan for the day when we won’t have paychecks. The projected Quinn budget works on a 4.5% withdrawal rate. We want to spend enough to be able to enjoy ourselves yet not so much that we start to worry. Again, you have to be “properly invested,” and that means you can’t be afraid of stocks. The research on 4% (and other withdrawal rates, up to 5.5%) assumes you’re keeping half your money in blue-chip stocks and the rest in intermediate-term government bonds (in both cases in the form of mutual funds). That assumption stops some conservative investors cold. (What, 50% in stocks?) Fortunately, you don’t have to go that high. The 4% rule still works with only 35% in stocks. If you don’t trust the market at all—and buy only fixed-income investments—your safe withdrawal rate goes down to about 2.5%. You can start with 4.5% if your investments include smaller stocks as well as larger ones. That said, the “safe” 4% withdrawal rate may indeed be too safe. In 97% of the periods studied, retirees wound up—30 years later— with at least the same amount of money they had when they started. If you’re flexible in your spending, you could start with as much as 5.5%. The problem is that you never know. That’s why planners generally advise you to start with 4% or 4.5%, take your annual inflation raises, and see where you stand in 10 years or so. If markets have risen, you can increase the draw.

RETIREMENT INCOME MADE EASY

and risk levels. I recommend a technique known as “bucketing.” It suits the way we think. The idea is to put your money into different buckets, each one reserved for a specific purpose. There’s one for cash, one for fixed income (bond funds), and one for growth (stock funds). The cash bucket is your safety net. It holds enough to help cover your living expenses for two or three years. That doesn’t mean all your expenses—only those that won’t be paid from other income. For example, say you need $55,000 a year to live, and you and your spouse jointly get $30,000 in Social Security. Your cash bucket has to cover the $25,000 gap, or $50,000 for two years. You dip into it for bills. As the cash runs down, you take profits from your stocks and bonds and fill that bucket up again. Jonathan Guyton of Cornerstone Wealth Advisors recommends that you add a “discretionary” bucket. That’s for the inevitable “wants” that come along. (This is not an emergency fund. It’s for the stuff—say, helping a child or taking a special vacation—you break your budget for.) Fund it with 10% of your investment money. When it’s gone, it’s gone.

size up your stock and bond buckets Once you have settled on the amount to keep in the cash bucket, next decide how to split the rest of your money between stocks and bonds. But first repeat after me: After down or “bear” markets, the broad stock market has always recovered. Individual stocks might not, which is why it’s so risky to be a stock picker. But the price of a broad-based, blue-chip mutual fund will go back up. You had an object lesson in 2007 when the ﬁnancial system almost collapsed. The average S&P stock lost 50% over 24 months. Investors ﬂed. Had you been in the market at its bottom in 2009, you’d have earned back all of your losses by 2012, and then gained another 42% by mid-2015. Unfortunately, no one rings a bell when prices start up. You just gotta be there. Of course, how much to hold in stocks is a

retirement income by the numbers Important figures to keep in mind as you plan for the future.

Average number of months it takes stock investors to recover their money after a market crash.

NOTES:

The most commonly recommended initial withdrawal rate from your nest egg.

The number of years your savings should last after you ﬁnally decide to retire.

Average months are from the stock market peak to bottom and back; dividends reinvested. How to Make Your Money Last: The Indispensable Retirement Guide

SOURCE:

very personal decision. Financial advisers ask you to consider your “tolerance for risk,” but that’s a poor place to start. Instead, consider your “capacity for risk.” “Capacity” measures whether you can afford the risks you take. If you’re a retiree with a pension, Social Security, a paid-up house, and a multimillion-dollar IRA, you have a high capacity. It won’t cripple your lifestyle if you’re hit with a temporary stock market loss. But if you’re living on Social Security plus a small amount of savings, your capacity for risk is zero, no matter how willing you are to gamble. I don’t mean to dismiss risk tolerance. You might have the capacity to keep 90% of your money in stocks but wouldn’t dream of doing so. Sometimes retirees choose very low stock allocations because they can’t stand the stress. So how much to allocate to stocks? Typically it’s 40% to 65%. You might keep 90% in stocks if you won’t need the money and are basically managing it for the next generation. You might put zero in stocks if you’re in poor health and your savings are modest. What’s not in stocks and cash goes into bonds. For an allocation that minimizes risk, divide money between high-quality short-term and intermediate-term bond funds.

TELL US HOW YOU’RE MANAGING YOUR RETIREMENT: letters@moneymail.com

INVESTOR’S GUIDE 2016

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Short-term funds pay less interest but are pretty stable in price. That makes them useful as a safety net. If stocks are down—and you have to sell an investment—selling short-term bond funds will minimize your loss. (Many planners advise that, between your cash and your shortterm bond funds, you hold enough money to protect yourself for four straight years.) The remainder of your ﬁxed-income money goes into high-quality intermediate-term bond funds, which pay higher rates of interest. Once you’ve settled on a stock/bond mix, rebalance every year or so to return to your original allocation or any new mix you choose. As to which of the thousands of mutual funds to buy, you can throw out most of them. The more streamlined your choices, the simpler and surer investment management will be.

fill up the stock bucket You hold stocks for growth over 10 or 15 years. You’re betting that the U.S. and world economies will have expanded substantially, with corporate proﬁts and stock prices up. It’s a good bet. With dividends reinvested, the Standard & Poor’s 500-stock average has never lost money over 15-year periods, and rarely over 10-year periods. Over the 15 years ending in March 2009, which covered the market collapses of 2000, 2008, and 2009, buy-and-hold investors reaped 6.5%. And that’s before the 2009–15 recovery. Buy and hold, and history says you’ll succeed. The 4% withdrawal rule assumes your stock performance will roughly match that of the S&P 500. The 4.5% rule assumes you also invest in an index of small stocks. The most reliable way to make this work is to buy index funds, which get the same results as these two markets. All the funds that follow the same index invest in essentially the same way. The only difference among them is cost. The lowest-cost funds, such as those offered by Vanguard and Fidelity, will provide the best return—and, yes, it’s that simple. As long as you buy low-fee index

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REPEAT AFTER ME: AFTER DOWN MARKETS, THE BROAD STOCK MARKET HAS ALWAYS RECOVERED.”

funds and rebalance, your annual withdrawals should last as long as the research says. Beware: Advisers who earn commissions sneer at index funds. They have a patented method for talking you out of them. “Why would you want average returns?” they ask with a smirk. “Average is for the ordinary schlub.” Before you nod and say, “Yes, please, please take my money now,” think what a “market average” means. It has nothing to do with “the middle.” It’s more like par in golf. Only the best golfers can beat par. The average golfer never does. In the stock market, the index is “par.” The miracle of index funds is that they let all investors, regardless of skill, score par all the time. If, like me, you’re leaning toward the 4.5% withdrawal rate, consider buying total market funds. They invest in smaller companies as well as large ones. They’ve mostly replaced the original S&P 500 funds. Some advisers suggest you “tilt” your portfolio by adding industry-speciﬁc funds that you think might beat the market. Take health care. Health care companies are included in a total market fund, along with companies from other business sectors. If you add a health care fund, you have placed an extra bet on that part of the economy. I don’t tilt, myself. I’m not smart enough to know which industry will do the best. My vote: Hold just one total market stock index fund. Adding different types of stock funds isn’t of great importance. Your risks and returns

RETIREMENT INCOME MADE EASY

are governed mainly by the total percentage you hold in stocks as opposed to bonds. It takes just one total market U.S. stock fund (for large and small stocks) and one total market U.S. bond fund to make the 4% or 4.5% rules work. (You get international diversiﬁcation from the big U.S. companies with foreign interests.)

what’s in your bond bucket Everything in a retirement portfolio has a speciﬁc job. For stocks, it’s growth. For bonds, it’s ballast. All safe withdrawal plans assume your bond funds invest mainly in Treasuries or other government securities, despite low rates. When stocks collapse, Treasury prices usually hold steady or rise. That limits your total loss. By contrast, popular high-yield corporate and tax-exempt bond funds tend to fall along with stocks. Bond prices are closely linked to changes in interest rates. When rates rise, bond prices fall and vice versa. With interest rates expected to rise, investors today are worried about the value of their funds. But during such periods, bond funds do better than you think. The managers will invest the fund’s cash ﬂow in bonds that pay the higher rates, so the income

A ‘MARKET AVERAGE’ … IS MORE LIKE PAR IN GOLF. ONLY THE BEST GOLFERS CAN BEAT IT.”

you receive from the fund goes up. If you’re spending it, you’ll have more in your pocket. If you’re reinvesting it, you’ll be purchasing shares at a lower price. When interest rates go down again and bond prices rise, those additional shares will provide you with extra gain. Please don’t panic and switch your money into a bank when rates rise. If you do, three bad things will happen. You’ll lose current income because banks often pay less than you earn from bonds. The capital loss that you took on the sale is permanent. And you’ll lose the future capital gains that the funds will rack up when the cycle turns and interest rates decline. As with stocks, it’s best to buy bonds in the form of index funds. Need I say that low-cost funds almost always beat the pack? To do better than the index, a managed bond fund has to take higher risks, and why would you want that? The ﬁnancial research shows that to succeed with a 4% or 4.5% withdrawal plan, you need only a single high-quality bond fund. In a tax-deferred retirement account you might choose Vanguard’s Total Bond Market Index Fund (VBMFX, which costs 0.20% a year and is primarily invested in government securities) or Fidelity’s Spartan U.S. Bond Index Fund (FBIDX, 0.22% and tilting toward corporates). Both are intermediate-term funds that hold short-term bonds too. With the safety-net bucket approach, add a short-term fund. A high-quality short-term fund falls by only a small amount when rates rise. It also recovers quickly, as the bonds mature and are replaced with new ones paying more. That makes it a potential inﬂation hedge.

final thoughts Watch a video of Jane Bryant Quinn talking more about retirement planning strategies at money.com/video.

I urge you to opt for simplicity. The fewer funds you have, the easier your investments are to manage, especially as you advance in years. Your buckets provide you with cash for withdrawals, bonds for liquidity and reasonable safety over the ﬁrst part of your retirement, and stocks to help you cover the second half of retirement. All with just two or three index funds. That’s it.

WORK HARD. PLAY HARD.

401(K) ROLLOVER: NOT HARD.

You appreciate the value of hard work. But you also appreciate the value of easy work. That’s why we take the stress out of rolling over your old 401(k). Our rollover consultants will help you with every step of the way. We’ll even call your old 401(k) provider with you. Difficulty may build character, but you have plenty of character already. The best returns aren’t just measured in dollars.

Roll over your old 401(k) into a new account and get up to $600. Visit tdameritrade.com/rollover for details or call 800-213-4583.

INVESTOR’S GUIDE 2016

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T O P P I C K S F R O M T O P P R O S P A G E 9 8 //// G R E AT F U N D S F O R T H E L O N G R U N P A G E 1 0 4 //// T H E R I G H T WA Y T O I N V E S T F O R C O L L E G E P A G E 1 1 0 //// H O W T O U S E T O D A Y ’ S H O T T E S T E T F s P A G E 1 1 8 //// T H E F U N D R E P O R T : T H E B I G G E S T A N D T H E B E S T P E R F O R M E R S P A G E 1 2 4

Illustration by MICHAEL BRANDON MYERS

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TOP PICKS FROM TOP PROS

Going against the grain, these fund managers have outperformed their peers with big bets on relatively few stocks. A look into these investors’ strategies and the companies they favor could pay off for you as well. By CAROLYN BIGDA

Photographs by MIKE McGREGOR

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FEAR OF FAILURE drives many mutual fund managers to spread their bets widely. Actively managed U.S. stock funds hold an average of 152 different companies, reports Morningstar. World funds, 225. The stewards of the funds on the following pages are different. They invest in 50 companies or fewer, following their best ideas with conviction—and to great success. Each fund’s ﬁve-year return has beaten those of more than half the funds investing in similar stocks. For the three funds that are at least a decade old, the same is true of their 10-year returns. Follow the managers’ advice and you may prosper too.

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PRABHA CARPENTER Homestead Value

JOHN ROGERS and TIMOTHY FIDLER Ariel Appreciation

ELIZABETH JONES Buffalo Large Cap

BILL NYGREN Oakmark Global Select

Carpenter sees value in big drug companies.

THE PICKS PFIZER (PFE) $32.25 P/E RATIO: 13.6

making a serious commitment to strong management in 2002; and Gregory Halter, who MARK ASHTON, started in 2014—see themselves as long-term partners of the compaPRABHA CARPENTER, nies in which they invest. AND GREGORY HALTER The trio stick to stocks of large HOMESTEAD VALUE (HOVLX) firms selling at a discount to the EXPENSES: 0.62% MINIMUM: $500 value of the underlying businesses. 5-YEAR ANNUALIZED RETURN: 12.6% They also screen for earnings 10-YEAR: 7.0% growth rates in the high single digits or better, ample cash flow, GROWTH OF $10,000 FOR FUND AND PEER GROUP and top brass who they believe HOVLX use resources wisely. “It’s hard to $18,689 find exceptional companies,” says Carpenter, “so once you do, you LARGE VALUE take a reasonable position.” $16,673 One area the Homestead team likes is pharmaceuticals, which ’11 ’12 ’13 ’14 ’15 make up five of the fund’s 49 current holdings. Big drug companies, says Carpenter, are rolling out new HOMESTEAD FUNDS was founded in 1990 medicines but are not as expensive to manage retirement savings for as their biotech peers. The managemployees at some 900 rural electric ers’ instincts have often been corcooperatives. In that spirit of collaborect. Homestead Value ranks in the ration, Homestead Value’s managers— top 20% of its category for one-, Mark Ashton, at the helm since 1999; three-, five-, and 10-year returns. Prabha Carpenter, who joined the fund

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In recent years big pharmaceutical firms have been hurt by patent expirations of popular prescription drugs. But Carpenter says Pfizer is replenishing its portfolio with smart acquisitions, like its intended merger with global pharma company Allergan. Pfizer could face political fallout for its plans to move to Ireland for a lower tax rate. But if the merger goes through, the company will have more than 100 medications in mid- to late-stage development. Pfizer’s forward price/earnings ratio is just 13.6, vs. the average 16.5 for large drug companies. And the stock has an attractive dividend yield of 3.5%.

BANK OF AMERICA (BAC) $17.00 P/E RATIO: 10.9 Bank of America has been digging itself out from under the housing market mess—and making progress. In the third quarter of 2014 the bank set aside $16 billion for litigation expenses related to the ﬁnancial crisis. One year later the bank needed less than $1 billion to cover such costs. Meanwhile, demand for its products

is growing. From July to September, mortgages and home-equity-loan originations expanded 13% from the year before, to $16.8 billion. And noninterest income rose 2%, to $11.2 billion. The stock trades at just one times Bank of America’s tangible book value (assets that would remain if the bank had to liquidate). Says Carpenter, “That’s a very reasonable valuation.”

HONEYWELL INTERNATIONAL (HON)

$102.00 P/E RATIO: 15.7

For earnings growth and good valuations, Carpenter says she and her co-managers “love the industrials,” especially Honeywell, which makes everything from homesecurity systems to airline parts. CEO David Cote says he wants Honeywell to be the Apple of industrials, and in 2014 the company launched an initiative to make products, like the Lyric smart thermostat, attractive and easy to use. The efforts are paying off: Analysts expect Honeywell’s 2016 earnings to hit $6.51 a share, up 6.7%. At the same time, the stock trades below the S&P 500’s P/E of 17.4.

NOTES: Stock prices, P/E ratios (all of which are forward looking), returns, and yields are as of Dec. 9, 2015. Growth of $10,000 is as of Nov. 30, 2015. SOURCES: Morningstar, Thomson Reuters

PICKS FROM THE PROS

focusing on earnings growth among unloved stocks

GROWTH OF $10,000 FOR FUND AND PEER GROUP

OAKWX

$17,016 WORLD STOCK

BILL NYGREN AND DAVID HERRO OAKMARK GLOBAL SELECT (OAKWX)

G R O O M I N G B Y S U S A N H E Y DT ( C A R P E N T E R ) A N D C A R O L W O O D ( N YG R E N )

EXPENSES: 1.13%

MINIMUM: $1,000

FREE TO INVEST in thousands of companies worldwide, Global Select has remarkably few holdings at any given time: about 20 stocks. More impressively, Global Select has beaten two-thirds or more of its peers in seven of the past nine years (it launched in 2006). To make their selections, managers Bill Nygren and David Herro look for stocks selling at a steep discount to the price they believe a buyer expecting a reasonable return would pay for the company. The managers also screen for ﬁrms that have a combined earnings growth rate and dividend yield that’s at least equal to the market’s average (about 7% today) and management teams focused on pershare growth. The fund is currently invested about 40% in the U.S. and 60% abroad. Low interest rates, slow growth in emerging markets, and the strong dollar are overall headwinds. But looking out over the next three to ﬁve years, the managers aren’t worried. “We don’t think these trends should persist,” Nygren says.

5-YEAR ANNUALIZED RETURN: 10.4%

10-YEAR: N.A.

$13,949 ’11

’12

$62.25 P/E RATIO: 12.1 Since AIG’s 2008 government bailout, the global insurer has shifted priorities. In place of growth at any cost, AIG is getting leaner. In October, for example, it said it was pulling back in Central America and

’14

’15

will improve. In fact, analysts estimate that proﬁts will jump 19.5% in 2016.

THE PICKS AMERICAN INTERNATIONAL GROUP (AIG)

’13

Japan. The trimming, says Nygren, should improve the company’s return on equity (a measure of proﬁtability). AIG’s stock trades at an inexpensive 80% of book value (a company’s net worth). As the legacy of AIG’s bad business continues to fade, Nygren says earnings

Nygren scours the world for only 20 stocks.

DAIMLER (DDAIY) $84.25 P/E RATIO: 10.6 Volkswagen’s emissions scandal and slow growth in emerging markets weighed on stocks of auto companies in 2015. But Nygren says that Germany’s Daimler is resilient. Third-quarter sales of its Mercedes-Benz cars rose 18% from the year before, thanks in part to strong U.S. demand. And cost cutting helps: From January through September, earnings per share rose 13% year over year.

TE CONNECTIVITY (TEL) $64.25 P/E RATIO: 15.3 Nygren likes the oftoverlooked TE Connectivity, which makes sensors and connectors used in cars, industrial products, and communication systems. In 2015, TE sold a subsidiary for $3 billion, earmarking almost all of that for stock buybacks to boost earnings per share. And demand is rising. TE forecasts 2016 automotive sales up 3% to 5% (ignoring exchange rates).

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finding bargains in energy stocks and industrials

GROWTH OF $10,000 FOR FUND AND PEER GROUP

CAAPX

$17,899 MIDCAP BLEND

JOHN ROGERS AND TIMOTHY FIDLER ARIEL APPRECIATION (CAAPX) EXPENSES: 1.12%

MINIMUM: $1,000

5-YEAR ANNUALIZED RETURN: 11.3%

10-YEAR: 7.7%

helicopters don’t ﬂy. And Bristow is reducing its

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’11

’12

’13

’14

’15

like drill bits and blades, have fallen 51% since December 2013, a result of low commodity prices; of the firm’s sales, 44% are to mining and energy firms. Kennametal was run inefficiently, says Fidler, operating too many factories. But under a new CEO, the company is slimming down. The managers value the stock at $36—a conservative figure, says Rogers, given the potential for bigger profits, especially if industrial spending picks up.

KKR & CO. (KKR) $15.75 P/E RATIO: 6.1

reliance on the energy market: It recently agreed to provide civilian search-andrescue services for the U.K. Analysts expect profits to rise 33% in the fiscal year ending March 2017, but Fidler says Bristow is already a deal: “The market value of their helicopter fleet alone is $50 per share.”

KENNAMETAL (KMT) $25.75 P/E RATIO: 15.0 Shares in Kennametal, which makes small industrial parts

As money flows into alternative investments, KKR, a private equity firm with $98.7 billion in assets, can benefit. Investors worry that it’s getting harder for KKR to find bargain companies to buy, but Rogers counters that it has diversified with international and real estate funds. It’s also returning cash to shareholders. Last year, KKR (a master limited partnership whose dividend is called a distribution) said it would pay $0.16 per share quarterly starting at the end of 2015, for a current annual yield of 4.1%. Rogers says the stock is worth $30.

GROOMING BY CAROL WOOD (ROGERS AND FIDLER)

REGULAR READERS of MONEY Rogers (right) need no introduction to and Fidler look for Ariel Appreciation, a long40% discounts. time member of the MONEY 50, our list of top mutual and exchange traded funds (see page 104). John Rogers, in charge since 2002, and co-manager Timothy Fidler, who joined the fund in 2009, invest in the stocks of 25 to 45 midsize companies. The fund’s fiveyear return beats those of more than 70% of its peers. To execute their winning formula, the managers buy when shares trade at a 40% discount to their estimate of a firm’s private market value, or the price a business would fetch if put up for sale. THE PICKS And though the bull market hits its seventh anniversary in March, the BRISTOW GROUP (BRS) two say they have no trouble find$26.50 P/E RATIO: 10.1 ing bargains. “There is still a lot of You need to believe in an pessimism out there keeping stock oil-price rebound to invest prices down,” Rogers says. in energy firms these Industrials and energy are two days—but not so to buy this sectors where the mood has been stock, say Rogers and Fidler. particularly gloomy—and where Bristow flies helicopters Rogers and Fidler are hunting. for the global offshore oil “You hear talk of an earnings reindustry, taking workers cession in industrials and the disto and from rigs. Clients tress in energy,” Fidler says. “But have cut spending, but the within those sectors are names company gets 60% of its worth owning.” contracts’ value even if its

$16,342

PICKS FROM THE PROS

THE PICKS TJX COMPANIES (TJX) $70.75 P/E RATIO: 19.6

Jones keeps her eye on the North American consumer.

tracking big trends that benefit consumers

firms that are leaders in their markets and add value to customers’ BUFFALO LARGE CAP (BUFEX) lives. “You have the wind at your back when a product is a good deal EXPENSES: 0.96% MINIMUM: $2,500 for a customer,” she says. Jones 5-YEAR ANNUALIZED RETURN: 12.3% also favors companies that can 10-YEAR: 7.8% generate impressive returns on their investments and build their GROWTH OF $10,000 FOR FUND AND PEER GROUP business in North America, where BUFEX she believes economic expansion $18,254 is sound. And overarching everything are 26 long-term growth trends that guide all investment LARGE GROWTH $17,722 decisions at Buffalo Funds, from changing demographics to health care costs. “By focusing on these ’11 ’12 ’13 ’14 ’15 trends, we’ll hopefully be invested in companies that are less impacted by business cycles,” Jones says. ELIZABETH JONES, who joined BufSo far the approach is workfalo Large Cap in 2007, buys stocks ing. Jones owns stocks of no more of large companies with strong than 45 companies at a time, and growth potential, using a strategy the fund’s five-year return beats that she has fine-tuned in recent those of 53% of its peers. years. For one, Jones screens for

ELIZABETH JONES

SEND COMMENTS ON THESE PROS’ PICKS TO letters@moneymail.com.

Online retailers threaten the business of department stores. But Jones says TJX, owner of off-price retailers such as T.J. Maxx and Marshalls, is well protected. “People like to buy name brands at a discount and in real time,” she argues. Home products make up as much as a quarter of revenue, and TJX has beneﬁted from the housing market recovery. Analysts forecast proﬁt growth of 10% in 2016, compared with mid-single-digit growth at best for other department stores.

CHIPOTLE MEXICAN GRILL (CMG)

$548.00 P/E RATIO: 32.2 This chain’s stock fell hard in 2015, a result of slower same-store sales growth and an E. coli outbreak. But Jones says people still want to eat healthy, and Chipotle, which touts organic ingredients and responsibly raised meats, feeds that demand. As for growth, Chipotle could as much as double its store count in the U.S., says Bradley Angermeier, a Buffalo analyst. The impact of E. coli on sales will go away

in a year at the latest, he thinks. Plus, the company is “just beginning to dip its toe overseas,” he says. Its 22 restaurants outside the U.S. represent 1% of Chipotle’s total locations.

AKORN (AKRX) $35.75 P/E RATIO: 15.2 Last year this genericdrug maker revealed it had overstated 2014 revenue and pretax income by about $35 million—a discrepancy linked to drugcompany acquisitions. Akorn’s stock is down 37% since then. A new chief ﬁnancial officer joined in October, but a corrected 2014 report won’t arrive before March. That makes the stock a risk, but Jones notes that Akorn has not restated its cash balance—a better indication, she says, that its business is sound. Akorn specializes in producing generic versions of hard-tomake drugs, and prospects are good. Last year, Akorn got the government okay to sell 11 new drugs, and the company has another 78 products awaiting approval. Analysts expect earnings to jump 21% in 2016.

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GREAT FUNDS FOR THE LONG RUN

Looking to fill a starring role in your investment portfolio? The MONEY 50, our list of the best mutual and exchange-traded funds, puts the spotlight on outstanding performers with staying power.

By TAYLOR TEPPER

Illustrations by MARLY GALLARDO

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AS THE GO-NOWHERE MARKET of 2015 winds down, you’re probably feeling disappointed by the returns of your fund portfolio. The typical core stock fund delivered double-digit returns for three years running, but was on track to close December flat for the year. Bond returns also stalled. At times like these it’s important to remember that staying the course is still a winning strategy. That’s the guiding philosophy behind the MONEY 50, our list of the best mutual and exchange-traded funds (ETFs). We refuse to chase after chart-topping performers, which typically fizzle out. Instead, we favor Steady Eddie funds, which are more likely to give you solid returns over the long term. History shows that this approach is the surest way to reach your financial goals.

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Since the MONEY 50 list is built to last, you can expect few changes from year to year. But this time around we made a major tweak: We added three tilted index ETFs, better known as smart-beta funds, which enable you to lean more heavily toward particular investing styles at a lower cost than hiring an active manager. To make room, we dropped three lagging actively managed funds. Still, the MONEY 50 mostly remains the same. The core of our list is the building-block category—14 index funds or ETFs that mirror market benchmarks. These funds should make up the bulk, or all, of your portfolio. We also have a one-decision option, which provides broad diversiﬁcation in a single fund. And we include a select group of active funds run by long-tenured managers. As always, all the funds are low cost, which gives you the best shot at the returns you need to meet your goals.

enter smart-beta stars If you’ve heard of smart beta, you may have wondered, What makes it so smart? Much like regular index funds, smart-beta ETFs mirror a particular benchmark. (The term “beta” is jargon for stock market risk, while “smart beta” is simply Wall Street’s marketing spin.) Unlike traditional indexes, which invest in companies based on market capitalization, these ETFs hold assets based on factors such as valuation and company size. Some may hold equal weightings of a benchmark’s stocks, while others favor bargain-priced shares. Research suggests that tilting your portfolio toward factors that outperform may enable you to beat the market. Many investors are using smart-beta funds as a cheaper alternative to traditional actively managed funds, which typically underperform their benchmarks. The three funds we’re adding to the MONEY 50 charge no more than 0.38%. “Strategic beta, which is lower cost than active management, is a sensible way to go,” says Morningstar research director Paul Kaplan.

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LOW FEES

% O.9

Average expense ratio for actively run MONEY 50 stock funds

VS.

% 1.3 average stock fund

SOURCE: Morningstar

(For more about smart beta, see page 118.) A smart-beta strategy isn’t necessarily smarter than regular indexing, however. Just as with actively managed funds, you may end up out of step with the market, often for long periods. Most people should limit their stake to no more than 20% of their portfolio. Three tilted indexes were on our list already: PowerShares FTSE RAFI U.S. 1000 ETF (PRF), PowerShares International Dividend Achievers ETF (PID), and SPDR S&P Dividend ETF (SDY). Here’s what we’re adding. PowerShares S&P 500 High Quality (SPHQ). It’s hard to ﬁnd an ETF that is pickier than this one, which buys only shares of companies with balance sheets strong enough to be rated A– or better by S&P. Case in point: The fund holds 132 of the largest U.S. companies but not a single share of Apple, which carries a B+ rating. Overall, its technology stake is just 6%, vs. 21% for the S&P 500, while it holds a hefty 27% in industrial companies. With its focus on consistent dividend payers, the ETF has been less risky than its large-cap peers. Over the past ﬁve years, its returns beat 96% of its rivals. WisdomTree MidCap Dividend (DON) . Most dividend-paying stock funds hold shares of companies paying a yield higher than the S&P 500. The WisdomTree approach is to build indexes based on the dollar amount per

WHAT ARE YOUR GO-TO FUNDS? LET US KNOW AT letters@moneymail.com.

THE MONEY 50

LONG TENURE

We’re dropping Delafield (DEFIX), Weitz Hickory (WEHIX), and Berwyn (BERWX), which have lagged

11.5

their peers badly over the past three, ﬁve, and 10 years. All three are bargain-hunting, or value funds, which is an investing style that has been out of favor. The managers have outperformed in the past, but our smart-beta funds are a better bet for future returns. We’re not suggesting that you sell now if you own them. But it’s time to start considering other options.

YEARS

Average tenure for a MONEY 50 manager

VS.

funds under review

5.9

share the companies pay out in dividends. The portfolio leans toward bargain-priced, midsize stocks—its holdings carry an average market capitalization of $6 billion. DON ranked in the top 25% of its category in three of the past five years, and it recently paid a yield of 2.4%. WisdomTree SmallCap Dividend (DES). This ETF holds dividend-paying companies, but with a focus on smaller firms. So it’s riskier than its midcap sibling. But the ETF has held up relatively well in down years, while its five-year returns rank in the top 40% of its category.

The MONEY 50 is all about the long term. So we do give poor performers time to improve. But persistent laggards are placed on our watch list, as are those with manager changes. Two funds merit closer scrutiny, but there’s no need to make any moves now: Wasatch Small Cap Growth (WAAEX): Jeff Cardon, who’s been at the helm since 1986, is stepping down as lead manager. Co-manager J.B. Taylor has been around for three years, but we are waiting to see how the transition goes. Royce Opportunity (RYPNX): Royce has delivered lousy returns over the past two years. It also charges a relatively high fee of 1.15%.

YEARS

Average tenure for all fund managers SOURCE: Morningstar

how to use the money 5O

A few core index funds can cover all the asset classes you need, but you may prefer to customize your mix. GO SIMPLE, CHEAP, AND DIVERSIFIED Vanguard REIT

ADD A VALUE TILT TO YOUR PORTFOLIO

Vanguard Total Intl. Bond

10%

Vanguard Total Intl. Stock

Vanguard REIT

10%

15%

Total expenses:

Vanguard Total Intl. Bond

10%

Total expenses:

0.18%

OR BET ON A FEW ACTIVE MANAGERS

0.20%

Vanguard Total Bond Market

30% Vanguard Total Intl. Stock

20%

Schwab Total Stock Market

30%

Vanguard Total Bond Market

30%

Schwab Total Stock Market

25%

WisdomTree SmallCap Dividend

PowerShares S&P 500 High Quality

Vanguard Total Intl. Stock

Vanguard REIT

10%

15% Schwab Total Stock Market

10%

Total expenses:

0.29%

25%

Oakmark Intl.

Vanguard Total Intl. Bond

Vanguard Total Bond Market

20%

Ariel Appreciation

Dodge & Cox Income

10%

INVESTOR’S GUIDE 2016

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TOOLS

THE MONEY 5O Use our list of recommended mutual and exchange-traded funds to construct a portfolio that’s built to last.

buildingblock funds These funds and ETFs, which offer you exposure to big chunks of both the U.S. and foreign stock and bond markets, should be used for the core part of your portfolio that you’ll hold for years. Because you’re seeking broad market exposure, low-cost diversified index funds are your best bet.

FUND NAME (TICKER)

STYLE

ANNUAL EXPENSES (% OF ASSETS)1

% TOTAL RETURN 20152

FIVE YEARS3

MINIMUM INITIAL INVESTMENT

LARGE-CAP Schwab S&P 500 Index (SWPPX)

BLEND

Schwab Total Stock Market Index (SWTSX)

0.09

3.5

13.6

$100

0.09

2.8

13.3

100

MIDCAP/SMALL-CAP iShares Core S&P Mid-Cap ETF (IJH)

0.12

1.2

11.8

N.A.

iShares Core S&P Small-Cap ETF (IJR)

0.12

2.0

13.1

N.A.

FOREIGN Fidelity Spartan International (FSIIX)

LARGE BLEND

Vanguard Total International Stock (VGTSX) Vanguard FTSE All-World ex-U.S. Small-Cap (VFSVX)

0.20

1.1

4.4

2,500

0.22

–2.1

2.2

3,000

SMALL/MID BLEND

0.37

1.6

2.6

3,000

EMERGING MARKETS

0.33

–13.1

–4.0

3,000

REAL ESTATE

0.26

0.1

11.7

3,000

Vanguard Total Bond Market Index (VBMFX)

INTERMEDIATE TERM

0.20

0.5

3.0

3,000

Vanguard Short-Term Bond Index (VBISX)

SHORT TERM

0.20

1.0

1.3

3,000

INFLATION-PROTECTED

0.20

–1.2

2.4

3,000

Vanguard Emerging Markets Stock (VEIEX)

SPECIALTY Vanguard REIT Index (VGSIX)

BOND

onedecision funds Don’t want to put together a portfolio on your own? Then use one of these professionally managed funds that hold a diversified mix of stocks and bonds.

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Vanguard Inﬂation-Protected Securities (VIPSX) Vanguard Short-Term Inﬂation-Protected Sec. ETF (VTIP) Vanguard Total International Bond Index (VTIBX)

Fidelity Balanced (FBALX)

0.10

0.0

N.A.

WORLD

0.23

0.8

N.A.

3,000

BALANCED

2,500

0.56

2.2

9.7

Fidelity Global Balanced (FGBLX)

0.99

0.0

5.0

2,500

Vanguard Wellington (VWELX)4

0.26

1.7

9.8

3,000

0.66

1.3

7.9

2,500

0.18

0.6

8.9

1,000

T. Rowe Price Retirement Funds (STOCKS/BONDS) Example: 2020 Fund (TRRBX) 62%/38%

TARGET DATE

Vanguard Target Retirement (STOCKS/BONDS) Example: 2035 Fund (VTTHX) 82%/18%

NOTES: 1Net prospectus expense ratios were used. 2Total return ﬁgures are as of Dec. 4. 3Five-year returns are annualized. 4Shares available only through fund company. 54.25% sales load. N.A.: Not available or not applicable. ETFs do not have a minimum initial investment. SOURCES: Lipper and fund companies

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THE MONEY 50

fund lingo

HOW TO READ THE TABLES

custom funds

Supplement your core holdings with these funds to tilt your portfolio toward certain kinds of stocks and bonds, diversify more broadly, or play a hunch.

LARGE-CAP

Invests in shares of ﬁrms with stock market values, or market capitalizations, of $10 billion or more SMALL-CAP and MIDCAP

Invest in smaller companies SPECIALTY

Invests in assets that don’t move in sync with the broad stock or bond market

FUND NAME (TICKER)

STYLE

ANNUAL EXPENSES (% OF ASSETS)1

% TOTAL RETURN 20152

FIVE YEARS3

MINIMUM INITIAL INVESTMENT

LARGE-CAP Dodge & Cox Stock (DODGX)

0.52

–1.4

13.1

PowerShares FTSE RAFI U.S. 1000 ETF (PRF)

0.39

–0.6

12.7

N.A.

Sound Shore (SSHFX)

0.92

–1.7

12.6

10,000

BLEND

0.29

3.1

14.4

N.A.

GROWTH

0.63

6.6

14.3

2,000

0.72

13.1

16.2

2,500

1,000

PowerShares S&P 500 High Quality Portfolio (SPHQ) Primecap Odyssey Growth (POGRX)

VALUE

T. Rowe Price Blue Chip Growth (TRBCX)

$2,500

MIDCAP TARGET DATE

Provides exposure to a mix of stocks and bonds appropriate for your age—and gradually grows more conservative over time BALANCED

Offers you exposure to a mix of stocks and bonds, but doesn’t grow more conservative over time VALUE

Looks for stocks that are selling at bargain prices GROWTH

Focuses on companies with fast-growing earnings BLEND

Owns both growth- and value-oriented stocks SHORT TERM

Owns bonds that mature in about two years or less INTERMEDIATE TERM

Owns bonds that mature in two to 10 years MULTISECTOR

Can buy foreign or domestic bonds of any maturity

Ariel Appreciation (CAAPX)

BLEND

1.12

–2.0

12.2

WisdomTree MidCap Dividend (DON)

VALUE

0.38

0.5

13.7

N.A.

GROWTH

0.89

4.6

12.3

2,500

2,000

T. Rowe Price Diversiﬁed Mid-Cap Growth (PRDMX)

SMALL-CAP Royce Opportunity (RYPNX)

1.15

–8.5

7.9

Vanguard Small-Cap Value ETF (VBR)

0.09

–0.8

12.0

N.A.

WisdomTree SmallCap Dividend (DES)

0.38

–2.7

11.5

N.A.

GROWTH

1.21

2.3

10.3

2,000

DIVIDEND

0.55

–14.9

2.3

N.A.

0.35

0.7

12.7

N.A.

0.97

2.9

11.6

10,000

Wasatch Small Cap Growth (WAAEX)4

SPECIALTY PowerShares International Dividend Achievers ETF (PID) SPDR S&P Dividend ETF (SDY) Cohen & Steers Realty (CSRSX)

Owns bonds whose value at least keeps pace with the consumer price index

REAL ESTATE

SPDR Dow Jones International Real Estate ETF (RWX) iShares North American Natural Resources ETF (IGE)

0.59

–2.1

5.9

N.A.

NATURAL RESOURCES

0.48

–19.0

–3.9

N.A.

FOREIGN Oakmark International (OAKIX)4 Vanguard International Growth (VWIGX) T. Rowe Price Emerging Markets Stock (PRMSX)

FOREIGN LARGE BLEND

0.95

–1.6

6.6

1,000

FOREIGN LARGE GROWTH

0.47

2.2

4.5

3,000

EMERGING MARKETS

1.24

–8.4

–2.7

2,500

INTERMEDIATE TERM

0.44

0.0

3.8

2,500

0.45

0.4

3.7

2,500

SHORT TERM

0.20

1.2

2.1

3,000

BOND Dodge & Cox Income (DODIX) Fidelity Total Bond (FTBFX) Vanguard Short-Term Investment Grade (VFSTX) iShares iBoxx $ Investment Grade Corp. Bond (LQD) Loomis Sayles Bond (LSBRX) Fidelity High Income (SPHIX)

INFLATION-PROTECTED

VALUE

Vanguard Intermediate-Term Tax-Exempt (VWITX) Vanguard Limited-Term Tax-Exempt (VMLTX) Templeton Global Bond (TPINX)5 Fidelity New Markets Income (FNMIX)

CORPORATE

0.15

–0.4

5.1

N.A.

MULTISECTOR

0.91

–5.3

4.5

2,500 2,500

HIGH YIELD

0.72

–3.0

4.8

MUNI NATL. INTERMEDIATE

0.20

2.3

4.3

3,000

MUNI NATL. SHORT

0.20

1.1

1.7

3,000

WORLD

0.90

–1.9

3.1

1,000

EMERGING MARKETS

0.90

1.9

5.0

2,500

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THE RIGHT WAY TO INVEST FOR COLLEGE Your children’s education is one of your family’s most important expenses. Make sure your portfolio has the right mix of risk and reward to carry you through to graduation.

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By IAN SALISBURY

Photographs by BILL DIODATO

INVESTOR’S GUIDE 2016

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HEN PUTTING AWAY money for retirement, you probably have a pretty good idea of the basics: Start early, pick a balanced, low-cost portfolio of stocks and bonds, and aim to spend it down judiciously over time. But when you turn to what’s probably your second-biggest investing goal—funding your child’s college education—the challenge gets far more, well, challenging. As with retirement, you have a big nut to come up with: The sticker price on a four-year education is now $176,000 at a typical private college ($78,000 in state at the average public school), according to the College Board. And it could be more than $400,000 for private college by the time today’s newborns turn 18.

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% 5

The annual rise in public college costs over the past decade, according to the College Board.

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than recent returns on a typical bond fund. So what’s a parent to do? To get where you have to go, you’ll need to max out your tax advantages, pick a smart portfolio approach, and resist the temptation to put it all on autopilot. Here is a step-by-step investment plan to follow, from diapers to freshman dorm.

put tax breaks to work College investors have one key thing in common with their retirement counterparts: access to a tax-advantaged account that can amplify savings growth. In a 529 savings plan, your investments grow tax-free and can be withdrawn tax-

P R O P ST Y L I N G B Y L I N D E N E L ST R A N

But unlike the case with retirement, your investing time frame is much shorter, both for amassing the funds (18 years, vs. 30 or 40) and for spending them down (four to six years per kid instead of decades). “It’s like the difference between landing a plane at an airport and landing on an aircraft carrier,” says New York City financial planner David Mendels. That requires a Goldilocks investment approach that is hard to get just right. You want a hefty helping of stocks, particularly when kids are young, to generate growth, but enough bonds later on to ensure that your money is intact when you need it. Go too heavy on risky assets at the wrong time, and face big losses— as some parents discovered during the financial crisis, when the supposedly conservative plans they had set up for their teens fell as much as 30%, according to Morningstar. But if you gorge on bonds, your savings will fall short; while tuition inflation has eased over the past decade, even the more modest 5% increases are higher

INVEST FOR COLLEGE

free, as long as the money goes to tuition or other qualified higher-education costs, like books or housing. Nearly every state sponsors its own 529s, with different investment options and, in some cases, tax breaks that supplement federal tax benefits. Most common are state income tax deductions, although a few offer tax credits. You can shop around for a plan with the best combination of investment offerings and low fees— but by going out of state, you may lose any tax breaks available to residents. The first decision for parents, then, is to pick the right plan—which in turn means weighing the quality of the investment options against the tax benefits you might earn by staying in state. “Not all plans are created equal,” says

IF YOU AREN’T PAYING ATTENTION TO YOUR MIX, YOU COULD END UP TOO AGGRESSIVE.” –KEVIN REARDON, financial planner in Pewaukee, Wis.

Dublin, Ohio, financial planner Mark Beaver. You have a broad menu of investment options. Almost every state has a prepackaged, age-based portfolio that shifts over time from a heavier stock allocation to more bonds and cash; in most cases this should be your starting point. About half of age-based plans also let you vary your risk level, choosing more conservative or aggressive approaches. And almost every state has some do-it-yourself options, although choices range from plain-vanilla index funds to actively managed funds. Plans generally let you move your money among different options, so these à la carte choices can be a good way to tinker around the edges of your account. If you’re going it alone, be aware that you can switch allocations only twice a year. There are also adviser-sold 529 plans—but if you’re not working with an adviser already, don’t seek one out for this purpose alone. You’ll wind up paying extra to get the adviser’s services, says Andrea Feirstein, a 529 plan consultant: “The extra cost eats into your returns.” When deciding whether to stay in state, use the rule of thumb offered by Morningstar analyst Janet Yang: If the tax benefit is worth more than 5% of your initial investment, it typically trumps the costs of even an expensive plan. In that case your best bet is to stay put. To run the numbers yourself, start by figuring out the dollar value of your state’s tax perk. If your state taxes income at, say, 5%, but caps the deduction at $2,000, the tax savings for a $2,400 annual contribution—$200 a month— would be $100. Then compare that figure against your total contribution; in this case the tax benefit is 4.2%. (Morningstar has done the math for you; see the map on page 115 for a state-by-state breakdown.) For instance, Indiana offers in-state investors a 20% tax credit on up to $5,000 in annual college savings. The plan’s fees are comparatively high—0.49% on the option designed for small children, more than twice what the cheapest plans in the country charge. But for Hoosiers it’s the best deal going, Yang says: The tax benefits are “too generous to ignore.”

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You should also stay in state if your state has a tax beneﬁt that’s at or below 5% but your state’s plan is a winner. By contrast, if you live in a state that offers no tax perks (or has no income tax)—or is one of the six that delivers tax beneﬁts no matter where you invest—you might as well shop around for a plan with a good slate of investment options and low costs. The Utah Educational Savings Plan, administered by index fund giant Vanguard, has among the lowest fees in the country and gets top marks from both Morningstar and Savingforcollege.com, a website that rates plans. Others that get gold stars from Morningstar—with low fees, solid track records, and well-regarded parent companies—are Alaska’s T. Rowe Price College Savings Plan, the Maryland College Investment Plan (also run by T. Rowe), and Nevada’s Vanguard 529 College Savings Plan. The math gets trickier in a handful of states,

the prepaid tuition gamble Some states offer ways to pay now for college credits later. But there can be big drawbacks. Pay tomorrow’s tuition at today’s prices? That sounds like a great deal—and it might be, but only under certain circumstances. Here’s what you need to understand about prepaid 529 plans.

HOW THEY WORK: In about a dozen states you can essentially buy educational credits now, at current prices or with an added premium, for future use at in-state institutions.

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There’s also one plan, at privatecollege529.com, that lets you prepay for about 300 private schools.

THE CAVEATS: You usually can invest only in your own state, says Joe Hurley, founder of Savingforcollege.com, which keeps a database of the plans’ ﬁnancial details. And while there are bailout options if your child wants to study elsewhere, you may get back only your own investment plus inﬂation.

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NOT ALL PLANS ARE CREATED EQUAL.” –MARK BEAVER, financial planner in Dublin, Ohio

BEST FOR: Parents who are pretty conﬁdent that their kids will end up at State U should do ﬁne. Florida and Maryland residents also get generous cash outs if your kid heads elsewhere, letting you walk away with about what you would have spent on in-state tuition. WHEN TO SKIP: For most out-ofstaters, of course, prepaid plans are a nonstarter. And if you think your child is going to be aiming for Yale rather than the local public university, steer clear. A traditional 529 is a safer investment bet.

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including Louisiana, New Mexico, and Mississippi, that offer middling tax benefits but lack an outstanding plan. In general, while your children are young (under 10, say), your best bet is to invest in the lowest-cost plan, according to Yang. Once you’re investing for a teenager, however, reach for the tax perks. That’s because while the tax benefits kick in the first year you make the investment, that’s a one-time benefit. Over time, high fees will act like a drag on your investment, sapping returns. So a 2.5% tax break is like getting a 2.5% bonus in the first year—but as the years go by and investing costs play an increasingly important role, that bonus gets diluted. The same thing happens every year. By year 10, the tax benefit is giving an annualized boost of just 0.19%, according to a Morningstar analysis that assumes 6% returns. One final thing to keep in mind: When setting up the account, title it in your name. That way, colleges will count the money as a “parental asset,” meaning those dollars will lower your child’s potential financial aid by a maximum of 5.64% a year. An account in a child’s name, by contrast, would be assessed more severely, at 20% a year.

sprint out of the gate With plenty of years to ride out market swings and capture the beneﬁts of compounding, this is the best time to get a jump on future college costs. So as a brand-new parent, you have three key goals to aim for: Start immediately, put aside as much as you can manage, and load up on stocks. The average age-based 529 plan starts off for newborns with about 80% invested in stocks, according to Morningstar; aggressive options average almost 90%, but conservative ones have just under 50%. At this point a conservative approach carries its own risks. Many 529 plans started offering these options after the 2008–09 crisis,

should you stay or should you go ?

To pick the right 529 plan, start by looking at your state’s tax benefits and local investment options. IT DEPENDS: Both your tax break and your plan are so-so. For young kids, high fees will erode any tax perk, so shop around. When kids are older, take the tax break.

SHOP AROUND: You’ll get a tax break no matter where you invest, or your state offers no tax beneﬁts.

STAY PUT: Your state’s tax perks are excellent, or you’ve got adequate tax beneﬁts and a good plan.

States whose plans get a gold star from Morningstar.

Wash.

N.H. Mont.

Vt.

N.D.

Maine

Minn.

Ore. Idaho

Wis.

S.D.

Mich.

Wyo. Nev.

Pa.

Iowa

Neb. Utah

Ill. Colo.

Calif.

Ind.

Ohio

N.C.

Ark.

S.C. Miss.

Alaska

Texas

Md. D.C. Stay Put

Tenn. N.M.

Va.

Ky.

Mo.

N.J. Del.

W.Va. Kans.

Okla.

Ariz.

Mass. R.I. Conn.

N.Y.

Ala.

Ga.

La. Fla.

Hawaii

NOTES: MONEY analysis based on Morningstar data. Calculations assume a $100,000 household income and $2,400 a year in college savings. A good plan is deﬁned as any getting a gold, silver, or bronze star from Morningstar, which considers fees, performance, and other factors; broker-sold plans were not considered. Morningstar does not evaluate Rhode Island’s plan because of a business relationship.

when investors panicked and pulled out funds at the market bottom, explains Mark Kantrowitz, author of several books on scholarships and financial aid. Yet research shows some of the downsides of playing it too safe. A study by Vanguard assumed that a college saver invested $1 a year, adjusted for inflation, each year for 18 years; it then ran market simulations to gauge the impact of various allocations. Investors in the aggressive track, which starts with 100% in stocks and introduces bonds in year four, ended up with a median $37 across the different scenarios. Conservative investors ended up with a median $26. What was surprising: The most conservative investors were also the most likely to finish the simulation with $18 or less. Over the 18-year time frame, stocks’ superior earning power

simply tended to make up for any losses. While most parents are best off using an age-based plan at least as a foundation, there are a handful of exceptions. You may want to be even more aggressive, for instance. Some advisers and analysts suggest starting out with a 100% allocation to equities if you have the temperament to ride out big market swings. Fees can be another key factor. Virginia residents, for instance, should stay in state to get the generous $4,000 tax deduction. But the state’s most aggressive age-based plans charge investment fees of 0.65% to 0.73% a year because they use active stock pickers. So Virginia residents could slash costs by creating their own allocations using the plan’s à la carte menu of index funds. (If you’re taking a DIY approach, the table on page 117 offers two allocation models.)

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shift gears for tweens Once your kids enter their second decade, it’s time to recalibrate. You still need stocks for growth, but you’ll want to shift at least some money into bonds for stability. How much should you pull back? Check your account statements for a gauge. You may be ahead of the game—perhaps you’ve been saving a ton, or maybe you’ve gotten a boost from a booming stock market or a surprise gift from a grandparent. Like some parents of tweens now, you might even be casting a nervous eye at equities as the stock market edges toward the eighth year of a bull run. If you’re doing well, shift more money out of an age-based portfolio and into bonds. “Capitalize on the gains you’ve made,” says Walpole,

going beyond 529 s There are other ways to save for college costs. Some offer more flexibility, although none have quite the same advantages.

roth iras UPSIDE: These are geared for retirement, but you can withdraw contributions, which are shielded from ﬁnancial aid calculations, at any time. DOWNSIDE: Couples can contribute only $11,000 a year—and that should really be earmarked for retirement.

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ugmas and utmas UPSIDE: Little. DOWNSIDES: These accounts, which predate 529s, are essentially obsolete for new savers.Tax benefits are limited: Only the first $1,050 of withdrawals are tax-free; the next $1,050 are taxed at the child’s rate, and the rest are taxed at your rate.You can’t change beneficiaries.

coverdells UPSIDE: Even more

YOU DON’T NEED TO SAVE THE FULL STICKER PRICE OF COLLEGE.” —MARK KANTROWITZ, author of several books on financial aid

ﬂexible than 529s, the Coverdell allows you to pay for college or private school.

DOWNSIDE: The maximum contribution is $2,000 per student per year.

savings bonds UPSIDE: Interest earned on Series I and EE savings bonds is exempt from federal income tax when used to pay for higher education. DOWNSIDE: With college costs still rising, you’ll generally need better returns than what you can get here; roughly 1.6% for I bonds, and 0.1% for EE.

Mass., financial adviser John R. Power. “You’re in good shape.” Yet a more likely scenario is that you still need to try to earn as much as you can. If so, the benefits of being at least somewhat aggressive still outweigh the risks. “For a lot of people, the risk you won’t get there in the first place is bigger than the risk that the market will go down,” says Mendels. Morningstar’s aggressive portfolio recommends 80% in stocks for 10-year-olds. At this point “it makes sense to be a little more aggressive,” says David Blanchett, the researcher at Morningstar’s investment management arm who helped develop its recommended glide path. After all, Blanchett says, college has one fail-safe that retirement doesn’t: Even though you should never plan to borrow heavily or tap your other savings to cover a shortfall, you’ll still have that option in a pinch. Note that you’ll still need the stomach to ride out a bear market; those 20% declines take place almost every five years, on average. And remember, because of the trading restrictions, you can’t expect to game the market by jumping out of stocks at the first sign of trouble. Then again, a 10-year-old has roughly a decade before most of the money needs to be spent, and while stocks can be volatile, they also have tended to snap back quickly. In the worst five-year stretch since the Depression, 1970-74, stocks finished down only about 2.4% a year, according to Ibbotson Associates. Over 10-year periods after the 1930s, they’ve never lost money. Most age-based 529 plans have already made some adjustments. But because there is a huge variety of approaches, this is a good time to make sure your plan is behaving the way you want it to. For example, Iowa’s plan— a top pick for residents of that state thanks to a tax break that could be worth nearly 9% of your investment—still has 100% in stocks at age 10 for those on the aggressive track. By contrast, Michigan’s aggressive version has already cut stock holdings to 75% by this point. And T. Rowe’s Maryland plan, which offers just a single age-based option, is still

HOW ARE YOU INVESTING FOR RISING COLLEGE COSTS? TELL US: ian.salisbury@moneymail.com

INVEST FOR COLLEGE

two paths to follow

DIY investors can use one of the following portfolio allocation models. PERCENTAGE IN STOCKS

100% 80%

Moderate

99% 74%

Aggressive

92% 82% 67%

70% 58%

53%

45%

34%

28% 11% 0

9 CHILD’S AGE

SOURCE: Morningstar recommended glide paths

more conservative, with 65% equities for 10-year-olds. If your automated plan’s allocation seems wrong for you, don’t be afraid to tweak it. If you’re in good shape but you’re using an aggressive path, check whether your state’s plan has a more conservative allocation. If you’re behind and your age-based plan has only 65% in equities, you could move some money into an index fund to bring your stock allocation higher. This is also a good time for a reality check on your savings goal. Don’t panic if you’re falling short, Kantrowitz says: “You don’t need to save the full sticker price.” A good rule of thumb? Aim to cover a third of the projected cost out of your investments, borrow a third, and pay for the ﬁnal third with any aid grants plus your salary at the time.

ratchet down risk For the ﬁnal years of high school, your 529 portfolio needs to get far more conservative. By the time your child is 16, you will want to have cut

MONEY COLLEGE PLANNER

equities to 20% to 30%, with the balance moved into bonds and cash. Once again, check your age-based account to make sure that it’s in line; if it’s not, shift a portion of your 529 funds to get a more conservative allocation or add a separate money-market or bond fund. “It’s important to track your mix,” says Pewaukee, Wis., financial adviser Kevin Reardon. “If you aren’t paying attention, you could end up too aggressive.” Remember that Vanguard study? One of the few scenarios in which conservative investors—with 100% in bonds and cash in the final years—ended up better off was when there was a massive market plunge in the last two years before a child went to college. Reardon suggests looking at least two years ahead. By the time your child is a junior in high school, have enough money in cash—not just bonds, which can suffer principal losses if rates rise—to cover your expected withdrawals for the first year of college. The following year, double that cash pile. “You’ll be confident you can ride out most downturns,” he says. Until your child enters school, don’t abandon stocks entirely. Despite the risk, you need to keep up with rising prices. A portfolio with 20% in stocks, 50% in cash, and the rest in intermediate-term bonds would have lost only 6% in 2008. Once your child is in school, you can move everything to cash and start spending down the balance. Your aim is to have no money left over—unless you’re ready to start saving for the grandkids.

College-bound students and their parents can get college cost estimates and a savings calculator with the new MONEY College Planner at money .com/colleges. Premium subscribers ($24.95 a year, $14.95 for MONEY subscribers) can also search for schools with generous aid and get access to a scholarship search and matching tool with information on thousands of awards.

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SIX SMART RULES FOR USING TODAY’S HOTTEST ETFs So-called smart-beta funds give you a shot at market-beating returns without sky-high fees. Here’s how they can give your portfolio a lift. By PAUL J. LIM

Illustrations by RICHARD MIA

IT USED TO BE THAT INVESTORS who wanted better results than the market could deliver simply turned to actively managed funds. Yet trying to ﬁnd a consistently good stock picker has proved exceedingly hard—only one in ﬁve has managed to beat the market over the past 10 years, because managers are, well, human and prone to cold spells. Enter smart-beta funds and ETFs. Backed by academic research and good old-fashioned marketing, the fund industry has launched more than 500 portfolios in recent years that offer investors a variety

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of new ways to try to outpace the market. Unlike actively managed funds, smart-beta ETFs don’t handpick the best stocks for any given moment. Instead, they hold baskets of stocks that tilt toward an attribute or “factor,” such as low valuations and low volatility, that has been shown to outperform over time. (The term “beta” refers to the risks attributable to the market, so “smart beta” suggests a more intelligent way of constructing that market.) And because they’re structured as index funds, smart-beta ETFs charge low fees, eliminating a big barrier to beating the market. All this sounds great in theory. And the average smart-beta value fund that’s been around for the past 15 years has beaten the S&P 500 by more than one percentage point annually. But are these funds necessary? And how do you incorporate them into an existing portfolio? To answer that, MONEY gathered several industry experts at a MoneyShow conference at the New York Stock Exchange in November. During that discussion, the panelists identiﬁed these six rules for using smart-beta ETFs.

the case for smart beta These funds have a built-in cost advantage …

… and the three major smart-beta strategies start out with an edge over the broad market.

AVERAGE EXPENSE RATIO

ANNUAL TOTAL RETURN, PAST 15 YEARS

1.31%

m o n e y. c o m

7.9% 5.1%

Smartbeta funds

Active stock funds

Low volatility stocks

Small-cap stocks

High-quality stocks

S&P 500

NOTE: As of Nov. 30. SOURCES: Morningstar, Standard & Poor’s, Ycharts.com

the market, which we should say is a very hard thing to do over a long period of time. If they’re not happy with the active funds they’ve owned, that’s an opportunity for smart beta.” The takeaway: There are several advantages to using smart-beta ETFs in place of an actively managed fund. “For people with actively managed portfolios, smart beta is sort of an opportunity to outperform but to do so in a more systematic way and at a lower cost,” says Robert Nestor, head of smart-beta strategy at the ETF provider iShares. The cost difference alone is striking. The average smart-beta ETF sports an annual expense ratio of just 0.66% of assets under management, half what actively managed stock funds charge on average.

smart beta should take the place of active funds

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8.2%

0.66%

RULE NO. 1

The issue: Because smart-beta ETFs are a type of index fund, conventional wisdom pits them against traditional index funds, such as the Vanguard 500, which buy and hold stocks based on their market capitalization. But if the point of smart beta is to outpace the market, shouldn’t you compare these ETFs with actively managed funds? The advice: “Why do people use smart beta?” asks Luciano Siracusano, chief investment strategist at WisdomTree, which manages smart-beta ETFs. “Why are they interested? I think it’s the same aspiration for why people would use an active manager. Some are using it because they think they might be able to beat

9.3%

PA N E L I ST S LUCIANO SIRACUSANO, chief investment strategist at WisdomTree ROBERT NESTOR, head of smart-beta strategy for iShares BEN JOHNSON, director of global ETF research at Morningstar

J A N U A R Y/ F E B R U A R Y 2 0 1 6

RULE NO. 2

walk, don’t run, to these funds The issue: Investors have plowed $132 billion into smart-beta funds and ETFs since the start of 2014, while equity funds in general have seen

TODAY’S HOTTEST ETFs

the need for patience But despite their long-term outperformance, core smart-beta strategies like value and small stocks are cyclical and can lag for several years. PRICE CHANGE Growth stocks

Value stocks

Large stocks

60%

300%

30%

200%

100%

–30%

–60%

Small stocks

RULE NO. 3

tilt in moderation

–100%

Jan. 2007

Jan. ’14

years have gone into strategic-beta ETFs with a Morningstar rating of three stars or greater,” Johnson adds, noting that star ratings are based on risk-adjusted past results relative to those of peers. (Morningstar says star ratings should be used only as a ﬁrst step in evaluating a fund and should not dictate the funds to buy now.) “It’s performance chasing 2.0.”

Jan. 1990

net redemptions. Yet history shows that chasing what’s hot isn’t an intelligent way to invest. The advice: “Control your own behavior,” says Morningstar’s Ben Johnson. “Smart outcomes depend almost entirely on smart use. Smart beta is not super green algae. It’s not as if we’ve created a super multivitamin that’s going to go up when the rest of the market’s going down. “Also, there is a huge gap between the returns that funds produce and the returns that investors experience,” he says. “It’s not that investors pick bad funds. They just use them poorly. They buy high and sell low repeatedly.” The takeaway: Behavior matters. Take value investing, which is probably the most familiar smart-beta factor. Between 1991 and 2013, valuestock funds returned 9.4% a year, beating the 9% returns for the S&P 500, according to Research Affiliates. Yet during this same stretch, value-fund investors earned just 8.1% on average because they bought only after value came into favor and sold once the strategy turned cold rather than holding on for the long run. Sadly, there are signs smart-beta investors are falling into the same old trap. “When we look at the data, 80%-plus of assets and 80%plus of investors’ new money over the past three

Jan. ’00

SMART OUTCOMES DEPEND ALMOST ENTIRELY ON SMART USE.” –BEN JOHNSON, director of global ETF research, Morningstar

The issue: Smart beta sounds great, but at last count there were more than 300 factors identified by various academics as capable of beating the market. Which should you choose and how do you fit them into a portfolio? The advice: “There are hundreds of factors, but there are only a handful—about five—that have demonstrated what we would call reward over the long term,” says Nestor. “There’s value and low volatility. The other three that we’ve researched and that are supported by sustained academic evidence are high-quality stocks, momentum, and size,” he adds, referring to shares of small companies with potential for growth. But once you settle on a factor, don’t let it overtake your existing strategy. “I would rarely recommend anyone dismantle their portfolio,” Nestor says. “There are some obvious costs that you wouldn’t want to trigger—most notably taxes, particularly after a roughly sevenyear rally for stocks. But for those who feel like they want to step into smart beta, I would think about replacing maybe 10% or 20% of your primary asset allocation.” The takeaway: When in doubt, invest in the portfolio tilts you know, such as value, which favors beaten-down or overlooked stocks that trade at lower prices based on the company’s underlying earnings, sales, or assets. Vanguard recently looked at various attributes and found that since 1926 a stock’s price/earnings ratio has been the most predictive of future long-term performance, with low P/Es leading to high

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returns and vice versa. Similarly, history has shown that over the very long term, you’re better off investing in shares of budding small companies, which have returned 12.2% annually, over blue-chip stocks, which gained two percentage points less a year over time. For top smart-beta ETFs in these areas, see our MONEY 50 list of recommended funds and ETFs on page 104.

RULE NO. 4

diversify your tilts The issue: You may truly believe in a portfolio tilt toward, say, undervalued stocks. But if you’re stuck in a period of underperformance like the 1990s, value investing can test your faith. The advice: Don’t hitch your entire portfolio to a single strategy. Siracusano notes that the smart-beta factors that generate excess returns “do it at different points in the economic cycle. It’s like an oscillating wave. It’s not as if every one of them is outperforming the market at the same time.” Nestor agrees. “The ﬁve factors that I think are most widely focused on by academics are highly cyclical,” he says. “The issue for most of us is to be able to identify what part of the cycle we are in. There are some sophisticated investors that try to do that, but most people will combine a few factors that have low correlations to one another or will look to buy a recipe of sorts, which is what you see with the proliferation of multifactored strategies.” The takeaway: Diversiﬁcation makes a lot of sense, but make sure you’re combining factors that aren’t correlated. The simple way to do that is through a multifactor ETF. If you’re diversifying factors on your own, pair strategies like value and momentum, “which are kind of the peanut butter and jelly of factors,” says Johnson. While value seeks outof-favor stocks, momentum favors securities that have recently done well on the theory that successful investments have a tendency to outperform for a considerable time. “One tends to

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m o n e y. c o m

zig when the other zags, so when you put those two together, you smooth out those oscillations.” Another classic pairing is small stocks with high-quality shares. While small-company stocks tend to outperform the market in the first two-thirds of a bull-market cycle, highquality stocks tend to do well in the ﬁnal phase of a rally (see story on page 62).

% O.7 is the average expense ratio for smart-beta ETFs, half of what you’ll pay for the typical actively managed stock fund.

RULE NO. 5

stick with your picks for at least a decade The issue: While it’s true that value stocks, small-company shares, and other portfolio tilts have historically outpaced the market, it’s also true that those strategies can lag for years. The advice: “If you want to invest in value, you’ve got to stick to value through thick and

TELL US HOW YOU TILT YOUR PORTFOLIO AND WHY: letters@moneymail.com

TODAY’S HOTTEST ETFs

tween 1989 and 1999. And while small stocks have beaten large ones by two points a year since 1926, they also underperformed blue-chip shares in the 1920s, 1950s, 1980s, and 1990s. Another lesson: Smart beta isn’t for everyone. If you’re saving for a down payment on a home that’s ﬁve years off or your kid’s college tuition that’s seven years away or if you’re more than halfway into retirement, you won’t have enough time to recover from these lulls.

THESE FACTORS GENERATE EXCESS RETURNS NOT EACH AND EVERY YEAR, BUT OVER 3O YEARS, 4O YEARS, 5O YEARS.”

RULE NO. 6

–LUCIANO SIRACUSANO, chief investment strategist, WisdomTree

thin, and your time frame should be at a minimum 10 years,” says Johnson. The same holds true for any other factor you want to take advantage of, be it high-quality companies with strong balance sheets or shares of small but rapidly growing companies. “It’s important to understand these anomalies you’re looking to exploit,” Johnson says. “What market environments will those particular factors fare well in? Which market environments will they fare poorly in? Understand that those excess returns have shown up in the historical data, but they showed up over periods that are many multiples of most of our attention spans.” Siracusano agrees: “These factors are generating excess return not each and every year, but over 30 years, 40 years, 50 years relative to the S&P.” The takeaway: Smart-beta funds are to be bought and held, not traded like a speculative stock. Case in point: Value funds frustratingly underperformed the rest of the market be-

when in doubt, do nothing The issue: For decades, investors who have relied simply on traditional low-cost index funds to match the market’s returns have met their investment goals with little fuss. If you’re in that camp, do you really need to incorporate this new strategy into your mix? The advice: If you’re interested in smart beta, “you should understand the investment case and you should feel conﬁdent in the underlying principles,” says Nestor. “Or else stick with traditional market-cap-weighted indexing. You are always going to do great with the market-cap-weighted index in my mind if you hold it for long,” he says. “You’re going to outperform 70% and 80% of managers.” But not every investor is content with matching the market, Nestor adds. Some “are trying to manage some volatility, or they feel compelled to try to outperform, or they’re at a point in their life that other factors, such as income, are really important. All three of those buckets are very neatly met by smart-beta approaches.” The takeaway: Don’t get hung up on the term “smart.” At Morningstar, they refer to these funds as strategic beta. “Yeah, there are some smart elements to it,” says Johnson. But there are also smart elements to traditional index investing. And recognizing that may be the smartest thing you do.

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THE FUND REPO the year in stock funds

As in 2014, international stock funds saw the most fresh cash … Foreign

… though U.S. stocks held up as international markets fell. 1-year total return

Cumulative inﬂows: U.S. Emerging markets

U.S. stocks

$250 billion

10-year annualized return Foreign stocks

1-year total return

Emergingmarkets stocks

7.0%

Large-cap stocks

1.3%

Wary investors pulled out of U.S. stock funds.

$50 billion

–$50 billion

Average active fund return

Average index fund return

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m o n e y. c o m

Fast-growing biotech and pharma stocks propelled small-caps.

stock funds vs. etfs

Index funds in all categories lost a bit less …

-1.22 % -1.15

1.8%

0.3%

–15.1%

Nov. ’15

passive vs. active

7.3%

Big energycompany losses washed out consumer stock gains.

A recession in Brazil and a crash in China surprised investors. July ’15

Small-cap stocks

–1.9%

March ’15

Midcap stocks

6.9%

1.3%

$150 billion

10-year annualized return

4.6%

Nov. ’14

In an overall flat year, small-cap stocks had an edge on larger peers …

… and investors left actively managed portfolios behind. Cumulative inﬂows:

Active

Stock ETFs took in almost 10 times as much money as mutual funds did.

Index

Cumulative inﬂows:

$600 billion

$250 billion

$300 billion

$150 billion

$50 billion

J A N U A R Y/ F E B R U A R Y 2 0 1 6

ETFs

–$200 billion Nov. ’14

Open-end

March ’15

July ’15

Nov. ’15

Nov. ’14

March ’15

July ’15

Nov. ’15

Additional reporting by Rebecca Sesny and Sophia Tewa

A scorecard for the best-performing and biggest mutual and exchange-traded funds of the past year.

PLUS 126 » Which funds did the best 131 » How the biggest funds performed

the year in bond funds

… and growth stocks dominated, driven by tech …

Most fixed-income funds eked out modest gains in 2015, with the exception of those investing in riskier debt.

4.5%

1-year total return

10-year annualized return

6.1%

Value returns (large-cap)

4.6%

4.2%

3.7%

Growth returns (large-cap)

–1.8%

… while low-expense stock funds beat costly ones.

0.7%

0.3%

2.2% 0.2% Returns on highexpense funds

Anticipation of higher interest rates weighed on bond prices.

Returns on lowexpense funds

investors vs. funds Overall, investors trailed funds because of poor market timing.

-1.10 % -1.86

Government bonds

–3.4% Investmentgrade bonds

High-yield bonds

Investors gained a narrow advantage by holding longer-term bonds …

Average fund return

Average investor return

0.2%

Short-term government

0.8%

Intermediate government

The energy-heavy high-yield-bond sector was hit by falling oil prices.

1.1%

Long-term government

U.S. bonds overall

… and skipping taxes. 2.6% Taxablebond returns

Munibond returns

–1.4%

NOTES: Data as of Nov. 30, 2015. “Investor” returns are dollar weighted, account for trading, and measure how the average investor performed. High- and low-expense funds are top and bottom quartiles for expenses among large-cap U.S. funds. Investors vs. funds and passive vs. active ﬁgures include both stock and bond funds. SOURCE: Morningstar

INVESTORâ&#x20AC;&#x2122;S GUIDE 2016

PA R T 2

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THE BEST PERFORMERS These mutual and exchange-traded funds topped their categories over the past year, five years, and 10 years, as of early December.

LARGE-CAP U.S. STOCK

Funds holding big, household-name consumer stocks (think Starbucks and Nike) got a boost in 2015. Over the longer haul, indexing the tech-heavy Nasdaq 100 was the way to win. 2015

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

Polen Growth Investor (POLRX)

Prudential Jennison Select Growth A (SPFAX)1

15.2

Dunham Focused Large Cap Growth A (DAFGX)1

14.5

EXP. RATIO

RANK FUND NAME (TICKER)

10 YEARS RETURN

Shelton Nasdaq-100 Index Direct (NASDX)

1.24

PowerShares QQQ ETF (QQQ)

17.7

1.40

USAA Nasdaq-100 Index (USNQX)

17.2

16.9% 1.25%

Rydex Nasdaq-100 Investor

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

Alger Spectra A (SPECX)1

0.20

PowerShares QQQ ETF (QQQ)

11.5

0.20

0.59

Shelton Nasdaq-100 Index Direct (NASDX)

11.4

0.49

11.0

1.24

17.8% 0.49%

12.3% 1.52%

16.6

1.26

Alger Capital Appreciation A (ACAAX)1

16.2

0.72

USAA Nasdaq-100 Index (USNQX)

10.9

0.59

1.21

John Hancock Large Cap Equity A (TAGRX)1

10.6

1.06

1.21

AMG Yacktman Focused Service (YAFFX)

10.5

1.26

10.5

1.26

Janus Forty A (JDCAX)

14.2

0.92

Prudential Jennison Growth A (PJFAX)1

13.8

1.05

T. Rowe Price Blue Chip Growth (TRBCX)

16.0 16.0

(RYOCX)

EXP. RATIO

TCW Select Equities I (TGCEX)

13.7

0.86

Saratoga Large Capitalization Growth I (SLCGX)

Morgan Stanley Institutional Advantage A (MAPPX)

13.7

1.20

AB Large Cap Growth A (APGAX)1

Harbor Capital Appreciation Investor (HCAIX)

13.6

1.03

ClearBridge Large Cap Growth A (SBLGX)1

15.8

1.15

Rydex Nasdaq-100 Investor (RYOCX)

T. Rowe Price Blue Chip Growth (TRBCX)

13.1

0.72

Investment House Growth (TIHGX)

15.7

1.48

Pimco RAE Fundamental PLUS A (PIXAX)1

10.4

1.20

1.21

Goldman Sachs Large Cap 10 Growth Insights A (GLCGX)1

0.96

SunAmerica Focused Dividend 10 Strategy A (FDSAX)1

10.2

1.07

Saratoga Large Capitalization 10 Growth I (SLCGX)

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m o n e y. c o m

13.0

J A N U A R Y/ F E B R U A R Y 2 0 1 6

15.5

THE FUND REPORT

MIDCAP U.S. STOCK

Growth-oriented funds in this category have eclipsed their bargain-seeking peers over the long and short term, in part because of soaring health care and consumer stocks. 2015

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

10 YEARS

RANK FUND NAME (TICKER)

RETURN

Eaton Vance-Atlanta Capital SMID-Cap A (EAASX)1, 2

BlackRock Mid-Cap Growth Equity A (BMGAX)1

T. Rowe Price Mid-Cap Growth (RPMGX)2

8.4

Oppenheimer Discovery Mid Cap Growth A (OEGAX)1

8.2

Tocqueville Opportunity Fund (TOPPX)

7.7

1.30

Buffalo Discovery (BUFTX)

14.6

Buffalo Discovery (BUFTX)

7.4

1.01

Eaton Vance-Atlanta Capital SMID-Cap A (EAASX)1, 2

14.5

PowerShares S&P MidCap Low Volatility (XMLV)

7.3

0.25

Madison Mid Cap Y (GTSGX)

14.1

PowerShares DWA Nasdaq Momentum (DWAQ)

6.9

0.60

T. Rowe Price Mid-Cap Growth (RPMGX)2

Guggenheim S&P MidCap 400 Pure Growth ETF (RFG)

iShares Morningstar Mid-Cap ETF (JKG)

9.1

10 MFS Mid Cap Growth A (OTCAX)1

Eaton Vance-Atlanta Capital SMID-Cap A (EAASX)1, 2

11.5

1.23

15.6

1.55

Buffalo Discovery (BUFTX)

10.5

1.01

14.9

0.27

T. Rowe Price Mid-Cap Growth (RPMGX)2

10.3

0.77

1.01

American Century Heritage Investor (TWHIX)

10.2

1.00

1.23

Goldman Sachs Small/Mid-Cap Growth A (GSMAX)1

10.2

1.33

1.15

Aston/Fairpointe Mid Cap N (CHTTX)2

9.8

1.11

14.0

0.77

Victory Sycamore Established Value A (VETAX)1

9.8

1.04

13.8

0.25

HSBC Opportunity A (HSOAX)1

9.7

1.65

13.8

1.26

(HAGAX)1

9.6

1.19

RETURN

EXP. RATIO

Eventide Gilead N (ETGLX)

17.3

0.77

Aquila Three Peaks Opportunity Growth A (ATGAX)1

1.36

6.8

0.35

6.5

1.20

Vanguard Strategic Equity

Putnam Equity Spectrum A

(PYSAX)1

EXP. RATIO

1.38

(VSEQX)

RETURN

Primecap Odyssey Aggressive 12.5% 0.63% Growth (POAGX)2

Primecap Odyssey Aggressive Growth (POAGX) 2

1.39

RANK FUND NAME (TICKER)

12.2% 1.23%

EXP. RATIO

18.2% 0.63%

Eagle Mid Cap Growth A

SMALL-CAP U.S. STOCK

Growth also led among small-company funds in 2015, largely thanks to a boom in biotech and pharmaceuticals. That’s in contrast with 2014, when small-cap value stocks reigned. 2015

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

10 YEARS

RANK FUND NAME (TICKER)

RETURN

RANK FUND NAME (TICKER)

Nationwide Geneva Small Cap Growth A (NWHZX)1

Oberweis Emerging Growth (OBEGX)

12.6

1.49

PNC Small Cap A (PPCAX)

16.0

1.29

Janus Triton T (JATTX)

Brown Capital Management Small Company (BCSIX)2

11.9

1.26

PNC Multi-Factor Small Cap Core A (PLOAX)1

16.0

1.15

15.8

1.26

15.5

1.50

13.4% 1.57%

T. Rowe Price New Horizons (PRNHX)2

EXP. RATIO

16.8% 0.79% 1

Brown Capital Management Small Company (BCSIX)2 2

11.8

0.93

T. Rowe Price New Horizons (PRNHX)2

10.8

0.79

Fidelity Small Cap Discovery (FSCRX) 2

10.7

1.06

Homestead Small-Company Stock (HSCSX)

10.5

0.91

10.3

1.51

10.3

0.98

Aberdeen Small Cap A (GSXAX)

11.4

1.47

Brown Capital Management Small Company (BCSIX)2

Oberweis Micro-Cap (OBMCX)

10.8

1.71

Virtus Small-Cap Sustainable Growth A (PSGAX)1

15.1

1.15

Natixis Vaughan Nelson Small Cap Value A (NEFJX) 1, 2

15.0

1.29

Lord Abbett Developing Growth A (LAGWX) 1, 2

13.1% 1.26%

PNC Small Cap A (PPCAX)

10.5

1.29

PNC Multi-Factor Small Cap Growth A (PLWAX)1

Brown Advisory Small-Cap Growth (BIASX)

10.2

1.14

Emerald Growth A (HSPGX)1

PNC Multi-Factor Small Cap Growth A (PLWAX)1

10.1

1.15

Buffalo Emerging Opportunities (BUFOX)2

14.7

1.47

Janus Venture T (JAVTX)

10.1

0.93

Nationwide Small Company Growth A (NWSAX)1

9.7

1.34

Janus Venture T (JAVTX)2

14.6

0.93

RS Small Cap Equity A (GPSCX)1, 2

10.0

1.27

1.22

SSgA Dynamic Small 10 Cap N (SVSCX)2

1.10

Hancock Horizon Burkenroad 10 Small Cap A (HHBUX)1

9.9

1.35

Fidelity Advisor Small Cap 10 Growth A (FCAGX)1

9.0

14.6

NOTES: Returns as of Dec. 4, 2015; ﬁve- and 10-year returns are annualized. When possible, investor share classes are used. Funds with total assets less than $15 million excluded. 1Indicates that the fund carries a sales load. 2 Closed to new investors. SOURCE: Lipper, 877-955-4773

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INTERNATIONAL STOCK

Though global stocks suffered overall in 2015, funds holding tech and health care companies galloped ahead. So did those that captured Japan’s market rally—and avoided the hardest-hit Chinese shares. 2015

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

RANK FUND NAME (TICKER)

Market Vectors ChinaAMC SME-ChiNext ETF (CNXT)

WisdomTree Japan Hedged Health Care (DXJH)

Deutsche X-trckrs Hrvst CSI 500 Chi A-Shares Small Cap ETF (ASHS)

28.5

0.80

Vanguard Health Care (VGHCX)

22.0

T. Rowe Price Global Technology (PRGTX)

23.7

0.91

T. Rowe Price Global Technology (PRGTX)

Matthews Japan Investor (MJFOX)

22.0

1.03

iShares MSCI Denmark Capped ETF (EDEN)

21.2

0.53

Morgan Stanley Institutional Global Opportunity A (MGGPX)1

20.5

iShares MSCI Ireland Capped ETF (EIRL)

19.4

KraneShares CSI China Internet ETF (KWEB)

19.4

PowerShares Golden Dragon China (PGJ)

18.6

36.9

Hartford Healthcare A (HGHAX)1

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

T. Rowe Price Global Technology (PRGTX)

Fidelity Select Pharmaceuticals (FPHAX)

13.5

0.79

0.34

Janus Global Life Sciences T (JAGLX)

13.4

0.93

21.0

0.91

Oberweis China Opportunities (OBCHX)

12.9

1.93

Fidelity Select Pharmaceuticals (FPHAX)

20.3

0.79

Vanguard Health Care (VGHCX)

12.6

0.34

Eaton Vance Worldwide Health Sciences A (ETHSX)1

19.3

1.46

Hartford Healthcare A (HGHAX)1

12.2

1.33

1.45

Putnam Global Health Care A (PHSTX)1

18.9

1.14

11.8

1.12

0.48

iShares MSCI Ireland Capped ETF (EIRL)

18.4

0.48

11.4

1.13

0.71

Invesco Global Health Care A (GGHCX)1

17.7

1.08

11.3

1.46

0.70

iShares Global Healthcare ETF (IXJ)

17.3

0.47

11.3

1.39

RETURN

EXP. RATIO

0.48

Janus Global Life Sciences T (JAGLX)

RETURN

48.2% 0.66%

10 YEARS EXP. RATIO

25.4% 0.93% 23.1

1.33

14.5% 0.91%

Matthews India Investor

(MINDX) Matthews China Investor

(MCHFX) Eaton Vance Worldwide Health Sciences A (ETHSX)1 Kinetics Medical No Load

(MEDRX)

BALANCED

These funds can own a mix of both stocks and bonds. In keeping with the trend among pure equity funds, growth-oriented balanced portfolios fared best this past year. 2015

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

T. Rowe Price Capital Appreciation (PRWCX)2

EXP. RATIO

6.9% 0.70%

RANK FUND NAME (TICKER)

10 YEARS RETURN

T. Rowe Price Capital Appreciation (PRWCX)2

12.2

EXP. RATIO

RANK FUND NAME (TICKER)

T. Rowe Price Capital Appreciation (PRWCX)2

1.15

Columbia Balanced Z (CBALX)

12.3% 0.70%

PSI Strategic Growth A (FXSAX)

4.3

2.21

Wells Fargo Advantage Index Asset Allocation A (SFAAX)1

Sector Rotation (NAVFX)

4.2

2.11

Dodge & Cox Balanced (DODBX)

10.7

0.53

Aston/Montag & Caldwell Balanced N (MOBAX)

4.1

1.36

American Funds American Balanced A (ABALX)1

10.6

0.59

Eaton Vance Balanced A (EVIFX)1

4.0

1.05

Columbia Balanced Z (CBALX)

10.2

0.84

Sit Balanced (SIBAX)

3.9

1.00

American Funds Growth Portfolio A (GWPAX)1

3.8

0.75

Value Line Asset Allocation

(VLAAX) Franklin Corefolio Allocation A (FTCOX)1

8.0

0.84

(SVBAX)1

7.8

1.23

Janus Balanced T (JABAX)

7.7

0.83

Waddell & Reed Advisors Continental Income A (UNCIX)1

7.6

1.15

Ivy Balanced Fund A (IBNAX)

7.5

1.11

Vanguard Wellington (VWELX)

7.4

0.26

7.1

0.25

7.1

0.73

7.1

1.21

10.1

1.19

10.0

1.06

John Hancock Balanced A

Vanguard Wellesley Income

Fidelity Puritan (FPURX)

3.3

0.56

Fidelity Puritan (FPURX)

9.9

0.56

American Funds American Balanced A (ABALX)1

3.3

0.59

Vanguard Wellington (VWELX)

9.8

0.26

0.84

J.P. Morgan Investor 10 Growth A (ONGAX)1

1.18

Tributary Balanced 10 Institutional (FOBAX)

10 Columbia Balanced Z (CBALX)

128

m o n e y. c o m

3.3

J A N U A R Y/ F E B R U A R Y 2 0 1 6

9.8

8.7% 0.70%

(VWINX) Mairs & Power Balanced

(MAPOX)

THE FUND REPORT

U.S. GOVERNMENT BOND

Over the long term, government-bond funds have led their category by sticking with Treasuries. But this year many were rewarded for reaching for yield (and taking on risk) with mortgage securities. 2015 RANK FUND NAME (TICKER)

American Funds Mortgage A (MFAAX)1

American Funds U.S. Gov. Securities A (AMUSX)1

FIVE YEARS RETURN

EXP. RATIO

2.0% 0.70% 1.7

0.65

RANK FUND NAME (TICKER)

10 YEARS RETURN

Pimco 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ)

Vanguard Extended Duration Treasury Index ETF (EDV)

9.2 8.1

EXP. RATIO

RETURN

EXP. RATIO

Wasatch-Hoisington U.S. Treasury (WHOSX)

Pimco Long-Term U.S. Government A (PFGAX)1

6.9

0.85

0.70

iShares 20+ Year Treasury Bond ETF (TLT)

6.9

0.15

Vanguard Long-Term Treasury (VUSTX)

6.7

0.20

6.6

0.51

12.9% 0.16% 12.4

RANK FUND NAME (TICKER)

0.12

7.6% 0.70%

Voya GNMA Income A (LEXNX)1

1.7

0.92

Wasatch-Hoisington U.S. Treasury (WHOSX)

Victory INCORE Fund for Income A (IPFIX)1

1.7

0.96

iShares 20+ Year Treasury Bond ETF (TLT)

iShares 3-7 Year Treasury Bond ETF (IEI)

1.7

0.15

Fidelity Spartan Long-Term Treasury Bond Index (FLBAX)

7.4

0.10

T. Rowe Price U.S. Treasury Long-Term (PRULX)

Fidelity Spartan Intermediate Treasury Bond Index (FIBAX)

1.7

0.10

SPDR Barclays Long Term Treasury ETF (TLO)

7.4

0.10

Dreyfus U.S. Treasury Long Term (DRGBX)

6.3

0.68

Vanguard Intermediate-Term Gov. Bond Index ETF (VGIT)

1.6

0.12

Vanguard Long-Term Gov. Bond Index ETF (VGLT)

7.3

0.12

iShares 7-10 Year Treasury Bond ETF (IEF)

5.6

0.15

Dupree Intermediate Gov. Bond Series (DPIGX)

1.6

0.51

Vanguard Long-Term Treasury (VUSTX)

7.3

0.20

Putnam U.S. Government Income Trust A (PGSIX)1

5.1

0.87

Schwab Intermediate-Term U.S. Treasury ETF (SCHR)

6.9

0.85

Fidelity GNMA (FGMNX)

4.9

0.45

6.7

0.68

10 Pimco GNMA A (PAGNX)

4.9

0.90

RETURN

EXP. RATIO

10 Wright Current Income (WCIFX)

1.6

0.09

Pimco Long-Term U.S. Government A (PFGAX)1

1.6

1.00

Dreyfus U.S. Treasury Long Term (DRGBX)

INVESTMENT-GRADE BOND

This year, bond funds that invested in shorter-term debt—taking a more conservative approach to the risk of an interest rate hike—stood out among funds holding high-quality bonds. 2015 RANK FUND NAME (TICKER)

FIVE YEARS RETURN

EXP. RATIO

4.4%

1.51%

Miller Intermediate Bond A (MIFAX)1

Guggenheim BulletShares 2020 Corporate Bond ETF (BSCK)

2.4

Pimco Low Duration Active ETF (LDUR)

2.2

iShares iBonds Dec 2020 Corporate ETF (IBDL)

5 6 7

iShares iBonds Mar 2020 Corp. ex-Financials ETF (IBCD) FlexShares Credit-Scored U.S. Corp. Bond Index Fund (SKOR) iShares iBonds Mar 2020 Corporate ETF (IBDC)

Guggenheim BulletShares 2019 8 Corporate Bond ETF (BSCJ) iShares iBonds Mar 2023 Corp. 9 ex-Financials ETF (IBCE) Guggenheim Limited 10 Duration A (GILDX)1

RANK FUND NAME (TICKER)

10 YEARS RETURN

EXP. RATIO

RANK FUND NAME (TICKER)

Delaware Extended Duration Bond A (DEEAX)1

0.24

Vanguard Long-Term Investment-Grade (VWESX)

7.7

0.22

0.51

Vanguard Long-Term Bond Index ETF (BLV)

7.1

0.10

7.0

0.12

6.3

0.20

7.9% 0.96%

Delaware Extended Duration Bond A (DEEAX)1 Calvert Long Term Income A

8.3% 0.96% 7.3

1.25

Pimco Investment Grade Corporate Bond A (PBDAX)1

6.9

0.91

Vanguard Long-Term Investment-Grade (VWESX)

6.8

0.22

Delaware Corporate Bond A (DGCAX)1

6.5

0.94

6.3

0.69

(CLDAX)1

2.2

0.10

Vanguard Long-Term Corp. Bond Index ETF (VCLT)

2.0

0.10

iShares 10+ Year Credit Bond ETF (CLY)

6.0

0.85

Metropolitan West Total Return Bond M (MWTRX)

5.8

0.80

Lord Abbett Income A (LAGVX)1

6.2

0.78

6.0

0.79

6.0

0.80

5.9

0.49

2.0

0.22

BlackRock Investment Grade Bond A (BLADX)1

2.0

0.10

Eaton Vance Core Plus Bond A (EBABX)1

5.6

1.03

Natixis Loomis Sayles Core Plus Bond A (NEFRX)1

5.5

0.67

PACE Strategic Fixed Income P (PCSIX)

1.9

0.24

Western Asset Corporate Bond A (SIGAX)1

1.9

0.10

Payden Corporate Bond (PYACX)

0.85

Pimco Investment Grade 10 Corporate Bond A (PBDAX)1

1.8

5.4

0.91

TCW Core Fixed Income I

(TGCFX)

J A N U A R Y/ F E B R U A R Y 2 0 1 6

m o n e y. c o m

129

INVESTOR’S GUIDE 2016

PA R T 2

TOOLS

HIGH-YIELD BOND

As was the case in 2014, funds holding “junk” bonds performed poorly overall in 2015. But funds owning investments with shorter maturities were able to buck the general downward trend in high-yield debt. 2015

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

Market Vectors Emer. Mkts. High Yield Bond ETF (HYEM)

PowerShares Global Short Term High Yield Bond (PGHY)

Aquila Three Peaks High Income A (ATPAX)1

3.7

iShares Emerging Markets High Yield Bond ETF (EMHY)

EXP. RATIO

4.9% 0.40%

RANK FUND NAME (TICKER)

Lord Abbett High Yield A

(LHYAX)1

10 YEARS RETURN

EXP. RATIO

6.7% 0.94%

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

Fidelity Capital & Income (FAGIX) 8.2% 0.72%

Fidelity Advisor High Income Advantage T (FAHYX)1

6.7

1.01

AllianceBernstein High Income A (AGDAX)1

8.2

0.89

1.29

Waddell & Reed Advisors High Income A (UNHIX)1

6.6

1.01

Ivy High Income A (WHIAX)1

7.6

0.94

3.3

0.50

Eaton Vance High Income Opportunities A (ETHIX)1

6.6

0.89

(LHYAX)1

7.4

0.94

Guggenheim BulletShares 2016 Hi-Yld. Corp. Bond ETF (BSJG)

3.2

0.43

Fidelity Capital & Income (FAGIX)

6.5

0.72

Principal High Yield A (CPHYX)1

7.3

0.93

Buffalo High Yield (BUFHX)

3.0

1.03

(RYHDX)1

6.4

1.55

Fidelity Advisor High Income Advantage T (FAHYX)1

7.0

1.01

7.0

0.95

4.0

0.35

Rydex High Yield Strategy A Vanguard High-Yield Corporate (VWEHX)

6.3

0.23

BlackRock High Yield Bond A (BHYAX)1

6.3

1.07

Columbia High Yield Bond A (INEAX)1

7.0

1.07

0.94

RidgeWorth Seix High Income A (SAHIX)1

6.9

0.99

1.09

Waddell & Reed Advisors High Income A (UNHIX)1

6.9

1.01

RETURN

EXP. RATIO

Artisan High Income (ARTFX)

2.9

1.11

Wells Fargo Advantage ShortTerm High-Yield Bond A (SSTHX)1

2.4

0.83

MainStay Short Duration High Yield A (MDHAX)1

2.1

1.01

Ivy High Income A (WHIAX)1

6.2

10 TCW High Yield Bond I (TGHYX)

2.1

0.55

10 Voya High Yield Bond A (IHYAX)1

6.2

Columbia High Yield Bond A

(INEAX)1

Lord Abbett High Yield A

TAX-EXEMPT BOND

High-yield municipal bonds were one exception to the overall decline in low-quality debt: They actually beat their higher-quality peers. Funds investing in these riskier munis topped their category in 2015. 2015

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

Transamerica High Yield Muni A (THAYX)1

Invesco High Yield Municipal A (ACTHX)1

5.1

Principal Opportunistic Municipal A (PMOAX)1

5.1

Pimco High Yield Municipal Bond A (PYMAX)1

5.0

Pioneer High Income Municipal A (PIMAX)1

4.7

Market Vectors CEF Muni Income ETF (XMPT)

4.6

Oppenheimer Rochester AMT-Free Muni A (OPTAX)1

4.5

MainStay High Yield Municipal Bond (MMHVX)1

4.5

Columbia High Yield Municipal Z (SRHMX)

4.4

m o n e y. c o m

4.3

RANK FUND NAME (TICKER)

10 YEARS RETURN

Nuveen California High Yield Muni Bond A (NCHAX)1

0.93

Nuveen High Yield Municipal Bond A (NHMAX)1

8.9

1.02

Oppenheimer Rochester AMT-Free Muni A (OPTAX)1

8.6

0.85

MainStay High Yield Municipal Bond (MMHVX)1

8.1

0.90

Eaton Vance TABS 5-to-15 Year Laddered Muni Bond A (EALTX)1

7.8

1.43

Franklin California High Yield Municipal A (FCAMX)1

7.8

0.90

Oppenheimer Rochester California Municipal A (OPCAX)1

7.7

0.91

Oppenheimer Rochester National Municipal A (ORNAX)1

7.7

0.67

Eaton Vance High Yield Municipal Income A (ETHYX)1

7.6

0.86

AllianceBernstein High Income 10 Muni Portfolio A (ABTHX)1

5.3% 0.94%

AllianceBernstein High Income 10 Muni Portfolio A (ABTHX)1

130

EXP. RATIO

J A N U A R Y/ F E B R U A R Y 2 0 1 6

EXP. RATIO

Delaware National High-Yield Muni Bond A (CXHYX)1

0.83

Franklin California High Yield Municipal A (FCAMX)1

5.5

0.63

0.90

Northern California Tax-Exempt (NCATX)

5.4

0.46

0.91

Wells Fargo Advantage Muni Bond A (WMFAX)1

5.4

0.75

0.65

Western Asset Managed Municipals A (SHMMX)1

5.3

0.66

0.63

Nuveen All-American Muni Bond A (FLAAX)1

5.3

0.70

0.96

Nuveen California Muni Bond A (NCAAX)

5.2

0.77

0.98

Clearwater Tax-Exempt Bond Fund (QWVQX)

5.2

0.33

0.89

Columbia California Tax-Exempt A (CLMPX)

5.1

0.81

0.86

MFS Municipal High 10 Income A (MMHYX)

5.1

0.69

9.7% 0.85%

7.6

RANK FUND NAME (TICKER)

5.5% 0.85%

THE FUND REPORT

THE BIGGEST

These funds and ETFs had the most money under management in their categories. They are ranked in descending order by total net assets. BOLDFACE RETURNS FOR 2015 INDICATE THAT THE FUND BEAT 50% OF ITS PEER GROUP.

LARGE-CAP U.S. STOCK

MIDCAP U.S. STOCK

These funds usually own stocks of companies worth more than $10 billion.

RANK FUND NAME (TICKER)

2015

These mostly hold stocks of companies valued at $2 billion to $10 billion.

FIVE 10 EXP. YEARS YEARS RATIO

3.6% 13.7% N.A. 0.05%

RANK FUND NAME (TICKER)

2015

FIVE 10 EXP. YEARS YEARS RATIO

Vanguard Mid-Cap Index ETF (VO)

1.2% 12.6% 8.1% 0.09%

Vanguard Extended Market Index ETF (VXF)

–0.2

11.9

8.1

0.10

0.65

Fidelity Low-Priced Stock (FLPSX)

2.3

12.5

8.6

0.79

8.9

0.64

iShares Core S&P Mid-Cap ETF (IJH)

1.2

11.9

8.3

0.12

7.3

0.09

T. Rowe Price Mid-Cap Growth (RPMGX)2

8.4

14.0

10.3

0.77

13.1

7.1

0.58

Fidelity Spartan Extended Mkt. Index (FSEMX)

–0.3

11.7

8.1

0.10

12.4

8.1

0.61

SPDR S&P MidCap 400 ETF (MDY)

1.0

11.7

8.1

0.25

11.7

6.7

0.59

iShares Russell Mid-Cap ETF (IWR)

–0.1

12.4

8.1

0.20

13.6

7.4

0.07

T. Rowe Price Mid-Cap Value (TRMCX)2

–0.8

11.2

8.3

0.80

13.1

6.1

0.52

10 Prudential Jennison Mid-Cap Gro. A (PEEAX)1, 2

–0.3

10.6

8.3

1.05

6.3

14.2

8.6

0.09

11 Vanguard Mid-Cap Value Index ETF (VOE)

0.8

13.5

N.A.

0.09 0.79

Vanguard 500 Index ETF (VOO)

SPDR S&P 500 ETF Trust (SPY)

3.6

13.6

Amer. Funds Growth Fund of Amer. A (AGTHX)1

7.7

13.0

7.5

Fidelity Contrafund (FCNTX)

9.2

13.4

Fidelity Spartan 500 Index (FUSEX)

3.5

13.6

Amer. Funds Washington Mut. Inv. A (AWSHX)1

1.9

American Funds Fundamental Inv. A (ANCFX)1

6.0

American Funds Inv. Co. of Amer. A (AIVSX)1

0.6

iShares Core S&P 500 ETF (IVV)

3.6

10 Dodge & Cox Stock (DODGX)

–1.4

11 Vanguard Growth Index ETF (VUG)

7.3% 0.09

12 Vanguard Windsor II (VWNFX)

–0.6

12.3

6.4

0.36

12 Columbia Acorn Z (ACRNX)

1.5

9.2

7.1

13 Vanguard Primecap (VPMCX)2

4.5

15.1

9.7

0.44

13 Goldman Sachs Mid Cap Value A (GCMAX)1

–6.4

9.8

6.7

1.14

14 T. Rowe Price Growth Stock (PRGFX)

12.4

15.1

9.2

0.68

14 Fidelity Mid-Cap Stock (FMCSX)

0.6

11.7

7.7

0.76

15 PowerShares QQQ ETF (QQQ)

12.4

17.7

11.5

0.20

15 Vanguard Mid-Cap Growth Index ETF (VOT)

1.4

11.6

N.A.

0.09

NOTES: Returns as of Dec. 4, 2015; ﬁve- and 10-year returns are annualized. When possible, investor share classes are used. Multicap funds excluded. 1Indicates that the fund carries a sales load. 2 Closed to new investors. N.A.: Not applicable. SOURCE: Lipper, 877-955-4773

m o n e y. c o m

131

INVESTOR’S GUIDE 2016

PA R T 2

TOOLS

SMALL-CAP U.S. STOCK

These funds typically hold stocks in companies valued at about $2 billion or less.

RANK FUND NAME (TICKER)

2015

FIVE 10 EXP. YEARS YEARS RATIO

–0.4% 11.9% 8.1% 0.09%

Vanguard Small-Cap Index ETF (VB)

iShares Russell 2000 ETF (IWM)

iShares Core S&P Small-Cap ETF (IJR)

2.0

13.1

8.1

Vanguard Small-Cap Value Index ETF (VBR)

–0.8

12.0

7.5

–0.5

10.9

7.0

INTERNATIONAL STOCK These funds hold

shares in foreign companies.

RANK FUND NAME (TICKER)

2015

FIVE 10 EXP. YEARS YEARS RATIO

Vanguard Total Intl. Stock Index ETF (VXUS)

American Funds EuroPaciﬁc Growth A (AEPGX)1

0.12

Amer. Funds Capital Income Builder A (CAIBX)1 –1.8

7.1

5.6

0.59

0.09

Amer. Funds Cap. World Gro. & Inc. A (CWGIX)1

7.8

6.3

0.77 0.64

0.20

–2.0% N.A. 1.6

0.1

N.A. 0.14%

4.4% 5.2% 0.83

T. Rowe Price New Horizons (PRNHX)

7.1

16.8

10.8

0.79

Dodge & Cox International Stock (DODFX)

–7.8

3.8

4.5

Vanguard Small-Cap Growth Index ETF (VBK)

0.0

11.5

8.5

0.09

American Funds New Perspective A (ANWPX)1

7.7

9.9

7.9

0.75

Vanguard Explorer (VEXPX)

–1.4

11.3

7.0

0.53

iShares MSCI EAFE ETF (EFA)

–0.1

4.2

3.3

0.33

Neuberger Berman Genesis (NBGNX)

8.2

1.01

Vanguard FTSE Developed Markets ETF (VEA)

1.9

4.5

N.A.

0.09

Vanguard Health Care (VGHCX)

12.3

4.8

11.3

0.1

12.5

8.8

0.91

12.6

0.34

10 iShares Russell 2000 Growth ETF (IWO)

2.9

12.4

8.2

0.25

10 Vanguard FTSE Emerging Markets ETF (VWO) –13.0 –3.8

4.1

0.15

11 T. Rowe Price Small-Cap Value (PRSVX)

–0.4

9.9

7.1

0.96

11 Harbor International (HIINX)

2.9

5.0

1.12

4.1

13.8

11.8

0.93

12 Oppenheimer Developing Markets A (ODMAX)1, 2 –11.9 –1.5

6.6

1.30

–3.9

9.3

5.6

0.25

13 Oakmark International I (OAKIX)2

–1.6

6.6

6.5

0.95

14 Goldman Sachs Small Cap Value A (GSSMX)

–1.9

11.9

8.0

1.35

14 American Funds Smallcap World A (SMCWX)1

4.4

7.9

7.4

1.07

15 Fidelity Small Cap Discovery (FSCRX)2

–1.6

13.6

10.7

1.06

15 MFS International Value A (MGIAX)1, 2

7.6

10.1

7.5

1.03

T. Rowe Price Small-Cap Stock (OTCFX)

12 Janus Triton T (JATTX)2 13 iShares Russell 2000 Value ETF (IWN) 1, 2

BALANCED

TARGET-DATE

Funds in this category hold a mix of stocks and bonds.

RANK FUND NAME (TICKER)

2015

–2.4

These balanced funds automatically adjust their asset mixes over time.

FIVE 10 EXP. YEARS YEARS RATIO

RANK FUND NAME (TICKER)

2015

FIVE 10 EXP. YEARS YEARS RATIO

0.7% 8.0% 5.7% 0.17%

Amer. Funds Income Fund of Amer. A (AMECX)1 –0.2% 9.0% 6.5% 0.55%

Vanguard Target Retirement 2025 (VTTVX)

Vanguard Wellington (VWELX)

1.7

9.8

7.4

0.26

Vanguard Target Retirement 2020 (VTWNX)

0.7

7.5

N.A.

0.16

Amer. Funds American Balanced A (ABALX)1

3.3

10.6

6.9

0.59

T. Rowe Price Retirement 2020 (TRRBX)

1.3

7.9

6.0

0.66

Franklin Income A (FKINX)1

–5.6

6.1

5.8

0.61

T. Rowe Price Retirement 2030 (TRRCX)

1.8

9.1

6.4

0.72

Vanguard Wellesley Income (VWINX)

2.0

7.9

7.1

0.25

Vanguard Target Retirement 2035 (VTTHX)

0.6

8.9

5.9

0.18

Fidelity Balanced (FBALX)

2.2

9.7

6.7

0.56

Vanguard Target Retirement 2030 (VTHRX)

0.7

8.5

N.A.

0.17

Vanguard Balanced Index (VBINX)

1.9

9.2

6.6

0.23

Vanguard Target Retirement 2015 (VTXVX)

0.7

6.9

5.5

0.16

Fidelity Puritan (FPURX)

3.3

9.9

7.0

0.56

T. Rowe Price Retirement 2025 (TRRHX)

1.6

8.5

6.2

0.69

T. Rowe Price Capital Appreciation (PRWCX)2

6.9

12.3

8.7

0.70

T. Rowe Price Retirement 2040 (TRRDX)

2.1

9.7

6.6

0.75

10 Vanguard STAR (VGSTX)

1.6

8.4

6.3

0.34

10 Vanguard Target Retirement 2040 (VFORX)

0.5

9.1

N.A.

0.18

11 Oakmark Equity and Income I (OAKBX)

–2.3

7.8

7.0

0.74

11 Vanguard Target Retirement 2045 (VTIVX)

0.5

9.1

6.1

0.18

12 Dodge & Cox Balanced (DODBX)

–0.6

10.7

6.1

0.53

12 T. Rowe Price Retirement 2035 (TRRJX)

2 .0

9.4

6.5

0.74

13 John Hancock Lifestyle Balanced A (JALBX)1

0.4

6.3

5.1

1.33

13 Fidelity Freedom 2020 (FFFDX)

1.4

6.3

4.8

0.66

14 Invesco Equity & Income A (ACEIX)1

0.0

9.3

6.3

0.80

14 Vanguard Target Retirement Income (VTINX)

0.6

5.2

0.16

15 John Hancock Lifestyle Growth A (JALGX)1

0.9

7.4

5.1

1.37

15 Fidelity Freedom 2030 (FFFEX)

1.8

7.4

4.9

0.74

132

m o n e y. c o m

J A N U A R Y/ F E B R U A R Y 2 0 1 6

THE FUND REPORT

U.S. GOVERNMENT BONDS

INVESTMENT-GRADE BONDS

These funds hold Treasuries and other government debt.

RANK FUND NAME (TICKER)

2015

Funds in this category invest in debt with low default risk.

FIVE 10 EXP. YEARS YEARS RATIO

RANK RANK FUND NAME FUND(TICKER) NAME (TICKER)

2015

FIVE 10 EXP. YEARS YEARS RATIO

Vanguard GNMA Fund (VFIIX)

1.2% 3.0% 4.8% 0.21%

Vanguard Total Bond Market Index ETF (BND) 0.6% 3.1%

iShares 1–3 Year Treasury Bond ETF (SHY)

0.5

0.6

2.4

0.15

Pimco Total Return A (PTTAX)1

0.6

3.1

5.5% 0.85

Vanguard Total Bond Market II Index (VTBIX)

0.5

3.0

N.A.

0.10

Met West Total Return Bond (MWTRX)

0.1

4.4

6.3

0.69

N.A. 0.07%

J.P. Morgan Short Duration Bond A (OGLVX)1

0.3

0.7

2.4

0.80

iShares 7–10 Year Treasury Bond ETF (IEF)

1.5

4.1

5.6

0.15

Amer. Funds U.S. Gov. Securities A (AMUSX)1

1.7

2.5

3.9

0.65

Vanguard Short-Term Inv.-Grade (VFSTX)

1.2

2.1

3.5

0.20

Vanguard Short-Term Treasury (VFISX)

0.5

0.8

2.7

0.20

Dodge & Cox Income (DODIX)

0.0

3.8

5.2

0.44

Franklin U.S. Government Securities A (FKUSX)1 1.0

2.3

4.1

0.75

Vanguard Short-Term Bond Index ETF (BSV)

1 .0

1.4

N.A.

0.10

iShares 20+ Year Treasury Bond ETF (TLT)

–1.9

8.1

6.9

0.15

Lord Abbett Short Duration Income A (LALDX)

0.9

2.8

4.5

0.59

Fidelity GNMA (FGMNX)

1.1

3.1

4.9

0.45

iShares Core U.S. Aggregate Bond ETF (AGG)

0.6

3.1

4.5

0.08

10 Vanguard Intm.-Term Treasury (VFITX)

1.6

2.7

4.7

0.20

10 Amer. Funds Bond Fund of Amer. A (ABNDX)1

0.6

3.2

3.4

0.62

11 iShares 3-7 Year Treasury Bond ETF (IEI)

1.7

2.3

N.A.

0.15

11 T. Rowe Price New Income (PRCIX)

0.5

3.2

4.8

0.59

0.8

1.1

3.1

0.20

12 J.P. Morgan Core Bond A (PGBOX)1

0.7

3.0

4.7

0.76

12 Vanguard Short-Term Federal (VSGBX)

13 Amer. Funds S/T Bond Fund of Amer. A (ASBAX)

0.6

0.5

N.A.

0.60

13 iShares iBoxx $ Inv. Grade Corp. Bond ETF (LQD) –0.4

5.1

5.5

0.15

14 Fidelity Government Income (FGOVX)

0.6

2.6

4.3

0.45

14 Vanguard Intm.-Term Bond Index ETF (BIV)

1.5

4.2

N.A.

0.10

15 Vanguard Long-Term Treasury (VUSTX)

–1.7

7.3

6.7

0.20

15 Fidelity Total Bond (FTBFX)

0.4

3.7

5.0

0.45

HIGH-YIELD BONDS

TAX-EXEMPT BONDS

These funds hold bonds with lower credit ratings (read: higher risk).

RANK FUND NAME (TICKER)

2015

These funds generally invest in municipal and state-agency debt.

FIVE 10 EXP. YEARS YEARS RATIO

RANK FUND NAME (TICKER)

2015

FIVE 10 EXP. YEARS YEARS RATIO

Vanguard High-Yield Corporate (VWEHX)

0.4% 6.3% 6.3% 0.23%

Vanguard Intm.-Term Tax-Exempt (VWITX)

BlackRock High Yield Bond A (BHYAX)1

–1.9

6.1

7.0

0.95

Vanguard Limited-Term Tax-Exempt (VMLTX)

2.3% 4.3% 4.4% 0.20% 1.1

1.7

2.7

0.20

Amer. Funds Amer. High-Income Trust (AHITX)1 –5.0

3.8

5.4

0.67

Franklin California Tax-Free Income (FKTFX)1

2.7

6.1

4.9

0.58

iShares iBoxx $ Hi.-Yld. Corp. Bond ETF (HYG) –3.4

5.0

N.A.

0.50

Vanguard Short-Term Tax-Exempt (VWSTX)

0.4

0.8

2.0

0.20

SPDR Barclays High Yield Bond ETF (JNK)

–4.4

4.5

N.A.

0.40

Nuveen High Yield Municipal Bond A (NHMAX)1

3.8

8.9

3.8

0.83

Fidelity Capital & Income (FAGIX)

1.2

6.5

8.2

0.72

Franklin Federal Tax-Free Income A (FKTIX)1

1.9

5.3

4.6

0.62

J.P. Morgan High Yield A (OHYAX)1

–2.6

4.8

6.6

1.01

Amer. Funds T/E Bond Fund of Amer. A (AFTEX)1 2.5

5.2

4.4

0.54

MainStay High Yield Corp. Bond A (MHCAX)1

0.5

5.5

6.0

0.99

Vanguard CA Intm.-Term Tax-Exempt (VCAIX)

2.5

4.9

4.4

0.20

Pimco High Yield A (PHDAX)1

–0.6

5.2

6.1

0.91

Vanguard High-Yield Tax-Exempt (VWAHX)

3.3

5.9

4.9

0.20

10 T. Rowe Price High Yield (PRHYX)2

–1.4

5.7

6.7

0.74

10 Vanguard Long-Term Tax-Exempt (VWLTX)

3.1

5.5

4.8

0.20

11 Ivy High Income A (WHIAX)1

–4.0

6.2

7.6

0.94

11 Franklin High Yield Tax-Free Income A (FRHIX)1 2.5

5.8

4.9

0.65 0.93

12 AllianceBernstein High Income A (AGDAX)

–2.4

5.6

8.2

0.89

12 Invesco High Yield Municipal A (ACTHX)

5.1

7.5

5.1

13 Northern High Yield Fixed Income (NHFIX)

–0.6

5.7

6.0

0.81

13 Thornburg Limited Term Municipal A (LTMFX)1

1.3

2.6

3.4

0.71

14 Franklin Templeton High Income A (FHAIX)1

–7.5

3.9

5.7

0.76

14 Bernstein Diversiﬁed Municipal (SNDPX)

1.7

2.7

3.5

0.56

15 Fidelity Series High Income (FSHNX)2

–3.9

N.A.

0.69

15 BlackRock National Municipal (MDNLX)1

2.8

5.7

4.7

0.75

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whereto FLY-FISHING IN SUN VALLEY, THE PEARL OF KETCHUM, IDAHO

goin 2o16 By Stirling Kelso

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A three-course dinner during Restaurant Week

BILTMORE HOUSE WAS ONCE THE LARGEST PRIVATE HOME IN THE U.S. BRITISH COLUMBIA, CANADA

FEBRUARY

Ski for less in British Columbia WHY NOW: The U.S. dollar appreciated 12% vs. the Canadian dollar in 2015, so everything north of the border is effectively on sale.

JANUARY

Explore artsy, eclectic Asheville, N.C. WHY NOW: The distant peaks might be dusted with snow, but January in Asheville is relatively mild, with highs reaching the 50s and 60s. It’s perfect weather for gallery hopping, not to mention restaurant sampling. Asheville Restaurant Week is Jan. 19 to 28, when more than 30 standout eateries offer discounted prix-ﬁxe menus: $15 for a two-course lunch and $30 for a three-course dinner (exploreasheville.com). WHAT TO DO: Walk off the postholiday blues with a hike around Looking Glass Falls, packed in summer but arguably more impressive come winter. When the edges of the 60-foot waterfall freeze, the rock takes on the mirrorlike quality that gave the natural beauty its name. Finish the outing with a steaming hot cocoa at French

ASHEVILLE, N.C.

Broad Chocolates, named one of the best hot chocolates in the country by Travel + Leisure ($4.50, frenchbroadchocolates .com). Biltmore House, once the largest private home in America, is also easier to tour without the summertime crowds. Highlights include the Winter Garden and the tropical Palm House, located in the heated, 7,000-square-foot conservatory, ($60 entrance fee, biltmore.com).

HOW TO SAVE: Rooms at

WHAT TO DO: Whistler may be one of the most celebrated ski resorts in North America, but you’ll ﬁnd chills and thrills for less all across British Columbia. The Sun Peaks Resort (sunpeaksresort .com), located about 220 miles northeast of Whistler, features 135 slopes on 4,270 acres. Don’t miss weaving through the scenic, snow-heavy trees on the Smooth Smoothie trail, suggests Barbara Linder, an instructor with Ski Adventures Canada. Kick off your boots for a dinner at Voyageur Bistro, where the walls are covered with Canadian artifacts from the fur-trade era and the kitchen serves hearty local fare, such as its “legendary” bison burger ($10). Stay slope-side at Nancy Greene’s Cahilty Lodge, where condo-like accommodations, some with kitchenettes, go for $131. You’ll save

$24 when you book in February at the four-star Sun Peaks Grand, which features a year-round outdoor heated pool and rooms starting at $117. About 115 miles to the east of Sun Peaks lies the SilverStar Mountain Resort (silverstar .com). It’s a great option for families, thanks to accommodations that are minutes from the lifts, such as Firelight Lodge, where contemporary rooms start at $118 a night. Along with skiing the 131 downhill trails, you can go cross-country skiing ($13 a day) and snowshoeing ($8 for rentals). Rooms at the condo-style Chilcoot Lodge, which is located in town, start at $124 a night.

HOW TO SAVE: Lift tickets at Sun Peaks ($63) and SilverStar ($62) are bargains compared with those at Whistler ($92). LOCALS’ TIP: Slide down the slopes in Tube Town park, at SilverStar ($14 for two hours).

FAMILY-FRIENDLY SILVERSTAR MOUNTAIN RESORT

the Biltmore’s brand-new Village Hotel start at $129 a night this month but jump to $225 a night come summer (biltmore. com). If you’d rather be within walking distance of Asheville’s downtown microbreweries, quirky coffee shops, and galleries, opt for the all-suites Windsor Boutique Hotel (rooms start at $299 this time of year, down from $389 in high season).

LOCALS’ TIP: The parkland around the city houses a notably diverse ecosystem. It’s also home to the Center for Honeybee Research. Try a free tasting at the Asheville Bee Charmer (ashevillebeecharmer.com).

FEEDBACK: letters@moneymail.com

Appreciation of U.S. vs. Canadian dollar in 2015.

THE MONEY TRAVELER HORSESHOE BEND IN NAMIBIA’S FISH RIVER CANYON

PHOTOGRAPHS, OPENING SPREAD: STEVE SMITH/GETTY IMAGES, THIS SPREAD (CLOCKWISE FROM TOP LEFT): ALAMY (2), GETTY IMAGES (4)

Save up to

MARCH

4O off

Safari in Namibia WHY NOW: Any safari is a splurge, but the cost for this trip of a lifetime goes down dramatically during southern Africa’s green (or rainy) season. Fortunately, Namibia is largely desert, and the two inches of rain it receives in March (on average) only serves to turn the countryside a lush green. That also makes it a great time to photograph foraging wildlife, notes Namibia

high-season safari prices.

expert and president of Premier Tours Julian Harrison.

WHAT TO DO: Book a thatchedroof house at the Kulala Desert Lodge (wilderness-safaris.com), located in the private 67,000acre Kulala Wilderness Reserve in central Namibia. Prices start at $297 a person per night, a 21% discount vs. high season (mid-June to October). The cost includes the use of quad NAMIBIA bikes, a nifty way to drop in on the grazing ostrich and antelope. If rhinos are more your speed, the Desert Rhino Camp is home to the largest roaming population of endangered black rhinos in Africa. Tented rooms look out over sweeping landscapes dotted with ancient Welwitschia plants, not to

mention strolling zebras, giraffes, and lions. At $365 a person per night, the Rhino Camp is pricier than the Kulala Reserve, but that’s still 40% less than in high season.

HOW TO SAVE: Don’t forget that almost any trip to a safari region will require in-country air travel. In that sense, Kulala Desert

Lodge is the better deal, with round-trip tickets from Windhoek’s international airport in Namibia costing $885, while the ﬂight to Desert Rhino Camp runs $1,170, says Harrison.

LOCALS’ TIP: Ask to spend a night on the rooftop under the stars at Kulala Desert Lodge.

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KAYAKING ON THE ST. MICHAELS WATER TRAIL

APRIL

MARYLAND

Fish and sail along Maryland’s Eastern Shore WHY NOW: Come summer, this charming slice of Chesapeake coastline is chockablock with Capitol Hill insiders, but it’s just as lovely—and less crowded—in the spring. Maryland crab season starts on April 1, and the sailboats hit the waters in the following weeks. Wait until April 29 and you can catch the Maryland International Kite Festival in Ocean City. WHAT TO DO: St. Michaels, a former shipbuilding town that has become a popular weekend destination, is a great place to start exploring the region. Get your sea legs aboard the 41-foot Selina II; Save you can join Captain Iris at the wheel or sit back and enjoy her history lesson peak hotel

($65 for two hours or $85 for two hours with wine and beer, sailselina .com). Landlubbers can take a trip to the Chesapeake Bay Maritime Museum ($15). Set on an 11-acre waterfront campus, it exhibits Native American boats and 18thcentury ﬁshing gear. And no bay adventure would be complete without a feast of hard-shell crabs. They’re about $55 a dozen at the Crab Claw (thecrabclaw.com), but go for the crab-cake sandwich ($17) if you’re not fond of cracking open your own meal.

52 off rates.

OLD BAY–SPICED HARD-SHELL CRABS

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THE PALAZZO DEL PRIORI IN PERUGIA, UMBRIA

HOW TO SAVE: St. Michaels Harbour Inn Marina & Spa (harbourinn.com) is a favorite among visitors not just for its spa but its complimentary bikes and waterfront rooms. Rates start at $159 in April, a 52% savings over high season ($279). Breakfast is included.

LOCALS’ TIP: Don’t miss WineFest in St. Michaels (winefestatstmichaels.com), on the weekend of April 22 to 24. Now in its seventh year, the festival features vintners from around the world, as well as from Maryland wineries. Tickets start at $60, with proceeds beneﬁting local charities.

J A N U A R Y/ F E B R U A R Y 2 0 1 6

MAY

TOKYO

Tour majestic Tokyo WHY NOW: Once the cherry blossoms fade and Japan’s Golden Week holidays are over, Tokyo’s hotel rates drop about 15%, says Nori Akashi of the Japan National Tourism Organization. More good news: Data scientists at Hopper are predicting a 20% decrease in U.S.-to-Tokyo airfare in 2016, compared with last year’s prices.

Gyoen National Garden. Consider setting up a tour in advance with the Japan National Tourism Organization (jnto.go.jp). The group connects volunteer (as in no charge) guides with tourists, and many of them will tailor outings based on visitors’ interests.

WHAT TO DO: Bucket-list stops include the Tsukiji ﬁsh market, the

HOW TO SAVE: Last year ﬁve hotels opened as Tokyo ramps up

THE MONEY TRAVELER

JUNE

UMBRIA, ITALY

Eat—and drink—in Umbria, Italy WHY NOW: Affordable Italy in June? High rollers might head to Venice and the Amalﬁ Coast, but Umbria, a two-hour drive from Rome, is more affordable and blissfully less touristy despite its wealth of vineyards, olive groves, and hilltop towns. STR Global puts the average hotel cost in Umbria at $59, vs. $145 in Tuscany. WHAT TO DO: Eat and drink,

Average hotel room price.

TEMPLE PRIESTS IN PROCESSION AT THE MEIJI SHRINE

PHOTOGRAPHS BY (CLOCKWISE FROM TOP LEFT): GETTY IMAGES (3), CORBIS, GETTY IMAGES (2)

for the 2020 Summer Olympics, so there are plenty of rooms to ﬁll. Check out the 453-room Hilton Tokyo Odaiba (from $147 a night; hilton.com) and the Hoshinoya Tokyo, slated to open this year as part of a luxe Japanese chain

that emphasizes the simple, earthy elegance of the traditional ryokan guesthouse (hoshinoresorts.com). And when you’re eating out, remember that tipping isn’t customary in Japan.

LOCALS’ TIP: Rise above the hustle and bustle and take in a panoramic view of the city from the 45thﬂoor observation decks in the Tokyo Metropolitan Government Building (tokyometro.jp). The trip is free, and on a clear day you’ll be able to spot Mount Fuji.

of course. Split your time between Montefalco and Orvieto, two hamlets overlooking the area’s beautiful scenery. The region’s most famous wine, Sagrantino, has started to make a name for itself, so book a private tour and tastings at the elegant Tenute Lunelli vineyards (tenutelunelli.it, $21) outside Montefalco, says Uri Harash of the Rome-based Perfetto Traveler. Or you can also swirl, sip, and tour the Antonelli San Marco family estate for half that ($11). In Montefalco, grab a café table on the main square for a late lunch at L’Alchimista (ristorantealchimista .it), Harash suggests, and dine on seasonal fare, such as house-made

tagliat leek cre , west, was built on dramatic tuff cliffs and is home to the striking black-and-white-striped Orvieto Cathedral. For an Umbrian feast, try the partridge or lamb at I Sette Consoli, says Beth Rubin of Select Italy (isetteconsoli.it; dinner, $50).

HOW TO SAVE: In Orvieto, the lovely Chiara e Benedetta bed and breakfast has double rooms for $74. For something more luxurious, try Montefalco’s four-star Villa Zuccari, a countryside estate, with rooms starting at $159. LOCALS’ TIP: Take a tour of Orvieto’s maze of underground tunnels, dug out of the lava-formed cliffs some 2,500 years ago ($7).

THE ANTONELLI WINERY IN UMBRIA

THE TOKYO TOWER (LEFT) WITH MOUNT FUJI IN THE DISTANCE

Save

2O%off

2015 airfares.

WHITE-WATER RAFTING ON THE MIDDLE FORK SALMON RIVER

THE MONEY TRAVELER

JULY

Explore the heart of California’s Central Coast WHY NOW: Just because it’s high season doesn’t mean you’ll be priced out of the prime summer surf. Big Sur tends to get all the glory (and has the ritzy and restaurants to mat but about 100 miles CALIFORNIA farther south you’ll find equally dazzling Pacific views, craggy cliffs, and a beachy vibe Welcome to the clas affordable) Central Co . WHAT TO DO: Make Cayucos your base—locals say it’s the state’s last true, undeveloped beach town. From there, head south to Morro Bay and board Sub Sea Tours’ Dos Osos for a chance to spot humpback whales before they travel to Mexico for mating season (tours from $45; subseatours.com). If you’re the DIY type, head to Kayak Horizons and paddle by the sea otters and pelicans ($12 for the first hour, kayakhorizons.com). Back in town, stroll along the idyllic beach and out onto the nearly 1,000-footlong fishing pier, built in 1872. HOW TO SAVE: At Cayucos’s On the Beach B&B, an oceanside room runs $249 a night, but the

AMILY OUT FOR A MORRO BAY SWIM

ame room facing y town costs ss (californiaonthebeach.com). For adventurous road-trippers, New Zealand– based camper-van company Jucy recently opened in Los Angeles and San Francisco: You can drive along the coast in a kitted-out minivan, complete with a pop-up “penthouse” double bed, fridge, sink, and more for less than $100 a day. That’s lodging and transportation in one affordable swoop (jucyrentals.com).

LOCALS’ TIP: Plan on a meal at the Cass House Grill, where the Mediterraneaninspired menu is made with veggies from the property’s garden and the day’s local catch. It’s an expansion of the beloved Cass House Inn (casshouseﬁveolives.com).

THE 982-FOOT PIER IN CAYUCOS

Beachside inns from

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AUGUST

IDAHO

Get outdoors in Idaho WHY NOW: The Gem State is home to seven National Park Service sites, making it a great place to enjoy the events celebrating the National Park Service’s centennial month. WHAT TO DO: Yellowstone is Idaho’s most famous park, but the Craters of the Moon National Monument and Preserve ($10 admission), three hours east of Boise, is worth a visit for its lunar landscape of lava ﬁelds and cinder cones. NASA even tests equipment there, notes Ted Stout, the park’s chief of interpretation. Hike to one of the lava-tube caves—they stay naturally cool, and some even contain ice throughout the summer. Or take a ranger-guided walk to Indian Tunnel, where you’ll see an 800-foot-long tube, says Stout.

Kick your adr line up a notch on a whitewater rafting trip with Row Adventures on the Middle Fork Salmon River, three hours northeast of Boise (rowadventures.com). Along with charging through more than 80 rapids, travelers on the ﬁve-day expedition pass through spruce forests, pineRIVERSIDE CAMPERS

WILSON’S, A SWEET-TOOTH SIREN IN DOOR COUNTY

SEPTEMBER

Hang on to summer in Door County, Wis.

FREE National Park entry, Aug. 25 to 28.

P H OTO G R A P H S B Y ( C LO C K W I S E F R O M TO P L E F T ) : G E T T Y I M AG E S , C H A D C A S E /G E T T Y I M AG E S , A L A M Y ( 3 ) , C H A D C A S E /G E T T Y I M AG E S , G E T T Y I M AG E S

A LAVA TUBE AT CRATERS OF THE MOON PARK

covered mountains, and pools of water so clear you can spot rainbow trout swimming below. There are also land excursions to see ancient Native American pictographs and old pioneer dwellings.

package costs $1,715—23% off high-season rates. Admission to Craters of the Moon is free Aug. 25 to 28 in honor of the National Park Service’s Founders’ Day and centennial celebration.

HOW TO SAVE: After Aug. 15, Row’s trip prices drop from $2,230 a person to $2,025, a 10% savings, and go down even further just before September, when the

LOCALS’ TIP: Row Adventures guides can add many special elements to a tour, so ask about cooking classes, yoga breaks, and early-morning ﬁshing trips.

with the tallest dunes tate (dnr.wi.gov).

WHY NOW: esque peninsula juts 75 WISCONSIN miles into Lake Michigan and is dotted with ice cream stands, mom-andpop diners, and intimate inns—the natural beauty the Hamptons with a do earth Midwest vibe. Visitors peak in July (cherry season), and by early October the Wisconsin Scenic Byway is clogged with leaf peepers. But September is the sweet spot: Days hit 70° F, the water is at its warmest, and the crowds are all but gone. Hotel prices are up to 40% or more off their midsummer peak.

HOW TO SAVE: Average September hotel rates are around $104 a , according to travel e STR, though a waterfront room can run $225. This month, rates at the Landing Resort ($90 a night; thelandingresort.com) and the Newport Resort ($129 a night; newportresort.com), both in Egg Harbor, come in 30% to 40% lower than summer stays. LOCALS’ TIP: Established in 1906, Wilson’s Ice Cream Parlor in Ephraim offers classic malts, homemade ice cream (served in cones with a jelly bean stashed in the bottom to prevent dripping), and a grand view of the town’s bustling marina ($3.50; wilsonsicecream.com).

WHAT TO DO: The shop at Egg Harbor’s Wood Orchard is stocked with cherry-preserved everything: jams, ready-made pie ﬁlling, juice, and more (woodorchard .com). Later in the month, you can pick your own apples at Orchard THE CANA ISLAND Country Winery and Market in LIGHTHOUSE Fish Creek (orchardcountry.com). Climb nearly 100 steps to the top of the Cana Island Lighthouse, one of 11 in the county, for a bird’s-eye view of Lake Save Michigan (dcmm.org). But the real attraction here is the 300 miles of shoreline and its 53 public swimming beaches, including peak summer hotel rates. Whiteﬁsh Dunes State

4O off

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THE MONEY TRAVELER

OCTOBER

o 5 p.m. eekdays—and PANAMA CITY, appetizers are half FLA. price. For dinner, ad to J Michael’s , $25) for , suggests get a voucher for ano enne , owner of the city’s If you strap on some snorkeling Seahaven Beach Resorts. If you gear, you might spy schools of have a good day of fishing, it will sea stars, puffer fish, and coloralso cook what you catch. ful reef fish, says the boat’s HOW TO SAVE: March rates captain, Lorraine Frasier. Twoat the Edgewater Beach & Golf hour sunset tours are $49. Resort, a row of beachfront towThis coastline faces west, ers with 11 pools and six tennis which makes it easy to time courts, start at $405 for a one your happy hour with sunset bedroom; in October rates dip to views at Sharky’s Beachfront $287, a 30% savings (edgewaterRestaurant. Go a little early—

Hit the beaches in Panama City, Fla. WHY NOW: The sugar-white sand ﬁlls up with spring breakers in March, but the crowds drop by 14% come October. One thing that doesn’t drop: the temperature, with highs hovering around 80° F. WHAT TO DO: Sign up for a half-day trip with Dolphin and Snorkel Tours ($70). It guarantees dolphin sightings (or you

NOVEMBER

AUSTIN

Sup and shop in Austin WHY NOW: The “live music capital of the world” is humming with festivals (SXSW, Austin City Limits) most of the year, but they taper off come November, when hotel prices fall by 10% compared with March or October peaks. WHAT TO DO: South Lamar Boulevard has some of the best local specialty shops. At Mockingbird Domestics, you’ll

ﬁnd A e decor items, while the new Aro (shop-aro.com) sells contemporary American jewelry. Austin is also a great food city. Breakfast tacos are almost the culinary mascot, so grab a few at Tacodeli—the Vaquero with corn and poblanos is a favorite ($2.75)—before a walk around Lady Bird Lake. Some of the best restaurants offer

beachresort.com). You’ll save even more by booking a stay off the beach. Rooms overlooking placid Lake Carillon—and just a few blocks from the Gulf—start at $139 at the pastel-colored Carillon Beach Resort Inn (carillonbeachresort.com).

LOCALS’ TIP: If you’re looking for stretch of sand to call your own, shuttle out to Shell Island, an undeveloped, seven-mile barrier isle that’s ideal for Fewer tourists private waterfront than in March. picnics (shuttle, $17).

happy-hour specials. From 4:30 to 6:30 p.m., sit at the bar at elegant Jeffrey’s (jeffreysofaustin .com) for half-off appetizers, such as the grilled serrano ham and cheese (regularly $12) and hamachi carpaccio (regularly $18). If you want to go casual, Donn’s Depot, in a converted train station, features live music and $2.50 Lonestar beers from 2 to 8 p.m.

HOW TO SAVE: The city has a handful of new hotels, including the centrally located, 366-room Westin Downtown, and rates start at $279 a month, 30% less than in October ($399). But Austin is also the headquarters for vacation-rental company HomeAway, which features 1,670 properties with four-star-plus user ratings. Average November price: $218. LOCALS’ TIP: The Harry Ransom Center (hrc.utexas .edu, free admission) is a bookworm’s paradise. It houses the manuscripts, diaries, and drafts of writers Graham Greene and James Joyce, as well as a Gutenberg Bible, one of only 21 complete surviving versions.

Save

3O on

hotels vs. October rates.

CRUISING PAST THE BUDAPEST PARLIAMENT

DECEMBER

EUROPE

River cruise for a European Christmas

PHOTOGRAPHS (CLOCKWISE FROM TOP RIGHT): COURTESY OF VIKING RIVER CRUISES (2), JAY JENNER/NEWSCOM, ALAMY, GETTY IMAGES

BOY WONDER IN PERFORMANCE

WHY NOW: Riverboats have long been the champagne of cruises, and December is a great time to ﬁnd a deal. Too cold, you say? “For a traditional winter wonderland, nothing beats the charm and holiday cheer of a European river boat,” says Lauramay LaChance, associate editor of Onboard.com.

co-founder of Cruise Planners.

HOW TO SAVE: End-of-year trips are a steal in comparison to high-season rates. Viking’s Rhine Getaway itinerary starts at $2,156 per person, double occupancy, compared with $3,356 per person in September. You’ll score similar savings on Avalon Waterways’ nine-day, Vienna-toPrague Christmas itinerary, which starts at $2,369 per person.

WHAT TO DO: On tours along the Danube with Avalon Waterways (avalonwaterways.com), you’ll visit Christmas markets in Germany and INSIDER TIP: Don’t know which Austria that date back to the 15th cabin to book? “You’ll generally get century. Don’t miss the mulled wine the same layout and save a few and handcrafted nutcrackers. hundred dollars by booking the Shopping is just one of the highstaterooms at the end of the ship,” lights on Viking River Cruises’ says Mary Curry, a travel adviser eight-day Rhine River trip between with Adventure Life.“But don’t Amsterdam and Basel skip a French balcony.” And (vikingrivercruises Save many cruisers think that the .com). In Germany, wake you see off the aft section travelers can visit Comakes for the best views. logne’s Romanesque churches and the fall rates. classic, half-timbered houses in Koblenz. “Back onboard, travelers will ﬁnd the ambiance alive with Christmas sing-alongs, tree trimmings, and authentic introductions to local holiday traditions,” says THE CHRISTMAS MARKET IN BASEL, SWITZERLAND Michelle Fee, CEO and

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Chickens Come Home to Roost by Lisa Burkhardt

OWE SOME OF my favorite childhood memories to chickens.

Every summer, my brother and I traveled from our home near Miami to the Ohio town where my aunt and uncle owned a chicken farm. In the mornings we’d gather the eggs, and then we’d sell them at our roadside stand. Pure bliss for a girl from the burbs. So it was no surprise when, years later, I told my husband that I longed to leave the suburbs and move a few miles farther out to the Kentucky countryside so we’d have space for a mini chicken farm. I wanted our kids, then ages 13, 11, 8, and 2, to appreciate life’s simpler pleasures too. So off we went. The kids and I wasted no time poring over a “hatchery” catalogue (yes, there are such things). We wanted to make sure we got eggs, so we ordered 15 chicks of a proliﬁc breed called Barred Rock. At only $2.85

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each, I wondered if they’d keep up their end of the bargain. We spent about $70 for a scraplumber coop and six weeks’ worth of feed, but the big investment was time. The chickens were a lot of work, especially for the kids: cleaning out the straw bedding, replacing the water and food, and keeping away the roaming raccoons at night. We let “the girls” free-range during the day, and the kids marveled that the birds knew when it was time to hit the hay—literally. In most months, our beloved hens produced about $32 worth of farm-fresh eggs—people were delighted to pay two bucks for a dozen. That barely covered the hens’ room and board, not to mention the cost of the fancier breeds the kids wanted: Columbian Wyandottes, Buff Orpingtons, Araucanas, and the delightful Top Hats, with the ﬂourish of feathers perched high on their heads. In the 13 years we’ve had chickens we’ve probably spent a few hundred dollars more than they’ve earned. Yet the chickens would make me happy even if they never earned a dime. From my kitchen window, I watch them scratch for bugs and take their dust baths. They seem so content. And we still get eggs: beautiful brown ones, lovely blue and green ones, and our little Top Hat named Lula Belle lays the tiniest white ones. I have heard of cat ladies—are there chicken ladies? If so, I am one. Buying and caring for them was the best investment for my children, and for me. Lisa Burkhardt lives with her chickens (and her family) in central Kentucky.

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Preproduction model shown. Available late 2016.