Money jan2015 by egarel07

AL SPECI TING S E V N I E DOUBL ISSUE

top travel deals of the year P.13O

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APPLE, AMAZON, OR GOOGLE: WHICH IS THE BUY? P. 8O

5 SMART WAYS TO DOUBLE YOUR YIELD P. 72

PLUS: MUTUAL FUND AND ETF SCORECARD P. 12O

THE POWER OF ACTIVE MANAGEMENT MEETS

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JANUARY/FEBRUARY 2015 VOLUME 44, NUMBER 1

The Fu Repor nd t 201 A scor perfor ecard for th 4 m e

mutua ing and b topig l fund s and gest ETFs. Page 120

F E AT U R E S

INTRODUCTION »

PART TWO »

How to Keep Winning

Sizing Up Tech’s Titans Do Amazon, Apple, and Google belong in your portfolio?

The easy victories are over, but you can stay on the path to your goals.

by Paul J. Lim and Taylor Tepper

Top Picks From Top Pros

by Penelope Wang

Tips from leading fund managers. by Ryan Derousseau

Why China Is Over The powerhouse is slowing down.

PART ONE »

by Paul J. Lim

PART THREE »

How 2% Explains the World

100

Ultralow interest rates signal what’s ahead for the economy—and your whole portfolio. by Pat Regnier

Our list of the best mutual funds and ETFs. by Taylor Tepper

106

On the Road to Wealth

How three households invest for a successful retirement.

Reaching for Yield P R O P ST Y L I N G B Y M E G U M I E M OTO

The MONEY 50

by Paul Keegan

Investors are eager for alternatives to bonds. Some roads to higher payouts, though, are riskier than others.

114

3 Habits of the Rich to Avoid Learn from the investing mistakes of the One Percent.

by Kim Clark

Photograph by tr av i s

by Paul Sullivan

r ath b o n e

J A N U A R Y/ F E B R U A R Y 2 0 1 5

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YOU KNOW WHAT YOU EARN FROM 9 TO 5. NOW CALCULATE THE VALUE OF WHAT YOU DO 24/7.

What if you got paid for all the work you do when you’re not at work? See how much it could be at bringyourchallenges.com/life-insurance-that-keeps-up Maybe you never thought about it. It’s easy to overlook all the things you do that someone else might be paid to do if anything happened to you. It’s why a lot of people have less life insurance than they might really need. Our new online tool can help you estimate the value of those things. And Prudential has life insurance solutions that can cover you, not just for the job you go to every day, but for all the other jobs you take care of.

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JANUARY/FEBRUARY 2015 VOLUME 44, NUMBER 1

Surfers and paddleboarders enjoy the waves in Leahi, Oahu.

Plan 29 / FOUR-SEASON CURB APPEAL Keeping your home gorgeous year-round is easier and less expensive than you think.

35 / CAREERS

Don’t let a promotion turn former peers into future critics.

36 / ASK THE EXPERT

When is my spouse eligible for Social Security beneﬁts?

38 / SECOND ACT

130

A layoff launches a health care entrepreneur’s new gig.

Where to Go in 2015 Our month-by-month calendar will help you ﬁnd this year’s best travel deals. by Stirling Kelso

40 / FIVE THINGS

What to know when HR asks if you’re healthy.

42 / FINDING A FIRST 18 / THE BIG NUMBER

H AWA I I TO U R I S M A U T H O R I T Y ( H TA ) / TO R J O H N S O N

23 / FAST TAKES 24 / SOCIAL CURRENCY 26 / TECH 27 / THE STATS

IN THIS ISSUE

6 / Money.com 14 / Editor’s Note 16 / Letters & Comments

GENEROUS COLLEGE

COLUMNS 44

144

LOVE AND MONEY

THE NEW RETIREMENT

MONEY WELL SPENT

Dig Out Together After the Holidays

Going to Extremes With Your IRA

Uneasy Rider

Overspent? Don’t point ﬁngers— take action. by Farnoosh Torabi

How to ﬁx the mix in your retirement portfolio. by Penelope Wang

A moped helps a freshly expatriated American experience Beijing like a local. by Alyssa Abkowitz

Use these tips to score a merit award big enough to put a real dent in tuition bills.

Retire 47 / LIVE HAPPILY EVER AFTER Here’s how to keep a smile on your face long after your working years are over.

Cover typography by SAWDUST

MONEY (ISSN 0149-4953) is published monthly (except one in January/February) by Time Inc. 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. PRINCIPAL OFFICE: Time & Life Building, Rockefeller Center, New York, N.Y. 10020-1393. U.S. subscriptions: $15 for one year. Periodicals postage paid at New York, N.Y., and additional mailing offices. SUBSCRIBERS: If the postal authorities alert us that your magazine is undeliverable, we have no further obligation unless we receive a corrected address within two years. POSTMASTER: Send address changes to MONEY, P.O. Box 30607, Tampa, Fla. 33630-0607. 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 32120, Tampa, Fla. 33662-2120; or e-mail help@money.customersvc.com. © 2015 Time Inc. All rights reserved. Reproduction in whole or in part without permission is prohibited. MONEY is a registered trademark of Time Inc. 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.A.

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JANUARY/FEBRUARY 2015 VOLUME 44, NUMBER 1

Money.com

OUTLOOK 2015 Our analysis of the biggest economic trends ahead—and 19 ways you can profit from them: money .com/outlook2015

TWITTER twitter.com/ money

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MAKING RESOLUTIONS STICK Living up to your best intentions in 2015 starts with setting smart, targeted, realistic goals. We offer fresh strategies around saving for college and retirement, paying off debt, spending less, and advancing your career at money.com/resolutions.

LOVE AND MONEY Finding ﬁnancial harmony in relationships, nudging kids out of the nest, and money tips for Modern Family families at

WHAT TO WATCH Farnoosh Torabi asks singles if—and when— money could be a relationship deal breaker.

C O LUMN I ST

money.com/loveandmoney.

THE YEAR AHEAD IN ... MONEY 101 Simple steps for budgeting, real estate, and more at

money.com/money101.

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MONEY’s editors and writers explain what you need to know about jobs, health care, Social Security, and interest rates in 2015. money.com/videos

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BRAD TUTTLE spotlights the good, bad, and just plain funny ways we spend our money. @bradtuttle

P H OTO G R A P H S B Y S C OT T M . L A C E Y ( R E S O L U T I O N S ) ; C H A D G R I F F I T H ( T U T T L E ) ; E R I C O G D E N ( L O V E A N D M O N E Y )

TA B L E T E IV E XCLUS

CHIEF CONTENT OFFICER Norman Pearlstine CHIEF EXECUTIVE OFFICER Joseph Ripp

MANAGING EDITOR Craig Matters EXECUTIVE EDITOR Diane Harris SENIOR EDITOR-AT-LARGE Ellen Stark ASSISTANT MANAGING EDITORS Paul J. Lim, Margaret Magnarelli, Pat Regnier EDITOR-AT-LARGE Penelope Wang SENIOR EDITORS Kristen Bellstrom, George Mannes SENIOR WRITERS Kim Clark, Donna Rosato WRITER Ian Salisbury STAFF REPORTER Taylor Tepper EDITORIAL ASSISTANT Jackie Zimmermann OFFICE MANAGER Melanie Birdsong-Ballew CONTRIBUTING COLUMNIST Sheila Bair CONTRIBUTING WRITERS Kate Ashford, Stephanie AuWerter, Daniel Bortz, Joan Caplin,

Karen Cheney, Carla Fried, Josh Garskof, Kerry Hannon, Josh Hyatt, Paul Keegan, Sarah Max, Neil Parmar, Elaine Pofeldt, Farnoosh Torabi, Cybele Weisser, Clint Willis COPY ROOM Carol Gwinn (copy chief), Ben Ake (deputy copy chief), Jonathan Brown,

Maria Carmicino, Judith Ferbel, Lauren Goldstein, Edward Karam, Kathleen Kent EDITORIAL CLOSE DIRECTOR Edward G. Carnesi PREMEDIA Richard K. Prue (executive director)

THE FORTUNE | MONEY GROUP VICE PRESIDENT, ADVERTISING SALES, MONEY Tony Haskel ASSOCIATE PUBLISHER, FORTUNE Michael Schneider VICE PRESIDENT, MARKETING Michael Joseloff VICE PRESIDENT, DIGITAL PLANNING AND CLIENT SERVICES Brian Maher ASSOCIATE PUBLISHING DIRECTOR, ASIA Ang Khoon Fong VICE PRESIDENT, CONFERENCES Peter Granath

ADVERTISING SALES Atlanta/Washington, D.C.: Greg Bowerman (executive director, multimedia), Lisa Danielczyk (Washington sales director), Anna Ryder, Vornida Seng, Eric Shaver Boston: AnneMette Bontaites, Melissa More (directors), Cailin Travers Chicago: Jacie Brandes (executive director, multimedia), Katie Groon, Sarah Matteson, Gina Milkovich, Laurie Minor, John Winterhalder Dallas: Jacquelyn Olson (August Media) Detroit: John Wattles (sales manager), Amy Simer Los Angeles: Jack Vincent (executive director, multimedia), Lexie Adams, Melissa Gursey New York: Sean Adrian (executive director, multimedia), Stephanie Swann, Casey Tatum (account directors), Chris Wolfe San Francisco: Rick Gruber (executive director, multimedia), Doug Harrison (manager), Lindsey Lee Singapore: Karen Mong Hong Kong: Elizabeth Kwong Japan: Kotaro Aikawa

INTEGRATED MARKETING Hulya Niver (executive director), Giselle Aranda, Christine Fulgieri, Donatella Zamora (senior managers), Stephanie Andersen, Sheyna Bruckner, Michael Hayden, Alex King, Hermela Nadew Asia: Judy Fong (senior digital sales manager), Audrey Yeong, Florence Thote (sales development manager), Rosa Chow (senior research manager) Europe: Mike Jeannes DIGITAL PLANNING AND CLIENT SERVICES Karen Szeto (director),

Fabian Fondriest, Courtney Kern, Tess Skoller, Colleen Tully CREATIVE SERVICES Hollie Vose (executive group director), Maryellis Bunn,

Jonah Copiaco, Miika Grady, Clarice Lorenzo, Paton Roth, Natalie Ryan, Cindy Shieh

DESIGN DIRECTOR Patty Alvarez ART DIRECTOR Rich Morgan DEPUTY ART DIRECTORS Leah Bailey, Linda Tran Tutovan DIRECTOR OF PHOTOGRAPHY Ryan Cadiz DEPUTY DIRECTOR OF PHOTOGRAPHY Shayla Hunter PHOTO EDITOR Scott M. Lacey

MONEY.COM EDITOR Scott Medintz DEPUTY EDITOR Laura Goldstein SENIOR WRITER Brad Tuttle ASSOCIATE EDITOR Susie Poppick REPORTERS/PRODUCERS Kara Brandeisky, Jacob Davidson, Kerri Anne Renzulli PHOTO EDITOR Sarina Finkelstein SENIOR VIDEO PRODUCER Jason Sanchez CONTRIBUTORS Caroline Ceniza-Levine, Dan Kadlec,

Darrow Kirkpatrick, Ruth Davis Konigsberg, Philip Moeller, Walter Updegrave

LIVE MEDIA Delwyn Gray (senior executive producer), Kristen Leoce (executive director), Janine Lind, Katie O’Connell, Allie Schnall, Virginia Slattery, Elisabet Torrents

COMMUNICATIONS Kerri Chyka (executive director), Daniel Leonard (senior manager), Kelsey Rohwer (senior publicist)

CONSUMER INSIGHT Andy Borinstein (executive director), Joel Kaji (senior director), Mac Dixon (senior research manager), Rachel Lazarus (associate research manager)

CONSUMER MARKETING Stephanie Solomon (VP), Eric Szegda (VP, retail), Adam Kushnick (finance director), Courtney Andrews, Laura Applestein, Berkeley Bethune, Eunice Chi, Nancy D’Auria, Nancy He, Alexandra Litvinovsky, Stephanie Moloney, Corey Schneider, Greg Wachtel

FINANCE Wajeeha Ahmed (executive director), Parniyan Gutierrez (director), Arbena Bal, Catherine Keenan, Kari Kus, Daniel Seon (managers), Jessica Pirro, Parth Vedawala

PRODUCTION Carrie Mallie (director), Mieko Calugay, Elizabeth Mata, Mary Michael (managers), Katherine Brown (specialist)

CONTENT MARKETING AND STRATEGIES Diallo Hall (director of content), Lawrence A. Armour, Alec Morrison (editors), Gregory Leeds, Ron Moss, Cindy Murphy (directors), Joel Baboolal, J. Thomas Lewis, Roger Greiner, Blair Stelle, C. Tasha Sterling, Chadwick Wiedmaier

MONEY.COM VP, GENERAL MANAGER Howard Manus BUSINESS DEVELOPMENT Mark Beavers (director) ADVERTISING OPERATIONS Donna L. Clarke (director)

SVP, DIGITAL M. Scott Havens SVPs, CONSUMER MARKETING Jeff Blatt, Stephen Selwood VP, FINANCE Maria Beckett VP, COMMUNICATIONS Daniel Kile VP, CONSUMER MARKETING Lydia Morris 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, Lynne Biggar, Colin Bodell, Teri Everett, Greg Giangrande, Lawrence A. Jacobs, 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 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, FINANCE Lori Dente VP, RESEARCH & INSIGHT Caryn Klein VP, DIGITAL AD OPERATIONS Nancy Mynio VP, YIELD AND PROGRAMMATIC Kavata Mbondo VIDEO J.R. McCabe (SVP) CONSUMER INSIGHT Barry Martin (VP) TECHNOLOGY AND PRODUCT ENGINEERING Colin Bodell (CTO and EVP), George Linardos, Erynn Petersen (SVPs), Linda Apsley, Neil Bailey, Robert Duffy, Jonathan Fein, Robert Ferreira, Amanda Hanes, Leon Misiukiewicz, Ben Ramadan, Scott Smith, Jimmie Tomei (VPs)

How to Reach MONEY LETTERS TO THE EDITOR Write to us at MONEY, Time & Life Building, Rockefeller Center, New York, N.Y. 10020, or money_letters@moneymail.com. Include your name, address, and phone number. Letters may be edited for clarity or space. SUBSCRIBER SERVICES For 24-hour service, go to cnnmoney.com/customerservice. You can also call 800-633-9970; write to MONEY at P.O. Box 30607, Tampa, Fla. 33630-0607; or email us at help@money.customersvc.com. If postal authorities alert us that your magazine is undeliverable, we have no further obligation unless we receive a corrected address within two years.

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. REPRINTS To order 1,000 or more custom reprints, or for photocopy permission, call 212-221-9595, ext. 437, or go to timeincreprints.com. Reprints reproduced by others are not authorized.

Write the Editor: managing_editor@moneymail.com

EDITOR’S NOTE

This Year I Resolve to…

…EAT MORE OF THIS GREEN (NOT REALLY), AND WORRY LESS ABOUT THE OTHER KIND.

m o n e y. c o m

in this issue). How can you cope? You need a strategy, lest you end up feeling worse for striving to be better. Try this. Take tasks off the table. Brain research suggests we’re pretty good at deciding among five to nine choices. After that, we’re less likely to be able to make a call and be happy about it. Get your list of potential resolutions down to a half-dozen. Then choose one. The odds on resolution keeping aren’t so hot. Only about one in 12 people reports complete success, with around half reporting some progress. The American Psychological Association says you can improve your chances of staying the course by

J A N U A R Y/ F E B R U A R Y 2 0 1 5

CRAIG MATTERS MANAGING EDITOR twitter.com/craigmatters

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

… LOSE A FEW POUNDS, learn the guitar, ﬁx up the house, keep a weekly date night with my wife, gain control of work email, learn meditation, get more limber, reconnect with old friends, worry less about money, be better organized, and read more books. Heck, I might as well add grow taller and learn to like lima beans. This is the problem with the annual taking stock of, and resolving to improve, oneself that comes with the New Year: There’s too much to fix. The resolution-industrial complex only makes things worse. Dieting apps, exercise monitors, budgeting sites, and, yes, even personal-ﬁnance magazines (there are over 100 recommended actions

setting a single, small goal. If you’re among the one in three resolution makers who focus on money, for example, don’t commit to a draconian budget that has you tripling your savings. You’re almost certain to fail. Instead, vow to up your saving by 20%. Cut yourself some slack. Don’t let one impulse buy, or impulse cupcake, do you in. If need be, restart the clock. Research shows that we like to anchor our attempts at self-improvement to memorable points in time, not just New Year’s, but our birthdays, the ﬁrst of the month, etc. So if you’ve stumbled, set a new beginning for, say, the following Monday. As for me, I’m convinced having an email program on constantly is counterproductive and fatiguing. So I’m setting up speciﬁc times to handle the deluge. Co-workers who need me right away, come on by.

Make your investing more

TAX EFFICIENT. Create a plan to help defer, manage, and reduce taxes.

We can help you take control of how much you pay in income taxes each year by choosing which accounts to invest in, managing how you generate income, and taking advantage of potential tax deductions. Call for guidance from a Fidelity representative.

800.544.9348 Fidelity.com/taxefﬁcient J.D. Power Ranked Fidelity “Highest in Investor Satisfaction with Full Service Brokerage Firms”* Mobile

Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation. *Fidelity Investments received the highest numerical score among full-service brokerage firms in the proprietary J.D. Power 2014 Full Service Investor Satisfaction StudySM. Study based on responses from 4,479 investors measuring 15 investment firms and measures opinions of investors who used full-service investment institutions. Proprietary study results are based on experiences and perceptions of consumers surveyed in January–February 2014. Your experiences may vary. The experiences of these customers may not be representative of the experiences of all customers. Visit jdpower.com. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 © 2014 FMR LLC. All rights reserved. 684903.2.0

LETTERS & COMMENTS

Write to MONEY: letters@moneymail.com

RE: BEST NEW MONEY IDEAS [DECEMBER]

While I think it’s great that you’re reminding readers of services like Scribd and Amazon Prime, you forgot the free option that almost everyone has: public libraries. Most libraries subscribe to services that offer thousands of lendable titles via Kindles or Kindle apps. Borrowing ebooks is even better than print books since there are no ﬁnes: When the borrowing period is over, titles disappear. lindsay hansen, Van Nuys, Calif. ENDLESS ASKS Re “The Big Question” [December]: I try to be generous in charitable giving, but I am disgusted with the way charities behave after a donation. If I give money to, say, a breast cancer research group, I start receiving regular requests from that group and related organizations that I never contacted. Think of the money wasted in phone calls and postage

that could be used for actual research. robert ﬁnkelstein

BOTHERED BY BILL PAY

Thank you for publishing “Time to Get Going” [November]. The story of the Liebhards’ struggle with debt is so relatable. I wish more articles were written on topics that realistic. joe kuban

“The Best Banks in America” [November] was informative. However, I would have liked to see more about online bill-paying capabilities. I ﬁnd this essential feature difficult to assess, since most banks don’t let you test-drive their systems. Please add this to your list of bank features to review in the future. bill woolley

Los Angeles

Costa Mesa, Calif.

Reston, Va.

TACKLING REALWORLD PROBLEMS

A FAN OF FLORIDA HANDS-ON RELIEF

Palm Harbor, Fla.

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 5

Thanks for this. I’m looking for a cheaper place to live to help stretch my dollars. angela tellone hatch Re: “Best Places to Retire” I buy cookies only when the girls sell them. It makes me happy to see the kids promoting their cookies; it teaches them marketing, sales, and communication. graciela sandt Re: “Girl Scout Cookie Sales Are Going Online”

The mistake is shopping on Black Friday in the first place! steve goetz Re: “Stop Making These 5 Shopping Mistakes” I remember when gas was just 99¢ a gallon. We filled our ’99 Mazda 626 for $12! @tanishastips Re: “Gas Prices Will Soon Drop Below $2 Per Gallon”

I L L U ST R AT I O N B Y J E F F R O G E R S

“Worthwhile Alternatives” [November] makes brief mention of massage therapy as an alternative therapy for chronic pain. My late mother suffered from chronic pain, and massage provided her with the most relief, greatly improving her quality of life. clifford scharff, Jackson Heights, N.Y.

Hard to believe there were no Southern states in “Best Places to Retire” [November]. I’ve lived in Florida for 37 years and have yet to meet a retired person who is sorry to live here. harry bird

WEB COMMENTS ON RECENT STORIES

Get your free guide to tax-free municipal bonds. Please call (800) 316-1837 right now. Municipal Bonds Offer Three Big Advantages. Advantage #1: The potential safety of principal. If you’re a prudent investor in need of investment income, you don’t want to gamble with your precious nest egg. If you’re nearing retirement or are already retired, you want to do everything you can to make sure your investments can support your retirement. That’s why our free Bond Guide makes “must” reading.

Advantage #2: The potential for regular, predictable income. When you invest in municipal bonds, you typically get interest payments every six months unless they get called or default. Because default rates for the investment-grade-rated bonds favored by Hennion & Walsh are historically low (according to Moody’s 2012 research,*) you can enjoy a regular income stream in retirement. Please note that if a bond is called, any bond you may buy in the future with the proceeds, may earn more or less than the original called bond.

Advantage #3: The potential for tax-free income. Good news! Income from municipal bonds is NOT subject to federal income tax and, depending on where you live, may also be exempt from state and local taxes.

About Hennion & Walsh Since 1990, Hennion & Walsh has specialized in investment grade tax-free municipal bonds. The company supervises over $2 billion in assets in over 15,000 accounts and provides individual investors with institutional quality service and personal attention. Dear Investor, We urge you to call and get your free Bond Guide. Having tax-free municipal bonds as part of your portfolio can help get your investments back on track and put you on a path to achieving your investment goals. Getting your no-obligation guide could be the smartest investment decision you’ll make. Sincerely, © 2014 Hennion and Walsh. Securities oﬀered through Hennion & Walsh Inc. Member of FINRA, SIPC. Investing in bonds involves risk including possible loss of principal. Income may be subject to state, local or federal alternative minimum tax. When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. *Source: Moody’s Investor Service, March 7, 2012 “U.S. Municipal Bond Defaults and Recoveries. 1970-2011.” Past performance is not guarantee of future results.

Here’s just some of what you’ll learn . . . Why municipal bonds may deserve a place in your portfolio. (Page 1) Why insured bonds often provide an extra degree of security. (Page 2) Why municipal bonds can potentially provide safety of principal. (Page 3) How municipal bonds can potentially provide tax-free income. (Page 3) Strategies for smart bond investing. (Page 4) Municipal bond facts every investor should know. (Page 4)

Plus lots more!

FREE Bond Guide Without Cost or Obligation

CALL (800) 316-1837 (for fastest service, call between 8 a.m. and 6 p.m.)

Hennion & Walsh, Bond Guide Offer 2001 Route 46, Waterview Plaza Parsippany, NJ 07054

JANUARY/ FEBRUARY 2015 THE BIG NUMBER FAST TAKES SOCIAL CURRENCY TECH THE STATS

States With Record Cold in November The frigid weather came early this season, with much of the country feeling record-setting chill in the first three weeks of November, according to Weather Channel data. And there’s more to come, says Weather Services International, which predicts a frosty winter for the East and Gulf coasts. Still, you can stay warm without spending a bundle. —KATE ASHFORD

SEAL THE CRACKS In most homes, $200 to $400 worth of energy escapes via leaks, says the Energy Department. TRY THIS: Experts estimate that caulking leaks could cut your heating bills by up to 10%. Windows and doors are usually the big culprits, but don’t forget to check pipes that pass through a wall, closet interiors, and outlets on exterior walls. Heating and cooling ducts can leak up to 30%. To seal them, use metal tape or mastic sealant (or call in a pro, who will most likely charge you a minimum of $500).

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J A N U A R Y/ F E B R U A R Y 2 0 1 5

SPRING FOR SNOW TIRES A recent study found that winter tires cut cars’ stopping distance by 25% on snow. TRY THIS: Edmunds.com editor Bill Visnic suggests comparing prices at TireRack.com, which typically runs deals in fall (expect to spend $500 to $700). You may also score a manufacturer rebate, offered year-round. To make your new snow tires last, be sure they’re inﬂated to the maker’s speciﬁcations, which may differ from those of summer tires.

BUNDLE UP When do you buy cold-weather gear? If your answer is late fall, you’re doing it wrong. TRY THIS: Hold off until January, when the average winter coat discount hits 45%, according to clothing sale site ShopItToMe.com. “Winter clothes go on sale then because most people have their coat by January,” says Mark Di Vincenzo, author of Buy Ketchup in May and Fly at Noon, a book about the best time to make purchases. Looking ahead to next year? You’ll ﬁnd even better deals if you wait until July or August, though the summer selection is typically pretty picked over.

INCREASE YOUR EFFICIENCY

JET AWAY Craving a warm-weather getaway? Bargain ﬂights aren’t easy to ﬁnd: By mid-2014, the cost of the average domestic ticket had climbed 16% since 2010, according to the DOT. TRY THIS: Book 57 days in advance for the best price on a domestic ticket or 171 days to go abroad. Missed the window? Pick an affordable destination. As of early December, the average fare for February and March travel to Trinidad and Tobago was down 14% vs. 2014, according to Travelocity. Also cheaper this winter: Maui (down 6%), the Dominican Republic, and the Bahamas (both down 3%).

Heating accounts for a full 45% of Americans’ utility bills. Chances are, you could be using your energy more strategically. TRY THIS: Use a programmable thermostat to keep the house at 68° while you’re home and as low as 55° when you’re out or asleep to save up to 15% a year. Adjust the hot water too: Setting it at 120° will trim your costs by up to 11%. Even little things help, like turning off bath and kitchen exhaust fans promptly, before they suck up warm air.

Photograph by s a m

k a pl a n

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FIRST Why a New Year’s resolution to save more might actually work: money.us/moneyresolutions

HEALTH

Why More Sick Americans Are Avoiding the Doc

FAST TAKES

THESE DAYS IT’S NOT JUST KIDS who are scared of the doctor. According to a recent Gallup poll, 33% of people say they’ve put off medical treatment because of the price, the highest level in the 14-year history of the poll. And it’s not only the uninsured who are concerned: 34% of those with private insurance say they are skipping care. The most likely culprit? Rising out-of-pocket costs. The average deductible for Americans who get single health care coverage through employers has more than doubled since 2006; those with a family PPO plan and a shared deductible saw a spike of 89% in the same period. Postponing treatment can be dangerous, of course, and is likely to backﬁre when it comes to cost cutting, since delaying care may result in pricey complications. Rather than ignoring your health, try shopping around. Your employer or insurer probably has an online tool that lists what you’ll pay for various services and procedures from local providers. On a highdeductible plan? Use your health savings account to cover as many expenses as possible. —KARA BRANDEISKY

OUT-OFPOCKET PAIN Deductibles for employersponsored plans are on the rise.

Average deductible for single coverage

$584

2006

$1,097

$1,217

$917

$735

2008

2010

2012

2014

NOTE: Data are for covered workers with a general annual health-plan deductible for single coverage. SOURCE: Kaiser Family Foundation

QUOTED

“We could see prices drop to the lowest levels since the Great Recession.” AAA spokesperson Avery Ash, speculating on the future of gas prices

CAREERS

RECRUITERS GO DIGITAL Gunning for a new job in 2015? Time to get online. A full 93% of recruiters plan to review candidates’ social media proﬁles before making a hiring decision this

Illustration by da l e

year, says a new survey from web recruiting platform Jobvite. What’s more, 79% report having hired candidates found via LinkedIn. The takeaway: You must stay on top of your digital footprint. Start by Googling yourself to learn what em-

e dw i n m u r r ay

ployers see. Next, ﬁll out your entire proﬁle on LinkedIn and make sure it’s associated with an email account you check regularly. Finally, stay active online, posting frequent status updates or content related to your expertise. —CAROLINE CENIZA-LEVINE

m o n e y. c o m

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

SOCIAL CURRENCY

READERS TO THE RESCUE

“I contribute to a 529 plan for my grandchild. Should I tell my son how much is in the account?” Be honest. I believe that families should share as much ﬁnancial information as possible so that all generations can plan accordingly.

jeff mann jr. Memphis

My parents do the same, and although I would never ask them, it would be great if they told me. Only because if I could put our money elsewhere, like paying off our home or toward my own college loans, we would be debt-free.

wendy k. The savings are for your grandchild, not your son. The grandkid is the one who should be told, when mature enough.

judith m. Georgia

Missouri

You should coordinate your savings for your grandchild’s education

with your son. It could help to make sure that the investments for college are diversiﬁed.

rob b.

Disclosing an actual amount is less important than making sure everyone is on the same page. It will help your son decide how much to allocate toward college vs. other ﬁnancial obligations, and it will help your grandchild evaluate the cost of different schools.

lou anne burns Mill Creek, Wash.

San Diego

Want solutions to a financial dilemma in your life? Email your question to social@moneymail.com.

m o n e y. c o m

Up our savings rate from 7% to 10%. Pay off our SUV. Pay for braces for our 13-year-old. —michelle lenins reichart

Find a job within my major (mechanical engineering) and start making enough to pay off my student loans. —stephanie ortega

Typically I’d say no, don’t tell them. However, if your son is particularly ﬁnancially responsible, he might appreciate the knowledge so he can allocate some of those funds elsewhere or, if necessary, contribute more.

john

I’m 32 years old, and my goal is to pay off my house this year. —amanda delana

J A N U A R Y/ F E B R U A R Y 2 0 1 5

My husband and I are working to pay off $20,000 in debt while also saving 20% for a mortgage down payment. We plan to purchase a home by the end of 2015. —dana martin Buy an investment property. —steph baker To be back in school with minimal student loans. I’m seeking grant and scholarship money for adult working students. —rose sudulich Make my first million! —ho ba tang

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

Brightworth Private Wealth Counsel

WHAT ARE YOUR TOP FINANCIAL GOALS FOR 2015?

Arlington, Mass.

THE EXPERT SAYS

Do you intend to fully cover the cost of college? Telling your son will allow him to prioritize elsewhere, like his retirement account. However, should you expect him to share the cost, the information may demotivate him from saving. If you have any doubt, more harm can come from sharing than from keeping it to yourself. charlie jordan, partner at

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FIRST

TECH

$90

$100 FOR BUSINESS USE

$99

FOR AMAZON ADDICTS

Here are three good reasons to break the $100 barrier. ier to use. Worth noting: Screen size increases price more than any other factor.

YOU WANT MORE. Will your tablet get heavy use or be your primary machine? For an extra $50 to $100, youâ&#x20AC;&#x2122;ll get a higherresolution screen, more storage, and better processing power.

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 5

Doug Aamoth covers tech news, reviews, and how-tos for Time. To see more of his work, go to time.com/tech.

P H OTO G R A P H B Y S A M K A P L A N ; P R O P ST Y L I N G B Y B R I A N B Y R N E F O R S E T I N I C E

When You Should Spend More

FIRST Next month’s question: Do you want to have your own business someday? To vote, go to Money.com.

THE STATS

MONEY READERS WEIGH IN Climb a little

24%

36%

How You See the Stock Market

POLL

WHAT WILL STOCKS DO IN 2015?

22% 18%

WHO OWNS MUTUAL FUNDS + ETFS?

3 out of 10

Rise dramatically

Drop like a rock

Americans

INVESTORS’ PICKS FOR THE SAFEST BETS: U.S. INVESTORS WHO SAY THEY WILL SACRIFICE RETURNS TO MINIMIZE RISK 66% OF GLOBAL INVESTORS AGREE

Hold stable

HEALTH CARE

TECHNOLOGY

WHY IT’S A BUY: When deciding whether to invest in a public company, 43% of people say the firm’s industry is an important consideration, while 42% weigh historical stock performance. Less important? Nearly half of investors say they don’t consider the board of directors or CEO’s pay. MUTUAL FUND OWNERS, BY GENERATION Gen X

AMERICANS THINK THE BEST LONG-TERM INVESTMENT IS...

ENERGY

31% 15%

Baby boomers

ADVICE FROM A FINANCIAL ADVISER IS KEY TO PICKING FUNDS, SAY…

42%

AUG. 26, 2014 THE FIRST TIME THE S&P CLOSED ABOVE

UP FROM 677 ON MAR. 9,’09

2000 GLOBAL ECONOMIC GROWTH EXPECTED IN 2015

12%

Real estate 30%

CONSUMER GOODS

43% of women

29% of men

Millennials Silent Generation Gold 24% Stocks 24% Savings accounts/CDs 14% Bonds 6%

WHO’S MOST SPOOKED BY VOLATILITY? In a survey by asset-management firm Natixis, Americans were least likely to say they’d lost confidence in the market (49%). The most put-off? 74% of Europeans.

GLOBAL INVESTOR CONFIDENCE

20% Investors who say they’re very conﬁdent that they can withstand a market shock.

NOTES: Online poll conducted in November; 1,406 responses. Mutual fund and ETF owners include those with workplace retirement accounts. The Silent Generation includes people born before 1946. SOURCES: Bankrate, Center for Audit Quality, Gallup, International Monetary Fund, Investment Company Institute, Natixis

m o n e y. c o m

The answer can be as simple as sitting down with your Allstate Agent and making a plan. Because the same person you count on to protect everything in the here and now also has some pretty good ideas about the future. Like setting a reasonable retirement goal. Helping to make your money work harder. And showing you all the ways life insurance can help provide for your family. A good plan, and a good life, starts with someone you know. Life Insurance Retirement Savings Mutual Funds IRAs Annuities College Savings Plans

Start the conversation by calling your local Allstate Agent today.

Source: 2014 Retirement Confidence Survey, EBRI.org. Allstate Life Insurance Company: Northbrook, IL. In New York, Allstate Life Insurance Company of New York: Hauppauge, NY. Securities offered by Personal Financial Representatives through Allstate Financial Services, LLC (LSA Securities in LA and PA). Registered Broker-Dealer. Member FINRA, SIPC. Main Office: 2920 South 84th Street, Lincoln, NE 68506. (877) 525-5727. ÂŠ 2014 Allstate Insurance Co.

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

Four-Season Curb Appeal

Photograph by jaso n

h i n d ley

DOES YOUR HOUSE look like a million bucks? That might depend on when you’re doing the looking. In most of the country, properties shine brightest in spring and summer, when everything is in bud and bloom. But when the weather starts to cool off, “things can get dull and dreary,” says Madison real estate agent Brian Callahan. It doesn’t have to be that way. You can maximize your curb appeal (and your property value) throughout the year with a few simple projects. Here, our seasonal guide to having the best-looking house on the block. J A N U A R Y/ F E B R U A R Y 2 0 1 5

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Plan

CURB APPEAL

ASK THE EXPERT

CAREERS

SECOND ACT

HEALTH

COLLEGE

LOVE AND MONEY

WINTER 1 BARK, BERRIES, AND SEEDS Colorful evergreens, such as cypress (gold) and barberry (red), brighten your winter yard, says landscape contractor Ross Mastrorocco of Monroe, Conn. Choose deciduous trees with interesting bark, like birch, or unusual shapes, such as corkscrew willows. COST: $25 to $200 per sapling, depending on type; add 50% for pro planting.

2 PAINT IN COLOR Next time you need to do a full exterior house-painting job, add a punch of color on the walls. “In winter, paint color can become the focal point of the property,” says home designer and contractor Dean Bennett of Castle Rock, Colo. COST: $4,000 to $10,000 to repaint the entire home.

3 ADD ACCENT LIGHTING During winter’s short days, landscape lighting creates after-dark appeal. Use up lights for trees, down lights for stoops and porches, and walkway lights on your entry paths. Today’s low-voltage systems are easy to install yourself: Plug the transformer into an exterior outlet and run the wires under your mulch. COST: $400 to $500—or two to three times that if you hire a pro for installation.

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3 5

SPRING

Illustration by ja s o n

schneider

FALL

10 11

12 7

SUMMER 7 MOW HIGH Tall grass stays greener, helping to mitigate the brownouts that are so common during the dog days of summer. So set your mower—or ask your landscaper to set his mower—about three inches off the ground. The longer turf will retain more moisture and also better shade the soil, ensuring that the roots don’t dry out—and shading out any crabgrass.

COST: Free if you mow yourself; $30 to $50 per mow if you hire a landscaper.

8 PLAY WITH NUMBERS Get rid of those boring “contractor grade” house numbers. You can ﬁnd interesting numerals in all sorts of fonts and ﬁnishes at houseofantiquehardware.com. Wayfair.com offers letters too, so you can spell out your low-number address. COST: $5 to $25 per digit.

9 UPGRADE THE WALK A cracked or outdated walkway hurts curb appeal all year long, but summer is the best time to tackle replacement. Handy? Interlocking pavers make the job simple enough to do it yourself. Look for tumbled pavers if you want a stonelike look. COST: $500 to $1,000 if you do it yourself; $2,500 for a professional installation (compared with $4,000-plus for natural stone).

m o n e y. c o m

HOW CAN A 12-MONTH-OLD KEEP YOU UP AT NIGHT WITHOUT EVER MAKING A SOUND? No babbling is one early sign of autism. Learn the others today at autismspeaks.org/signs. Early diagnosis can make a lifetime of difference.

Plan

CURB APPEAL

CAREERS

ASK THE EXPERT

SECOND ACT

HEALTH

COLLEGE

LOVE AND MONEY

Shifting From Buddy to Boss WHEN A PROMOTION KICKS YOU OUT OF THE COFFEE KLATCH, YOU’LL NEED TO KEEP YOUR FORMER PEERS FROM BECOMING YOUR FUTURE CRITICS. by Daniel Bortz RIGHT AFTER you celebrate that well-earned promotion, reality hits: You’re now the boss of people who had been your peers. “When you become a supervisor, the relationship structurally changes, whether you like it or not,” says Good Boss, Bad Boss author Robert Sutton, a Stanford University professor who studies organizational behavior. Going forward, your work will be judged on your ability to lead people with whom you used to consort and complain. If that’s not enough pressure, you’re now at risk of being the one complained about. Make the transition seamless with these steps.

MEET ONE-ON-ONE Sit down with each person to discuss the change in leadership. “You’re in learning mode,” says Linda Hill, a Harvard Business School professor and co-author of Being the Boss. Ask staffers to share their short- and long-term goals, skills they’re building, and

Illustration by m i k ey

bu rto n

obstacles that get in the way of doing their jobs. You’ll convey respect and gain valuable info that can help you achieve buy-in. Also, if you were promoted over a colleague, “address the elephant in the room” and alleviate worries about your ability to work well together, advises Atlanta social media strategist and job coach Miriam Salpeter.

STEP BACK SOCIALLY You can be a great manager and preserve friendships by slightly altering your behaviors. Continue attending happy hour, for example, but stay for only one drink, suggests Hill. Allow your staff space to vent. “We all need to blow off steam sometimes,” says Katy Tynan, author of Survive Your Promotion! (Just make it clear to your people that if something is really bugging them, they can talk to you, she adds.) Also, disconnect from your subordinates on all non-workrelated social media. “Many times

you’re doing people a favor, since it puts less pressure on what they can and can’t share on their proﬁles,” says Salpeter. Do let employees know before unfriending them, though, so that they don’t take it personally.

PROVE YOU DON’T PLAY FAVORITES Prepare to make—and to justify— difficult decisions, particularly regarding raises and promotions. To be seen as objective, try to grade everyone using the same metrics, and be sure people know what those metrics are, says Keith Murnighan, a professor at the Kellogg School of Management at Northwestern University. To show humility, solicit feedback from subordinates on your own performance, says Gentz Franz, a University of Illinois lecturer who studies job succession. “It’s incumbent upon managers,” he says, “to open the lines of communication if they want to create a collaborative work environment.”

J A N U A R Y/ F E B R U A R Y 2 0 1 5

m o n e y. c o m

CURB APPEAL

CAREERS

m o n e y. c o m

SECOND ACT

HEALTH

COLLEGE

LOVE AND MONEY

Plan

SOCIAL SECURITY

At what point after marriage is a spouse eligible for spousal beneﬁts? —mark sander,

Only a year. That said, it may not be wise for your partner to file on that anniversary, says Steve Vernon, author of Recession-Proof Your Retirement Years. “You need to think strategically about how to maximize Social Security benefits.” You told us that you’re 66. That’s your full Social Security retirement age. But for your future wife (now 63) to collect full spousal benefits (50% of your monthly payment), she must also be at full retirement age. You can see in the graphic above just how much less she gets by claiming earlier. Waiting to collect also means a higher payout for you. You can boost your check by 8% each year you defer filing until 70. You do have the option to file—so your wife can start getting spousal benefits—but suspend receiving your checks until 70.

ASK THE EXPERT

Indianapolis

To maximize spousal Social Security benefits, your partner also needs to be at full retirement age. PERCENTAGE OF HIGHER EARNER’S BENEFIT RECEIVED Age 64

42% 46%

50% (FULL)

NOTE: Assumes higher earner is 66, full retirement age. SOURCE: Social Security Administration

E S TAT E P L A N N I N G

I’m single with no family. Whom could I hire to administer my will? —paul, California

Though you could name your accountant, lawyer, or financial adviser as executor, Greg Sellers, a CPA and president of the National Association of Estate Planners and Councils warns against it. “If your executor is also drafting your estate planning documents … it presents a chance for conflicting interests.” He recommends using a corporate trust firm. Such companies have

J A N U A R Y/ F E B R U A R Y 2 0 1 5

INVESTING

What’s a better longterm investment: an S&P 500 index fund or a Nasdaq index fund? —james

teams that manage estates full time. (And, no, you don’t need a trust to use a trust company.) The ﬁrm will take a one-time fee from your assets after your death. The amount depends on the estate’s complexity and value, but usually caps out at 5%, Sellers says. The company likely won’t settle on a fee until it determines exactly what will be required, which can’t be known until your death.

A Nasdaq fund could “play a supporting role in a diversified portfolio,” says Indianapolis financial adviser Leslie Thompson. But if you’re going to pick just one index fund for the core of your portfolio, you’re better with one that tracks the Standard & Poor’s 500, she says. Such a fund invests in the 500 largest stocks listed on the NYSE and Nasdaq, across a spectrum of industries. By contrast, the most popular Nasdaq index, the Nasdaq 100, tracks about 100 of the largest nonfinancial companies on Nasdaq. It’s much less diverse. Tech firms account for about 60% of its weighting, says Thompson, and “just two companies—Apple and Microsoft—make up 23% of the index.” When these stocks tumble, so will the index. By Donna Rosato, Kerri Anne Renzulli, and Sarah Max

Read more answers from Ask the Expert and submit your own question about personal finance at money.com/expert.

“This label sealed the deal on our new home.” NAME :

Jesse and Melissa Gallo

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EPA’s blue ENERGY STAR label on the Gallos’ new home means a lot. It means their home was designed and built to standards of quality and durability well beyond most others on the market today. It also means that they will save energy and reduce the greenhouse gases that cause climate change for years to come. Visit energystar.gov.

Plan

CURB APPEAL

CAREERS

ASK THE EXPERT

SECOND ACT

HEALTH

COLLEGE

LOVE AND MONEY

I’M ALWAYS THINKING, THERE’S SOMETHING BETTER.”

AFTER BEING LAID OFF FROM HER RETAILING JOB, HEIDI RASMUSSEN JOINED HER HUSBAND TO LAUNCH THE HEALTH DISCOUNT CARD FRESHBENIES. by Josh Hyatt

THEN

RETAILING EXECUTIVE

NOW

HEALTH CARE ENTREPRENEUR

m o n e y. c o m

AT AGE 15, Heidi Rasmussen began working in retailing, at the same department store where her stepfather put in 35 years. After eight years in store management and 12 years in corporate, Rasmussen had reached the rank of divisional vice president by 2012. Then, while she was out for a memorial service, she found out over the phone that she’d been let go—one of hundreds downsized that day. “Many people were just devastated,” she says. “But that’s not my outlook. I’m always thinking, There’s something better.” It took her a week to ﬁnd it. Her husband, Reid, had already left his job as

J A N U A R Y/ F E B R U A R Y 2 0 1 5

Photograph by s a r a h

wilson

ST Y L I N G B Y L I N D S AY W E AT H E R R E A D ; G R O O M I N G B Y Y VO N N E C OA N

A Healthy Outlook

help with billing errors. Employers who buy cards for their workers (typically $8.50 a pop) make up 90% of the business. Both the companies and their workers—who often get cards paired with highdeductible health plans— can save if an employee’s call to a doctor heads off WHAT WOMEN WANT Freshbenies’ original spokesan office visit. Likewise, character was blond, but Rasmussen made a switch after pinpointing billing errors her informal focus group of 30 women reacted negatively. pays off for everyone. Then she tested the pitch with 30 women she knew (women manager at an insurance agency are behind 80% of family beneﬁt to launch a business. His idea: Get decisions, she says). The group insurers to offer workers discounts vetoed the name “concierge card” on expenses like prescriptions and because “it sounded too hoity-toity.” urgent care. Struggling to get his And she learned that $12 was the concept off the ground, he appealed most they could charge for their to his wife to apply her marketing direct-to-consumer card. brain. “I decided to transform the Rasmussen expects freshbenies idea into an engaging brand,” she to bring in $3.5 million in 2014, up says. “It was a total step of faith.” from $1.3 million in 2013. While the Working at full stride, Rasmuscouple left higher-paying jobs, sen came up with a card that “that looks like a small tradeoff for bundles 10% to 60% discounts on the opportunity to work together vision and dental care with 24/7 on something that we love.” phone consults with doctors and

BY THE NUMBERS

2016

$82,000

2 years

HOW MUCH SAVINGS THEY TAPPED TO LAUNCH. That amounted to about 55% of her severance. About $25,000 went to a consulting ﬁrm that advised them to pitch to HR managers—a total bust. They had more success reaching out to insurance brokers who set up employer beneﬁts.

HOW LONG THEY COULD HAVE GONE WITH NO INCOME. For their personal expenses, which came to $8,000 a month, they relied on the $350,000 they had saved, leaving their 401(k)s alone. “We were already very frugal and living below our means,” says Rasmussen.

Illustration by

r o be rt a . d i i e s o j r .

WHEN SHE HOPES TO TRIPLE REVENUES. In two years, Rasmussen expects freshbenies to bring in $12 million a year. The company is adding at least a dozen insurance brokers as clients every month. “Now that I’m starting to get in front of some really big brokerages,” she says, “I know they are going to want to work with us.”

STARTUP

WHEN TO “PIVOT” YOUR BUSINESS Podcast platform Odeo turned into Twitter. Check-in app Burbn switched its focus to photo sharing and became Instagram. Does your startup need a change in direction to succeed? Here are three signs it’s time to revamp: 1 | CUSTOMERS ARE TELLING YOU.

Is your target buyer consistently asking for something you don’t offer? “Customers exist because you make them better off,” says Gary Gebhardt, an associate professor of marketing at Canadian business school HEC Montréal. Listen to them. 2 | YOUR IDEA ISN’T STICKING.

Do you have a hard time holding on to business? Go beyond focus groups and surveys. People often misrepresent their behavior. Instead, says Gebhardt, observe your customers going about their day. “When you see how people do things, you see how you can create a solution,” he says. 3 | THE COMPETITION IS WINNING.

Look at why people are favoring your rival’s product. But don’t panic pivot, says Steve Blank, co-author of The Startup Owner’s Manual. “A pivot requires substantial evidence that your original hypotheses for your business were incorrect.” —ANTONIA MASSA

Plan

CURB APPEAL

CAREERS

ASK THE EXPERT

SECOND ACT

HEALTH

COLLEGE

YOUR COMPANY IS GETTING NOSIER

A third of employers ask workers enrolled in the company health plan to complete a questionnaire about their health, reports the Kaiser Family Foundation. That’s up from 24% in 2013; more than half of ﬁrms with 200-plus workers use one. Covering topics ranging from your weight and diet to your outlook and stress levels, these risk assessments aim to identify current behaviors that may cause costly health problems in the future.

LOVE AND MONEY

YOU MIGHT BE ASKED TO DO BETTER

Your employer might set goals for you based on your answers. If you’re overweight, say, your firm can reward you for lowering your body mass index—or levy a penalty if you don’t. The financial incentives can be worth 30% of the plan’s total costs; 22% of large firms had outcomesbased programs in 2014, according to a Towers Watson/NBGH survey. If your doctor says you can’t hit a goal, you must be given another way to earn the incentive.

Things to Know When 2

BUT YOUR BOSS WON’T SEE YOUR ANSWERS

Employers usually hire an outside vendor to pose the questions. By law your boss can’t use assessments for any reason other than to run wellness programs, says beneﬁts attorney Todd Martin. Knowing your answers could expose your company to a lawsuit if you’re ﬁred. So, says Jillian Fagan of risk-assessment creator Wellsource, “most employers don’t want to see that information as much as employees don’t want to give it to them.”

m o n e y. c o m

HR Asks If You’re Healthy 5 by Kara Brandeisky

THE GOAL IS TO SAVE MONEY

Knowing more about employee health can help companies develop wellness initiatives, such as smoking-cessation classes, nutrition counseling, gym discounts, and lifestyle coaching (98% of big companies have a program). While employers see wellness as an effective tactic for controlling health care costs, so far the evidence that they do is mixed.

Illustrations by g i l l i a n

blease

SOME PROGRAMS FALL INTO A LEGAL GRAY AREA

The Equal Employment Opportunity Commission has questioned whether wellness programs at three companies are mandatory and thus discriminatory. The most well-known of the ﬁrms, Honeywell, says its program is voluntary. But employees who refuse health screenings must pay a $500 surcharge for their insurance and can lose out on up to $1,500 in health savings account contributions. Legal experts are closely watching the EEOC’s actions.

The non-habit forming sleep-aid from the makers of NyQuil.TM Sleep easily. Sleep soundly. And wake refreshed. Keep out of reach of children. Â© Procter & Gam Ga ble, Inc., 2014

Plan

CURB APPEAL

CAREERS

ASK THE EXPERT

SECOND ACT

HEALTH

At Presbyterian College in South Carolina, 46% of students get scholarships, averaging $16,000 a year.

USE THESE TIPS TO SCORE A MERIT AWARD BIG ENOUGH TO PUT A REAL DENT IN TUITION BILLS. by Kim Clark

LOVE AND MONEY

graduates getting merit aid has more than tripled in the past 20 years, the government reports, and it’s not just “A” students who qualify. Palmasani, a counselor at Providence Catholic High School in New Lenox, Ill., says, “Never anticipate that your child’s test scores and GPA are too low to be considered for merit aid.” The stakes can be substantial. An analysis of the merit aid budgets of the 665 colleges in MONEY’s Best Colleges rankings— schools that meet basic criteria for value and educational quality— found that last year about 17% of students got scholarships at private colleges. The average award: $12,500. And at the most generous schools, at least a third of students get merit grants, typically covering at least half of tuition. The downside of the uptick in merit awards is that they often take dollars away from grants based on ﬁnancial need. Recently net college prices for low- and moderateincome households have been rising faster than for more affluent ones. That makes it imperative for families of all income levels to seek out every merit dollar available. These strategies should help.

GO WHERE THE MONEY IS MAYBE YOUR KIDS aren’t exactly Einsteins, but they can do math well enough to ﬁgure out that even upper-middle-class families can’t easily afford the $100,000 average sticker price for a degree from a public college, let alone $200,000 for a private school. And you know that’s a pretty tough equation too. One way to help close the gap between your savings and any

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need-based aid your student is likely to get: Set your sights on merit aid awarded by colleges based on grades, test scores, or other accomplishments. Nabbing a merit award is getting easier, says Frank Palmasani, author of Right College, Right Price, as more schools use scholarships as a marketing tool to attract quality students. Indeed, the percentage of under-

J A N U A R Y/ F E B R U A R Y 2 0 1 5

The most selective schools are the least likely to be liberal with merit money. At colleges in the MONEY rankings that accept 20% or less of applicants, only 7% of students receive merit aid. At schools where at least a third of students get merit scholarships, the average acceptance rate is 61%. As the list on page 43 shows, the best odds are at lesser-known private schools such as Furman University in

P H OTO G R A P H B Y ST E P H E N A L L E N , C O U R T E S Y O F P R E S B Y T E R I A N C O L L E G E

How to Find a Generous College

COLLEGE

South Carolina, which accepts about two-thirds of applicants. It awards almost half the students merit scholarships. Don’t assume a high acceptance rate means the school has lowerquality students: The typical undergrad at Millsaps, which accepts 47% of applicants and is ranked No. 1 for merit aid on our list, had SAT scores of about 1140; at No. 2, Hendrix, which accepts 80%, the typical freshman scored 1200. The SAT national average: 1010.

by putting them at the top of school lists requested on FAFSA (the Free Application for Federal Student Aid), the SAT or ACT forms, and college-search sites. Schools tend to offer the most aid to prospects who would improve their student proﬁle and have several college options. But some don’t bother making offers to students they believe, realistically, probably won’t choose their institution. At Beloit, in Wisconsin, where

about a quarter of students get merit aid, the best offers go to applicants with the highest grades and test scores who have also indicated the school is one of their top picks, says Beloit president Scott Bierman. “We have a decent sense of what other schools offer families” and want to make offers that compete favorably, he says. “But if we’re not in your top three, we know you’re not really a serious candidate.”

LOOK BEYOND HOME Public universities generally don’t hand out a lot of merit awards; only 9% of students at the state schools we ranked received scholarships, averaging $4,500. A few exceptions include public schools in Alabama, North Dakota, and South Carolina, and many nonflagships in other states, which are making a concerted effort to woo out-of-state students. The University of South Carolina, for example, last year offered scholarships worth about $8,500 a year to outof-state students with A-minus grades and SAT scores averaging 1245. Among the public schools in our rankings, Truman State in Missouri and the New College of Florida also offer at least 25% of their students merit aid. Call the admissions office—not the financial aid office—at public schools to find out whether they offer merit awards to out-of state students.

The 20 Best Colleges for Merit Aid Among the 665 schools in our Best Colleges ranking, these 20 offer the biggest merit scholarships to the greatest percentage of their students. RANK: MERIT AID (OVERALL BEST COLLEGES)

1 (544) 2 (592) 3 (194) 4 (84) 5 (150) 6 (409) 7 (138) 8 (162) 9 (359) 10 (518) 11 (92) 12 (235) 13 (433) 14 (231) 15 (293) 16 (555) 17 (480)

PLAY A LITTLE HARD TO GET

18 (657)

Encourage your child to apply to several schools where his grades and test scores put him in the top quarter of the applicant pool. Then he should designate his favorites

19 TIE (328) 19 TIE (328)

PERCENT WHO GET MERIT AID

AVG. MERIT AWARD

AVG. AWARD AS PCT. OF TUITION

40%

$19,600

60%

$23,700

UNIVERSITY OF TULSA ` Okla. PRESBYTERIAN COLLEGE ` S.C.

$17,100

$15,000

WESTMINSTER COLLEGE ` Mo. TRINITY UNIVERSITY ` Texas

$10,400

$15,200

CENTRE COLLEGE ` Ky. DENISON UNIVERSITY ` Ohio FURMAN UNIVERSITY ` S.C.

$17,700

$17,200

$16,400

COLLEGE OF WOOSTER ` Ohio ILLINOIS INST. OF TECH. ` Ill.

$19,300

$19,900

MISSISSIPPI COLLEGE ` Miss. AUGUSTANA COLLEGE ` S.D.

$6,900

$13,500

RHODES COLLEGE ` Tenn. SOUTHWESTERN UNIVERSITY ` Texas

$16,900

$17,700

TULANE UNIVERSITY ` La. OHIO WESLEYAN UNIVERSITY ` Ohio

$21,100

$20,800

$18,400

$17,900

$13,200

SCHOOL

MILLSAPS COLLEGE ` Miss. HENDRIX COLLEGE ` Ark.

WASHINGTON COLLEGE ` Md. DORDT COLLEGE ` Iowa SAINT MARY’S COLLEGE ` Ind.

NOTES: Ranking was determined by multiplying the percentage of students who get merit aid by the average award at schools in our Best Colleges rankings. To break ties, schools ranked higher overall took the top spot. SOURCES: MONEY, Peterson’s

J A N U A R Y/ F E B R U A R Y 2 0 1 5

m o n e y. c o m

Plan

CURB APPEAL

CAREERS

ASK THE EXPERT

SECOND ACT

HEALTH

COLLEGE

LOVE AND MONEY

DESIGN A SUPPORT SYSTEM

Dig Out Together After the Holidays OVERDID IT ON SPENDING? STOP POINTING FINGERS AT EACH OTHER AND START TAKING ACTION JOINTLY.

by Farnoosh Torabi FOR MICHELLE ARGENTO and Brendan Diamond, bickering over holiday spending usually kicks off as soon as the Christmas tree goes up and lasts until they pay off their credit card bill in February. While she’s a self-described “giver,” he doesn’t get her need to buy presents for everyone and his brother. “It’s a culture clash that drives us nuts,” Argento says. And tensions increase when the ﬁnal tally arrives: Last winter the Chicago couple charged $1,630 over the holidays, more than twice what the average American spends. Sound familiar? “People put good ﬁnancial sense on the back burner around the holidays,” says

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Gail Cunningham of the National Foundation for Credit Counseling. And when couples need to face the music in January and pay down debt, she says, “that ugly ﬁnger of blame can come out very easily.” Nurse your holiday hangover as a team with these steps.

TAKE THE BLAME TOGETHER Regardless of who spent what, accept that you’re both responsible. “You might not have swiped the card, but you were likely complicit, either by putting all the gift-giving responsibility on your partner or for not starting a discussion around a holiday budget,” says Brad Klontz, a clinical psychologist in Lihue, Hawaii, and the author of Mind Over Money. What’s passed is past, so move forward and focus on getting out from under.

Illustration by tay l o r

ca l l e ry

Keep from getting on each other’s cases by making a payoff plan. Start by moving the debt to a card like Chase Slate, which offers 0% for 15 months with no transfer fee in the ﬁrst 60 days. Then set up auto-payments to zero out the debt before the no-interest window is up, and use the ReadyForZero app (free) for an occasional nudge to good behavior. If you make a largerthan-normal bank deposit, for example, the app sends a notiﬁcation suggesting an extra payment.

CUT EXPENSES INDEPENDENTLY Rather than try to pare, say, $300 from the family budget, assign each other a goal of $150 from personal expenses. That way you can both reduce spending as you wish—as opposed to how your mate insists. Along the way, schedule (free) celebrations, like a marathon of your favorite TV show on Netﬂix when you’ve paid off half. “Having something to look forward to helps you stay on track,” says Kate Northrup, author of Money: A Love Story.

WORK IT OFF Budgeting gives you the blues? The alternative is to raise extra cash. On evenings and weekends last winter, Argento and Diamond picked up jobs running errands via Craigslist and TaskRabbit. Their hustle got them back in the black before spring arrived. Now they plan to make it a tradition—ahead of shopping season. “It’s no longer about me buying gifts for my friends,” says Argento. “It’s about us using our business to pay for gifts together.” Contributing editor Farnoosh Torabi is the author of When She Makes More. Catch her columns and videos at Money.com.

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Get up to $600 when you roll over your old 401(k). Call TD Ameritrade at 800-454-9272 or go to tdameritrade.com/rollover for details.

A rollover is not your only alternative when dealing with old retirement plans. Please visit tdameritrade.com/rollover for more information on rollover alternatives. All investments involve risk, and successful results are not guaranteed. Offer valid through 04/30/2015. Funding of $25,000–$99,999 receives $100; funding of $100,000–$249,999 receives $300; and funding of $250,000 or more receives $600. Cash bonus subject to twelvemonth funding-duration condition. See Web site for details and other restrictions/conditions. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2015 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

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

Live Happily Ever After

Illustration by jaso n

h i n d ley

RETIREMENT OUGHT TO BE a happy time. You can set your own schedule, take long vacations, and start spending all the money youâ&#x20AC;&#x2122;ve been saving. And for many retirees that holds true. According to the Gallup-Healthways Well-Being Index, people tend to start life happy, only to see their sense of well-being decline in adulthood. No surprise there: Working long hours, raising a family, and saving for the future are high-stress pursuits. Once you reach age 65, though, happiness picks up again, not peaking until age 85. How can you make sure you follow this blissful J A N U A R Y/ F E B R U A R Y 2 0 1 5

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Retire

SECRETS TO HAPPINESS | THE NEW RETIREMENT

pattern? Financial security helps. And good health is crucial: In a recent survey 81% of retirees cite it as the most important ingredient for a happy retirement. Some of the other triggers are less obvious. Here’s what you can do to make your retirement a happy one.

CREATE A PREDICTABLE PAYCHECK No doubt about it: More money makes you happier. Once you amass a comfortable nest egg, though, the effect weakens, says financial planner Wes Moss. For his recent book, You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest Retirees, Moss surveyed 1,400 retirees in 46 states. The happiest ones had the highest net worths, but Moss found that money’s power to boost your mood diminished after $550,000. “Once you reach a certain level, more money doesn’t buy a lot more happiness,” says Moss. Similar research based on the University of Michigan Health and Retirement Study (see right) found a dropoff in happiness with extreme wealth. Where your income comes from is just as important as how much savings you have, says Moss. Retirees with a predictable income—a pension, say, or rental properties— get more enjoyment from spending those dollars than they do using money from a 401(k) or an IRA. Similarly, a Towers Watson happiness survey found that retirees who rely mostly on investments had the highest financial anxiety. You can engineer a steady income by buying an immediate fixed annuity. According to ImmediateAnnuities .com, a 65-year-old man who puts $100,000 into an immediate annuity today would collect about $500 a month throughout retirement.

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STICK WITH WHAT YOU KNOW As the graphic below shows, people who work past 65 are happier than their fully retired peers—with a big asterisk. If you have no choice but to work, the results are the opposite. The benefit of working isn’t just financial. It’s also a boon to your health—a key driver of retirement happiness. The physical activity and social connections a job provides are a good antidote to an unhealthy sedentary and lonely lifestyle, says medical doctor turned financial planner Carolyn McClanahan. A 2009 study published in the Journal of Occupational Health Psychology found that retirees with part-time or temporary jobs have

What Will Make Your Retirement a Happy One?

fewer major diseases, including high blood pressure and heart disease, than those who stop working altogether, even after factoring in their pre-retirement health. Switching careers in retirement, though, isn’t as beneﬁcial. Retirees who take jobs in their ﬁeld reported the best mental health, says lead researcher Yujie Zhan of Canada’s Laurier University, perhaps because adapting to a new work environment and duties is stressful.

FIND FOUR HOBBIES Busy retirees tend to be happier. But just how active do you have to be? Moss has put a number on it. He found that the happiest retirees

YOU CAN’T ESCAPE THE FACT THAT MONEY HELPS …

As you might expect, retirees with fatter nest eggs are happier, though the beneﬁt eventually wears off. LIFE SATISFACTION IN RETIREMENT

YOU BECOME HAPPIER LATER IN LIFE.

Typically, happiness over your lifetime has been compared to a smile: It’s high when you’re young, declines through your working years, and peaks late in life. OVERALL WELL-BEING ON A 1 TO 100 SCALE

67.3

66.5

68.7 64.7

% change

35% 30% 25% 20%

Non-housing wealth (millions)

… AS DOES A GUARANTEED INCOME. The more of your income you get from regular pension checks, the better you feel about your ﬁnancial future. % WHO WORRY ABOUT FINANCIAL FUTURE

31%

Less than 25% of income from pension or annuity

28%

25% to 49% of income 50% of income or more

Age 18–29

30–44

45–64

24%

65+

NOTE: Measure of emotional and physical health, life evaluation, healthy behaviors, and work environment. SOURCE: Gallup-Healthways Well-Being Index

SOURCES: Michael Finke and Nhat Hoang Ho analysis of University

of Michigan Health and Retirement Study (top); 2014 Towers Watson Retiree Survey (bottom)

RENT LATE IN LIFE

goes on, that changes. Michael Finke, a professor of retirement and personal ﬁnancial planning at Texas Tech University, analyzed the satisfaction of homeowners vs. that of renters from age 20 to 90-plus and found a drop late in life. The hassles of homeownership build as you age, Finke notes, and a house can be isolating. Most people want to stay put in retirement. Yet, says Finke, “you need to plan for a transition to living in an environment with more social interaction and less home responsibility.”

In retirement, as in your working years, owning a home brings you more joy than renting does. But, as the graphic below shows, as time

Once you suddenly have a lot more time on your hands, your closest

engage in three to four activities regularly; the least happy, only one or two. “The happy retiree group had extraordinarily busy schedules,” he says. “I call it hobbies on steroids.” For the biggest boost to your happiness, pick a hobby that’s social. The top pursuits of the happiest retirees include volunteering, travel, and golf; for the unhappiest, they’re reading, hunting, ﬁshing, and writing. “The happiest people don’t do things in isolation,” says Moss.

KEEP YOUR KIDS AT ARM’S LENGTH

STILL, OTHER FACTORS CAN MAKE A BIG DIFFERENCE TOO.

Your happiness doesn’t hinge solely on your bank account. Good health matters, and socializing brings you more pleasure than it did when you were younger. Working helps your mood too, especially if it’s by choice. Homeownership turns out to be a mixed bag depending on your age.

relationships can have a big impact on your mood. According to an analysis by Finke and Texas Tech researcher Nhat Hoang Ho, married retirees, particularly those who retire around the same time, report higher satisfaction than nonmarrieds—but only if the couple get along well. A poor relationship more than erases the positive effects of being married. Children don’t make much of a difference, with one twist. Living within 10 miles of their kids leaves retirees less happy. “People overestimate the amount of satisfaction they get from their kids,” says Finke. The reason is unclear—could being a too accessible babysitter be the problem?

MOST IMPORTANT INGREDIENTS FOR A HAPPY RETIREMENT

81%

Good health

58%

Financial security

Loving family and friends

Having purpose

31%

20%

AVERAGE SATISFACTION BY TYPE OF HOUSING, SCORED ON A SCALE OF 1 TO 10 Homeowner

Renter

Continually trying new things

SELF-REPORTED HAPPINESS BY WORK STATUS, AGES 65 TO 75, ON A SCALE OF 1 TO 10

% REPORTING A LOT OF ENJOYMENT AFTER SOCIALIZING WITH FAMILY AND FRIENDS

6 8 Ages 30–39

42%

Ages 40–49

43%

6.5

5.9

4 2

5.2

4.4

Age 40–49 50–59

60–69

70–79

80–89

90+

Ages 50–64

47%

Ages 65+

64%

Voluntarily employed part-time

Employed full-time

Retired

Involuntarily employed part-time

NOTE: Happiness survey of retirees 50-plus, multiple answers allowed. SOURCES: Merrill Lynch Age Wave Health and Retirement Survey (top right); from left, Gallup-Healthways Well-Being Index; IZA Journal of

European Labor Studies: “Employment, Late-Life Work, Retirement, and Well-Being in Europe and the U.S.”; Regional Science and Urban Economics Journal

Retire

SECRETS TO HAPPINESS | THE NEW RETIREMENT

Going to Extremes With Your IRA A NEW STUDY REVEALS THAT MANY SAVERS HAVE CRAZY RETIREMENT PORTFOLIOS. HERE’S HOW TO FIX YOUR MIX.

by Penelope Wang WHEN DID YOU LAST pay attention to how your IRA is invested? It’s time to take a close look. Nearly two out of three IRA owners have extreme stock and bond allocations, a new study by the Employee Beneﬁt Research Institute (EBRI) found. In 2010 and 2012, 33% of IRA savers had no money in stocks, while 23% were 100% in equities. An all-bond or all-stock IRA may be just what you want, of course. Perhaps you can’t tolerate the ups and downs of the stock market or you think you can handle 100% equities (more on that later). Or maybe your IRA is part of a larger portfolio. But chances are, you ended up with an out-of-whack allocation because you left your IRA alone. “It seems likely many investors aren’t investing the right way for their goals, whether out of inertia or procrastination,” says EBRI senior research associate Craig Copeland. An earlier study by the Investment Company Institute found that less than 11% of traditional IRA investors moved

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money in their accounts in any of the five years ending in 2012. To keep a closer tab on how your retirement funds are invested, take these four steps. See where you stand. Looking at everything you have stashed in your IRA, 401(k), and taxable accounts (don’t forget your spouse’s plans), tally up your holdings by asset class—largecompany stocks, short-term bonds, and the like. You’ll probably find that the bull market of the past five years has shifted your

All or Nothing A sizable number of young savers and pre-retirees have portfolios that are too risky or too cautious. IRA EXTREMES

41% 21% Ages 55–64 with 100% in stocks

Ages 25–44 with 0% in stocks

allocation dramatically. If you held 60% stocks and 40% bonds in 2009 and let your money ride, your current mix may be closer to 75% stocks and 25% bonds. Get a grip on your risks. An extreme allocation—or a more extreme one than you planned— can put your retirement at risk. Hunkering down in fixed income means missing out on years of growth. Putting 100% in stocks could backfire if equities plunge just as you retire—what happened to many older 401(k) investors during the 2008–09 market crash. Reset your target. If you also have a 401(k), your plan likely has an asset-allocation tool that can help you settle on a new mix, and you may find that you need to make big changes. That’s especially true for pre-retirees, who should be gradually reducing stocks, says George Papadopoulos, a financial planner in Novi, Mich. A typical allocation for that age group is 60% stocks and 40% bonds. As you actually move into retirement, it could be 50/50. Make the shift now. If moving a large amount of money in or out of stocks or bonds leaves you nervous, you may be tempted to do it gradually. But especially in tax-sheltered accounts, it’s best to fix your mistake quickly. (In taxable accounts you may want to add new money instead to avoid incurring taxable gains.) “If you’re someone who’s a procrastinator, you may never get around to rebalancing,” says Boca Raton, Fla., financial planner Mari Adam. And you don’t want a market downturn to do your rebalancing for you.

NOTE: In 2010 and 2012. SOURCE: EBRI IRA Database

J A N U A R Y/ F E B R U A R Y 2 0 1 5

Editor-at-large Penelope Wang tweets about retirement at @PennyWriter.

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J A N U A R Y/ F E B R U A R Y 2 0 1 5

THE MONEY 50

I N V E ST O R’S GU I DE 2015

HOW TO KEEP WINNING BY P E N E L O P E WA N G WITH KARA BRANDEISKY

PHOTOGRAPHS B Y T R A V I S R AT H B O N E

RACKING UP BIG INVESTING VICTORIES OVER THE PAST SIX YEARS WAS EASY. NOW, THOUGH, THE GOING LOOKS TO GET TOUGHER. THE PAGES THAT FOLLOW WILL HELP YOU STAY ON THE PATH TO YOUR GOALS.

INSIDE THIS GUIDE

PART 1 » Playing Defense: What the bond market is telling you

PART 2 » Going on Offense: Where the opportunities are in stocks

PART 3 » The Playbook: Putting your game plan into action

I N V E ST O R’ S G U I D E 2 0 15 INTRODUCTION

a roaring bull market to make you feel like a winner. Since the March 2009 market bottom, the Standard & Poor’s 500 stock index has returned more than 200%, and bonds have posted a respectable 33% gain. The financial crisis of 2008? It was bad, but perhaps you feel as if you can finally start to relax. Don’t get too comfortable: Expect lower returns ahead. The stock market rally is about to enter its seventh year, making it one of the longest ever (see the graphic on page 56); at some point a bear will stop the party. Meanwhile, the Federal Reserve is signaling the end to its program of holding down interest rates and thus encouraging risk taking. And there’s zero chance that Congress will add further fiscal stimulus. In short, the post-crisis investing era—when market performance was largely driven by Washington policy and Fed intervention— is over. “As the global risks have receded,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab, “the focus is going back to earnings HERE’S NOTHING LIKE

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U.S. STOCKS ARE STILL YOUR CORE HOLDING STOCKS ARE EXPENSIVE. The aver-

age stock in the S&P 500 is trading at a price of 16 times this year’s estimated earnings, about 30% higher than the long-run average. A more conservative valuation gauge developed by Yale ﬁnance professor Rob-

J A N U A R Y/ F E B R U A R Y 2 0 1 5

P R O P ST Y L I N G B Y M E G U M I E M OT O

and other fundamentals.” The stage is set for a reversion to “normal,” but as you’ll see, it’s a normal that lacks support for high future returns. For you, that means a balancing act. If you don’t want to take on more risk, you’ll have to accept the probability of lower returns. Helping you assess the right risk/reward balance and choose the right investments is the aim of this Investor’s Guide. As you dig in, keep these guidelines in mind.

ert Shiller that compares prices with longer-term earnings shows that stocks are trading at more than 50% above their average. “Given current high valuations, the returns for stocks are likely to be lower over the next 10 years,” says Vanguard senior economist Roger Aliaga-Díaz. He expects annual gains to average between 5% and 8%, compared with the historical average of 10%. Shiller’s numbers suggest even lower returns over the next decade. That doesn’t mean you should give up on U.S. stocks. They remain your best shot at staying ahead of inflation, especially today, when what you can expect from a bond portfolio is, well, not much. “Stock returns may be lower,” says AliagaDíaz, “but bond returns will be much less, so the relative advantage of stocks will be the same.” And the U.S. economy, though far from peak performance, is the healthiest big player on the global ﬁeld. Your best strategy: Now is a particularly important time to make sure your stock allocation is matched to your time horizon. “The worst outcome for older investors would be a bear market just as you move into retirement,” says William Bernstein, an adviser and author of The Investor’s Manifesto. A traditional asset mix for someone in his ﬁfties is the classic 60% stock/40% bond split, with a shift to 50%/50% by retirement. If your allocation was set for a 35-year-old and you’re 52, update it before the market does. On the other hand, if you’re in your twenties and thirties, you should be far less worried about today’s prices. Hold 70% to 80% of

your portfolio in equities. The power of compounding a dollar invested over 30 to 40 years is hard to overstate. And you’ll ride through many market cycles during your career, which will give you chances to buy stocks when they’re inexpensive.

FOREIGN STOCKS ARE CHEAP, BUT FOR A REASON

Bernstein. Many core overseas stock funds, such as those in your 401(k), invest mainly in developed markets, so you may need to opt for a separate emerging-markets offering—you can find excellent choices on our MONEY 50 list of recommended mutual and exchange-traded funds. (See page 100.) For an all-in-one fund, you could opt for Vanguard Total International Stock Index (VGTSX) , which invests 20% of its assets in emerging markets.

HOLD BONDS FOR SAFETY, NOT FOR INCOME FIXED-INCOME INVESTORS have few options right now. Today’s rockbottom interest rates are expected to move a bit higher, which may ding bond fund returns. (Bond rates and prices move in opposite directions.) Yet over the long run, intermediate-

WITH MANY OVERSEAS economies barely out of recession or dragged down by geopolitical crises, international equity markets have been trading at low valuations. And some market watchers are expecting a rebound over the next few years. “Central banks in Europe, China, and Japan are making ﬁscal policy changes that are likely to boost global growth,” says Schwab’s Kleintop. Oil prices, which have fallen 40% in recent months, may boost some markets as consumers spend less on fuel and step up discretionary buying. But foreign stocks aren’t uniformly bargains. The slowdown in China’s economic growth threatens the economies of the countries that supply it with natural resources. (See “Why China Is Over,” page 92.) Japan’s stimulus program to date has had mixed success, and the reason to expect stimulus in Europe is that policymakers are again worried about deﬂation. Your best strategy: Spread your money widely. The typical investor should hold 20% to 30% of his stock allocation in foreign equities, including 5% in emerging markets, says

J A N U A R Y/ F E B R U A R Y 2 0 1 5

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I N V E ST O R’ S G U I D E 2 0 15 INTRODUCTION

THE MARKET IS RETURNING TO

With the ﬁnancial crisis far behind us, the stock market has entered a new “normal” phase in which earnings and stock Logarithmic scale*

S&P MONTHLY CLOSE

2000

1. THE GREAT RECESSION REALLY IS OVER The sheer stamina of the current bull says the crisis years are behind us.

1000

LENGTH OF FIRST MAJOR RALLY AFTER END OF:

1919 deﬂation

2,959 days

World War II

200

100

2,607 days

1981–82 recession

1,839 days

Tech wreck

1,826 days

Financial crisis

2,100 days

1919 DEFLATION

END OF WORLD WAR II

GILDED AGE

ROARING ’20s

POSTWAR EXPANSION

1900s

’10s

term rates are likely to remain below their historical average of 5%. If you want higher income, your only alternative is to venture into riskier investments. “Reaching for Yield” on page 72 presents you with the most prudent options.

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’20s

’30s

Your best strategy: If you don’t want to take risks outside your stock portfolio, then accept that the role of your bond funds is to provide safety, not spending money. “After years of relative calm, you can expect volatility to return to the stock

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’40s

’50s

’60s

market—and higher-quality bonds offer your best hedge against stock losses,” says Russ Koesterich, chief investment strategist at BlackRock. Stick with mutual funds and ETFs that hold either investment-grade, or the highest-rated junk bonds.

FEEDBACK: pwang@moneymail.com

’7

O NORMAL

70s

2. YOU MAY HAVE SEEN MUCH OF THE GAINS

valuations matter more than government intervention.

Stock prices have climbed faster than in previous bull markets, and valuations are even higher. PRICE GAIN IN THE FIRST SIX YEARS

Major bull markets

Roaring ’20s

Other rallies

Postwar expansion

Current bull market

149%

16.9 192%

The great bull

156%

Current (3/9/09 to 12/8/14) TECH WRECK

P/E AT SIX YEARS

17.4 14.2

202%

27.0

FINANCIAL CRISIS

3. YOU COULD STILL SUFFER A BIG LOSS Downturns are painful, especially if you’re near retirement. BEAR MARKETS WITHIN BULL MARKETS

August 1956 to October 1957

1981–82 RECESSION

–21.6%

December 1961 to June 1962

August 1987 to December 1987

–19.9%

–28.0%

–33.5%

4. BONDS WON’T GIVE YOU MUCH Bond returns won’t revisit their highs of recent decades, when interest rates were recovering from their own crisis. THE GREAT BULL

CURRENT INFLATIONADJUSTED ANNUALIZED RETURNS

’80s

’90s

2000s

Don’t rely solely on government issues. Corporate bonds will give you a little more yield. You may be tempted to hunker down in a short-term bond fund, which in theory will hold up best if interest rates rise. But this is one

’10s

1927– 1977

1978– 2007

2008– present

1.1% 4.0% 2.6%

corner of the market that hasn’t returned to normal. Short-term bonds are sensitive to moves by the Federal Reserve to push up rates. The Fed has less ability to set long-term rates, and demand for long-term Treasuries is strong, which will keep down-

July 1990 to October 1990

NOTES: Price/earnings ratios are based on 10 years of averaged earnings. The S&P composite price index was created in 1926; monthly stock prices from 1/1900 to 11/1927 are estimates from Robert J. Shiller. Bull market dates from 1900 to 1921 are from Darwin Investment Strategies, based on Shiller’s estimates. SOURCES: Standard & Poor’s, Shiller, Bloomberg, Morningstar

ward pressure on the rates those bonds pay. (See “How 2% Explains the World” on page 62.) So an intermediate-term bond fund that today yields about 2.25% is a reasonable compromise. Sometimes in investing, winning means not losing.

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INVE STOR’S GUIDE 2015

» PART 1

62 HOW 2% EXPLAINS THE WORLD » What low rates say about the economy and future returns.

P R O P ST Y L I N G B Y M E G U M I E M O TO ; G R O O M I N G B Y R Y U TA R O

REACHING FOR YIELD » The smart (and not-so-smart) ways to find income now.

PLAYING DEFENSE P H O T O G R A P H B Y T R A V I S R AT H B O N E

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THE BOND MARKET

HOW 2% EXPLAINS THE WORLD ULTRALOW INTEREST RATES DONâ&#x20AC;&#x2122;T JUST MAKE THE BOND MARKET A TOUGH PLACE TO EARN MONEY TODAY, THEY SIGNAL WHAT COULD LIE AHEAD FOR YOUR WHOLE PORTFOLIO, AND THE ECONOMY, IN THE YEARS TO COME.

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BY P AT R E G N I E R / PHOTOGRAPHS BY JOE PUGLIESE

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ELAINE STOKES, CO-MANAGER OF LOOMIS SAYLES BOND, SAYS LOW YIELDS REFLECT GLOBAL CHANGE.

I N V E ST O R’ S G U I D E 2 0 15 PA R T 1 » P L A Y I N G D E F E N S E

ARREN BUFFETT MADE a commonsense call in early 2009. Bonds were the new bubble, the famed investor said, comparable to the recent dotcom and housing manias. The yield on a 10-year Treasury, a standard benchmark for the market, had fallen to 3%, less than half the previous three-decade average of 7.4%. Bond yields fall when investors pile in and push prices higher. Conversely, investors stood to lose money if bond interest rates moved back up to normal. At 3%, where else could rates go but up? Flash-forward six years. Treasury yields are … 2.1%, and it turns out sideways and even down are real possibilities for rates. That’s proved to be a

hard lesson. In 2011, Bill Gross, then manager of Pimco Total Return, the planet’s then-biggest bond fund, sold all of the fund’s Treasuries on a bet that rates would rise. Gross ended up with his worst year relative to his peers. One day this past October, the price of a 30-year Treasury quickly and brieﬂy shot up 5% in value. That huge rally, by bond standards, was probably ampliﬁed when hedge fund managers who had bet against Treasuries had to race to reverse themselves. All told, if you stuck to a plain-

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vanilla intermediate-term bond index fund, you earned an annualized return of 5.8% over five years. Cash made almost nothing in that time. Even more striking than those numbers is that some vivid crash scenarios failed to materialize. The Federal Reserve’s aggressive monetary easing, for one, didn’t stoke runaway inflation, which would have forced up yields. Yet as Bonnie Baha, head of developed-market bonds at the fund company DoubleLine, points out, “Every single day of every single year for the past five years you could have

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turned on CNBC and someone would have said, ‘Rates are going to rise, rates are going to rise.’ ” That’s because many investors remain mentally anchored to the inﬂationary 1970s and early 1980s, when rates hit double digits, Baha thinks. “People are pattern-driven, storytelling creatures,” she says. Of course, it would be just as dangerous to tell yourself a story in which recent returns forecast the future. A 2.1% yield on Treasuries is extremely low. Thin payouts have pushed investors to take on more risk (see “Reaching for Yield” on page 72). And managers like Baha and the others you’ll meet in this story are trying to navigate a market—and a global economy—that’s not like any other they’ve seen. Talk to the pros who spend long days studying yield curves and default rates, and you learn some things that matter even if you aren’t trying to time this inscrutable bond market. While the Dow Jones average or Apple share prices capture the headlines, the bond yield can be a window on what’s happening in the economy and what you can expect in the future for your whole portfolio. Nothing in the picture is certain, and a lot of it isn’t pretty. But if you’re saving to retire, build a business, or send a kid to college, you’ll want to take a closer look at this 2% world.

THE “NO” FUND THOMAS ATTEBERRY RUNS the $6 billion FPA New Income Fund out of an office on Los Angeles’s Westside.

THE BOND MARKET

ECONOMIST ROBERT SHILLER HAS ADDED A CHAPTER ON BONDS TO HIS CLASSIC BOOK ON MARKET BUBBLES.

An odd fact about the bond world is that many of the top managers, including Pimco and DoubleLine, are located in Southern California. But if FPA’s location is near to the heart

of things, its views on bonds are way off the beaten track. FPA’s website features a picture of a child drawing the one-word grafﬁto “No” on a brick wall. Since before

ST Y LING BY CA LL ISTA W I LSO N ; G RO O MI N G BY MEL PALDI N O

the financial crisis, Atteberry has mostly been saying no to the bond market. He’s kept New Income’s “duration”—a measure of how much a fund can lose on its bonds if rates rise—very low, making it one of the more consistently bearish generalpurpose bond funds. By way of explaining his position, Atteberry, dressed business-casual in jeans and a striped dress shirt, prints out a historical chart of rates on long-term bonds. “I find pictures help a lot,” he says. He points to the troughs, and highlights, yes, a pattern. It’s hard to miss. “Only a handful of times do you get something like [today’s] number—actually only one,” he says. He’s drawing attention to the years around World War II, the one other long period when interest rates bounced around near 2% before they then climbed for 25 years. It’s probably helpful to pause for some bond market basics. How can someone be “bearish” or “bullish” on bonds? After all, a bond tells you from the get-go what you should expect to earn. It represents a loan from investors, whether to a company or a government, and is supposed to pay a fixed rate of return until maturity. At that point the issuer pays you back the principal— that is, the bond’s face value. So why worry about losing money? Part of the answer is that until the bond matures, it can be bought and sold in the vast global bond market, which at $108 trillion in value is twice the size of the world’s stock markets. As rates change moment to moment—based on anything from expectations about inflation to minute shifts in Fed policy—the value of a bond adjusts so that the

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INVESTOR’S GUIDE 2015 PA R T 1 » P L A Y I N G D E F E N S E

yield for a prospective buyer matches the new rate. Say you own a Treasury paying a coupon of 2.1%; if rates rise to 3%, which they touched in 2013, you have to cut your asking price for the bond until its effective yield equals 3%. If you’re one of the relatively few investors who own individual bonds and hold to maturity, you may be indifferent to these fluctuations. But in mutual and exchange-traded funds, sharp movements in rates can translate into significant capital gains or losses. One of New Income’s goals, which is unusual for a fund, is to never show a loss over a 12-month period. Today’s 2.1% yield is too little reward for the risk of going negative, says Atteberry. To avoid that, he has been holding mostly bonds that mature within three years. That’s brought the fund’s duration, or rate sensitivity, to 1.4, which roughly means that for every percentage point rates rise, the fund’s portfolio value would drop 1.4%. By comparison, an index fund tracking the Barclays Aggregate index has a duration of 5.6. Over the past five years, Atteberry’s conservatism has earned his investors a paltry 1.8% annualized total return— about even with inflation. It takes a strong worldview to hold on to that kind of contrarian bet, and FPA certainly has one. Robert Rodriguez, who ran New Income with Atteberry until 2010 and remains a managing partner at the firm, is a harsh, even angry, critic of government spending and Fed policy. He correctly warned of a housing-driven credit crisis before 2008, and the fund made money that year, while most bond funds fell. But Rodriguez also predicted that the government

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“Investors are willing to buy anything with a yield to it, in many respects because the Fed asked them to go do it.” –THOMAS ATTEBERRY, manager of FPA New Income Fund

THE BOND MARKET

response to the crisis could trigger inflation, and he has said the federal debt load will cause rates to spike. So far none of that has happened. Atteberry shares with Rodriguez a belief that the Fed may ultimately stoke a bubble. Right now, though, he isn’t talking about inflation. Atteberry pulls more charts up on his computer. Economic inequality has held down income growth for most. The bottom 90% of Americans have essentially no savings. That restrains spending and, typically, inflation. That actually makes low yields look a bit better. (If inflation is mild, a small yield goes further.) “But it also makes the economy look worse,” says Atteberry, and that’s bad news for another part of the market, corporate bonds with low, or “junk,” credit ratings. These bonds’ higher yields often protect them when Treasury rates rise, but a slow economy raises the risk of defaults. Atteberry owns some junk, but his low-growth, low-yield outlook means “the marketplace is not offering

much,” he says. He sums it up: “When I was paid to take risk, I took it. I don’t get paid to take that risk today.” Until rates rise, FPA New Income investors are going to live with low returns and wait for better yields.

THE BIG QUESTION OF QE LURKING BEHIND ANY discussion of where bond prices are headed is the unusual role of the Federal Reserve in the markets since 2008. After the collapse of Bear Stearns and Lehman Brothers, the Fed cut the short-term interest rate it controls to essentially zero to keep the economy alive. Rates have stayed there ever since. The central bank went even further, buying up trillions of dollars’ worth of longermaturity Treasuries, as well as bonds backed by mortgages, in a program called “quantitative easing.” Economists and historians will

HOW LOW ARE TODAY’S LOW YIELDS? Compared with the past 124 years of long-term yields, the answer is very, very low. INTEREST RATES SINCE 1890

12%

14.6%

2% 6%

1890

1915

1940

1965

1990

2015

NOTES: Yields are as of beginning of the calendar year; 2015 is as of Dec. 17, 2014. SOURCE: Robert Shiller

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debate how well QE worked. But it looks as if the Fed’s buying helped push down interest rates on Treasuries, encouraging investors to seek higher returns in riskier stuff like corporate bonds and perhaps stocks. Lower corporate bond rates helped companies shore up their balance sheets, and the signal from the Fed may have made investors more optimistic.

“Europe and Japan are holding everything down. It doesn’t look like that’s going away soon.” –ELAINE STOKES, co-manager of Loomis Sayles Bond

In October, though, the Fed announced it had ﬁnally stopped buying up new bonds, the beginning of the end of the QE era. For bond investors now, the worry is this: Was QE a short-term, artificial sugar high for the markets? And if so, without it will longer-term rates come roaring back up? The difficulty with the “artiﬁcial” argument is that there are a lot of reasons besides the whims of Fed chair Janet Yellen and her predecessor, Ben Bernanke, for long-term rates to be low. “I used to be really concerned about the U.S. rates and the Treasury market because I was thinking too small,” says Elaine

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Stokes, a co-manager, with Dan Fuss and Matt Eagan, of Loomis Sayles Bond, which is on the MONEY 50 list of recommended portfolios.

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Stokes is no Treasury bull: She thinks rates are bound to rise. But Stokes says some big global trends could keep a lid on how high interest

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THE BOND MARKET

rates go. “Transitions take a long time, and this is not like any of the rate cycles we’ve seen in the past 30 years,” she says. Jobs are ﬁnally coming back in the U.S., but Europe and Japan still have huge economic problems. Because weak growth and low rates generally go together, and investors expect European and Japanese policymakers to cue up their own versions of QE, some overseas rates have fallen even more sharply than Treasuries. The 10-year German government bond, for example, yields only 0.6%. That essentially exports low rates to the U.S., as foreign investors buy up Treasuries. “Our 2% or 3% looks cheap next to Japan and Europe,” says Stokes. At the same time, America is aging. “We’re a month from the last baby boomer turning 50,” notes Stokes, speaking in her Boston ofﬁce. “That’s going to change things.” With more people retiring and the workforce growing more slowly,

companies don’t need to invest as much in factories and machines. According to a theory gaining favor among economists, this means less demand for borrowing, holding down rates. Japan, where the trend is worse (the workforce is actually shrinking), hasn’t cracked 2% on government bond yields since 1999. Unlike FPA, Loomis Sayles Bond is willing to place bets that can lose money—sometimes a lot of money. In 2008 it fell by more than 20%. (It up made that loss the next year.) But Stokes echoes Atteberry’s concern that there’s not a lot of compelling value left in the bond market. QE has helped draw investors into lower-quality corporates. Loomis Sayles Bond rode that wave, earning more than 8% annualized over the past ﬁve years. Now, Stokes says, that has largely played out. And the lower yields also make the bonds vulnerable if rates rise. “In every area where we’re invested,” says Stokes, “it feels a little bit stretched.”

WHAT’S DRIVING DOWN YIELDS Since 2007 investors have added more than $1 trillion to bond funds. CUMULATIVE INFLOWS/OUTFLOWS Bond funds

$1,200 billion

Stock funds

$600 $0

–$600 ’07

’08

’09

’10

’11

’12

NOTE: Includes all stock and bond fund categories. SOURCE: Investment Company Institute

’13

’14

IRRATIONAL GLOOMINESS? IN JANUARY, Yale

economist Robert Shiller, who shared the Nobel Prize in economics in 2013, is publishing the third edition of his classic book Irrational Exuberance. Some might take this as an ominous sign. The ﬁrst version came out in 2000, and it made the case that stock valuations looked awfully high, and that people seemed too optimistic about tech stocks. You know what happened next. The second edition, published in 2005, had a new chapter about the unusually high price of real estate. This new edition adds a chapter on—you guessed it—bonds. In a phone interview, Shiller demurs from applying the B-word to bonds. “It doesn’t clearly ﬁt my definition of ‘bubble,’ ” he says. “It doesn’t seem to be enthusiastic. It doesn’t seem to be built on expectations of rapid increases in bond prices.” In the unlikely event you meet anyone at the proverbial cocktail party talking about bond funds, he’s probably complaining about the lousy yields, not talking about the killing he expects to make. Still … Shiller does point to one similarity between today’s low yields and past bubbly episodes. Bubbles are a result of a psychological feedback loop: As asset prices go up, people come up with stories to explain why, which helps push prices higher, reinforcing the story, and so on. In the tech boom the story was of a new era of dotcom-fueled growth. The rationalizations about housing prices centered on cheap mort-

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gages and financial “innovations.” With bonds, too, says Shiller, “there are theories that have been amplified by the price performance.” The low-rate story driving bond prices, however, is a gloomy one. If inequality, troubles in Europe and Asia, and bad demographics weren’t worries enough, you can even add robots. “There’s a suggestion that computers are going to create a more unequal world, and that this is inhibiting people’s spending plans,” says Shiller. Instead consumers try to save more, bidding up the prices of assets. The idea of an economy that never quite gets back to prosperity has been labeled “secular stagnation” and the “new normal”—the latter term popularized by Bill Gross, before he made his surprising turn away from Treasuries. (Gross recently left Pimco for Janus; he declined to be interviewed for this story.) The “new normal” story is at least partly built into today’s bond prices. Shiller also points out that his research with Wharton economist Jeremy Siegel has shown that bond investors are pretty bad at anticipating inflation. Forget fever dreams of ’70s-style price hikes—a return to 3% inflation would render Treasuries a money loser in real terms. (Inflation is below 2%.) That doesn’t seem like such a high bar to clear. It’s what some economists think a healthy economy would look like. That said, the slow-growth, mildinflation scenario remains compelling. The last time rates were this low, a spike followed—but that coincided with postwar expansion, Cold War defense spending, and the baby boom. Maybe that was the anomaly.

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TIME IS ON YOUR SIDE You can earn roughly the current yield if you buy and hold. Hypothetical return for an index fund yielding 2.1% if rates rise… 1 point

-3%

2 points

5 points

-8%

Return in ﬁrst year Annualized return after seven years

-23%

NOTE: Assumes seven-year average maturity and a one-time change in rates across maturities. SOURCE: Vanguard

The assumption of continued low rates has probably been even more important, says Shiller, in driving up stock prices. With yields on bonds so meager, investors may have shifted money into stocks in hopes of getting a better return. In early versions of his new edition of Irrational Exuberance, Shiller described today’s bull market as the “post-subprime boom.” “But I changed it at the last minute,” he says. Now Shiller calls this era “the new normal boom.”

INVESTING IN A LOW-YIELD WORLD BOND MANAGERS HAVE been employing a baffling array of tactics to make the best of this market: Atteberry

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holds bonds backed by auto loans and airplanes. DoubleLine says it’s ﬁnding value in mortgages on commercial buildings. Julien Scholnick of Western Asset Management in Pasadena likes long-maturity Treasuries, which should do well if the recovery is followed by slow growth. Stokes’ fund even owns some stocks. If you hold bonds as part of, say, a 401(k) plan, the most important thing you can do is understand your risk. A decline in the value of a fund that’s the safe part of your retirement portfolio could come as a shock, and for money you may need soon, a short-term bond fund makes sense. But over the longer run a shift up in rates can also help make up for what you lost, and the current yield on bonds gives you a strong clue about what to expect. Say you own a diversiﬁed bond fund. Assume the yield is about 2% when you buy it, and the fund’s average bond matures in seven years. According to numbers from Vanguard, a sudden two-point jump in rates would cause the fund to lose about 8%. As its bonds paid out higher yields, however, your annualized return after seven years would be likely to level off to just about 2%. Of course, this hypothetical assumes an indexlike, consistent portfolio, which you might not get in an actively managed bond fund. Brent Burns, president of the investment adviser Asset Dedication, says the low-rate environment is pushing some managers to take bigger bets. And the wagers can be risky, even in Treasuries. The 30-year bond went up over 25% in 2014, notes Gibson Smith, chief investment officer for bonds at Janus. That also means

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THE BOND MARKET

“Investors are finding it hard to get used to such a low yield. But they’re going to find it hard to get used to slow growth—or what we at Pimco call the ‘new normal.’ ” —BILL GROSS, in a 2010 Money interview “it could have been negative 25%— that type of volatility,” says Smith. The real risk with bonds today, however, is not losses. It’s that the returns stay frustratingly low.

Ben Inker, co-head of asset allocation at GMO, a Boston fund manager, lays out two scenarios, one he calls “purgatory” and the other “hell.” In purgatory, economic growth picks up

and rates are headed for a spike. Bond prices will fall, and stocks might too. But after that you pick up better yield. In hell, secular stagnation is a reality. Your bonds don’t lose money, because rates stay low. And today’s stock prices, oddly, might make sense too. Here’s why: When the price of stocks is high relative to past earnings, future returns tend to be lower. Today the P/E ratio for stocks, as Shiller measures it, is expensive at 27. (The average is 17.) So stock returns may be on the low side. You still may be willing to take that deal, however, if you are earning only 2% on your bonds. That may help explain why stocks have recently shot up. If so, that’s a one-time adjustment. Hell is not just a low-bond-yield world. It’s a low-total-return world—and the economy is lousy too. That would be bad news for savers, especially younger ones. In the hell scenario, a typical portfolio earns 3.4% after inﬂation instead of the 4.7% Inker assumes you’d have gotten in the past. “Let’s say you turned 25 in 2009 and started saving,” he says. “You end up accumulating 25% less by retirement.” Inker stresses he doesn’t know which scenario we’re headed for. The one constant is that in neither are there lots of opportunities to make money with low risk. “This is a frustrating environment for us as investors,” admits Inker. “It is less clear what the right thing to do is than throughout almost the rest of history.” The trouble with bonds, it turns out, is bigger than unpalatable yields. And it’s the trouble with an economy that is taking a long time to ﬁnd its true normal.

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WITH BOND RATES LOOKING BARE, INCOME INVESTORS ARE EAGER TO GRAB GREENER OPTIONS. HIGHER PAYOUTS ARE OUT THERE, BUT WATCH YOUR STEP: SOME ARE RISKIER THAN OTHERS.

REACHING FOR YIELD FALLING OIL PRICES have sent shudders through the ﬁnancial markets lately, but if you’re investing for income, this development could actually spell opportunity. Over the past few years, as rates shriveled on traditional bonds, yield-starved investors poured billions into higher-yielding alternatives, including dividend stocks, real estate investment trusts, energy partnerships, and new “go-anywhere” bond funds. That paid off handsomely if you got in early enough but has been problematic lately: All that money ﬂooding in caused prices to rise sharply on bond alternatives, which sent yields plummeting. As a result, many of these securities by late last fall were paying out half as much as they usually do—or less.

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That is, until recently. Jitters over what sharply declining energy prices might mean for the economy have prompted a rush back into government bonds and other “safe” securities. As a result, yields on some alternative assets are rising—and you can once again find payouts ranging from 4% to 7%, compared with the measly 2.1% rate on 10-year Treasuries. To get to greener payouts, though, you have to climb a wall of risk. Historically, when market conditions turn sour, alternative assets lose more money, sometimes a lot more, than traditional fixed-income investments. That’s why financial advisers such as Mitch Reiner, chief operating officer of Capital Investment Advisers in Atlanta, recommend limiting the amount you invest in them to 5% to 25% of your portfolio, depending on how much income you need and whether you could let losses ride during market setbacks. What follows is the lowdown on the most popular bond alternatives, and the safest ways to use them to improve your income prospects.

D I V I D E N D ST O C K S

GO GLOBAL AND FOR PREFERREDS HIGH-QUALITY STOCKS that return a

hefty portion of profits to shareholders via dividends are a favorite of income investors when bond yields are low. That’s been especially true over the past few years, when many blue-chip and even some tech companies were yielding as much as or more than Treasury bonds. The same payouts with real growth

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potential—slam dunk, right? Not so much anymore. Yieldhungry investors have been bidding up prices on dividend payers since the financial crisis, and despite the market’s recent slide, they still look expensive relative to their earnings. For instance, the average stock in the SPDR S&P Dividend ETF, which tracks an index of companies that have boosted payouts consistently over the past 20 years, was recently selling at more than 18.7 times projected earnings. The price/earnings ratio for the Standard & Poor’s 500, which historically has commanded a higher multiple than slowergrowth dividend stocks: about 16. The more stock prices race ahead of earnings, the more likely they are to fall, warns James Stack, president of InvesTech Research of Whitefish, Mont. “We are in the sixth year of a bull market,” he warns, adding: “A retirement portfolio can be destroyed reaching for yield.” And while high-dividend shares typically drop less than the average stock during downturns, their losses are still substantially more on average than you could expect with bonds. Your best strategy: Rather than seeking out the highest yields, zero in on companies that consistently raise dividends. And don’t overpay. To avoid that, look for dividend payers overseas, where stocks have been less inflated than in the U.S. A good option: PowerShares International Dividend Achievers ETF (PID),a MONEY 50 pick that invests in foreign companies that have hiked dividends for at least five years straight. It paid out 3.5% last year yet has a modest average portfolio P/E of 15. Preferred stocks offer even higher

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yields, recently averaging 7%. These shares can be traded like regular stocks but have more in common structurally with bonds: Their payments tend to be fixed over time, and their shareholders are ahead of common stockowners in the pecking order of whom companies must pay first. What you give up in exchange for that reliable income: a shot at much appreciation, because preferred shares, like bonds, have set redemption prices. And like bonds, preferreds are also sensitive to interest rates. If rates jumped, your shares could lose value, as they did in 2013. Preferreds also lack diversification; almost 90% of them are issued by financial institutions. To reduce your exposure to banks, James Kinney, an adviser in central New Jersey, suggests splitting your preferred stake between iShares U.S. Preferred Stock ETF (PFF) and Market Vectors Preferred Securities ex-Financials (PFXF), which counts blue chips like United Technologies and Tyson Foods among its top holdings.

HIGH-YIELD BONDS

STICK WITH QUALITY JUNK FALLING OIL PRICES have really pum-

meled the high-yield bond universe, where energy issues make up 15% of the market. Worried that these developments raise the risk of defaults for junk—issues rated BB+ or lower —investors have been selling their bonds. That has driven yields up sharply as new buyers demand higher payments to offset greater risk. That’s a big change from last year,

ALTERNATIVES

when you might as well have called these securities the “bonds formerly known as high yield.” Halfway through 2014, amid high demand, junk was paying just 3.4 percentage points more than Treasury securities of similar duration—well below the long-term average premium of 5.8 points and a world away from the yawning 20-point gap during the ﬁnancial crisis in late 2008. Now the yield gap is back near the norm. “The spreads are at fair value,” says Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors. Fridson believes the fall in oil will turn out to be a positive for junk investors: “Eventually the economy will beneﬁt from lower oil prices, which will help the 85% of high-yield bonds not in the energy sector.” Stay away from the junkiest junk, though, where yields aren’t good enough to justify the higher default risk, says Gershon Distenfeld, director of high yield at AllianceBernstein.

According to Standard & Poor’s, 65% of issues rated CCC to C historically have defaulted within ﬁve years, compared with 3.4% for BBrated bonds. Sure, the C’s yield a lot more—11.7%, vs. 5.3% for BB’s—but that won’t matter if the issuer stops making payments. Your best strategy: Focus on funds that overweight bonds rated BB+ through B, which are still paying more than twice as much as Treasuries. Jeff Tjornehoj, head of Lipper Americas Research, calls USAA High Income Fund (USHYX) “a stellar performer” because of its ability to manage risk while still providing high returns. The fund was recently yielding about 5% and has only 8% of its holdings in C-rated bonds. Morningstar analyst Sarah Bush also praises the conservatism of Vanguard HighYield Corporate (VWEHX), yielding 6%. The fund has 93% of its portfolio in bonds rated B or better and a razor-thin expense ratio of 0.23%.

WHERE THE MONEY IS GOING Over the past three years, yield-hungry investors have lost their taste for ultrasafe Treasuries and sharpened their appetite for riskier fare. THREE-YEAR NET FLOW (IN BILLIONS)

Intermediate government bond

–$34.2

$83.9

$3.9 Preferred stock

$12.7 Real estate

NOTE: For the three years ending Nov. 30, 2014. SOURCE: Morningstar

$23.5

$24

High-yield bond

Energy limited partnership

Nontraditional bond

REAL ESTATE INVESTMENT TRUSTS

FOCUS ON HEALTH CARE HIGH DEMAND OVER the past year for

the traditionally lofty yields on REITs—the trusts are required to pay out 90% of their profits—has led to spectacular returns. Among the most popular REIT funds, for example, iShares Real Estate Fifty ETF and longtime MONEY 50 member Cohen & Steers Realty both gained more than 27% in 2014. The rally has resulted in skimpy payouts for new investors: REIT index funds were yielding about 3% by year-end, far below their 7.5% historical average. That’s led many analysts, such as Brad Thomas, editor of The Intelligent REIT Investor newsletter, to urge investors to be very picky about where they put new money. One pocket of opportunity now, he says, can be found in health care REITs, which specialize in leasing space to nursing homes, hospitals, and other medical facilities and will profit from the aging of the population. While their high P/Es may be off-putting—some are selling at more than 40 times earnings—a better way to assess REITS is to look at their funds from operations, or FFO. Whereas reported earnings treat depreciation on real estate holdings as an expense that lowers results, FFO adds depreciation back, which more accurately reflects the value of a trust’s property. Using that metric, health care REITs look relatively inexpensive, trading at 14.5 times FFO, compared

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with the industry’s average of 15.5. Your best strategy: While you’re usually better off investing via mutual funds and ETFs, there are none now that substantially overweight health care trusts. That’s why Thomas and Morningstar senior REIT analyst Todd Lukasik instead favor individual health care REITs. Both, for example, are fans of Ventas (VTR), which owns about 1,500 senior housing communities, skilled nursing facilities, and similar properties in the U.S. and Britain and was recently selling for 15 times FFO. Ventas raised its dividend 9% in December, giving it a yield around 4%. They also like HCP Inc. (HCP), which owns $22 billion worth of medical-related property. It is selling for 12 times FFO and yields nearly 5%.

M A ST E R L I M I T E D PA RT N E R S H I P S

GRAB A BARGAIN LIKE REITS, MLPs pass on to investors most of the income they generate from their core business, typically storing or transporting oil, natural gas, and other energy resources. And like REITs, MLPs spent much of 2014 looking frothy. In the 10 years through September, these shares nearly doubled the gains of the S&P 500. As a result, by fall MLPs were yielding only 2.7 points more than 10-year Treasuries, vs. their typical premium of 3.2 percentage points. Since then, the partnerships have suffered a sharp reversal. As fears of a global slowdown grew, oil prices slid by more than a third to $60 a

HIGHER YIELDS, HEIGHTENED RISK These alternatives to conventional bonds all pay more than Treasuries and have delivered solid returns lately. But when the market goes sour, they tend to lose a lot more, as their performance during the crash shows.

INVESTMENT (TICKER)

RECENT 1-YR. TOTAL 5-YR. AVG. YIELD RETURN ANN. RETURN

Alerian MLP ETF (AMLP)

6.3%

HCP Inc. (HCP)

4.8

33.3

12.0%

iShares U.S. Preferred Stock ETF (PFF)

5.6

13.1

8.5

-23.7

Loomis Sayles Bond (LSBRX)

3.0

4.9

8.3

-22.1

Market Vectors Prf. Sec. ex Financials ETF (PFXF)

6.0

15.9

N.A.

PowerShares Intl. Dividend Achievers ETF (PID)

3.5

0.6

9.1

-0.5

T. Rowe Price Spectrum Income (RPSIX)

2.8

3.7

5.7

-9.4

USAA High Income Fund (USHYX)

5.1

3.3

9.6

-28.1

4.6%

N.A.

N.A. -14.9%

Vanguard High Yield Corporate (VWEHX)

5.1

2.3

8.2

-21.3

Ventas (VTR)

3.9

38.6

14.6

-21.3

NOTES: Yield is 30-day SEC yield as of Dec. 15, 2014; total returns are through Dec. 14, 2014. SOURCE: Morningstar

2008 LOSS

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barrel, and skittish investors started dumping MLP shares. That has pushed the average MLP yield up to 6.25%, which means they’re now paying more, relative to Treasuries, than they have historically. Many analysts believe the panic has been overdone. While a minority of MLPs are involved in drilling and oil production, most are pipeline companies that simply collect transmission fees, with much of their revenues set by long-term contracts. Still, these complex investments aren’t for everyone. As a result of the partnership structure, payouts from MLPs are considered a return of capital, on which taxes are deferred until you sell. That tax benefit can create a paperwork nightmare, since you may have to file separate tax returns in states the company operates in so there is a government record of the income you’ve received, notes Tom Roseen, head of research services at Lipper. You can invest via a fund that will eliminate the need to file, but that is likely to reduce your returns. Your best strategy: Since these are still rocky times in the energy sector, your best bet is to go with a fund that gives you exposure to a diversified collection of MLPs. Stick with a fund that focuses on pipeline companies and that won’t tie you up in tax knots. That means investing via an ETF that’s set up as a corporation, not as a partnership. One fund that meets all the criteria, says Kinney: the Alerian MLP ETF (AMLP), which tracks an index of pipeline MLPs. It has paid out 6.25% in the past year. But thanks to the pullback in share prices and a 4% hike in its distributions in 2014, buyers are

FEEDBACK: kclark@moneymail.com

ALTERNATIVES

likely to collect a yield of almost 7% in 2015. Because it is a corporation, not a partnership, Alerian can’t defer taxes on its payouts; that gets rid of the hassle of ﬁling multiple state returns every year. But convenience comes at a price: The tax bite dampens Alerian’s total return relative to other MLPs. If you’re focused on income, though, that 6% to 7% yield may be ample compensation.

G O -A N Y W H E R E B O N D F U N D S

BE OLDFASHIONED AT A TIME when traditional routes to

investment income aren’t paying off, it’s only natural to seek out pros who are willing to go off the beaten path. Enter “unconstrained” bond funds. The appeal of these actively managed portfolios is that they’re not bound to invest only in the low-yielding government and corporate debt. Instead, they buy anything—foreign debt, asset-backed securities, stocks,

preferreds, and even derivatives—to boost yields and hedge against price drops if interest rates rise. Sounds good in theory. Alas, there’s no proof that derivatives and other exotica lead to better results. Pimco Unconstrained Bond, one of the biggest funds in the group, is up 2.7% annually over the past three years—that’s less than the plainvanilla Vanguard Total Bond Market Index Fund. Plus, unconstrained bond funds are expensive, with average fees of 1.3% of assets, vs. 1% for the average bond fund and 0.28% for bond index funds. Your best strategy: Let your managers roam—just don’t let them run completely wild. Before unconstrained bond funds came along, investors who wanted to give their managers a longer leash turned to multisector bond funds. These ﬁxed-income portfolios also allow managers to invest in a wide variety of assets, such as junk and foreign debt, in addition to high-quality bonds. However, these funds typically set boundaries over what

those areas are—and how much of the fund can wander there. This reduces risk, which should help to limit losses in bad markets. The approach also results in lower costs; the typical multisector bond fund has annual fees of 0.8% of assets. T. Rowe Price Spectrum Income (RPSIX), for instance, can stray into emerging-market bonds and floatingrate bank loans, but only up to 10% of assets for each. This has been enough freedom for Spectrum Income to beat the Barclays Aggregate U.S. Bond index over the past three, five, 10, and 15 years. The same goes for Loomis Sayles Bond ( LSBRX) , a MONEY 50 fund that has also beaten at least 80% of its peers over the past three, five, 10, and 15 years. Recognize, though, that while boosting your investment in multisector bond funds and other alternative assets can help boost your yield, the strategy isn’t a cure-all. Shifting 20% of a portfolio split fifty-fifty between stocks and traditional bonds into a mix of higher-paying alternatives might raise your yield from about 2% to 2.6% with little additional risk, says Geoff Considine, who runs the portfolio modeling firm Quantex. If you’re retired, that means you’ll still probably have to rely on principal and capital gains to fund at least some of your living expenses. You might prefer to just cash dividend checks to pay the bills and leave the rest of your savings intact—but in reality, where you pull the money from isn’t that important, says Chris Philips, a senior investment analyst at Vanguard. Says Philips: “What really matters is maximizing the total return of your whole portfolio.”

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INVE STO ’ GUIDE

» PART 2

80 SIZING UP THE TECH TITANS » Is Apple, Amazon, or Google a buy? It’s all about the ecosystem.

P R O P ST Y L I N G B Y M E G U M I E M O TO ; G R O O M I N G B Y R Y U TA R O

GOING ON OFFENSE P H O T O G R A P H B Y T R A V I S R AT H B O N E

TOP PICKS FROM TOP PROS » The stock market has been good. These fund managers have been great.

92 WHY CHINA IS OVER » And what it means when the engine of global growth sputters.

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AMAZON, APPLE, AND GOOGLE EACH WANT TO BE THE HUB OF YOUR DIGITAL LIFE. LEARN THEIR STRATEGIES, AND SEE WHICH COMPANY’S VISION IS MOST LIKELY TO PREVAIL.

SIZING UP TECH’S TITANS in technology used to be straightforward: Develop a cutting-edge product people need; build a (near) monopoly; then reap the rewards of controlling that technology—be it the software or chips that make computers run or the switches that make the Internet possible. That was how Microsoft, Intel, and Cisco Systems ruled the ’90s. Fifteen years after the ﬁrst great tech stock boom ended, the industry’s new colossal trio of Apple, Google, and Amazon couldn’t be more different from their ancestors. They’ve created vast arrays of products, from mobile devices to streaming services to payment systems, which they tie together in various ways to support their THE BLUEPRINT FOR SUCCESS

BY PA U L J. L I M & TA Y L O R T E P P E R / I L L U S T R AT I O N S BY HARRY CAMPBELL

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INVESTOR’S GUIDE 2015 PA R T 2 » G O I N G O N O F F E N S E

core revenue stream. Think not of solitary giants, but of giant ecosystems. And those systems, not the latest iPhone or Google Glass or Kindle, are “the deﬁning characteristic of the company,” says Robert Stimpson, co-manager of the White Oak Select Growth Fund. That means evaluating the strength of those ecosystems is what a tech stock investor has to do. To help, MONEY consulted some of the smartest analysts in the business for guidance and took a hard look at the valuations investors are placing on those systems today.

APPLE

ELEGANT HARDWARE AND CASH TO SPARE The heart of the ecosystem: More than 90% of Apple’s $183 billion in revenue in its latest fiscal year came from hardware sales— 56% from iPhone sales alone. Fuel for growth: Hardware is what Apple sells, but it’s not what the company markets. “Apple’s main product is an experience,” says tech analyst Neil Cybart. “They look at all of their products as taking away the complicated part of technology so the users can feel like they have more control over their lives.” Apple aims to build a world in which you’ll own Beats by Dr. Dre headphones, wear an Apple Watch, buy coffee with the Apple Pay payments system, and make handsfree phone calls via Apple CarPlay. With all those products interlinked

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and running on Apple’s iOS software, you’ll rely on the ecosystem for daily tasks, making it a hassle for you to buy your next phone or tablet from anyone other than Apple. Potential threats: Apple has a hit with the iPhone 6 and 6 Plus, selling an estimated 60 million of the phones last year. But the company isn’t particularly good at enticing the owner of one Apple product to purchase another, says Consumer

TALE OF THE TAPE: APPLE VS. GOOGLE VS. AMAZON All three giants have particular strengths upon which they’re trying to build.

Intelligence Research Partners’ Michael Levin. For instance, only 28% of iPhone owners have an Apple computer, and less than half of them own a tablet, says CIRP. Sales for the iPad have fallen 4% over the past year, acknowledges Apple. But CEO Tim Cook, noting that the company has sold 237 million iPads over four years, told investors in October that he’s “very bullish on where we can take the iPad over time.”

Mobile presence

War chest

SMARTPHONE MARKET SHARE

CASH ON HAND

Google Android

Apple

13%

Apple

$155 billion

83% Google Amazon

<1%

Other

Amazon

$62 billion $7 billion

NOTES: Phone ﬁgures are global, as of Q3 2014. Revenue growth is for last four reported quarters. SOURCES: Gartner, IDC, companies, MONEY calculations

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TECH STOCKS

Outlook: BUY Apple enjoyed a banner year in 2014. Spurred by sales of the latest iterations of the iPhone and anticipation of the Apple Watch’s release early this year, the company’s stock rose 33%. Despite that gain, Apple’s price/ earnings ratio, based on projected profits, is just 13.8. That means the stock trades at a 16% discount to the S&P 500 technology index, even though the company’s earnings are growing 33% faster than the average big tech stock’s. Apple’s low valuation stems from factors such as investors’ doubts that a company its size can grow as fast as smaller tech firms, along with uncertainty that Apple will keep making products that are both popular and profitable. That said, Apple is still the best company by far at creating exciting technology that people want to buy. Plus, signs point to an ever-increasing dividend from the stock, which now yields 1.8%; a larger payout can be easily covered by Apple’s cash reserves (see the graphic below).

Growth ANNUAL REVENUE INCREASE

20.7%

21.5%

Apple

Google

Amazon

AMAZON.COM

SALES GROW, BUT EARNINGS ARE SCARCE The heart of the ecosystem: Already the world’s biggest online retailer, racking up $85 billion in annual sales, Amazon aims to catch up to the world champion, Wal-Mart, which has just under half a trillion in revenue. To close that gap, Amazon wants to convert more customers to Amazon Prime, the two-day shipping service now priced at $99 per year. Amazon Prime members make twice as many purchases as nonmembers, and they spend 40% more per transaction, reports ComScore. Prime customers are also loyal: 92% say they’ll renew their subscriptions. Fuel for growth: To get more people to join Amazon Prime—and buy more goods per year—Amazon has morphed into a streamingmedia and mobile-device company. In 2011 the e-tailer began offering Prime members access to instant streaming movies and television shows; the retailer now produces its own TV programs as well. To sweeten Prime, Amazon recently added a streaming-music service and free online photo backups. Plus, when the company launched its Fire smartphone last year, a one-year Prime membership came bundled free with the device. The result: There are now an estimated 30 million Prime members, up from around 5 million in 2011. Potential threats: Amazon has spent heavily on the entertainment it’s using to lure new Prime sign-ups.

The company has posted cumulative losses of more than $350 million over the past 10 quarters—vs. the $94 billion in profits Apple churned out. Amazon CEO Jeff Bezos is unapologetic; last year, he reprinted a 1997 letter to shareholders saying that “long-term market leadership” was more important than “short-term profitability.” One hit to profitability has been the Fire phone. While 10 million iPhone 6’s were purchased the first weekend they went on sale, Amazon reportedly sold only 35,000 of its smartphones in the first month. Late last year the company took a $170 million charge stemming from the fiasco. Amazon is learning a hard lesson. It may be a hot retail brand—but not when it comes to cutting-edge technology. “There are people who say, ‘I’m an Apple guy,’” says Kevin Landis, a longtime tech investor who runs the Firsthand Technology Opportunities Fund. “I haven’t heard anyone say, ‘I’m an Amazon guy.’ ” Outlook: SELL Despite losing a quarter of their value last year, Amazon shares still trade at a whopping P/E of nearly 100, owing to the fact that the company is barely profitable. And even if Amazon cuts costs, problems are likely to persist. While traditional technology companies enjoy big profit margins, retailers like Amazon don’t, notes Christopher Baggini, a portfolio manager at Turner Investments. Amazon’s operating profit margin has historically been in the low single digits, compared with 20% to 30% for Apple and Google. That means even if Amazon stops spending on losers like the Fire phone, it won’t have Apple and Google’s resources to keep building out its ecosystem.

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GOOGLE

HELPED AND HINDERED BY AN OPEN SYSTEM The heart of the ecosystem: Given Google’s driverless cars, Internet-connected glasses, and smartphone-linked Nest thermostat, you might think this company was all about the future. Actually, a lot of what Google is working on is meant to reinforce the past: the company’s roots as a search engine reaping ad dollars based on what people look for online. Advertising still generates about 80% of the company’s $64 billion in annual revenues. Fuel for growth: The Android operating system, which Google launched in 2007, is essential for protecting its search franchise. Well before the rise of smartphones, Google management foresaw that the biggest threat to its business wouldn’t be a rival search engine, says Connor Browne, manager of the Thornburg Value Fund. Rather, he says, the company saw that danger lay in adoption of new hardware: As people shifted from PCs to mobile devices, manufacturers could conceivably eliminate Google’s technology from their products. Android was the company’s defense against gatekeepers like Apple. While Google doesn’t make much money off the software, Android puts the company’s search technology at the ﬁngertips—or voice control—of more than 1 billion people. For further revenue growth, Google may have to rely on rival Apple’s stronger talents for setting

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technology trends. Just as Apple’s marketing efforts for the iPhone and iPad created whole new markets for smartphones and tablets, the Apple Watch, scheduled for release this year, could bring wearable devices into the mainstream. Android-based watches came on the market last year, but Apple’s introduction could spark sales industrywide. The situation is similar for Google Wallet, the electronic-payment platform that has found less traction in its first three years than Apple Pay did in its first three months. “Google will benefit from Apple making head-

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way in creating a walletless society,” says White Oak’s Stimpson, whose fund owns Google shares. E-payments are actually more central to Google’s core ad business than to Apple’s success. If you’re watching a video on Google-owned YouTube, for example, companies can run messages tailored to your interests. It would be a natural step— and also seamless—for you to buy an advertised item via Google Wallet. Potential threats: Start with Android itself. Unlike Apple’s iOS operating system, Android is open source, meaning that Google’s “part-

FEEDBACK: letters@moneymail.com

TECH STOCKS

ners” can tweak it. When Amazon built its Android-based Fire phone last year, it stripped out Gmail and Google Play Store. Fire phones and Kindle tablets link instead to the Amazon Appstore, which competes with Google Play and iTunes. Similarly, Google can’t dictate which version of Android hardware makers employ. Google Wallet’s convenient “tap and pay” function, for example, requires versions of the operating system that are installed on only 34% of Android phones. Google also faces threats from other major players. The Chinese e-commerce giant Alibaba, for one, has developed its own smartphone operating system, which could cut into Android’s 80% share of mobile devices in China. Google executive chairman Eric Schmidt acknowledges the company faces threats known and unknown. “Someone, somewhere in a garage is gunning for us,” he said in an October speech. “I know, because not long ago we were in that garage.” Outlook: HOLD As Google’s earnings growth rate has declined, so too has its P/E ratio— from around 25 last year to 18. That means Google stock is 25% cheaper than the average for Internet companies in the S&P 500, even though it’s traditionally been on par. Paul Meeks, a portfolio manager at Saturna Capital, which owns the stock, notes that there may be more rockiness ahead, as Google keeps reporting lower ad prices. Once that stabilizes, he says, the stock should start to rebound, just as you’d expect any sound ecosystem to recover from a minor disturbance. In both cases, though, the healing takes time.

MICROSOFT: STILL SEEKING A MOBILE PATH THE ONETIME technology leader Microsoft now ﬁnds itself struggling to compete in mobile and media markets. It wants to be seen as the fourth member of the current pack of tech titans, but it has a ways to go.

THE GOOD Microsoft is still the world’s largest software producer, with a stock market value of $372 billion (north of Google’s) and $90 billion in cash on hand. Revenue from selling and licensing products like Windows to companies— about half of Microsoft’s business—grew by an impressive 10% last quarter. Revenue from Xbox, one of the world’s most popular gaming consoles, grew more than 58%. Meanwhile, the company released its latest cellphone to positive reviews.

THE BAD Microsoft still faces headwinds. Demand for personal computers has fallen off,

thanks to smartphones and tablets. Sales of Microsoft’s own tablets, such as the Surface Pro 3, have picked up recently but lag far behind those of the Kindle Fire and iPad. And despite positive reviews, Windows models account for less than 5% of phones in use. The company’s smartphone—$600 at its most expensive—is “too high cost, and it’s too late,” says Mary Monahan of research company Javelin. A tardy entrance gave Google and Apple valuable lead time and made Windows a less desirable outlet for app developers. “The value of the iPhone is that you get all of these great apps,” says Monahan. “When you buy a Microsoft phone, what do you get?”

THE OUTLOOK Prospects for Microsoft aren’t ugly, but they’re not great either. While Xbox, with its legions of dedicated customers, has proven popular, ana-

lysts believe long-term success requires an untethered platform. “The future is more control of your day-today life with your phone,” says Monahan. So Microsoft is between acts: Its commercial and gaming businesses are doing well, but its tablet and phone efforts haven’t yet made an impact. New chief executive Satya Nadella is prioritizing investments in mobile, like its 2014 purchase of Nokia’s handset division; Microsoft is likely to use its cash kitty to fund further deals. Microsoft’s forward price/earnings ratio is near Apple’s, and it has a higher-thanaverage dividend yield: 2.8%, vs. 1.6% for its informationtechnology peers. That means investors are paid well to hold the onetime personal computing champion and wait for a turnaround. Since the length of that wait is unclear, the stock merits holding— but not buying.

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DAVID CARLSEN Buffalo Discovery

BILL NYGREN Oakmark Select

ELIZABETH JONES Buffalo Discovery

BILL HENCH Royce Opportunity

WIN MURRAY Oakmark Select

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IN A STOCK MARKET THAT’S BEEN GOOD TO MOST INVESTORS, THESE FUND MANAGERS HAVE BEEN GREAT. LEARN HOW THEY LOOK AT THE MARKET, AND WHAT STOCKS THEY LIKE NOW.

SUDHIR NANDA T. Rowe Price Diversified Small-Cap Growth

TOP PICKS FROM TOP PROS LOW-COST INDEX FUNDS are the smart choice for most of your portfolio, given how few active managers consistently beat the market. For the 10% or so of your holdings, though, where you can afford to take more risk in hopes of greater rewards, you need to venture out of index territory to find stocks or funds with the potential for outsize gains—even in today’s hot market. To find these opportunities, MONEY sought out fund managers who have beaten the benchmarks over the past five years in different corners of the U.S. market: large and small companies, along with growth and value stocks. Those managers’ picks follow, along with a look at the strategies behind their choices.

BY R YA N D E R O U S S E A U / PHOTOGRAPHS BY ROBERT ASCROFT

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BANKING ON A COMEBACK IN FINANCIAL STOCKS WIN MURRAY & BILL NYGREN EXPENSES: 1.01%

MINIMUM: $1,000

OAKLX

OAKMARK SELECT (OAKLX)

$22,643

S&P 500

$20,963

5-YEAR ANNUALIZED RETURN: 17.8%

of this fund, who hunt for values among the market’s largest stocks, see a payoff from investors’ focus on small and medium-size companies in recent years. Worldclass businesses such as Oracle, Google, and MasterCard, they say, are underpriced. “We have spent a lot of our careers outside these companies,” says Win Murray, promoted in 2013 with Tony Coniaris to run the fund alongside famous investor Bill Nygren. “Now the market is giving them back to us.” Nygren’s willingness to take outsize stakes in sectors has set him apart from other largecap value managers. The best example of that now: Select’s 36% allocation to ﬁnancial services companies—J.P. Morgan Chase, AIG, and Bank of America are among its top holdings—compared with the 16% average for large-cap value funds. Although bank stocks have recovered since the 2008 downturn, their 17.7% average annual return over the past three years trails the overall market’s gains of 21% a year. Banks’ steady income stream from fees and loans is underappreciated, Nygren says. By the end of the decade, he adds, people will say, “I can’t believe how cheap those stocks were.”

GROWTH OF $10,000 FOR FUND AND BENCHMARK INDEX

10-YEAR: 8.6%

’10

’11

’12

’13

’14

THE MANAGERS

More than 90% of this database software giant’s customers renew their annual subscription fees. That income stream gives Oracle time to catch up to competitors Microsoft and Salesforce in cloud offerings—software and services delivered over the Internet. Early results are promising: Last fall, Oracle said it had 2,000 sign-ups. The stock trades at a discount to the industry’s average P/E of 16.4 and, Murray estimates, is worth over $60 a share.

MURRAY SAYS GOOGLE IS INEXPENSIVE AT LAST.

THE PICKS BANK OF AMERICA (BAC) $17.25 P/E RATIO: 12.1 BofA’s stock has more than tripled over the past three years, but it’s still 14% below the average price-earnings ratio of U.S. financial firms. Blame investor worries about the ongoing fallout from the financial crisis, such as

BofA’s agreement last year to pay a $16.7 billion fraud penalty. A more important number, says Murray, is the $21 billion the company generates a year in free cash ﬂow (cash from operations, minus capital expenditures); that’s 23% of revenue, ﬁve points more than the industry average.

APACHE (APA) $56.50 P/E: 17.8 With oil hitting ﬁve-year lows lately, this driller has suffered, falling 28% in 2014. But Murray sees management’s recent stock buybacks as a sign the shares are undervalued. Apache is also selling its slow-growing international assets, currently 42% of oil production. Once investors view it as a North American energy company, says Murray, it should be valued at more than $100 per share.”

NOTES: Price-earnings ratios are based on projected earnings. Five- and 10-year returns are annualized. Performance data for funds is through Nov. 30, 2014; stock prices and P/E ratios are as of Dec. 12, 2014. SOURCES: Morningstar, S&P Dow Jones Indices, Bloomberg, company ﬁlings, and fund prospectuses

P H OTO G R A P H B Y K E V I N J . M I YA Z A K I ( B I L L N YG R E N , P R E V I O U S S P R E A D ) ; G R O O M I N G B Y A L L I E K U N K L E R ( W I N M U R R AY ) ; G R O O M I N G B Y D E M E T R E S S VA L E N T I N E ( S U D H I R N A N D A )

ORACLE (ORCL) $40.00 P/E: 13

PICKS FROM THE PROS

THE PICKS MARRIOTT VACATIONS WORLDWIDE (VAC) $72.25 P/E RATIO: 23.6

NANDA FINDS OPPORTUNITIES IN SPINOFFS.

HOLDING SMALL STOCKS FOR THE LONG HAUL

The offspring is usually cut loose so that it can focus on one business, and it often gets an injection of financing from the parent company that helps foster growth. The spun-off stock often does quite well, says Nanda, a former finance professor. Mindful of how expensive SUDHIR NANDA T. ROWE PRICE DIVERSIFIED small-cap stocks have beSMALL-CAP GROWTH (PRDSX) come—they’re up about 40% over the past two years—Nanda EXPENSES: 0.82% MINIMUM: $2,500 takes an almost value-minded 5-YEAR ANNUALIZED RETURN: 20.8% approach to picking growth 10-YEAR: 10.6% stocks. He looks for companies with a history of returning cash GROWTH OF $10,000 FOR FUND AND BENCHMARK INDEX to shareholders through dividends or stock buybacks. He PRDSX $25,680 also seeks out stocks he can hold for years, trading only 14% of his holdings annually, vs. $24,515 turnover rates of more than MSCI U.S. SMALL-CAP GROWTH 100% for many small-cap funds. ’10 ’11 ’12 ’13 ’14 “High turnover can be expensive,” says Nanda. ONE OF SUDHIR NANDA’S favorite The payoff: The fund’s perfortypes of investments among small mance has landed it in the top stocks is companies that have been 5% of its category for the past spun off from larger corporations. five- and 10-year periods.

This timeshare operator, part of Marriott International until 2011, is one spinoff that Nanda favors. Its revenues come from ﬁnancing and renting 189,000 units, plus running the 1,550 resorts in which they sit. As the job market improves, so does vacation spending. Analysts expect Marriott Vacations’ earnings per share to grow 18.5% annually over the next two years, compared with 13.3% for its competitors.

BRINKER INTERNATIONAL (EAT) $56.00 P/E: 17.7 In addition to spinoffs, Nanda is a fan of Brinker, operator of the Chili’s casual restaurant chain. The company is expanding overseas, with plans to open 35 to 39 locations this year in countries such as India and the Philippines. Brinker will keep costs low, says Nanda, by franchising nearly all of those restaurants; the

company’s cash ﬂow, after adjusting for capital expenditures, is 6.8% of sales, vs. 5.2% for the similar Cheesecake Factory. While Brinker’s projected 14% revenue growth is on par with the industry, its lower costs help give it room to raise its dividend, as it did in 2014, says Nanda.

TORO (TTC) $60.75 P/E: 17.8 The manufacturer of lawn-care products has beneﬁted from rising home sales over the past two years, and Nanda sees Toro increasing earnings per share by 13% next year. Another positive development: Last October, Toro agreed to buy snowplow manufacturer Boss, which accounts for 25% of U.S. snowplow sales. The purchase should help offset a slowdown in lawn mower sales over the winter. Nanda acknowledges Toro isn’t growing particularly fast, but he’s in it for the long haul. Beﬁtting his low turnover strategy, he’s owned the stock since 2007.

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CARLSEN AND JONES LOOK FOR LONGTERM TRENDS.

THE PICKS HOSPIRA (HSP) $60.25 P/E RATIO: 28.9

USING LONGTERM TRENDS TO FIND GROWTH STOCKS

managers start with the long view. They’ve developed a list of 26 trends they believe will shape our economy’s future—an aging population, a push to contain health care costs, and the proliferation of connected devices, for example. Then, says co-manager Elizabeth Jones, they look for companies responding to those shifts. DAVID CARLSEN & The forecasts Jones has made ELIZABETH JONES with co-managers David Carlsen and BUFFALO DISCOVERY (BUFTX) Clay Brethour have led to big stakes in technology and health care for EXPENSES: 1.01% MINIMUM: $2,500 their midsize-company fund. To en5-YEAR ANNUALIZED RETURN: 18.3% sure their bets are good ones, they 10-YEAR: 11.1% estimate the potential returns on a GROWTH OF $10,000 FOR FUND AND BENCHMARK INDEX stock if their theories are correct, BUFTX along with their losses if they’re wrong. If the upside-to-downside $23,193 ratio isn’t more than 2 to 1, they pass. “We like a safety net,” says Carlsen. RUSSELL 3000 GROWTH The strategy has led to an 18.3% $21,792 annualized return over ﬁve years, vs. ’10 ’11 ’12 ’13 ’14 16.9% for the Russell 3000.

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One of the trends Buffalo tracks is the use of generic drugs to counter rising health care costs, and Hospira is one of the managers’ favorite providers of generics. The manufacturer gets nearly 70% of its sales from injectables, which require expensive development efforts, thus limiting competition. Once three drugs now in Hospira’s pipeline are approved for sale, Jones believes that operating margins will grow from 16% to the 20% to 30% range that other companies in the ﬁeld enjoy. Says Jones: “In three years, Hospira will be a $100 stock.”

AKAMAI TECHNOLOGIES (AKAM) $60.75 P/E: 23.2 If you’ve downloaded video content on your phone, then it’s likely you’ve used technology developed by Akamai. It works on the back end of servers and data centers, ﬁnding the fastest paths to

distribute highdeﬁnition videos or apps to mobile devices. While telecom service providers such as AT&T can do this, Akamai’s expertise and established technology encourage the telecoms to outsource the process, says Carlsen. “The company is in the best position to take advantage” of the increasing amount of content streamed to mobile devices, he believes.

INOGEN (INGN) $24.75 P/E: 77.5 This newly public company has developed a portable oxygen machine, as light as five pounds, that can produce the same airflow as a home machine that weighs 10 times as much. Since the number of Americans over 65 is expected to nearly double by 2030, Jones believes Inogen’s machines will become an important technology. Inogen, she says, can grow 20% to 30% annually for the next five years.

FEEDBACK: letters@moneymail.com

PICKS FROM THE PROS

FINDING VALUE IN ULTRA-SMALL PACKAGES BILL HENCH

ROYCE OPPORTUNITY (RYPNX)

G R O O M I N G B Y J O L I E A L L E N ( D AV I D C A R L S E N A N D E L I Z A B E T H J O N E S ) ; G R O O M I N G B Y C L A U D I A A N D R E AT TA ( B I L L H E N C H )

EXPENSES: 1.17% MINIMUM: $2,000 5-YEAR ANNUALIZED RETURN: 16.8% 10-YEAR: 8.2%

ONE MIGHT THINK there are no bargains left in smaller stocks after their recent run-up. Not Bill Hench, who runs this value fund with lead GROWTH OF $10,000 FOR FUND AND BENCHMARK INDEX manager Buzz Zaino. Hench looks for companies that have had hits to RYPNX $21,724 earnings because of bad management decisions or poor luck, tending RUSSELL 2000 VALUE to focus on ultra-small companies. $20,390 The average stock market value of ’10 ’11 ’12 ’13 ’14 companies Opportunity holds is $739

million, less than half that of the average small-cap stock. Many of these smaller stocks “are still on sale,” says Hench, because investors tend to avoid these riskier companies. With these small ﬁrms come big swings in stock price. The fund fell 13% in 2011, for example, while rising 44% in 2013. Over the past three years it has returned 20.1% annually, vs. 17.8% for the Russell 2000 Value index. Hench and Zaino often invest in secondary stock offerings or underperforming IPOs. If a company fails to meet initial expectations, the price can fall dramatically. “We take advantage of that,” says Hench.

THE PICKS WEST MARINE (WMAR) $11.25 P/E RATIO: 28.5 This chain of boating supplies and accessories has had operational problems, including poor pricing, says Hench. New management is better targeting customers with noncore products such as footwear and apparel, which are now 16.5% of sales, up from 13.9% in 2011. Lower gas prices also help the bottom line. Hench thinks earnings will double by 2017, lifting the stock to $22.

IDENTIV (INVE) $13.25 P/E: N.A.

HENCH LIKES COMPANIES THAT HAVE SUFFERED SETBACKS.

A marketer of workplace ID systems, Identiv completed a $15-a-share

secondary stock offering in September. A month later, the stock fell 42%, hit by concerns about high-priced small stocks. Hench invested then, lured by Identiv’s technology and by the rep of the CEO, hired in 2013, as a turnaround specialist.

RTI INTERNATIONAL METALS (RTI)

$23.00 P/E: 14.5

Revenues at this maker of titanium parts for the aerospace industry sputtered in 2014, thanks to product oversupply at Boeing, one of its largest customers. That backlog has now started to clear, says Hench, which should help the stock bounce back to the mid-40s.

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THE POWERHOUSE THAT SEEMED READY TO PROPEL THE GLOBAL ECONOMY FOR DECADES IS NOW STUCK IN A PERIOD OF SLOWING GROWTH. HERE’S WHAT THAT MEANS FOR YOUR PORTFOLIO.

WHY CHINA IS OVER EVERY SO OFTEN an investment theme comes along that seems so big and compelling that you feel it can’t be ignored. This happened in the 1980s with Japanese stocks. It happened again with the Internet boom of the 1990s. You know how those ended. Today history appears to be repeating itself in China. Just a decade ago, China was hailed as the engine that would single-handedly drive the global economy for years to come. That seemed plausible, as a billion Chinese attempted something never before accomplished: transitioning from an agrarian to an industrial to a consumer economy, all in a single generation. Recently, however, this ride to prosperity has hit the

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skids. A real estate bubble threatens to crimp consumer wealth; over-investment in a wide range of industries is likely to dampen growth; and the transition to a developed economy is stuck in an awkward phase that has trapped other emerging markets. No wonder Chinese equities— despite a strong rebound last year— are down more than half from their 2007 peak. Like the Japan and dotcom manias before it, China looks like an old story. “Do you have to be in China?” asks Henrik Strabo, head of international investments for Rainier Investment Management in Seattle. “The truth is, no.” If you’ve bought the China story— and since 2000 hundreds of thousands of U.S. investors have plowed $176 billion into emerging-markets

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mutual and exchange-traded funds, which have big stakes in China— that’s a pretty bold statement. In fact, even if you haven’t invested directly in Chinese stocks and simply hold a broad-based international equity fund, China’s Great Slowdown has an impact on how you should think about your portfolio. Here’s what you need to understand about China’s next chapter.

CHINA HAS HIT MORE THAN A SPEED BUMP AFTER EXPANDING AT an annual clip of more than 10% a decade ago, China’s economy has slowed, growing at

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just over 7% in 2014. That’s expected to fall to 6.5% in the next couple of years, according to economists at UBS. And then it’s “on to 5% and below over the coming decade,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab. Why is this worrisome when gross domestic product in the U.S. is expanding at a much slower 3%? For starters, it represents a steep drop from prior expectations. As recently as three years ago, economists had been forecasting that China would still be growing at roughly an 8% clip by 2016. The bigger worry is that the slowdown means that China has reached a phase that frustrates many emerging economies on the path to becoming fully “developed,” a stage some economists refer to as the middle-income trap. On the one hand, a growing number of Chinese are approaching middle-class status, which means wages are on the rise. That sounds good, but rising labor costs chip away at China’s competitive advantage in older, industrial sectors. “You’re seeing more and more manufacturers look at other, cheaper markets like Indonesia, Vietnam, and the Philippines,” says Eric Moffett, manager of the T. Rowe Price Asia Opportunities Fund. At the same time, the country’s new consumer-centric economy has yet to fully form. About half of China’s urban population is thought to be middle-class by that nation’s standards, but half of Chinese still live in the countryside, and the vast majority of those households are poor. Couple this with the deteriorating housing market—which ac-

INVESTING IN CHINA

counts for the bulk of the wealth for the middle class—and you can see why China isn’t able to buy its way to prosperity just yet. This in-between stage is when fast-growing economies typically downshift signiﬁcantly. After prolonged periods of “supercharged”

U.S. economy, which is expected to keep accelerating through 2017. In recent years, some market strategists and ﬁnancial planners have instructed investors to keep as much as 40% to 50% of their stocks in foreign funds. But dropping that allocation to 20% to

“China is still the beating heart of Asia and the emerging markets. If it slows down, all the other countries exporting to and importing from China will see their growth prospects affected.” —ERIC MOFFETT, manager, T. Rowe Price Asia Opportunities Fund

expansion, these economies tend to suffer through years when they regress to a more typical rate of global growth, according to a recent paper by Harvard professors Lawrence Summers and Lant Pritchett. In some cases, like Brazil, this slowdown prevents the economy from taking that final step to advanced status. Brazil had been expanding 5.2% a year from 1967 to 1980, but that growth slowed to less than 1% annually from 1981 to 2002. No one is saying China will be stuck in this trap for a generation, like Brazil, but China could be looking at a long-term growth rate closer to 4% to 5% than 8% to 10%. Your best strategy: Go where the growth is—at home. A few years ago the global economy was expected to expand at an annual pace of 4.2% in 2015, trouncing the U.S. Today the forecast is down to 3.1%, pretty much the same pace as the

30% still gives you most of the diversification benefit of owning non-U.S. stocks.

THE LOSERS AREN’T JUST IN ASIA CHINA’S RISE TO power lifted the fortunes of its neighboring trade partners too, so it stands to reason that a broad swath of the emerging markets is now at risk. “China is still the beating heart of Asia and the emerging markets,” says Moffett. “If it slows down, all the other countries exporting to and importing from China will see their growth prospects affected.” The country’s biggest trading partners in the region are Hong Kong, Japan, South Korea, and Taiwan, and all are slowing down.

Economists forecast that the growth rates in those four nations will slip below 3% next year. Beyond Asia, “you have to be careful with the commodity exporters,” says Rainier’s Strabo. China’s slowdown over the past ﬁve years is a big reason commodity prices in general and oil specifically have sunk around 30% since 2011. China consumes about 40% of the world’s copper and 11% of its oil. As the country’s appetite for commodities wanes, natural resource producers such as Australia, Russia, and Latin America will feel the blow. Your best strategy: Keep your emerging-markets stake to around 5% of your total portfolio. If your only foreign exposure is a total international equity fund, then you’re probably already there. If, however, you’ve tacked on an emerging-markets “tilt” to your portfolio to try to boost returns, unwind those positions, starting with funds focusing on Asia, Latin America, or Russia. Here’s another bet that’s now played out: A popular strategy in the global slowdown was to take ﬂiers on Western companies with the biggest exposure to China— companies such as the British spirits maker Diageo (think Johnnie Walker and Guinness) and Yum Brands (KFC and Pizza Hut)— solely because of their China reach. And for a while, that paid off. Now, though, the stocks of Yum and Diageo have stalled, and major global companies such as Anheuser-Busch InBev and Unilever have reported disappointing results recently in part owing to subpar sales in China as well as in other emerging markets.

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DEMOGRAPHIC PROBLEMS WILL ONLY MAKE THINGS WORSE

THE CHINESE CENTURY? Chinese stocks have actually performed badly. STOCK PRICE GAINS

Shanghai Composite Index S&P 500 Index

353% 187% 49%

18%

-49%

2006–07

1993–2005

41%

2008–present

Meanwhile, economic growth has been decelerating rapidly … ANNUAL GDP GROWTH IN CHINA

10.5% 9.3%

2010

2011

7.7%

7.3%

2012

2013

2014

6.8%

6.5%

2015

2016

… and the country’s workforce has entered a period of long-term decline. CHINA’S WORKING-AGE POPULATION

944,177,000

726,428,700

800M

600M 2005

2010

2015

2020

2025

2030

2035

2040

2045

NOTES: Future years are forecast; working-age population is 15–59. SOURCES: Bloomberg, UBS, United Nations

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sheer size was seen as a massive competitive advantage. Indeed, China has three times as many workers as the United States has people. Yet as the country’s older workers have been retiring, China’s working-age population has been quietly shrinking in recent years. Economists say this will most likely lead to labor shortages over the coming years, putting even more pressure on wages to rise. China’s demographic problem has been exacerbated by the country’s “one-child” policy, which has prevented an estimated 400 million births since 1979. But China isn’t the only emerging market suffering from bad demographic trends. Birthrates are low throughout East Asia. The ratio of people 15 to 64 to those 65 and older will plummet from about 7 to 1 to 3 to 1 in the next 15 years in Taiwan, South Korea, and Hong Kong, dragging down growth. Your best strategy: If you’re a growth-focused investor who wants more than that 5% stake in emerging markets, concentrate on developing economies with more youthful populations and more potential to expand. One fund that gives you that—with big holdings in the Philippines, Saudi Arabia, Egypt, and Colombia—is Harding Loevner Frontier Emerging Markets (HLMOX). Over the past five years, the fund has FOR YEARS, CHINA’S

2050

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INVESTING IN CHINA

gained around 7% a year, more than triple the return of the typical emerging-markets portfolio. Another option is EGShares Beyond BRICs ( BBRC). Rather than investing in the emerging markets’ old-guard leaders—Brazil, Russia, India, and China—this ETF counts ﬁrms from more consumer-driven economies, such as Mexico and Malaysia, among its top holdings.

THE PARALLELS BETWEEN CHINA AND 1990S JAPAN ARE ALARMING is facing a real estate crisis similar to Japan’s, says Nariman Behravesh, chief economist at IHS. With easy access to cheap credit, developers have ﬂooded the major cities with excess housing. Floor space per urban resident has grown to 40 square meters, compared with just 35 square meters in Japan and 33 in the U.K. Not surprisingly, prices in 100 top Chinese cities have been sliding for seven months. Whether China’s property bubble bursts or not, falling home values chip away at household net worth; that, in turn, drags down consumer sentiment and spending, Behravesh says. Other unfortunate similarities between the two nations: Excess capacity plagues numerous sectors of China’s economy, ranging from steel to chemicals to an auto industry made up of 96 car brands. Also, Chinese officials face political pressure to focus on short-term FOR STARTERS, CHINA

growth rather than long-term ﬁxes. This type of thinking has resulted in the rise of so-called zombie companies, much like what Japan saw in the ’90s. “These are companies that aren’t really viable but are being kept alive,” Behravesh says. Yet for the economy to get back on track, inefficiently run businesses have to be allowed to fail, market strategists say. Your best strategy: Focus on the few major differences between the two countries. Unlike Japan, for instance, China is still a young, emerging economy. Slowdown or not, “the growth of the middle class will continue in China, and that will absorb some of the overhang in the economy, which is something Japan couldn’t count on,” says Michael Kass, manager of Baron Emerging Markets Fund.

goods, valuations on consumer staples companies have nearly doubled over the past four years to a P/E of around 27. At the same time, the loss of faith in the Chinese story means there are decent values in industries that cater to the established middle and upper-middle class, says Nick Niziolek, co-manager of the Calamos Evolving World Growth Fund. Health care and gaming stocks in particular suffered setbacks last year. And Chinese consumer discretionary stocks are trading at a P/E of just 12, down from 20 ﬁve years ago. You can invest in such businesses through EGShares Emerging Markets Domestic Demand ETF (EMDD), which owns shares of companies that cater to local buyers within their home countries, rath-

“The growth of the middle class will continue in China, and that will absorb some of the overhang in the economy, which is something Japan couldn’t count on.” —MICHAEL KASS, manager, Baron Emerging Markets Fund

What’s more, when Japan’s bubble burst in late 1989, stocks in that country were trading at a frothy price/earnings ratio of around 50. By contrast, Chinese shares trade at a reasonable P/E of around 10. To be sure, not all Chinese stocks enjoy such low valuations. As competition heats up to supply China’s population with basic

er than relying on exports. Chinese shares represent about 17% of the fund, led by names such as China Mobile. That one of the world’s great growth stories is now best viewed as a place to pick up stocks on the cheap might seem a strange twist— until you remember your Japanese and Internet history.

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THE MONEY 50 » The mutual funds and ETFs you need for the long run.

ON THE ROAD TO WEALTH » How three families plan to get there.

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P R O P ST Y L I N G B Y M E G U M I E M O TO

THE PLAYBOOK 3 HABITS OF THE RICH TO AVOID » Don’t regret their investing mistakes.

THE FUND REPORT 2014 » Ranking the biggest and best.

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THE MONEY 50, OUR LIST OF THE WORLD’S BEST MUTUAL AND EXCHANGE-TRADED FUNDS, CAN STEER YOU SAFELY TOWARD YOUR GOALS—EVEN WHEN THE GOING GETS ROUGH.

FUNDS FOR THE LONG RUN OVER THE PAST FIVE YEARS of impressive stock and

bond returns, a rising tide lifted nearly all boats. Alas, tides ebb too, and the markets have been high for longer than usual. It’s time to look at what matters to you not only when seas are calm, but also when they’re stormy. That’s the thinking behind the MONEY 50, our selection of the world’s best mutual and exchange-traded funds. Note that we didn’t say “top-performing” or “hottest.” Instead, by sticking to low-cost portfolios run by rock-solid management, the MONEY 50 is meant to give you the best shot possible at outperformance over decades, not months or years. Funds are broken into two main categories: building-

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BY TA Y L O R T E P P E R / I L L U S T R AT I O N BY ANGUS GREIG

THE MONEY 50

I N V E ST O R’ S G U I D E 2 0 15 PA R T 3 » T H E P L A Y B O O K

block and custom. The former comprises 14 low-fee index funds—both traditional mutual funds and ETFs that you buy and sell like stock— that closely track market benchmarks such as the S&P 500; select among these for your core holdings. Most of the remaining entries let you augment that core with alternative investments such as real estate or natural resources, or tilt your portfolio toward asset classes that tend to outperform the market over the long run, such as the stocks of smaller companies or “value” stocks that are cheap relative to their earnings per share. For actively managed funds, we focus on managers who have long tenure, who post above-average long-term performance records, and whose funds are owned by companies that treat shareholders right. We also include two target retirement-date fund offerings if you want to keep your money in a single investment that grows more conservative as you get older.

HOW TO USE THE MONEY 5O 1. SEEK BROAD DIVERSIFICATION

With a few building-block funds, you can cover all the core asset classes. VANGUARD TOTAL INTL. BOND INDEX

10%

30%

VANGUARD VANGUARD TOTAL INTL. TOTAL BOND STOCK MARKET VANGUARD REIT INDEX INDEX INDEX

10%

30%

WHILE WE ARE cautious about mak-

ing switches, events can force our hand. We are replacing three funds:

20%

2. TILT YOUR PORTFOLIO

Add “custom” funds such as small and value-oriented stocks. VANGUARD SMALLCAP VALUE ETF

POWERSHARES FTSE RAFI U.S. 1000

VANGUARD TOTAL INTL. BOND INDEX

SCHWAB TOTAL STOCK MARKET INDEX

25%

10% VANGUARD TOTAL BOND MARKET INDEX

30%

CHANGES TO THE LIST

SCHWAB TOTAL STOCK MARKET INDEX

VANGUARD REIT INDEX

10%

VANGUARD TOTAL INTL. STOCK INDEX

15%

3. OR SEEK HELP

Use a “one-decision” fund for professional diversification and portfolio management. T. ROWE PRICE RETIREMENT 2020

100%

Out: T. Rowe Price Equity Income (PRFDX) Longtime manager Brian

Rogers is stepping down in October. His successor, John Linehan, has a wealth of experience, so shareholders needn’t sell. That said, the fund’s stellar record belongs to Rogers. In: Dodge & Cox Stock (DODGX) The

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management team has delivered impressive returns at low cost, beating 99%, 92%, and 67% of their peers over the past three, ﬁve, and

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10 years, respectively. The fund watchers at Morningstar give Dodge & Cox an “A” for how it treats shareholders, taking into account fees, disclosures, manager compensation, and other factors. Dodge & Cox Stock is a true value fund, meaning the managers look for unpopular stocks and hang on, expecting investors to come around and bid share prices up. “You have to understand the firm’s strategy and be willing to hold on,” says Morningstar analyst Laura Lallos. For instance, battered computer giant HewlettPackard is the fund’s top holding, and the nine-person management team has other big technology bets, including one on Microsoft. A recent success: buying J.P. Morgan Chase after news of the London Whale trading scandal in 2012. The stock has risen almost 70% since then. That said, the fund fared poorly during the financial crisis. But over the years it has bested the market in up months and lost less in down months. Out: Primecap Odyssey Aggressive Growth (POAGX) After posting top returns for a decade and seeing an influx of money, the fund closed to new investors. That’s a positive for shareholders as management decided to go with its best ideas rather than find ways to deploy more cash. In: iShares iBoxx $ Investment Grade Corporate Bond (LQD) Instead of replacing Primecap with another stock fund, we bulked up our fixed-income selection at a time when Treasuries, the go-to bond investment, pay so little. Low-fee LQD buys the debt of

THE MONEY 50

such household names as Verizon, Goldman Sachs, and General Electric and has outperformed its peers. While blue-chip debtors are unlikely to default, corporate bonds are more volatile than Treasuries, so this fund should supplement, not replace, your core bond holding.

one-seventh of the portfolio now. The idea is to add yield without signiﬁcantly increasing risk.

that have lagged the broader market. Still, Delaﬁeld has ﬁnished in the top 15% of similar funds in three of the past six years.

FUNDS UNDER REVIEW

Out: Harbor Bond (HABDX) Why? In a name, Bill Gross. The co-founder of Pimco left the bond giant in the fall for Janus. Investors have been pulling money from Harbor, a sister fund to Pimco Total Return, as Gross’s recent bets against Treasuries failed to pay off. Harbor has trailed 72% of its peers over the past 12 months, although the fund has a solid long-term record. Still, given management uncertainty at Pimco, we replaced Harbor. In: Fidelity Total Bond Fund (FTBFX) An experienced team led by Ford O’Neil has given investors a smooth ride at a lower cost than Harbor. The fund can invest up to 20% of its assets in non-investment-grade debt. Those “junk” holdings are

WHILE WE SEEK

WEITZ HICKORY (WEHIX) Run by Omaha’s second-most-famous value investor, Wally Weitz, this fund has trailed competitors badly over the past three- and 10-year periods, thanks to performance laggards such as security ﬁrm ADT. Plus, a large cash allocation meant Weitz didn’t fully capitalize on the bull market. Nevertheless, the fund ranks in the top 13% of peers over the past ﬁve years.

out portfolios that beat their average competitor over five years, we don’t immediately eject funds on the list should returns lag. Contrarian-minded managers can post subpar results before the market vindicates their thinking. That said, continued underperformance bears scrutiny. We’re watching the following funds:

WA S AT C H S M A L L C A P G R O W T H (WAAEX) Jeff Cardon, the manager

DELAFIELD (DEFIX) Managers J. Dennis Delaﬁeld and Vincent Sellecchia have whipped the average competitor that invests in midsize value stocks by 2.5 percentage points a year since 1999, but they’ve struggled the past two years, in part due to large holdings in industrials and basic materials, sectors

since 1986, tries to find companies that have low levels of debt and can double their earnings in five years. While the fund’s 15-year record is impressive, Wasatch has trailed almost 60% of its peers over the past five years, thanks in part to its bet on energy stocks, which have fallen as oil prices decline.

MAKING OF THE MONEY 5O

STRONG STEWARDSHIP

MONEY looks for solid long-term performers with these important traits: LOW FEES

LONG TENURE

Below-average expense ratios are a good predictor of better-than-average performance.

Good returns don’t mean much if the manager responsible for them is no longer around.

Average expenses for actively managed MONEY 50 funds

Average stock fund

0.94%

1.33%

Average tenure for a MONEY 50 manager

For all funds

You want fund managers who put shareholders first. We use Morningstar stewardship grades as a guide. Actively managed MONEY 50 funds graded A or B

12.4 years

13% 5.5 years

64%

All actively managed stock funds graded that high

NOTE: For funds that do not receive any stewardship grade

from Morningstar, MONEY relies on its own assessment. SOURCE: Morningstar

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THE MONEY 50 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 the stock and bond markets, should be used for the core part of your portfolio that you’ll hold on to for years. Because you’re seeking broad market exposure, low-cost diversified index funds are your best bet.

STYLE

ANNUAL EXPENSES (% OF ASSETS)1

20142

BLEND

0.09 0.09

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

FUND NAME (TICKER)

FIVE YEARS3

MINIMUM INITIAL INVESTMENT

13.5

15.9

$100

11.9

16.2

100

0.14

8.1

17.1

N.A.

0.14

2.4

17.7

N.A.

0.20

–2.6

6.1

2,500

0.22

–2.1

5.0

3,000

% TOTAL RETURN

LARGE-CAP Schwab S&P 500 Index (SWPPX) Schwab Total Stock Market Index (SWTSX)

MIDCAP/SMALL-CAP

FOREIGN Fidelity Spartan International (FSIIX)

LARGE BLEND

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

SMALL/MID BLEND

0.40

–4.4

6.6

3,000

EMERGING MARKETS

0.33

2.2

2.6

3,000

REAL ESTATE

0.24

28.4

17.6

3,000

Vanguard Total Bond Market Index (VBMFX)

INTERMEDIATE TERM

0.20

5.3

3.9

3,000

Vanguard Short-Term Bond Index (VBISX)

SHORT TERM

0.20

1.2

1.8

3,000

INFLATION-PROTECTED

0.20

3.8

3,000

0.10

–0.6

N.A.

WORLD

0.23

7.9

N.A.

3,000

BALANCED

0.56

10.1

12.0

2,500

0.26

10.1

11.5

3,000

0.67

6.0

10.7

2,500

0.18

7.4

11.8

1,000

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.

Vanguard Inﬂation-Protected Securities (VIPSX) Vanguard S/T Inﬂation-Protected Sec. ETF (VTIP) Vanguard Total International Bond Index (VTIBX)

Fidelity Balanced (FBALX) Vanguard Wellington (VWELX) T. Rowe Price Retirement Funds (STOCKS/BONDS) Example: 2020 Fund (TRRBX) 64%/36%

TARGET DATE

Vanguard Target Retirement (STOCKS/BONDS) Example: 2035 Fund (VTTHX) 83%/17%

NOTES: 1Net prospectus expense ratios were used. 2Total return ﬁgures are as of Dec. 8. 3Five-year returns are annualized. 44.25% sales load. 5Shares available only through fund company.ETFs do not have a minimum initial investment. N.A.: Not available. 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 give

your portfolio a tilt toward certain kinds of stocks and bonds, diversify more broadly, or play a hunch.

STYLE

ANNUAL EXPENSES (% OF ASSETS)1

20142

FIVE YEARS3

MINIMUM INITIAL INVESTMENT

VALUE

$2,500

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 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 INFLATION-PROTECTED

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

FUND NAME (TICKER)

% TOTAL RETURN

LARGE-CAP Dodge & Cox Stock (DODGX)

0.52

10.4

16.0

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

0.39

11.6

16.4

N.A.

Sound Shore (SSHFX)

0.93

11.9

15.4

10,000

0.66

15.1

17.1

2,000

0.74

9.6

17.7

2,500

Primecap Odyssey Growth (POGRX)

GROWTH

T. Rowe Price Blue Chip Growth (TRBCX)

MIDCAP Delaﬁeld (DEFIX)

VALUE

1.22

–6.0

11.9

1,000

Ariel Appreciation (CAAPX)

BLEND

1.13

7.1

16.7

1,000

1.22

0.8

17.3

2,500

GROWTH

0.91

10.1

17.1

2,500

2,000

Weitz Hickory (WEHIX) T. Rowe Price Div. Mid-Cap Growth (PRDMX)

SMALL-CAP Royce Opportunity (RYPNX)

1.17

–4.1

15.7

0.09

8.3

17.0

N.A.

BLEND

1.20

–7.6

14.9

3,000

GROWTH

1.24

0.0

15.5

2,000

DIVIDEND

0.54

–0.3

8.4

N.A.

0.35

13.1

15.8

N.A.

0.97

28.4

16.9

10,000

VALUE

Vanguard Small-Cap Value ETF (VBR) Berwyn (BERWX) Wasatch Small Cap Growth5 (WAAEX)

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

REAL ESTATE

SPDR Dow Jones Intl. Real Estate ETF (RWX) iShares North American Nat. Res. ETF (IGE)

0.59

5.7

9.9

N.A.

NATURAL RESOURCES

0.48

–13.1

4.2

N.A.

FOREIGN LARGE BLEND

0.64

3.3

8.8

2,500

0.98

–2.6

10.6

1,000

FOREIGN LARGE GROWTH

0.48

–2.7

7.7

3,000

EMERGING MARKETS

1.25

3.0

2.9

2,500

INTERMEDIATE TERM

0.43

5.4

5.1

2,500

0.45

5.3

2,500

SHORT TERM

0.20

1.7

2.8

3,000

FOREIGN Dodge & Cox International Stock (DODFX) Oakmark International5 (OAKIX) Vanguard International Growth (VWIGX) T. Rowe Price Emerging Mkts. Stock (PRMSX)

BOND Dodge & Cox Income (DODIX) Fidelity Total Bond (FTBFX) Vanguard S/T Investment Grade (VFSTX) iShares iBoxx $ Inv. Grade Corp. Bond (LQD) Loomis Sayles Bond (LSBRX) Fidelity High Income (SPHIX)

CORPORATE

0.15

7.9

6.8

N.A.

MULTISECTOR

0.92

4.9

8.5

2,500 2,500

HIGH YIELD

0.72

1.8

8.5

Vanguard Interm.-Term Tax-Exempt (VWITX)

MUNI NATL. INTERMEDIATE

0.20

6.9

4.4

3,000

Vanguard Limited-Term Tax-Exempt (VMLTX)

MUNI NATL. SHORT

0.20

1.9

3,000

WORLD

0.88

2.7

6.1

1,000

EMERGING MARKETS

0.86

5.7

7.4

2,500

Templeton Global Bond4 (TPINX) Fidelity New Markets Income (FNMIX)

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ROAD TO WEALTH

WITH 30-PLUS YEARS TO RETIREMENT, DAVID AND ASHLENE LARSON—HERE WITH DAUGHTER ROSALIE— CAN AFFORD TO TAKE MORE INVESTING RISK.

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THE RIGHT WAY TO INVEST FOR RETIREMENT DEPENDS ON WHERE YOU ARE ON THE JOURNEY. MONEY OFFERS READERS AT DIFFERENT MILE MARKERS DIRECTIONS TO THEIR DESTINATIONS.

ON THE ROAD TO WEALTH THE IRONY OF planning for retirement is that

so much of your working life is spent saving up for the day you’ll quit. Of course, a lot changes along the way, including your earnings, your ability to save, and your tolerance for risk. So it pays to stop and reassess your investments periodically to make sure they’re in line with where you are and where you hope to be headed. On the following pages, MONEY helps five readers at different stages get their mixes right. Whether you’re getting started, in your peak earning years, or on the cusp of quitting, you’ll ﬁnd advice here to help you too. Get more guidance at money.com/roadtowealth.

BY PA U L K E E G A N / PHOTOGRAPHS BY PETER BOHLER

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GETTING STARTED

FIGURE OUT PRIORITIES DAVID AND ASHLENE LARSON, 33 AND 32, BALTIMORE $120,OOO*

TOTAL INCOME:

$71,1OO

TOTAL SAVINGS:

*Approximate

DAVID AND ASHLENE LARSON know

KICK UP THE STOCK STAKE

Rosalie’s college. Total savings rate: 3%. “It’s nerve-racking,” David says. Meanwhile, they don’t know what to do with the $27,500 they’ve saved for retirement. Nor do they have any idea how to deploy the pile of savings bonds—worth $42,000 and earning 1.49%—that David’s grandparents gave him as a kid. “Our investments are all over the place,” says Ashlene. Matt Morehead of Greenspring Wealth Management in Towson, Md., says that the Larsons’ overall allocation for retirement—73% stocks, 27% ﬁxed income—is a tad conservative for their ages. But worse, Ashlene inadvertently has $15,000 in an old 401(k) invested in a 2025 target-date fund that will move to 50% bonds in 10 years, hampering its growth potential. Another concern: They have

RETIREMENT SAVINGS ALLOCATION

BEFORE

Morehead suggests the Larsons invest in a target-date fund that is better geared to their age and time horizon.

51%

22%

23%

U.S. stocks

Intl. stocks

Bonds

Cash

Other

63%

26%

AFTER

SOURCE: Matt Morehead

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J A N U A R Y/ F E B R U A R Y 2 0 1 5

no cash in the bank. “The Larsons are stuck in the ‘foundation phase’ because they have debt and not enough emergency funds,” says Morehead. “They need to take care of those issues before sinking money into retirement.”

THE ADVICE Build in a shock absorber. Since they’re both self-employed, the Larsons should keep a reserve fund of at least nine months of expenses to prevent them from having to tap retirement funds if business slows, says Morehead. With basic costs of $6,000 a month, that’s $54,000. David’s savings bonds are a good headstart, since these can be redeemed anytime without penalty— though taxes will drop their value to about $39,000. To make up the difference, the Larsons should redirect their $300 monthly retirement and college savings to a savings account. Plus, 40% of any monthly earnings over their base pay of $9,000 should go to the cash stash (another 35% to student loans, 25% to taxes).

O P E N I N G S P R E A D A N D T H I S PA G E : WA R D R O B E ST Y L I N G B Y P O L LY S PA D AV E C C H I A ; H A I R A N D M A K E U P B Y S U S A N H E Y DT

how important it is to save for retirement. The problem is they don’t have much cash to spare, as they are new parents—daughter Rosalie is 18 months—who are both starting new businesses. David took his sideline video-production company full-time in June, and Ashlene left her job at a PR ﬁrm in July to freelance. The Larsons have more stable income than many self-employed workers, with $9,000 coming in monthly from two regular clients and twice that in a good month. But after payments for a mortgage, day care, car lease, and $25,000 in student loans—and after plowing some proﬁts back into David’s growing business—they can put only $200 a month in Ashlene’s Roth IRA and $100 in a 529 savings plan for

THE LARSONS NEED A LOW-MAINTENANCE INVESTING STRATEGY.

ROAD TO WEALTH

AT THE PEAK

BEGIN DIALING BACK RISK MAURICE GREER, 53, BOWIE, MD. TOTAL INCOME:

$103,OOO

MAURICE GREER WAS a late starter

Consolidate with the right target-date fund. David should open a Roth IRA for himself at a low-cost brokerage; Ashlene should move her accounts there too. Morehead suggests they go all in on Vanguard’s Target Retirement 2045 Fund (VTIVX). This bumps their stock stake to about 89% and gives them broad market exposure. Plus, the fund automatically rebalances until reaching a 50%/50% mix in 30 years. “This is a great way to invest for a young couple who don’t have time to monitor their portfolio,” Morehead says. Beef up retirement savings. When their reserves are established, that 40% of additional income can go to their IRAs. Once they max out these regularly (each can put in $5,500 in 2015) or exceed the income limits ($193,000 modiﬁed AGI for couples filing jointly), Ashlene can open a SEP-IRA and David can start a 401(k). Only when they’re saving 15% of pay should they return to funding Rosalie’s 529. “You can always borrow for college,” says Morehead. “But you can’t borrow for retirement.”

in saving for retirement. After a decade in the Air Force and eight years in retail—during which he’d saved $10,000 in a 401(k) but spent it when a sports injury threw him out of work—he decided in 2000 to start taking classes toward a certification in information technology. “I didn’t like the idea of getting old and having no money, so I had to catch up,” he says. At age 40, newly minted with the tech credential, he moved to the Washington, D.C., area for an entry-level IT job with a Pentagon contractor. Thirteen years and five government jobs later, he earns $103,000 a year helping run the FBI’s computer systems. Along the way, he’s piled up $261,000 for retirement and $43,000 in the bank. His aggressive investing style (80% in stocks) and savings plan (20% of pay) have brought him far. Now he wants to up the ante. Greer, who has the government’s second-highest security clearance, has grown weary of the demands of the job, not to mention the polygraph tests and intrusive security checks the FBI requires. “My work is very stressful,” he

TOTAL SAVINGS:

$304,OOO

says. “Life is short, and I want to enjoy it.” To travel more and pursue his photography passion, Greer wants to retire in seven to 10 years—the sooner the better. In hopes of growing his money faster and making his dream a reality, Greer is considering buying individual stocks, perhaps big brand names like Coke and McDonald’s. Investment adviser Riyad M. Said of TA Capital Management in Washington, D.C., doesn’t think that’s wise. With such a short time horizon, Greer should dial back (rather than crank up) the risk in his portfolio, Said says. “If he were 20 years from retirement, I’d say ﬁne, stay aggressive,” he notes. “But when you’re seven to 10 years away, there’s a big risk that your portfolio could take a huge hit right when you want to take money out.”

THE ADVICE Reduce risk. Said suggests Greer turn down his equity exposure to 60% of his portfolio, with 40% in domestic and 20% in international funds. A quarter of Greer’s portfolio should go into fixed income, with 15% in U.S. bonds through MetWest Total Return (MWTRX) and 10% inter-

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MAURICE GREER WANTS TO BE ON THE FINAL SPRINT TO RETIREMENT.

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which he gets a $2,000 match—and $10,000 a year in a savings account. Rather than sock away so much in the bank, he should take full advantage of 401(k) catch-up provisions for those aged 50-plus to contribute a total of $24,000 a year to that account. Then he should put the

PEDAL BACK ON RISK

PORTFOLIO ALLOCATION

BEFORE

Greer should cut his exposure to stocks if he wants to retire within the next seven to 10 years.

J A N U A R Y/ F E B R U A R Y 2 0 1 5

SOURCE: Riyad M. Said

63%

18%

16%

U.S. stocks

Intl. stocks

Bonds

Alternatives

Cash

40%

20%

25%

10%

AFTER

WA R D R O B E ST Y L I N G B Y P O L LY S PA D AV E C C H I A ; G R O O M I N G B Y S U S A N H E Y DT

national through SPDR Barclays International Treasury Bond ETF (BWX). Another 10% should go into alternatives—Said suggests Baron Real Estate Fund (BREFX) and Alerian MLP (AMLP)—and 5% in cash. Aim for a target. Greer’s expenses are modest: With a mortgage payment of $900 on his condo and no other debt, he spends only about $2,700 a month. At that rate, he’ll need $800,000 to retire in seven years or $730,000 to retire in 10, assuming that he takes Social Security at 63. To reach these goals, he will need to save $44,000 or $24,000 per year, respectively, based on a 6% to 6.5% average return. Invest tax-efficiently. A disciplined saver, Greer sets aside $20,000 a year in his 401(k)—on

remaining $6,000 in a new brokerage account invested in an index fund or ETF of dividend-paying stocks (the tax consequences will be modest, and he can reinvest the dividends). One option: PowerShares S&P 500 Low Volatility ETF (SPLV) . These steps will let him save enough to retire in 10 years and get him started toward an earlier quit date. Greer currently overpays $425 a month on his mortgage; if he stops doing that, he can free up $5,100 more a year. Additionally, he will earn his bachelor’s degree in cybersecurity soon, which would qualify him for positions that could increase his salary by 30%. Making a job change and putting all his extra earnings in the dividend fund should allow him to save enough to retire in seven years—though a new position could be more stressful than his current one. “If that would increase my chances of retiring early,” Greer says, “the tradeoff would be well worth it.”

You’ve always known the importance of planning for retirement. We have that in common. Merrill Edge® can streamline your investing and help you reach your full retirement potential.

To get started, visit merrilledge.com/streamlined Bank with Bank of America. Invest with Merrill Edge.

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MLPF&S is a registered broker-dealer, member SIPC and a wholly owned subsidiary of BofA. Banking products are provided by Bank of America, N.A., member FDIC and a wholly owned subsidiary of BofA. © 2014 Bank of America Corporation. All rights reserved. ARPQGMMF

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AT RETIREMENT

FOCUS ON INCOME

JEANNE MUSOLF WOULD LIKE TO JOIN HUSBAND KEN IN RETIREMENT IN THREE TO SIX YEARS.

KEN AND JEANNE MUSOLF 63 AND 59, MUSKEGO, WIS.

TOTAL INCOME:

$149,00O

TOTAL ASSETS:

$1.1 million

OVER THE PAST four

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loan. So the Musolfs have been living very comfortably on $8,500 a month, leaving them room to make extra debt payments, give $600 a month to charity, and splurge on their three grandkids. And Jeanne has been saving 20% of her pay in her 403(b). As she starts her new job, her salary will drop to $65,000. The Musolfs can absorb that pay reduction and avoid dipping into their retirement funds by cutting back on overpayments on their

J A N U A R Y/ F E B R U A R Y 2 0 1 5

mortgage and car loan, says Kay Allen of Aspen Wealth Management in Colleyville, Texas. The bigger challenge will be managing Jeanne’s retirement—when to quit and when to take Social Security—to minimize the impact on their portfolio. Depending on their choices, the couple could need to withdraw from $35,000 to $80,000 a year, Allen says. “The Musolfs are doing well,” she notes, “but it’s critical that they handle this transition carefully.”

FEEDBACK: letters@moneymail.com

WA R D R O B E ST Y L I N G B Y B E T H B E R L I N ; H A I R AND MAKEUP BY ALLIE KUNKLER

decades, Ken Musolf has carefully plotted out an investment strategy for him and his wife, Jeanne, and his ﬁnancial acumen has helped the couple accumulate $1.1 million in retirement funds. Though Ken retired in 2012 after 35 years as a construction electrician, he and Jeanne have yet to tap that nest egg. He gets three pensions and Social Security, totaling $48,840 a year; and until December, she had been earning $100,000 as a department manager at a hospital. But they’ll need to start drawing down soon: Jeanne is scaling back her hours and job duties in January and plans to retire in three to six years. Ken admits to being at a loss on this next phase: How do they transition from saving to taking income? With a portfolio across seven accounts that’s 66% stocks, 30% bonds, and 4% in cash, he says, “our quandary is that we have a basketful of investments and want to consolidate them in a sensible allocation that allows for growth and safety.” Their only debt is a $43,000 home-equity loan and a $26,000 car

ROAD TO WEALTH

SHIELD ASSETS FROM VOLATILITY The Musolfs should keep ﬁve years of expenses between cash and bonds in retirement.

PORTFOLIO ALLOCATION

BEFORE

52%

14%

U.S. stocks Intl. stocks

40%

20%

I/T bond

S/T bond

23%

12%

30%

Bonds

Cash

AFTER

SOURCE: Kay Allen

THE ADVICE Reallocate to reduce risk. Ken can better manage their seven retirement accounts by consolidating them into four: one rollover IRA for each, Jeanne’s 403(b), and an IRA Jeanne inherited from her mother. Next they should shift their allocation from a 66% stocks, 34% ﬁxedincome mix to a 60%/40% mix. “This will enable them to better withstand

market volatility,” says Allen. “At 60/40, they would have suffered a 22% loss during the Great Recession, requiring a 28% gain to catch up. With their current allocation, they’d have lost 30%, requiring a 43% gain. That is not something you want to experience in retirement!” The mix she suggests (above) introduces shorter-term bonds for 12% of the portfolio via Vanguard Short Term Bond Index (VBISX) and 2% emerging-markets stock through Vanguard Emerging Market Index (VEIEX) for diversiﬁcation. Allen also suggests always keeping a year’s living expenses in cash and four years’ in bonds to cushion against market turmoil. Tally up expenses. To determine an income strategy, the Musolfs needed to ﬁgure out their retirement budget. If she retires before Medicare kicks in at 65, Jeanne will have to pay for health insurance ($1,000 a month). Allen also wants the Musolfs to get long-term-care insurance ($500 a month), plus a Medigap policy for Ken once he turns 65 ($175 a month). Since the Musolfs want to travel more, Allen helped them come up with an annual vacation budget

of $15,000. All told, the couple will have $146,000 in yearly inflationadjusted expenses if Jeanne retires at 62, or $127,000 if she waits till 65. Strategize withdrawals and Social Security together. Normally, retirees are advised to draw down at a rate of no more than 4% the first year, adjusting only for inflation annually, for the best chances of portfolio longevity. But if Jeanne retires at 62 and doesn’t take Social Security right away, the couple will need to replace $85,000 in income, for a whopping 7.6% withdrawal. So if Jeanne does want to retire on the early end, Allen suggests she take a check from the government immediately. The couple would then initially have to draw 5.5% to get the $61,000 they’d need. But that’s okay, says Allen—three years later Jeanne qualifies for Medicare and won’t need health insurance, so their withdrawal rate will fall to 3.4%. This way their money should last at least to their life expectancies, with some left for heirs. “Jeanne is concerned about retiring—she wants to know if she really can do it,” says Allen. “If they follow these steps, the answer will definitely be yes.”

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WHEN IT COMES TO BUYING AND SELLING INVESTMENTS, IT TURNS OUT THE ONE PERCENT MAKE THE SAME MISTAKES THE REST OF US DO. FIX THOSE ERRORS, AND YOU GREATLY INCREASE YOUR CHANCES OF ACHIEVING REAL WEALTH.

3 HABITS

OF THE RICH TO AVOID WHAT SEPARATES THE TRULY WEALTHY from the rich and everyone else in investing? Brad Klontz, a financial psychologist who has an appointment to Kansas State University’s personal-financial-planning department, and I undertook a survey in the winter of 2013 to find out what was different about the One Percent. When it came to investing, almost all of them had a financial adviser, over 80% had an accountant, and two-thirds of them had a lawyer they consulted regularly. They would seem to be set. Yet those advisers could not protect them completely from the tendencies and biases that can derail anyone’s investment strategy. Drawing the thin green line between the wealthy and the rich was not as simple

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BY PA U L S U L L I VA N / I L L U S T R AT I O N S BY OLIVER MUNDAY

I N V E ST O R’ S G U I D E 2 0 15 PA R T 3 » T H E P L A Y B O O K

as tallying up how much money someone had to invest. It isn’t that easy. People with a lot of money to invest make the same dumb mistakes as everyone else. Just because they successfully managed businesses that sold cars or vinyl siding or computer software didn’t mean they understood how to manage the money made from those decisions. In our survey, with representative samples of people in the top 1%, 5%, and 20% for earnings, Klontz and I found that the 1% were actually more likely than the top 5% to make common investing mistakes. They were overconfident in their investing ability. They made more trades. They took pride in selling winners, and they were more likely to hold on to investments that had lost value instead of selling them, taking the loss, and moving on to something else. They also invested in businesses run by friends—even though they said they knew that was a bad idea—and took friends’ advice over that of a ﬁnancial adviser on investments. While these ﬁndings make the One Percent similar to less rich people, it also shows how ingrained destructive investing behavior is. It seems hardwired. What people and their advisers need to do to get on the right side of the thin green line—by which I mean a sense of wealth that lets you make

the choices you want, whether you are a nurse, an executive, or a hedge fund manager—is to avoid the three things that can ruin any investment plan: optimism, trust, and self-confidence. When it comes to investing my own money, I shed these feelings, laudable in other areas of life, years ago. I owe my skeptical view to three people: Gregg Fisher, Daylian Cain, and Terrance Odean.

BE WARY OF THE PAST of Gerstein Fisher, a wealth-management ﬁrm in New York, has found a way to get clients to be less optimistic without making them so pessimistic that they bury their money in the backyard. When I sit down in his office, amid the high-rises of Midtown Manhattan, he extends to me a bowl ﬁlled with marbles. “Without looking, pull one out,” he tells me. I do. Black. “Now put it back and take out another.” Black again. “One more time.” White. “You made money,” he says with a smile.

FISHER, PRESIDENT

Paul Sullivan is the “Wealth Matters” columnist for the New York Times. Excerpted from The Thin Green Line: The Money Secrets of the Super Wealthy. Published by arrangement with Simon & Schuster. © 2015 by Paul Sullivan.

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In the bowl there are six white marbles and two black ones. The white marbles stand for a rising stock market, the black ones for a declining one. Historically the stock market has gone up 75% of the time, but it doesn’t go up three years in a row and down the next one. I had two declining years before I picked the white marble. Fisher, who manages $2 billion for about 600 clients, says that what his clients struggle with the most is being fixated on events that have already happened. That’s the point of picking marbles out of the bowl: The color you just picked has no bearing on what color you’re going to get next. “Most people cannot turn off yesterday,” he says. “And if the past 10 years are influencing your decisions around investing, it’s going to hurt you.” In 2010, after 17 years in business, Fisher thought he had seen a lot of bad investing behavior. He wanted to know if his rich clients were any better than other people at resisting the urge to buy and sell at the wrong times. So he decided to team up with Philip Z. Maymin, a former hedge fund manager and professor of ﬁnance and risk engineering at the NYU Polytechnic School of Engineering, to analyze his ﬁrm’s clients. The two men focused on 1.5 million client calls to Fisher’s firm starting with its founding in 1993. After they weeded out the routine calls—happy holidays, here’s my new address—they found that the number of calls to sell securities increased after down days in the stock market, while calls to buy securities increased after days

FEEDBACK: letters@moneymail.com

BOOK EXCERPT

when the stock market did well. If this behavior seems logical to you, then you’re destined to lose money when you invest. A better strategy is to buy or sell a stock based on information about the future—a new product or a new market, a loss of competitiveness, or an ineffective strategy—that could inﬂuence its future price. A savvier investor would take that information and decide what he thought the value of a stock should be and buy or sell it accordingly. While he would not panic because it went down one day—he might buy more because the lower price made it a deal—he would, just as important, sell the stock when it reached the value he thought it should have. Alas, the average investor acting on his own does not seem to exhibit this kind of patience. The Maymin-Fisher study, which was published in the Journal of Wealth Management in 2011, found that the kind of knee-jerk reactions to what happened the day before cost an investor four percentage points of return each year. That’s not only a drag on the portfolio but difficult to recover from over time. What’s more, there seemed to be no logical reason for people to call when they did. “It’s more about the randomness of what they ate for lunch yesterday,” Fisher says. “Or if they bought Google at the IPO, they’re more likely to want to buy Facebook. That explains their risk behavior more.” And people with more money called with the same frequency as people with less. The study argued that the annual loss people suffered from their

“Most people cannot turn off yesterday. And if the past 10 years are influencing your decisions around investing, it’s going to hurt you.” —GREGG FISHER, money manager

own folly was greater than the 1% an adviser charged to manage their money. That would sound like an argument for using an adviser, but the result presumed that advisers could hold themselves above the same urges that affected their clients. Don Phillips, a managing director and former president of research at Morningstar, which monitors mutual fund performance, has questioned whether advisers can keep clients from making bad decisions. “If most investors use advisers and most investors continue to do the wrong thing, then there must be a tremendous amount of bad advice being given,” Phillips wrote in a Morningstar report in October 2010. This was an argument for boring index funds that would be rebalanced without any input from the investors—a rational option that would help put you on the right side of the thin green line, but one that most investors struggle with because they think they can pick winners. What I ﬁnd equally interesting in the Maymin-Fisher study is the research that provided its hypoth-

esis: a 1978 psychological study of a man who could not control his urges to binge-eat in the middle of the night. He went so far as to put a lock on his refrigerator and give the key to a friend. But he still woke up wanting to eat, unable to control the urge on his own. At some point the refrigerator would not be locked and he would binge again. Maymin made a similar observation about Fisher’s clients—and investors in general: Some cannot help themselves in buying high and selling low. “The urge never goes to zero,” he says. “People who want to trade aggressively, it will never go away. If the market is volatile, it increases.” An average investor might be better off thinking of that refrigerator as a ﬁctional bucket called “retirement” or “college savings” or “winter vacation.” He could mentally lock his money there and not touch it. It would be set aside for a goal and be as unretrievable as the money he spent on lunch. This strategy could keep him from caring about the price of the stocks day to day. Those movements would be irrelevant, and his chance of obtaining real wealth greater. It would make him less optimistic and in the long run wealthier.

TAKE ADVICE WITH A LARGE GRAIN OF SALT an associate professor at the Yale School of Management, has focused on what advisers like Fisher tell clients when they call for all of their irrational reasons. His

DAYLIAN CAIN,

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research has found that they are too trusting, particularly when their adviser tells them he has a conflict of interest. “Disclosure doesn’t work because people don’t understand that conflicts of interest are dangerous,” Cain says. “Even very clear disclosures don’t actually have the intended warning effect. People stick to bad advice. They adjust, but they don’t adjust enough.” In the case of the adviser’s disclosing a conflict, be it putting you into an investment run by his brother or one that pays him a higher commission, investors may buy less of what is being sold, but they will still buy some of it. They don’t want their adviser to think they don’t trust him or consider him dishonest. Simply put: Investors do not understand the difference between what is being disclosed and what the risk is. “Warning that you’re sitting on a plant is different from warning that you’re sitting on poison ivy,” Cain says. A willingness to trust is good in other areas of life, such as marriage, but it may not be beneficial in investing. “We asked people how unethical it is to give potentially misleading advice to line your own pockets,” Cain says. “Most people thought that was bad no matter what it was for.” That’s understandable. But then he adds, “We asked another group that same question and said, ‘But what if you disclosed your financial incentive in giving bad advice?’ People thought it was okay.” This is what psychologists call moral licensing. Once you’ve disclosed your conflict of interest, the burden shifts, in this case to the client who has been told and should be

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WHEN STOCKS STAR ON TV Retail investors tend to jump in or out of stocks in the news. IMBALANCE OF BUY AND SELL ORDERS

2.7%

9.4%

Not in the news

In the news

NOTE: At discount brokers. SOURCE: Terrance Odean

able to act prudently. But the research shows this will not be the case. The investor may make adjustments, but he will not adjust enough to account for the conﬂict. The solution would seem to be a second opinion from an adviser who has nothing to gain. But that fails too. People demonstrate an anchoring bias, which means they use the ﬁrst set of recommendations as the starting point. What they should do is collect many types of advice and weigh them against one another.

DON’T THINK YOU’RE SO SMART after a conﬂict is disclosed is not a great idea, but other problems in buying are worse—like hearing about a company on TV while you’re having lunch and buying the stock. Terrance Odean, a professor of

MAKING AN INVESTMENT

J A N U A R Y/ F E B R U A R Y 2 0 1 5

finance at the Haas School of Business at the University of California at Berkeley, has done a series of experiments showing people are blithely and irrationally overconfident when it comes to investing. He had a hunch in the years between the tech stock bust and the Great Recession that people overvalued their investment knowledge. His hypothesis was that stocks talked about on television would have a spike in trading on the day they were mentioned, regardless of the show or channel or person talking about the stock. He was right. In a 2008 paper, “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors,” he labeled the television-driven stock picking “attention-driven buying.” With too many stocks to choose from, investing in what flashed on the television screen narrowed the list of choices. “Buying is this daunting task,” Odean says. “Investors informally, if not consciously, limit their attention. A stock catches their attention and they make the decision based on that. Instead of choosing from 5,000 stocks, they consider 15.” But the extent to which a television appearance of a stock sways investors’ buying and selling habits is extreme. On any given day at discount brokerages, the imbalance between buy and sell orders for stocks out of the news is 2.7%, meaning just about the same number of people are selling as buying. But the imbalance is 9.4% for stocks in the news. At large retail brokerages the difference is even more extreme, with a 16% imbalance for stocks in the news.

BOOK EXCERPT

“Investors informally, if not consciously, limit their attention. A stock catches their attention and they make the decision based on that.” —TERRANCE ODEAN, finance professor

What a ludicrous way this is to spend your money. Without real research, how would you know the quality of those 15 stocks? They could be 15 great stocks, 15 awful stocks, or a mix. And since you were probably eating lunch or otherwise taking a break from work when you caught the news, were you properly evaluating the tip or just reacting like Fisher’s clients? Is that person on television knowl-

edgeable, or is he trying to proﬁt from what he is telling you without even the weak disclosures that Cain found do not work? In his paper, Odean compared an individual’s strategy with that of professionals, who still pick losers but at least have a method. “With more time and resources, professionals are able to continuously monitor a wider range of stocks,” Odean wrote. They “are likely to

employ explicit purchase criteria— perhaps implemented with computer algorithms—that circumvent attention-driven buying.” Of course, for an individual the alternative to choosing from a small set of stocks is to be totally overwhelmed by thousands of them and do nothing. Odean’s research has shown that it was unlikely people would take the time to pore through all the stocks; instead, people prefer to divine patterns where none exist. “We’re like pattern-finding machines,” he says. “If lightning strikes and something falls off the table, we think the lightning caused it. Or worse, the book falls and lightning strikes and you think the book caused the lightning.” Looking for patterns certainly has an evolutionary place: If you noticed family members being eaten by lions when they went out alone, you might not go out alone. But trying to divine patterns in stocks based on theories more akin to racetrack hunches is less likely to yield lifesaving beneﬁts. “The investor who is in the market and constantly seeing patterns better have a good day job,” Odean says. So what about Odean? Is he immune to human frailty? “I buy index funds so that when you ask me I can say that,” he quips. “People are overconﬁdent about their ability to be an active manager.” Coming to that conclusion was hard-won. Before becoming an academic, Odean traded stocks between working at various day jobs. How did he do? “The thought that you can do part-time what professionals struggle to do full-time and with teams,” he says, “that’s hubris.”

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THE FUND R A SCORECARD FOR THE BEST-PERFORMING AND BIGGEST MUTUAL AND EXCHANGE

THE YEAR IN STOCK FUNDS ...but U.S. stocks fared better last year

International stock funds saw the most net inﬂows... Cumulative inﬂows: Foreign Emerging markets

U.S.

1-yr. total return

$100 billion

$50 billion

10-yr. annualized return

1-yr. total return

10-yr. annualized return

13.7%

Trend followers were sorely disappointed.

10.4% Investors chased the last few years’ returns.

Big stocks left smaller ones behind as well Smallcaps lagged after a run-up in the past few years.

10.4% 9.1%

7.9%

8.6%

7.7%

7.9%

5.8% 3.0%

2.9% –0.2% Jan. ’14

June ’14

U.S. stocks

Nov. ’14

Foreign stocks

Emergingmarket stocks

8.0 % 6.8 %

Average index fund return

Average active fund return

120

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Midcap stocks

Small-cap stocks

FUNDS VS. ETFs

PASSIVE VS. ACTIVE Actively managed mutual funds underperformed...

Large-cap stocks

...and all active funds took in less money than index funds Cumulative inﬂows:

Active

Index

Ultimately, stock ETFs took in more than mutual funds Cumulative inﬂows:

$300 billion

$150 billion

$75 billion

Open-end

ETFs

–$50 billion

J A N U A R Y/ F E B R U A R Y 2 0 1 5

Jan. ’14

June ’14

Nov. ’14

Jan. ’14

June ’14

Nov. ’14

THE FUND REP ORT

REPORT

PLUS 122 » WHICH FUNDS DID THE BEST 127 » HOW THE BIGGEST FUNDS PERFORMED

-TRADED FUNDS OF THE PAST YEAR.

THE YEAR IN BOND FUNDS In 2014 growth trounced value... 14.3%

Growth returns (large-cap)

Investors got higher returns for higher quality in 2014... Junk bond prices fell as yields rose on fears about oil prices.

12.4%

4.3% 3.8%

3.7% 3.4%

Value returns (large-cap) High demand boosted government bond funds.

...and cheaper stock funds topped pricey ones 12.9%

15.1%

Returns on high-expense funds

Returns on low-expense funds

INVESTORS VS. FUNDS Investors trailed funds because of poor market timing

6.8 % 6.0

U.S. bonds overall

High-yield bonds

...for going long...

Investmentgrade bonds

Government bonds

…and for skipping taxes

16.6% Interest rates fell unexpectedly, beneﬁting longterm funds.

Average fund return

3.8% Taxable-bond returns

4.0% 7.6% 0.9%

Average investor return

Short-term government

Intermediate government

Long-term government

Muni-bond returns

NOTES: Data are through November 2014. “Investor” returns are dollar weighted, account for trading, and measure how the average investor performed. High-expense funds are top quartile for expenses; low-expense funds are bottom quartile. SOURCE: Morningstar

I N V E ST O R’ S G U I D E 2 0 15 PA R T 3 » T H E P L A Y B O O K

THE BEST PERFORMERS THESE MUTUAL AND EXCHANGE-TRADED FUNDS TOPPED THEIR CATEGORIES OVER THE PAST YEAR, FIVE YEARS, AND 10 YEARS AS OF DEC. 8, 2014.

LARGE-CAP U.S. STOCK /Among blue-chip stock funds, the big winners last year—and over

the past decade—were those that focus on fast-growth companies, such as the tech names in the Nasdaq 100 index. 2014

FIVE YEARS

RANK FUND NAME (TICKER)

1 2

RETURN

Vanguard Primecap Core (VPCCX) Nuveen Concentrated Core A1 (NCADX)

20.6% 0.50%

RANK FUND NAME (TICKER)

10 YEARS RETURN

Pimco Fundamental IndexPLUS AR A1 (PIXAX)

20.6 20.5

EXP. RATIO

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

Alger Capital Appreciation A (ACAAX)

0.90

John Hancock Large Cap Equity A1 (TAGRX)

11.3

1.09

0.49

AMG Yacktman Focused (YAFFX)

11.1

1.26

11.0

0.20

21.2% 1.19%

12.0% 1.26%

20.5

1.21

Metropolitan West AlphaTrak 500 M (MWATX)

20.4

0.45

Shelton Nasdaq-100 Index (NASDX)

20.4

0.20

PowerShares QQQ Trust Series 1 (QQQ)

20.1

1.34

Shelton Nasdaq-100 Index (NASDX)

11.0

0.49

10.7

0.77

Vanguard Primecap (VPMCX)

PowerShares QQQ Trust Series 1 (QQQ)

20.3

0.20

PowerShares QQQ Trust Series 1 (QQQ)

Shelton Nasdaq-100 Index (NASDX)

20.2

0.49

Saratoga Large-Cap Growth Portfolio I (SLCGX)

USAA Nasdaq-100 Index (USNQX)

20.0

1.28

Laudus U.S. Large Cap Growth (LGILX)

19.8

0.64

AMG Yacktman (YACKX)

10.7

0.76

10.6

0.89

10.5

0.45

10.4

0.91

PNC Large Cap Growth A (PEWAX)

19.9

0.64

Touchstone Sands Capital Select Growth Z (PTSGX)

19.3

1.28

USAA Nasdaq-100 Index (USNQX)

19.6

1.04

Columbia Contrarian Core Z (SMGIX)

19.1

1.29

Vanguard Primecap (VPMCX)

1.72

Fidelity Focused 10 Stock (FTQGX)

Rydex Nasdaq-100 (RYOCX)

19.1

1.29

Pimco StocksPLUS Absolute Return A1 (PTOAX)

ProFunds Nasdaq-100 (OTPIX)

18.1

1.65

Rydex Nasdaq-100 (RYOCX)

1.17

SunAmerica Focused Alpha 10 Large-Cap A1 (SFLAX)

Nuveen Large Cap Core A1 10 (NLACX)

122

EXP. RATIO

m o n e y. c o m

18.1

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18.1

THE FUND REP ORT

MIDCAP U.S. STOCK /

A boom in health care and transportation stocks—not just in 2014, but over the past ﬁve years—propelled many of the highest-performing funds that invest in midsize companies. 2014 RANK FUND NAME (TICKER)

FIVE YEARS RETURN

PowerShares S&P MidCap Low Volatility (XMLV)

Direxion All Cap Insider Sentiment (KNOW)

16.7

Hennessy Cornerstone Mid-Cap 30 (HFMDX)

EXP. RATIO

RANK FUND NAME (TICKER)

10 YEARS RETURN

Primecap Odyssey Aggressive Growth (POAGX)

0.65

Putnam Equity Spectrum A1 (PYSAX)

22.4

16.3

1.31

Eventide Gilead N (ETGLX)

Primecap Odyssey Aggressive Growth (POAGX)

15.5

0.65

Lord Abbett Calibrated Mid-Cap Value A1 (LVMAX)

14.7

0.85

iShares Morningstar Mid-Cap ETF (JKG)

14.7

TrimTabs Float Shrink ETF (TTFS)

EXP. RATIO

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

Primecap Odyssey Aggressive Growth (POAGX)

1.36

American Century Heritage (TWHIX)

12.4

1.00

21.4

1.45

Hennessy Cornerstone Mid-Cap 30 (HFMDX)

12.2

1.31

Guggenheim Investments Spin-Off ETF (CSD)

20.5

0.65

HSBC Opportunity A1 (HSOAX)

11.5

1.65

Hotchkis & Wiley Mid-Cap Value A1 (HWMAX)

20.5

1.26

Eaton Vance-Atlanta Capital SMID-Cap A1 (EAASX)

11.4

1.25

0.25

AllianceBernstein Discovery Growth A1 (CHCLX)

20.0

1.04

Transamerica Small/ Mid-Cap Value A1 (IIVAX)

11.2

1.33

14.5

0.99

Vanguard Strategic Equity (VSEQX)

19.4

0.29

T. Rowe Price Mid-Cap Growth (RPMGX)

11.1

0.78

Aquila Three Peaks Opp. Growth A1 (ATGAX)

14.1

1.55

iShares Morningstar Mid-Cap ETF (JKG)

19.3

0.25

11.0

1.12

Eventide Gilead N (ETGLX)

14.1

1.45

Longleaf Partners Small-Cap (LLSCX)

19.3

0.91

10.9

1.31

J.P. Morgan Intrepid Mid-Cap A1 (PECAX)

13.9

1.18

Delaware Smid Cap Growth A1 (DFCIX)

19.1

1.19

10.8

1.05

RETURN

EXP. RATIO

17.1% 0.25%

22.5% 0.65%

ASTON/Fairpointe Mid-Cap N (CHTTX) BlackRock U.S. Opportunities Portfolio A1 (BMEAX) Victory Established Value A1 (VETAX)

13.4% 0.65%

SMALL-CAP U.S. STOCK / With small-company shares having grown expensive in

recent years, funds that focused on the cheaper “value” end of this universe tended to outperform in 2014. 2014 RANK FUND NAME (TICKER)

Meridian Small Cap Growth Legacy (MSGGX)

FIVE YEARS RETURN

EXP. RATIO

15.9% 1.26%

RANK FUND NAME (TICKER)

10 YEARS RETURN

Hodges Small Cap Retail (HDPSX)

21.9 21.5

EXP. RATIO

RANK FUND NAME (TICKER)

Brown Capital Mgmt. Small Company (BCSIX)

0.80

Lord Abbett Developing Growth A1 (LAGWX)

12.3

1.11

1.22

Fidelity Small Cap Discovery (FSCRX)

12.1

1.01

11.6

0.80

22.1% 1.37%

12.6% 1.26%

Nashville Area ETF (NASH)

14.5

0.49

T. Rowe Price New Horizons (PRNHX)

Hennessy Cornerstone Growth (HFCGX)

10.8

1.29

AMG SouthernSun Small Cap (SSSFX)

SPDR Russell 2000 Low Volatility ETF (SMLV)

10.3

0.25

Walthausen Small Cap Value (WSCVX)

20.8

1.25

T. Rowe Price New Horizons (PRNHX)

Oppenheimer Main Street Small-Cap A1 (OSCAX)

9.4

1.25

Hotchkis & Wiley Small Cap Value A1 (HWSAX)

20.7

1.25

J.P. Morgan Small Cap Equity A1 (VSEAX)

11.5

1.31

Lazard U.S. Small-Mid Cap Equity (LZCOX)

8.9

1.20

UBS U.S. Small Cap Growth A1 (BNSCX)

20.4

1.41

Homestead Small Company Stock (HSCSX)

11.3

0.94

Nationwide HighMark Small-Cap Core A1 (NWGPX)

8.7

1.64

PNC Multi-Factor Small Cap Core A1 (PLOAX)

20.4

1.23

Natixis Vaughan Nelson Small-Cap Value A1 (NEFJX)

11.3

1.66

Hotchkis & Wiley Small Cap Value A1 (HWSAX)

8.3

1.25

Buffalo Emerging Opportunities (BUFOX)

20.3

1.49

Invesco Small Cap Value A1 (VSCAX)

11.2

1.12

Vanguard Small-Cap Value Index ETF (VBR)

8.3

0.09

Fidelity Small Cap Discovery (FSCRX)

20.2

1.01

TETON Westwood Mighty Mites AAA (WEMMX)

10.9

1.44

1.30

T. Rowe Price Diversiﬁed 10 Small-Cap Growth (PRDSX)

0.82

Fidelity Small Cap 10 Value (FCPVX)

10.9

1.09

Hodges Small Intrinsic 10 Value (HDSVX)

8.2

20.0

NOTES: 2014 returns are as of Dec. 8; ﬁve- and 10-year returns are annualized. When possible, investor share classes are used vs. institutional. Lists exclude actively managed funds with total assets of less than $15 million. 1 Indicates that the fund carries a sales load; sales loads on funds here range from 1.5% to 5.75%. N.A.: Not applicable. SOURCE: Lipper, 877-955-4773

I N V E ST O R’ S G U I D E 2 0 15 PA R T 3 » T H E P L A Y B O O K

INTERNATIONAL STOCK / Emerging-market stocks in general outpaced Europe and Japan in the past decade. But last year the developing-world theme narrowed, and the big winners focused just on India. 2014

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

RANK FUND NAME (TICKER)

10 YEARS RETURN

Matthews India Fund (MINDX) 65.7% 1.13%

iShares MSCI Thailand Capped ETF (THD)

iShares MSCI India Small-Cap ETF (SMIN)

59.8

0.74

Oberweis International Opportunities (OBIOX)

17.6

EGShares India Small Cap ETF (SCIN)

53.7

0.85

Guinness Atkinson Global Innovators (IWIRX)

Market Vectors India Small-Cap ETF (SCIF)

51.7

0.93

ALPS/Kotak India Growth A1 (INDAX)

51.1

2.00

46.4

6 7

Franklin India Growth A1 (FINGX) Wasatch Emerging India Fund (WAINX)

EXP. RATIO

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

Oppenheimer International 13.3% 1.24% Small Company A1 (OSMAX)

1.60

Fidelity Advisor Emerging Asia A1 (FEAAX)

13.3

1.41

17.5

1.47

Invesco Asia Paciﬁc Growth A1 (ASIAX)

12.9

1.51

AllianzGI Global Small-Cap D (DGSNX)

15.8

1.61

T. Rowe Price New Asia (PRASX)

12.9

0.93

Artisan Global Opportunities (ARTRX)

15.8

1.28

Matthews Paciﬁc Tiger Fund (MAPTX)

12.3

1.09

1.68

Wasatch World Innovators (WAGTX)

15.5

1.80

Oppenheimer Developing Markets A1 (ODMAX)

12.2

1.32

45.3

1.95

Oppenheimer International Small Company A1 (OSMAX)

15.4

1.24

Columbia Greater China A1 (NGCAX)

11.9

1.54

18.0% 0.61%

Eaton Vance Greater India A1 (ETGIX)

43.0

1.88

Artisan Global Value (ARTGX)

14.6

1.38

Driehaus Emerging Markets Growth (DREGX)

11.9

1.66

PowerShares China A-Share (CHNA)

41.5

0.51

Harbor Global Growth (HGGIX)

14.3

1.27

iShares MSCI Mexico Capped ETF (EWW)

11.8

0.50

Market Vectors China AMC A-Share ETF (PEK)

38.9

0.72

10 Marsico Global Fund (MGLBX)

14.3

1.60

Fidelity China Region Fund (FHKCX)

11.5

1.02

BALANCED /Over the past decade, the winning approach to funds that invest in both stocks and bonds was to go with the conservative players. Last year, though, both aggressive and moderate funds fared well. 2014

FIVE YEARS

RANK FUND NAME (TICKER)

10 YEARS RETURN

Thornburg Global Opportunities A1 (THOAX)

Wells Fargo Advantage Index Asset Alloc. A1 (SFAAX)

16.4

Forward Dynamic Income A1 (FDYAX)

16.3

Nuveen Real Asset Income A1 (NRIAX)

14.7

1.17

Villere Balanced Fund (VILLX)

14.4

Archer Balanced (ARCHX)

14.2

1.24

Bruce Fund (BRUFX)

Putnam Capital Spectrum A1 (PVSAX)

1.15

Marsico Flexible Capital (MFCFX)

18.6

1.53

Thornburg Global Opportunities A1 (THOAX)

15.4

18.5% 1.48%

EXP. RATIO

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

9.3%

1.23%

John Hancock Balanced A1 (SVBAX)

1.47

First Eagle Global A1 (SGENX)

9.2

1.13

1.48

Bruce Fund (BRUFX)

9.0

0.73

0.92

T. Rowe Price Capital Appreciation (PRWCX)

9.0

0.71

14.2

0.73

Thornburg Income Builder A1 (TIBAX)

8.7

1.39

13.9

1.15

FPA Crescent (FPACX)

8.6

1.23

21.2% 1.27%

Teberg Fund (TEBRX)

13.8

2.46

Wells Fargo Advantage Index Asset Alloc. A1 (SFAAX)

Putnam Capital Spectrum A1 (PVSAX)

13.4

1.27

Wells Fargo Advantage Diver. Cap. Builder A1 (EKBAX)

13.9

1.20

Columbia Balanced Z (CBALX)

8.5

0.89

Wells Fargo Advantage Diver. Cap. Builder A1 (EKBAX)

13.1

1.20

Transamerica MultiManaged Balanced A1 (IBALX)

13.7

1.26

Janus Balanced T (JABAX)

8.5

0.83

Highland Global Allocation A1 (HCOAX)

13.1

0.94

T. Rowe Price Capital Appreciation (PRWCX)

13.5

0.71

Northern Income Equity (NOIEX)

8.3

1.00

0.73

Value Line Asset Allocation 10 (VLAAX)

1.09

Vanguard Wellington 10 (VWELX)

8.2

0.26

10 Bruce Fund (BRUFX)

124

RETURN

EXP. RATIO

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 5

13.2

THE FUND REP ORT

U.S. GOVERNMENT BOND / Despite predictions that rising interest rates would hold them back, bond funds that invest in long-term government debt excelled this past year and decade, producing stock-like returns. 2014 RANK FUND NAME (TICKER)

FIVE YEARS RETURN

Pimco 25+ Year Zero-Cpn. U.S. Treas. Ind. ETF (ZROZ)

Vanguard Ext. Duration Treas. Ind. ETF (EDV)

39.2

Wasatch-Hoisington U.S. Treasury (WHOSX)

EXP. RATIO

RANK FUND NAME (TICKER)

10 YEARS RETURN

Pimco 25+ Year Zero-Cpn. U.S. Treas. Ind. ETF (ZROZ)

0.12

Vanguard Ext. Duration Treasury Index ETF (EDV)

13.2

28.2

0.71

Wasatch-Hoisington U.S. Treasury (WHOSX)

iShares 20+ Year Treasury Bond ETF (TLT)

23.8

0.15

Fidelity Spartan Long-Term Treas. Bond Ind. (FLBAX)

22.1

0.10

Vanguard Long-Term Treasury (VUSTX)

22.0

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

SPDR Barclays Long Term Treasury ETF (TLO) Pimco Long-Term 9 U.S. Gov. A1 (PFGAX) Dreyfus U.S. Treasury 10 Long Term (DRGBX) 8

EXP. RATIO

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

8.2%

0.71%

Wasatch-Hoisington U.S. Treasury (WHOSX)

0.12

iShares 20+ Year Treasury Bond ETF (TLT)

7.3

0.15

10.3

0.71

Pimco Fixed Income SHares Series R (FXIRX)

7.2

0.05

iShares 20+ Year Treasury Bond ETF (TLT)

9.1

0.15

Pimco Long-Term U.S. Government A1 (PFGAX)

7.1

0.83

Pimco Long-Term U.S. Government A1 (PFGAX)

8.7

0.83

TCW Total Return Bond I (TGLMX)

7.0

0.49

0.20

Fidelity Spartan Long-Term Treasury Bond Index (FLBAX)

8.5

0.10

Vanguard Long-Term Treasury (VUSTX)

7.0

0.20

21.8

0.12

SPDR Barclays Long Term Treasury ETF (TLO)

8.5

0.14

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

6.8

0.52

21.7

0.14

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

8.5

0.12

Dreyfus U.S. Treasury Long Term (DRGBX)

6.7

0.72

21.1

0.83

Vanguard Long-Term Treasury (VUSTX)

8.4

0.20

iShares 7-10 Year Treasury Bond ETF (IEF)

5.5

0.15

20.5

0.72

Dreyfus U.S. Treasury Long Term (DRGBX)

8.0

0.72

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

5.3

0.87

RETURN

EXP. RATIO

42.3% 0.15%

13.6% 0.15%

INVESTMENT-GRADE BOND /

With interest rates sinking rather than rising in recent years, funds that own high-quality debt—both corporate and government—produced sizable gains. 2014 RANK FUND NAME (TICKER)

FIVE YEARS RETURN

Vanguard Long-Term Bond Index ETF (BLV)

Vanguard Long-Term Bond Index (VBLTX)

17.6

Vanguard Long-Term Investment-Grade (VWESX)

16.1

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

15.1

Delaware Extended Duration Bond A1 (DEEAX)

14.2

iShares 10+ Year Credit Bond ETF (CLY)

14.1

Calvert Long Term Income A1 (CLDAX)

iShares Utilities Bond ETF (AMPS)

9.6

Payden Corporate Bond (PYACX)

8.6

13.0

8.5

RANK FUND NAME (TICKER)

10 YEARS RETURN

Delaware Extended Duration Bond A1 (DEEAX)

0.20

Vanguard Long-Term Investment-Grade (VWESX)

9.4

0.22

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

9.3

0.12

Vanguard Long-Term Bond Index ETF (BLV)

9.0

0.93

Vanguard Long-Term Bond Index (VBLTX)

8.9

iShares 10+ Year Credit Bond ETF (CLY)

17.7% 0.10%

Pimco Investment Grade 10 Corp. Bond A1 (PBDAX)

EXP. RATIO

0.20

EXP. RATIO

Delaware Extended Duration Bond A1 (DEEAX)

0.22

Vanguard Long-Term Bond Index (VBLTX)

7.1

0.20

0.12

Vanguard Long-Term Investment-Grade (VWESX)

7.0

0.22

0.10

Pimco Investment Grade Corporate Bond A1 (PBDAX)

7.0

0.91

0.20

Delaware Corporate Bond A1 (DGCAX)

6.7

0.93

Natixis Loomis Sayles Inv. Grade Bond1 (LIGRX)

6.5

0.83

6.5

0.78

6.5

0.68

11.2% 0.93%

8.7

RANK FUND NAME (TICKER)

0.20

8.7% 0.93%

Western Asset Corporate Bond A1 (SIGAX)

8.0

1.03

0.30

BlackRock Investment Grade Bond1 (BLADX)

7.8

0.90

0.67

Delaware Corporate Bond A1 (DGCAX)

7.8

0.93

Natixis Loomis Sayles Core Plus Bond1 (NEFRX)

6.3

0.79

0.91

Calvert Long Term 10 Income A1 (CLDAX)

7.6

1.25

10 AMG Managers Bond (MGFIX)

6.2

0.99

1.25

Lord Abbett Income A (LAGVX) Metropolitan West T-R Bond M (MWTRX)

J A N U A R Y/ F E B R U A R Y 2 0 1 5

m o n e y. c o m

125

I N V E ST O R’ S G U I D E 2 0 15 PA R T 3 » T H E P L A Y B O O K

HIGH-YIELD BOND / Funds investing in “junk” bonds are expected to produce big returns over time. But investors weren’t compensated for taking this risk last year, as high-quality debt funds outperformed high-yield. 2014

FIVE YEARS

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

RANK FUND NAME (TICKER)

10 YEARS RETURN

Market Vectors Fallen 6.7% 0.40% Angel Hi-Yld. Bond ETF (ANGL)

John Hancock Core High Yield A1 (JYIAX)

Fidelity Capital & Income (FAGIX)

6.0

0.71

Waddell & Reed Advisors High Income A1 (UNHIX)

10.6

Westcore Flexible Income (WTLTX)

4.7

0.85

BlackRock High Yield Bond A1 (BHYAX)

Natixis Loomis Sayles High Income A1 (NEFHX)

4.5

1.15

American Beacon SiM High Yield Opp. A1 (SHOAX)

4.4

1.24

Wells Fargo Advantage High Yield Bond A1 (EKHAX)

4.3

Vanguard High-Yield Corporate (VWEHX)

EXP. RATIO

RANK FUND NAME (TICKER)

RETURN

EXP. RATIO

AllianceBernstein High Income A1 (AGDAX)

1.04

Fidelity Capital & Income (FAGIX)

8.6

0.71

10.5

0.95

Ivy High Income A1 (WHIAX)

8.3

0.93

Ivy High Income A1 (WHIAX)

10.4

0.93

8.0

0.92

Fidelity Advisor High Income Advantage T1 (FAHYX)

10.3

1.01

7.8

0.97

1.03

Fidelity Capital & Income (FAGIX)

10.0

0.71

BlackRock High Yield Bond A1 (BHYAX)

7.7

0.95

4.2

0.23

USAA High Income (USHYX)

10.0

0.89

Waddell & Reed Advisors High Income A1 (UNHIX)

7.6

1.04

USAA High Income (USHYX)

4.1

0.89

Hotchkis & Wiley High Yield A1 (HWHAX)

9.9

0.95

7.6

0.95

iShares Emerging Markets High-Yield Bond ETF (EMHY)

4.1

0.65

Rydex High Yield Strategy A1 (RYHDX)

9.8

1.56

7.5

1.01

RBC BlueBay Global High Yield Bond A1 (RHYAX)

3.9

1.05

Lord Abbett High Yield A1 (LHYAX)

9.8

0.95

10 USAA High Income (USHYX)

7.5

0.89

11.0% 1.14%

Principal High Yield A1 (CPHYX) RidgeWorth High Income A1 (SAHIX)

Lord Abbett High Yield A1 (LHYAX) Fidelity Advisor High Income Advantage T1 (FAHYX)

9.3% 0.90%

TAX-EXEMPT BOND / As the economy improved, state and local government budgets healed. And funds that invest in municipal bonds surged—led by those that focus on worrisome areas, like California. 2014

FIVE YEARS

RANK FUND NAME (TICKER)

Nuveen California Hi-Yld. Municipal Bond A1 (NCHAX)

Nuveen High Yield Municipal Bond A1 (NHMAX)

18.3

Oppenheimer Rochester VA Municipal A1 (ORVAX)

17.6

Market Vectors CEF Municipal Inc. ETF (XMPT)

17.5

Eaton Vance High Yield Municipal Income A1 (ETHYX)

17.0

BlackRock High Yield Municipal Inv. A1 (MDYHX)

16.8

AllianceBernstein High Income Municipal A1 (ABTHX)

16.8

MainStay High Yield Municipal Bond1 (MMHVX)

16.7

Oppenheimer Rochester High-Yield Muni A1 (ORNAX)

15.9

Invesco High Yield 10 Municipal A1 (ACTHX)

126

RETURN

m o n e y. c o m

EXP. RATIO

RETURN

Nuveen California Hi-Yld. Municipal Bond A1 (NCHAX)

0.85

Nuveen High Yield Municipal Bond A1 (NHMAX)

9.7

1.04

Oppenheimer Rochester AMT-Free Muni A1 (OPTAX)

8.6

1.65

Oppenheimer Rochester California Muni A1 (OPCAX)

8.3

0.97

Franklin California High Yield Municipal A1 (FCAMX)

8.3

1.02

Oppenheimer Rochester High-Yield Muni A1 (ORNAX)

8.2

0.89

Eaton Vance High Yield Municipal Income A1 (ETHYX)

8.1

0.90

BlackRock High Yield Municipal Inv. A1 (MDYHX)

7.9

0.71

Goldman Sachs High Yield Municipal A1 (GHYAX)

7.9

0.92

Delaware National Hi-Yld. 10 Municipal Bond A1 (CXHYX)

20.2% 0.87%

15.9

RANK FUND NAME (TICKER)

10 YEARS

J A N U A R Y/ F E B R U A R Y 2 0 1 5

EXP. RATIO

RETURN

EXP. RATIO

Delaware National Hi-Yld. Municipal Bond A1 (CXHYX)

0.85

Franklin California High Yield Municipal A1 (FCAMX)

5.6

0.63

1.05

Wells Fargo Advantage Municipal Bond (SXFIX)

5.5

0.79

0.96

Western Asset Municipal High Income A1 (STXAX)

5.5

0.80

0.63

Western Asset Managed Municipal A1 (SHMMX)

5.4

0.66

0.71

Waddell & Reed Advisors Municipal Hi-Inc. A1 (UMUHX)

5.4

0.91

0.97

Northern California Tax-Exempt (NCATX)

5.3

0.46

1.02

MFS Municipal High Income A1 (MMHYX)

5.3

0.69

0.87

Nuveen All-American Municipal Bond A1 (FLAAX)

5.2

0.72

0.85

American Century CA 10 Hi-Yld. Muni (BCHYX)

5.2

0.50

10.2% 0.87%

7.8

RANK FUND NAME (TICKER)

5.7% 0.85%

THE FUND REP ORT

THE BIGGEST

THESE FUNDS AND ETFs HAD THE MOST MONEY UNDER MANAGEMENT IN THEIR CATEGORIES AS OF DEC. 8, 2014. THEY ARE RANKED IN DESCENDING ORDER, BY AMOUNT OF ASSETS.

BOLDFACE RETURNS FOR 2014 INDICATE THAT THE FUND BEAT 50% OF ITS PEER GROUP.

LARGE-CAP U.S. STOCK /These funds usually own stocks of companies worth over $10 billion.

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

MIDCAP U.S. STOCK /These mostly

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

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

Vanguard Total Stock Market Ind. (VTSMX) 12.0% 16.1% 8.3% 0.17%

Vanguard Mid-Cap Index (VIMSX)

SPDR S&P 500 ETF (SPY)

13.5

15.8

7.9

0.09

Fidelity Low-Priced Stock (FLPSX)

6.6

16.2

9.6

0.82

Vanguard 500 Index (VFINX)

13.5

15.8

7.8

0.17

Vanguard Extended Market Index ETF(VXF)

5.5

17.5

9.5

0.10

American Funds Gro. Fund of Am. A (AGTHX)

9.4

14.2

8.4

0.66

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

8.1

17.1

9.9

0.14

Fidelity Contrafund (FCNTX)

9.9

15.7

10.1

0.67

Columbia Acorn A1 (LACAX)

–1.4

13.6

8.3

1.08

Fidelity Spartan 500 Index (FUSEX)

13.5

15.9

7.9

0.09

Fidelity Spartan Ext. Market Index(FSEMX)

5.6

17.4

9.6

0.10

American Funds Inv. Co. of America A1 (AIVSX) 13.4

14.0

7.7

0.61

SPDR S&P MidCap 400 ETF (MDY)

8.0

16.9

9.7

0.25

American Funds Wash. Mut. Inv. A1 (AWSHX) 11.3

15.2

7.6

0.60

iShares Russell Mid-Cap ETF (IWR)

12.0

17.8

9.7

0.20

American Funds Fundamental Inv. A1 (ANCFX)

9.2

14.1

9.0

0.63

Goldman Sachs Mid Cap Value A1 (GCMAX) 12.0

16.2

9.0

1.14

10 iShares Core S&P 500 ETF (IVV)

13.6

15.9

7.9

0.07

10 Fidelity Mid-Cap Stock (FMCSX)

5.9

16.2

9.5

0.81

11 Dodge & Cox Stock Fund (DODGX)

10.4

16.0

7.5

0.52

11 Morgan Stanley Inst. Mid Cap Gro. A1 (MACGX) –0.6

13.8

9.9

0.96

12.5% 17.8% 9.7% 0.24%

12 Vanguard Windsor II (VWNFX)

11.5

14.5

7.6

0.36

12 iShares Russell Mid-Cap Value ETF(IWS)

13.4

17.9

9.6

0.25

13 PowerShares QQQ Trust Series 1 (QQQ)

20.3 20.4

11.0

0.20

13 Vanguard Mid-Cap Value Index ETF(VOE)

12.9

17.9

N.A.

0.09

14 Vanguard Growth Index (VIGRX)

13.3

16.6

8.7

0.24

14 Victory Munder Mid-Cap Core Gro. A1 (MGOAX)

8.7

16.6

9.4

1.38

15 American Funds AMCAP A1 (AMCPX)

12.3

16.0

8.5

0.70

15 American Century Heritage (TWHIX)

6.8

15.9

12.4

1.00

I N V E ST O R’ S G U I D E 2 0 15 PA R T 3 » T H E P L A Y B O O K

SMALL-CAP U.S. STOCK

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

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

These funds hold shares in foreign companies.

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

Vanguard Small-Cap Index (NAESX)

Vanguard Total Intl. Stock Index(VGTSX)

–2.1% 5.0% 5.5% 0.22%

iShares Russell 2000 ETF (IWM)

1.5

15.9

7.8

0.20

American Funds EuroPaciﬁc Gro. A1 (AEPGX)

–0.0

6.5

7.4

0.84

Vanguard Small-Cap Growth Index(VISGX)

1.8

17.5

9.6

0.24

Dodge & Cox International Stock Fund(DODFX) 3.3

8.8

7.5

0.64

Vanguard Small-Cap Value Index (VISVX)

8.2

16.8

8.5

0.24

Vanguard Em. Markets Stock Ind. (VEIEX)

2.2

2.6

8.8

0.33 0.33

5.2% 17.3% 9.2% 0.24%

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

2.4

17.7

9.0

0.14

iShares MSCI EAFE ETF (EFA)

–2.4

5.9

5.1

Neuberger Berman Genesis (NBGNX)

–1.4

14.5

9.7

1.02

Harbor International (HIINX)

–3.6

6.3

7.7

1.11

Vanguard Explorer (VEXPX)

1.8

17.2

8.4

0.52

Vanguard Developed Markets Index(VDVIX)

–3.1

N.A.

0.20

T. Rowe Price Small-Cap Value Fund(PRSVX) –2.8

14.6

8.4

0.96

iShares MSCI Emerging Markets ETF(EEM) –0.9

1.6

8.6

0.67

0.92

Fidelity Strategic Adv. Small-Mid Cap (FSCFX)

2.1

14.9

N.A.

0.92

Fidelity Diversiﬁed International (FDIVX)

–1.5

7.2

5.7

10 AllianzGI NFJ Small-Cap Value A1 (PCVAX)

0.5

N.A.

1.18

10 American Funds New World A1 (NEWFX)

–1.2

5.8

9.2

1.06

11 iShares Russell 2000 Growth ETF (IWO)

2.1

17.2

8.6

0.25

11 Fidelity Strategic Advisers Intl.(FILFX)

–2.8

7.2

N.A.

0.89

12 iShares Russell 2000 Value ETF (IWN)

0.9

14.4

6.8

0.25

12 Vanguard FTSE All-World ex U.S. Ind.(VFWIX) –2.0

5.1

N.A.

0.30

13 Fidelity Series Small Cap Opp. (FSOPX)

–0.2

15.6

N.A.

0.82

13 Vanguard International Growth (VWIGX)

–2.7

7.7

7.0

0.48

14 American Beacon Small Cap Val. A1 (ABSAX)

1.8

N.A.

1.24

14 MFS International Value A1 (MGIAX)

2.8

10.1

8.4

1.07

15 ClearBridge Small Cap Growth A1 (SASMX) 0.0

18.0

9.2

1.24

15 Oppenheimer Intl. Growth A1 (OIGAX)

–5.4

9.2

7.9

1.15

BALANCED /Funds in this category

TARGET-DATE /These balanced funds

hold a mix of stocks and bonds.

RANK FUND NAME (TICKER)

2014

automatically adjust their asset mixes over time.

FIVE 10 EXP. YEARS YEARS RATIO

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

Vanguard Wellington (VWELX)

Vanguard Target Retirement 2025(VTTVX)

American Funds American Bal. A1 (ABALX)

8.9

12.3

7.2

0.61

Vanguard Target Retirement 2020(VTWNX)

7.1

9.9

N.A.

0.16

Fidelity Balanced Fund (FBALX)

10.1

12.0

7.7

0.56

Vanguard Target Retirement 2015(VTXVX)

6.6

9.2

6.1

0.16

Fidelity Puritan Fund (FPURX)

10.7

12.1

7.3

0.56

Vanguard Target Retirement 2010(VTENX)

5.9

8.1

N.A.

0.16

Vanguard Balanced Index (VBINX)

9.4

11.3

7.1

0.24

Wells Fargo Adv. DJ Target 20251 (WFAYX)

4.2

N.A.

0.86

Oakmark Equity and Income I (OAKBX)

6.6

10.2

8.2

0.77

American Century One Choice 20251 (ARWAX) 6.6

9.4

6.3

1.07

Vanguard STAR Fund (VGSTX)

7.7

10.5

7.1

0.34

J.P. Morgan SmartRetirement 20151 (JSFAX)

8.5

N.A.

0.82

Dodge & Cox Balanced Fund (DODBX)

8.8

13.1

7.0

0.53

John Hancock Retire. Living … 20151 (JLBAX)

4.5

8.6

N.A.

1.33

John Hancock Lifestyle Balanced A (JALBX)

4.3

9.0

N.A.

1.31

John Hancock Retire. Living … 20101 (JLAAX)

4.2

8.0

N.A.

1.33

10 Vanguard LifeStrategy Mod. Growth(VSMGX)

7.1

9.5

6.1

0.16

10 Nationwide Destination 20251 (NWHAX)

4.4

9.2

N.A.

0.92

11 Vanguard LifeStrategy Conserv. Gro.(VSCGX)

6.7

7.6

5.4

0.15

11 Nationwide Destination 20201 (NWAFX)

4.4

8.1

N.A.

0.92 0.91

10.1% 11.5% 8.2% 0.26%

7.2% 10.6% 6.4% 0.17%

5.7

12 MFS Total Return A (MSFRX)

8.3

10.2

6.2

0.75

12 Nationwide Destination 2015 (NWEAX)

4.3

7.1

N.A.

13 MFS Moderate Allocation A1 (MAMAX)

4.3

9.5

6.5

1.01

13 Deutsche LifeCompass 20151 (SPDAX)

3.8

7.3

4.0

1.14

14 J.P. Morgan Investor Balanced A1 (OGIAX)

6.4

8.5

6.2

1.27

14 MainStay Retirement 20101 (MYRAX)

5.5

8.3

N.A.

1.01

15 Principal SAM Balanced A1 (SABPX)

6.4

10.1

6.4

1.36

15 Putnam RetirementReady 2015 A1 (PRRHX) 4.8

5.7

3.4

0.93

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THE FUND REP ORT

U.S. GOVERNMENT BONDS

These funds hold Treasuries and other government debt.

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

INVESTMENT-GRADE BONDS Funds in this category invest in debt with low default risk.

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

American Funds U.S. Govt. Sec. A1 (AMUSX) 4.6% 3.0% 3.8% 0.64%

Vanguard Total Bond Market Index (VBMFX) 5.3% 3.9% 4.5% 0.20%

Fidelity Government Income (FGOVX)

5.0

3.3

4.4

0.45

Vanguard Total Bond Market II Index(VTBIX)

5.4

3.9

N.A.

0.12

Pimco Long-Term U.S. Govt. A1 (PFGAX)

21.1

8.7

7.1

0.83

Vanguard Short-Term Inv.-Grade (VFSTX)

1.7

2.8

3.6

0.20

MFS Government Securities A1 (MFGSX)

4.3

2.7

4.0

0.88

Vanguard Short-Term Bond Index (VBISX)

1.2

1.8

3.2

0.20

J.P. Morgan Government Bnd. A (OGGAX) 4.9

3.8

4.5

0.76

Lord Abbett S/D Income A (LALDX)

1.9

3.9

4.5

0.58

Wells Fargo Advantage Govt. Sec.(STVSX)

4.7

3.0

4.0

0.91

Dodge & Cox Income (DODIX)

5.4

5.1

5.3

0.43

Morgan Stanley U.S. Govt. Sec. Trust1 (USGAX) 5.1

3.6

3.1

0.87

American Funds Bnd. Fund of Amer.1 (ABNDX)

5.1

4.4

3.5

0.61

Sit U.S. Government Securities (SNGVX)

1.9

3.6

0.80

T. Rowe Price New Income (PRCIX)

5.5

4.3

4.9

0.61

2.2

Putnam American Govt. Income A (PAGVX)

4.3

3.3

4.9

0.87

J.P. Morgan Core Bond A (PGBOX)

4.7

4.1

4.7

0.75

10 Prudential Government Income A1 (PGVAX)

4.9

3.6

4.1

0.97

10 Fidelity Series Inv. Grade Bond (FSIGX)

5.5

4.6

N.A.

0.45

11 iShares Agency Bond ETF (AGZ)

3.3

2.3

N.A.

0.20

11 iShares Core U.S. Aggregate Bond ETF(AGG) 5.6

4.0

4.5

0.08

12 TransWestern Inst. S/D Govt. Bond(TWSGX)

2.7

N.A.

0.65

12 Fidelity Spartan U.S. Bond Index (FBIDX)

3.9

4.3

0.22

5.4

13 Sentinel Government Securities A (SEGSX) 3.8

2.4

4.0

0.85

13 iShares iBoxx $ Inv.-Gd. Corp. Bd. ETF (LQD)

7.9

6.8

5.4

0.15

14 First Investors Government A1 (FIGVX)

3.0

2.5

3.7

1.17

14 Vanguard Intm.-Term Inv.-Grade (VFICX)

5.5

6.0

5.3

0.20

15 Vanguard L/T Govt. Bnd. Ind. ETF (VGLT)

21.8

8.5

N.A.

0.12

15 Fidelity Advisor Total Bond A1 (FEPAX)

5.0

4.9

4.8

0.76

HIGH-YIELD BONDS /

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

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

TAX-EXEMPT BONDS /These funds generally invest in municipal and state-agency debt.

RANK FUND NAME (TICKER)

2014

FIVE 10 EXP. YEARS YEARS RATIO

American Funds High-Income Trust1 (AHITX) 1.2% 8.1% 6.4% 0.66%

Vanguard Intm.-Term Tax-Exempt(VWITX) 6.9% 4.4% 4.3% 0.20%

Vanguard High-Yield Corporate(VWEHX)

4.2

8.8

6.5

0.23

Vanguard Limited-Term Tax-Exempt(VMLTX)

1.9

2.7

0.20

BlackRock High Yield Bond A1 (BHYAX)

3.8

10.5

7.7

0.95

Vanguard Short-Term Tax-Exempt(VWSTX)

0.7

0.9

2.1

0.20

iShares iBoxx $ H/Y Corp. Bnd. ETF(HYG)

2.1

8.4

N.A.

0.50

Nuveen H/Y Municipal Bond A1 (NHMAX)

18.4

9.7

4.1

0.85

Pimco High Yield A (PHDAX)

2.9

8.3

6.6

0.90

American Funds T/E Bd. Fund of Amer.1 (AFTEX)

9.3

5.4

4.4

0.56

Fidelity Capital & Income(FAGIX)

6.0

10.0

8.6

0.71

Vanguard Long-Term Tax-Exempt(VWLTX)

10.5

5.4

4.7

0.20

J.P. Morgan High Yield A1 (OHYAX)

2.6

8.5

7.1

1.01

Vanguard High-Yield Tax-Exempt(VWAHX)

11.1

6.0

4.9

0.20

SPDR Barclays High Yield Bond ETF(JNK)

1.4

8.5

N.A.

0.40

Invesco High Yield Municipal A (ACTHX)

15.9

7.7

5.2

0.92

MainStay High Yield Corp. Bd. A1 (MHCAX)

1.6

7.9

6.4

1.01

Thornburg Ltd. Term Municipal A1 (LTMFX)

3.0

3.3

0.71

10 Fidelity Series High Income(FSHNX)

1.9

N.A.

0.70

10 Wells Fargo Adv. S/T Muni Bond(STSMX)

1.5

2.1

3.0

0.63

11 AllianceBernstein High Income A1 (AGDAX)

2.0

9.4

9.3

0.90

11 AllianceBernstein Intm. Diver. Muni A1 (AIDAX)

3.7

2.7

3.1

0.78

12 Fidelity High Income(SPHIX)

1.8

8.5

7.2

0.72

12 Wells Fargo Adv. Ultra S/T Muni Inc. (SMAVX)

0.3

0.8

2.2

0.67

13 Northern High Yield Fixed Income(NHFIX)

2.6

8.9

6.3

0.81

13 Fidelity Municipal Income (FHIGX)

10.2

5.5

4.8

0.46

14 Goldman Sachs High Yield A1 (GSHAX)

2.1

8.4

6.6

1.05

14 Oppenheimer Rochester H/Y Muni A1 (ORNAX) 15.9

8.2

2.2

0.71

15 Eaton Vance Inc. Fund of Boston A1 (EVIBX)

2.5

8.8

6.9

1.00

15 Fidelity Intermediate Muni Income(FLTMX)

4.0

4.1

0.37

6.5

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A TRANQUIL DAY ON LANIKAI BEACH, LOCATED ON OAHU’S EAST, OR WINDWARD, COAST

by ir t s l in g kelso

Make this your best vacation year yet.

no matter when you ’ d like to escape, this month-by-month calendar will help you find the best getaway—and the best deals.

THE MONEY TRAVELER

JAN

Cruise the Caribbean WHY NOW: January is the ideal time to sail the balmy Caribbean, says Carolyn Spencer Brown, editor of CruiseCritic .com. “You avoid the December holiday crowds, and pricing is quite affordable,” she says. Indeed, many cruises are 50% or more off peak rates. WHAT TO DO: For a small island and beach-oriented trip, book a sailing in the eastern Caribbean, which includes destinations like Turks and Caicos, as well as the British and U.S. Virgin Islands. Or, if you prefer to visit ancient ruins, scuba-dive, or do some ziplining, check out the western route, where you may stop in Playa del Carmen, Mexico; Roatán, Honduras; and Belize City, Belize. HOW TO SAVE: Starting at $299 per person, Princess Cruises’ four-night eastern Caribbean trip, which departs Jan. 22 from Fort Lauderdale, is up to 50% off its holiday price. (All rates are as of early December.) The ship offers a poolside movie theater, history lectures, and yoga, and stops in the Bahamas and Princess Cays, the liner’s 40-acre private island. For a more luxurious pick, Peter Lloyd of Century Travel recommends a 10-day western Caribbean sailing on the Oceania Riviera (Jan. 14). Departing from Miami, the ship stops in Key West, Cozumel, and Belize City. Onboard, indulge in a treatment at the Canyon Ranch spa and dine in any of nine restaurants. The trip starts at $2,499, 65% off holiday and summer rates. SUN SEEKERS ABOARD THE CARIBBEAN PRINCESS

WHAT TO DO:

FEB

Ski Lesser-Known Mountains

WHY NOW: Skiing on the edge of the season can mean bargains, but it’s hard to predict whether the snow will play along. Instead, pick a smallername resort in-season; you’ll ﬁnd reliable conditions and savings of 20% or more (avoid Presidents’ Day weekend).

Some of the country’s best powder falls in Colorado, Utah, and Montana. Fortunately, you don’t need to pay through the nose to ski it. Just ﬁnd the right mountain, buy your lift tickets online and in advance, and go hit those slopes.

HOW TO SAVE: In Colorado, try Monarch Mountain, three hours from Denver and located in a microclimate that gets hammered with snow, says Colorado-based travel writer Jayme Moye. Advance lift tickets start at $57 a day, vs. $110 for Vail.

Thinking about Park City? Visit Ogden’s Powder Mountain, which gets over 500 inches of natural snow a year, instead. Lift tickets are $69 (vs. $105 in Park City)—or free when you book a package at the Ben Lomond Suites (from $144). Big Sky, an hour south of Bozeman, is Montana’s most high-proﬁle resort. However, many locals prefer to head north to Bridger Bowl, where lift tickets are just $52. (They’re $103 at Big Sky.) Plus, since you’re only 20 minutes from the city, you can stay in Bozeman, where boutique properties like the C’mon Inn start at an affordable $99 a night.

THE MONEY TRAVELER

A VIEW OF THE PACIFIC FROM MAKAPUU LIGHTHOUSE TRAIL

lights Hawaiian art, dance, and music. Stay up for the Honolulu Night Market on March 21, when local designers and chefs line the streets of the city’s Kakaako district with food and fashion stalls.

MAR

Escape the Spring Breakers in Oahu A SNOWBOARDER ENJOYS THE FRESH POWDER AT MONTANA’S BRIDGER BOWL.

PREVIOUS SPREAD PHOTOGRAPH BY SUSAN SEUBERT. THIS PAGE, CLOCKWISE FROM TOP: PHOTOGRAPH BY CHRIS KERR/COURTESY OF BRIDGER BOWL; COURTESY OF HAWAII TOURISM AUTHORITY (HTA)/TOR JOHNSON; DOUGLAS PEEBLES/FIRST LIGHT; MANDI COLEMAN/GETTY; JORDAN CONFINO/FLICKR

DOWNTOWN OGDEN, UTAH

WHY NOW: Since many schools go on spring break in March, it’s a tough month for deals in fairweather destinations. The Hawaiian island of Oahu is a surprising exception. Waikiki, the popular beach neighborhood in Honolulu, on the island’s south side, sees an average rate dip of 10%, vs. July and August, according to hotel research firm STR. WHAT TO DO: Oahu is Hawaii’s most populous island, but you can find open countryside and quiet beaches outside Honolulu, says Marilyn Clark with Lighthouse Travel. Take the five-mile hike at Kaena Point, the westernmost tip of the island, where you’ll see albatross and whales. Check out free events such as the Honolulu Festival (March 6–8), a cultural celebration that high-

HOW TO SAVE: Rooms with partial ocean views at Honolulu’s Sheraton Princess Kaiulani are $225, half off the high season. Farther inland, rates are even lower: The Coconut Waikiki Hotel, a 10-minute walk from the beach, has rooms from $169 (vs. $209). Visiting in March could mean airfare savings as well: As of early December, nonstop ﬂights from Los Angeles to Honolulu started at $660 in March, vs. $810 in July.

INDULGING IN SOME SHAVED ICE IN HONOLULU

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THE MONEY TRAVELER

ANDEAN WEAVERS IN CUYUNI, A VILLAGE OUTSIDE OF CUZCO

APR

Hike Peru’s Sacred Valley

WHY NOW: April marks the end of the low season in southern Peru’s popular Sacred Valley region. If you’ve always dreamed of seeing the sun rise over Machu Picchu, now’s a great time. April’s short but frequent showers limit crowds and keep prices slightly lower than usual. Plus, the markets will be overﬂowing with harvest-time bounty, and the LOOKING OVER MACHU PICCHU

countryside is vibrant from the past few months of rain, says Holly Wissler, a trip expert for tour operator Paragon Expeditions.

WHAT TO DO: Obviously, you must visit Machu Picchu, the Incan emperor’s estate dating to the 15th century. A limited number of people are allowed in daily, so go with a tour group or buy your entrance tickets at least three months in advance (machupicchu.gob.pe). In Cuzco, the region’s largest city, enjoy historic sites like the Plaza de Armas, which dates to the Incas, and there are more modest delights too, like a glass of chicha, a fermented-corn drink, at Picanteria and Chicheria Valia. HOW TO SAVE: Paragon’s eight-day Machu Picchu and Sacred Valley tour is $3,298, $500 less than in peak season.

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J A N U A R Y/ F E B R U A R Y 2 0 1 5

A PAIR OF LOCALS SURVEY THE SCENERY.

You’ll tour the iconic ruins, meet Andean weavers, and visit the strangely beautiful tiered salt mines outside of Cuzco. Another eight-day trip, the Classic Machu Picchu from Knowmad Adventures, is a manageable $2,160 in April ($200 off regular price). Standout outings include a visit to Sacsayhuaman, an Inca fortress of massive rock walls, just north of Cuzco, and a chance to browse through the artisan goods at the Sunday Urcos Market.

FEEDBACK: letters@moneymail.com

HOW TO SAVE:

MAY Safari in Kenya

WHY NOW: May, the tail end of the green, or rainy, season, is one of the best and most affordable months to take a safari. While the dry landscapes of high season make it easier to spot big game, visitors arriving this month will enjoy wildﬂowers and lush scenery, says Kent Redding of Africa Adventure Consultants. Even better, he says: “It’s birthing season, so you’ll see baby animals.”

C LO C K W I S E F R O M TO P L E F T: C O U R T E SY O F PATAG O N I A E X P E D I T I O N S ; C L A R E N C E H O L M E S / F I R ST L I G H T; E L I Z A B E T H C EC I L ; LU I S DAV I L L A / F I R ST L I G H T; E T H A N W E LT Y; A S H O K S I N H A

WHAT TO DO: Safari, of course! Depending where in Kenya you go, and what outﬁtter you choose, you could see everything from elephants and rhinos to zebras and impalas. Another important consideration: Will you travel by land or air? Air is speedier and more convenient, while staying earthbound will save you the biggest bucks. SPOTTING RHINOS IN LAKE NAKURU NATIONAL PARK

For a splurge, pick Africa Adventure Consultants’ Kenya Unforgettable safari, a private nine-day trip by small plane. You’ll stay at camps such as Amboseli National Park, famous for its huge elephant herds, and Samburu National Reserve, where you’ll see northern species such as Grevy’s zebra and the reticulated giraffe. This once-in-alifetime getaway totals out at $7,494 per person, a $1,785 savings from the high season. For a more manageable price tag, opt for smarTours’ 12-day Kenya Wildlife Safari; it’s $3,599 for May departures, $1,000 below peak season. This group trip drives from camp to camp, visiting gems such as the Maasai Mara National Reserve and Lake Nakuru National Park, home to a rhino reserve and massive flamingo flocks. Airfares, too, tend to be affordable in May, according to flight search site Momondo.com. Recently, roundtrip flights from Chicago to Nairobi started at $765, vs. $1,542 in July.

PORTLAND HEAD LIGHT, A HISTORIC LIGHTHOUSE

of the Moon Maine guidebook, recommends McLoons Lobster Shack on Spruce Head Island). Make time for a couple of leisurely detours. Stop in Boothbay to see the lovely Coastal Maine Botanical Gardens ($16). Further north, drive down St. George peninsula to take in the views from Marshall Point Lighthouse.

JUNE

Road-Trip Along Coastal Maine

WHY NOW? While much of New England is shifting into summer mode by June, it still feels like spring in northerly Maine, with highs in the low 70s, long sunny days, and fields of wildflowers coming into bloom. Vacationers won’t start flooding into the state in earnest until July, so you’ll find fewer crowds and reasonable prices. At many of Maine’s coastal lodges, June rates are up to 35% lower than in peak summer, says Greg Dugal of the Maine Innkeepers Association. WHAT TO DO: Take advantage of the relatively clear roads with a drive along scenic Route 1, which runs up the coast toward New Brunswick. Not sure where to start? The 158-mile stretch between Portland and Acadia National Park is particularly pretty. Along the way, be sure to put down several of the state’s famous lobster rolls (Hilary Nangle, author

HOW TO SAVE: Point Lookout Resort, located in Northport, knocks $45 off the peak-summer price of its gorgeous pine cabins, complete with porches and ﬁreplaces (from $206). In Rockport, check out the Samoset Resort. The property, on 230 waterfront acres, has an 18-hole golf course, spa, and pool, and a wide range of outdoor sports courts. June rates start at $239, compared with $339 in August.

LOBSTERS PLUCKED FROM THE CHILLY WATERS OF THE MAINE COAST

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THE MONEY TRAVELER

A SUNSET VIEW OF SAN MIGUEL DE ALLENDE

JULY

Visit Mexico’s Heartland WHY NOW: While you could also head to Mexico’s Caribbean coast for July deals, San Miguel de Allende, located in the Bajío mountains, is a better choice. Rather than suffer the humidity of the coast, you’ll enjoy daytime temps in the mid-70s and cool evenings. Still, tourism to the area does slack off in the summer, so there’s plenty of cheap lodging to be had.

SAN MIGUEL IS KNOWN AS A HAVEN FOR ARTISTS AND U.S. EXPATS.

136

m o n e y. c o m

WHAT TO DO: San Miguel is famous for its colonial architecture. Get your design bearings with the House & Garden tour (Sundays, $20), which takes travelers inside many of San Miguel’s historic homes, suggests Zachary Rabinor, CEO of Journey Mexico. The city is also home to a range of superb restaurants, serving up everything from traditional enchiladas to newer spins on the classics, like short ribs in mole sauce. Then there’s the street food: You’ll ﬁnd cheap eats—bean soup and stewed pork or chicken ($4)— at Mercado El Nigromante, a relatively tourist-free market, says Alberto Aveleyra of Artisans of Time tours. For gifts, visit Mercado Ignacio Ramírez for brass handicrafts. HOW TO SAVE: For an ultraaffordable stay, book Casa Gutiérrez, a colorful guesthouse where rooms with private baths start at $32, down more than 40% from spring rates. According to CheapAir.com, you’ll get the best fares to Mexico by booking three months out. And don’t forget to check fares into Mexico City, three hours away, as well as the closer Querétaro airport.

J A N U A R Y/ F E B R U A R Y 2 0 1 5

OVERWATER BUNGALOWS AT COCO BODU HITHI

RIDING BIKES ON THE WATERSOUND BOARDWALK

AUG

Unwind in the Maldives

WHY NOW: This island nation, off the tip of India, is one of the world’s most striking—and expensive—vacation spots. During the summer rainy season, though, resort prices drop by 30% to 40% and some hotels start throwing in free extras, says Justin Parkinson, a Maldives specialist with Linara Travel. While travelers can expect three to ﬁve showers a week in August, he says, storms are typically short and clear quickly. WHAT TO DO: The diving and snorkeling in the Maldives are world-class. The crystal-clear waters are home to whale sharks, rays, sea turtles, and more. In most cases, your resort will arrange for a dive (typically $80 to $150).

island in the northern atoll, costs $4,900—still a whopping sum, but more than 30% cheaper than in high season. All villas are tricked out with their own terraces and private pools. Guesthouses, legalized in the Maldives in 2011, are a more affordable alternative, says Guesthouses-in-Maldives.net founder Raki Bench. He suggests the Arena Lodge on Maafushi, a South Malé atoll, priced at $119 a night, including meals and snorkeling gear. A caveat: The Maldives is a Muslim country, so alcohol is banned in residential areas, and people cover up on public beaches. However, many guesthouses have day rates with resorts (from $30), where guests can have a cocktail and break out their swimwear. A SEA TURTLE IN THE MALDIVES

HOW TO SAVE: Is staying in a private overwater bungalow on your bucket list? Seven nights at Coco Bodu Hithi, located on an

C LO C K W I S E F R O M TO P L E F T: P H OTO G R A P H S B Y LU I S DAV I L L A / F I R ST L I G H T; C O U R T E SY O F C O C O B O D U H I T H I ( 2 ) ; J E A N A L LS O P P ; F I R ST L I G H T

SEPT

Hit the Beach on the Emerald Coast

WHY NOW: There are few places more picturesque than Florida’s Emerald Coast, especially the section edged by Highway 30A, east of Destin. The 28-mile road links a series of sugar-white sand beaches and manicured towns, both of which are packed throughout the summer months. But come September the families clear out, prompting hotel prices to drop and leaving you plenty of room to enjoy the clear bluegreen ocean and 80 ° days.

WHAT TO DO: Explore the various coastal towns, each with its own vibe. In Seaside, known for its pastel houses (you may recognize them from The Truman Show, which was ﬁlmed here), visit Modica Market to stock up on essentials. Then, stroll to the beach for a pleasantly sandy picnic. For a more active afternoon, hike along dune-ﬂanked trails in Deer Lake State Park (entrance fee: $3), next to WaterSound Beach. Nearby Rosemary Beach is known for its New Orleans–style houses and charming shops.

HOW TO SAVE: Lodging prices typically dip 10% to 20% in September. For a splurge, rent a one-bedroom cottage in Seaside, where starting rates fall 17% in September to $350 a night. Or choose one of the area’s affordable inns. Rooms at the Hibiscus Coffee and Guesthouse in Santa Rosa Beach start at $125, down 15% over August rates. Plus, you’ll get a dynamite free breakfast; past visitors rave about the cinnamon-roll French toast and spinach frittatas.

The city is also a shoppers’ paradise, stocked with one-ofa-kind delights, says editor Heather Henley of DoSavannah.com. Check out Satchel for Take in Savannah’s unique leather handbags and Folklorico Southern Charm for crafts from a range of countries. Finally, be sure to sample the city’s culinary WHY NOW: Savannah is scene, which ranges from Low best known for its 19thCountry classics to newer adcentury architecture and ditions, like Florence, an Italian oak-lined streets. However, spot recommended by Stefanie the city also has an impresDasher, who blogs about the sive modern design scene, city on Lifeonthesquares.com: thanks in large part to the “Try the black bucatini pasta Savannah College of Art and with a pork sausage ragu ($20).” Design (SCAD), which has campus buildings all over HOW TO SAVE: Savannah’s town. The crowds that ﬂood popularity as a convention the city earlier in the year destination keeps hotel prices start to thin in November, yet relatively stable, but, accordthe weather stays pleasant, ing to STR, the average rate with highs in the low 70s. does slide 10% in November as tourists head to even WHAT TO DO: Immerse warmer climes. Look carefully, yourself in the region’s and you’ll ﬁnd more impressive design history with a walking deals: At Brice, for instance, tour from Jonathan Stalcup, a new property with fourfounder of Architectural poster beds and a chic, allSavannah. His in-depth white library, rates start at itineraries ($30) detail $179, down from a peak of Savannah’s progression from $399. The no-frills Holiday Inn Georgian buildings (when we Express, ideally located in the loved the English) to Greek historic district, has rooms Revival mansions (when we from $125 (vs. $172 in April). loathed the English).

NOV

A NUIT BLANCHE EXHIBIT BY ARTIST DAVID BROOKS

OCT

Tour Artsy Toronto

WHY NOW: Fall temperatures can be cool in Toronto (think highs in the low 60s), but for culture vultures, October is an ideal time to visit. Oct. 3 is Scotiabank Nuit Blanche, a contemporary arts festival when cultural institutions, from museums to artistrun centers, open their doors and offer free access to their collections. Plus, arrive before mid-month and you’ll catch some beautiful fall foliage.

DOWNTOWN TORONTO, AS SEEN FROM CENTRE ISLAND

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WHAT TO DO: Learn your way around with a free walking tour of downtown, offered by the Royal Ontario Museum. Or, for something a bit more neighborhoody, explore the city’s Queen West district, known for its galleries and independent boutiques, says art consultant and city guide Betty Ann Jordan. While you’re there, be sure to check out the Stephen Bulger Gallery, where you’ll see historical and contemporary photographs by the likes of Vivian Maier and André Kertész. The space includes a 50-seat theater and hosts free ﬁlms on Saturdays at 3 p.m. Music fans should also plan to visit the steel-and-glass Richard Bradshaw Amphitheatre, which hosts biweekly performances by the Canadian Opera Company. For a break from the city, take in the fall colors on Centre Island, a residential isle just a 15-minute ferry ride ($7) from downtown. HOW TO SAVE: In October, hotel rates dip by 10% or more compared with the summer high season. Rates at the 586-room InterContinental, for example, are 30% lower at $166. At the Gladstone Hotel, a redbrick Victorian on Queen Street West, industrialstyle rooms with exposed brick walls start at $131 (vs. $197).

J A N U A R Y/ F E B R U A R Y 2 0 1 5

A ROW OF CLASSIC SAVANNAH HOMES

THE MONEY TRAVELER

TRAVEL RESOLUTIONS

THIS YEAR, VOW TO BE THE SMARTEST TRAVELER YOU CAN BE. HERE, YOUR PLAYBOOK FOR 2015: GET CARDED Thinking about applying for a travel rewards credit card—or switching the one you have? Check out the Barclaycard Arrival Plus World Elite, which lets you put your points toward any type of travel you book, rather than limiting you to a single airline or hotel chain.

CHECK YOUR MILES If you bank your frequentﬂier points with a single airline, review its latest policies, says Ryan Lile of the Frequent Flyer Academy. United and Delta, for example, have altered their programs this year, reducing the value for many members. You may want to switch.

A BUTCHER SLICES HAM AT MERCADO DE SAN MIGUEL

WHY NOW: Madrid rings out the year in high style. Serrano, a top shopping street, shows off lights and festive window displays, and the city’s many churches set up glowing nativity scenes, says Virginia Irurita, founder of travel company Made for Spain. Madrid is already a steal compared with other European capitals (the average hotel rate is about $100, vs. $179 in Rome), and lodging rates dip 20% in December.

Christmas concerts hosted by the Prado Museum, says Irurita. Then, indulge in the other thing Madrileños worship—food—at the cozy new Ultramarinos Quintín, part market, part restaurant. Don’t miss the bacalao-stuffed croquettes, shrimp, and fried potatoes. Shopping for holiday gifts? Skip the weekend crowds at the city’s famous Sunday Rastro ﬂea market; the best vendors are open all week long, says Madrid-based journalist Andrew Ferren. Among his favorites: La Recova, which carries homedecor items, and La Brocanterie, the place to ﬁnd mid-century furnishings. Afterward, duck into Lhardy for a cup of hot caldo, or bouillon, mixed with sherry, Ferren says.

WHAT TO DO: Get in the holiday spirit with a choral or organ performance at the Almudena Cathedral or one of the free

HOW TO SAVE: For affordable accommodations, check out room-matehotels.com,

BE PROMISCUOUS C LO C K W I S E F R O M TO P L E F T: P H OTO G R A P H S B Y C A R LO S O S O R I O/G E T T Y; B I L L STA M AT I S /G E T T Y; J O H N G R E I M / L I G H T R O C K E T/G E T T Y I M AG E S ; G E R A R D J U L I E N /A F P/G E T T Y I M AG E S ; A N D R E W R U B TS OV/A L A M Y

REAP THE REWARDS Airlines free up more award seats as the departure date nears, so try booking about a month out, says Brian Kelly of ThePointsGuy.com. Just remember: Many carriers charge extra for booking within 21 days of travel.

SEARCH ON SUNDAY Use Sundays to research ﬂights. “It’s the best day of the week to ﬁnd low airfares,” says Lile.

PICK YOUR DAY When you book a ticket, choose the cheapest departure day. According to Kayak .com, that’s Friday for domestic trips, and Tuesday or Wednesday for international.

DEC

Spend the Holidays in Spain’s Capital

a Madrid-based chain of unique properties throughout the city. Simple double rooms at Room Mate’s centrally located Mario hotel cost $73 in December, compared with $98 in summer. Planning a holiday splurge? Opt for Urso Hotel & Spa, housed in a former palace. The property has gotten a lot of attention for its elegant custom furnishings and hydrotherapy spa pool. Rates start at $205, down about 20% from March. A GIANT CHRISTMAS TREE IN THE CENTER OF MADRID

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Uneasy Rider by Alyssa Abkowitz

OTORCYCLES and mopeds have always seemed obnox-

ious to me. The noise, the reckless weaving between cars, and the drivers who think they’re so cocky and cool, better than the rest of us stuck bumper to bumper. About a year ago my husband, Scott, and I moved from New York to Beijing for his job as a foreign correspondent. Here, mopeds are everywhere, carting everything from towering stacks of cardboard or recycled water containers to entire families (sans helmets). Soon after we arrived, Scott suggested we join these throngs with our own bike. I was hesitant. He argued that a moped would help us acclimate to our new home. Rather than observing Beijing through the windows of taxis, we’d be out there—part of it all. I thought about how trapped and

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J A N U A R Y/ F E B R U A R Y 2 0 1 5

overwhelmed I sometimes felt in this city of 20 million. Reluctantly, I agreed, and we were soon the owners of a $300 used moped. Our ﬁrst ride was terrifying and exhilarating. I clutched Scott’s waist with a death grip and kept yelling at him to slow down. After a few kilometers, though, I started to relax. I peered down the alleyways as they ﬂashed by, and watched locals sweep their stoops and haggle at street stands. The lights of the red lanterns lining the sidewalks seemed brighter than before. The honks of the surrounding traffic started to sound like a set of purposeful signals rather than a wall of senseless noise. Still, my safety concerns proved valid one rainy night. Scott took a corner too quickly, and suddenly we were both splayed on the pavement. Amazingly, no one got hurt. That’s when we started talking about upgrading to a newer, safer bike. Our new moped, an electric Yamaha Metis GT SP, cost $1,200 (about a quarter of the average annual salary of a private-sector worker in China). The bike has sturdy tires and brakes that can stop on a dime. I still don’t drive it, and have no desire to learn. But I have come to love climbing on behind Scott. On the Yamaha, I feel safe (or at least safer). On a sunny day, as the wind whips by and we slalom through traffic, I feel a bit more like a local and less like a foreigner living in a strange land. Alyssa Abkowitz is a freelance writer based in Beijing. She lives with her husband and their two cats.

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“…FUEL-EFFICIENT, RELIABLE AND STRONG RESALE VALUE….” KELLEY BLUE BOOK For the second year running, Kelley Blue Book’s KBB.com has named Mazda the most affordable 5-Year Cost to Own brand among all automotive manufacturers.1 It takes Conviction, Creativity and Courage to make things better. That’s how Mazda developed SKYACTIV® TECHNOLOGY to achieve exceptional fuel efﬁciency, performance and reliability. And it’s why we’re applying KODO design to our most innovative lineup yet. It’s no wonder Mazda vehicles are considered such a smart buy. This is the Mazda Way.

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2013 and 2014 model-year vehicle’s projected cost to own for the initial ﬁve-year ownership period is based on the average Kelley Blue Book 5-Year Cost to Own data which considers depreciation and costs such as fuel and insurance. For more information, visit www.kbb.com.