If you've done any driving at all, you've likely seen one of those bumper stickers that read, "My child is a student at (your name here) Middle School." There's no mention of achievement, just that the kid is attending. Is that a good thing?
That's the kind of barely noticeable contribution we've been getting recently from the housing market relative to the broader economy. Housing has been just a present pupil, not like one of the students in Garrison Keillor's mythical Lake Wobegon, where "all the children are above average." And the economy itself has been rather "meh."
A post-Fed focus on housing
After last week's Federal Reserve meeting and news conference by Chair Janet Yellen, the focus of the coming week's economic data shifts to housing. The comments from the nation's chief central banker, coupled with the official statement from the Federal Open Market Committee, didn't do much to change the near-term outlook for the economy. This week, we'll looking for signs whether the housing market has fared any better recently.
Here's what we have on tap:
- The National Association of Realtors reports on May existing home sales, Monday at 10 a.m. (All times Eastern.)
- The Case-Shiller home price index for April, Tuesday at 9 a.m.
- The Commerce Department reports on May new home sales, Tuesday at 10 a.m.
- The Conference Board releases consumer confidence, Tuesday at 10 a.m.
- The Commerce Department releases a revision of first-quarter gross domestic product, Wednesday at 8:30 a.m.
- The Commerce Department reports on May personal income and spending, Thursday at 8:30 a.m.
Investing: How do you get started?
So, you want to be an investor, but you don't know a 401(k) from an ETF. Here's how to make good first steps.
Mark Hamrick: From Bankrate.com, this is "Your Money This Week."
I'm Mark Hamrick in Washington.
Under the best of circumstances, investing can be a daunting task. Even as the stock market has roared to record highs, some individual investors are skittish of wading back in. This week, our goal is to ask the question, where to begin, or when to begin? Whether looking at individual equities or mutual funds, we'll try to answer the question with two experts. Hugh Johnson, who's been guiding institutional and individual investors for decades, starts us off. And A.J. D'Asaro, alternative strategies analyst with Morningstar, will also be our guest.
All of that and more coming up on "Your Money This Week."
Hugh Johnson has been helping his clients make investing decisions for years. Certainly I've talked with him for several decades now, seeking his views on what might be driving the stock market at any given time. For this segment, we sought a longer-term view, about investing in the stock market for individuals.
Hugh is chairman and chief investment officer with Hugh Johnson Advisors in Albany, New York.
To begin, I asked Hugh: When is it right to begin owning individual equities, or stocks?
Hugh Johnson: Well, the first step in the whole process, of course, is trying to determine what is the level of risk and the level of return that they want to assume. and that is just historical numbers. They might want a portfolio that is 50 percent in stocks, maybe 50 percent in bonds, and that reflects -- that is a relatively modest level of risk-taking and, therefore, reflects the fact they want to be a little bit safer, a little conservative. So that is the first step in the whole process.
The second step in the process is to explain to every individual investor, quite frankly is -- individual and institutional investor -- is that you want to be diversified. In other words, to tell them that there are -- to explain to everybody that there are 10 sectors of the stock market. You want to own all 10 sectors of the stock market to be properly diversified, to prevent some sort of big surprise happening, and you find yourself down very sharply. So be diversified among all 10 sectors, and you do not want to really over-weight any one sector or under-weight any sector significantly. In other words, reduce your risk.
And then the third step in the process is to try to emphasize, that -- look, when you get started at this, you should try to emphasize buying stocks that are high-quality stocks. In other words, stocks that are -- I do not want to call them, necessarily, household names, but certainly some companies that you might be somewhat familiar with or have at least heard about. So stay with quality names, be diversified in the portfolio, and make sure that you understand the risk and return that you want to pursue.
Mark Hamrick: Hugh, lets us say that I am a young person. And I am coming to you, and I do not know what my risk appetite is. How do we find out what the answer is?
Hugh Johnson: It is very difficult to find out what the answer is. There is no easy answer, and through a process of talking to somebody, I usually can kind of figure that out. I can sort of get an idea of what their, sort of, life game plan is. The age of their children -- their age, the age of their children, the kind of hurdles that are going to lie ahead, such as providing an education for their children, which is always a formidable task. And then after providing an education for their children, trying to build a nest egg for their futures. Then along the way, of course, you want to buy a house and things of that sort.
So, along the way I can kind of get an idea as to, first of all, the level of risk from just talking to somebody, but also the return that they are going to need in order to accomplish their objectives. So really, there is no easy answer to that. It is a process of, myself, talking to the particular individual and getting a sense as to the return they are going to need. That will tell me what percentage of their portfolio needs to be in stocks, based on the history of the stock market or the historical performance of stocks and bonds.
Mark Hamrick: Another way to look at that, Hugh, might be -- I wonder if you agree -- that someone should be asking themself that question, essentially before they enter the market. In other words, that is something they want to spend some time on and ponder.
Hugh Johnson: Yeah, they should, but these are very, very uncharted waters for a lot of investors, and they should ask themselves: What is the level of risk I want to take, the level of volatility in the portfolio, the market value of my portfolio that I am willing to take? Otherwise, I will not be able to sleep at night. And it's really a sleep-at-night issue, in part, but believe me the primary drivers of your initial step into the markets is in trying to decide what percentage of your assets are you going to start with, and then how much you are going to put in continuously? Really, the primary driver is the level of risk or the sleep-at-night -- the level of risk you are willing to assume and how much is it going to allow you to sleep at night, and then ask yourself the question: What is the kind of return I am going to need? If the return is higher, you are going to need a higher percentage of your portfolio in equities. So all of that can be mapped out, and it should be mapped out in advance.
Mark Hamrick: Hugh, we hear -- and apparently there is plenty of data to support it -- that many millennials, young people, are avoiding stocks. And if they are out of market since 2008, they missed significant gains. What is your advice to them?
Hugh Johnson: It is not too late, is my advice to them. And I can certainly understand that after the experience of 2008, there is a lot of individual investors -- and there is young and millennials and there are older people, too -- that are very gun-shy. I happen to believe that this is going to be a good decade for stocks. It is going to follow a very rough decade, but I think it is going to be a good decade of stocks. And I think that everybody could start or restart, I guess is the way to say it, right now.
I think if you take a look at the, basically, long-term performance of the markets, the equity markets, the fixed income markets, you look at the returns that have been associated with that long-term performance, you will come away with the conclusion that, yeah, there are going to be some very tough periods. There are going to be bear markets. They might even be just as sharp or severe as we saw in 2008, but over the long-term -- and I think that is the way you should look at it -- the returns from equities are going to be very, very good. The returns for fixed incomes will be less good, but, nevertheless, positive and therefore you should start with that basic realization. It is really all I am talking about is have the right perspective when you start the whole process, and recognize that over the long period of time -- again, it is time, not timing that is the real secret to success in the financial markets, or in investing.
Mark Hamrick: Well, the point is common sense is not all that common, and that is why we like coming to people like you, Hugh Johnson. Thanks so much for your time.
Hugh Johnson: You are certainly welcome.
Mark Hamrick: Hugh Johnson, chairman and chief investment officer with Hugh Johnson Advisors. He spoke with us from his office in Albany, New York.
Next, we move from New York State to Chicago.
A.J. D'Asaro is alternative strategies analyst with Morningstar.
Continuing with the theme of "where to begin," I asked A.J. whether mutual funds are ideally suited for most individual investors, who are looking to wade into the financial markets.
A.J. D'Asaro: Well, most individuals own mutual funds through their company 401(k) plan. And that is because the companies choose funds for investors to invest in, and you really have no choice. You have to choose a mutual fund in that case. But yeah, they are very good vehicles for individual investors.
Mark Hamrick: Well, sure, and there are trillions of dollars, I guess, invested that are a testament to that. And when the market is doing as well as it has here lately, people feel good about that. But what about equities themselves? When might it be appropriate for someone, whether this is money that they are sort of using real-time? In other words, they are not planning necessarily for retirement. Or maybe they are or maybe they want to invest even for a college fund for their child. When is it appropriate to start looking at individual equities?
A.J. D'Asaro: So when you want to invest your money, Mark, you have a few options. You can put that money in a savings account, which right now, according to Bankrate, you can get about 0.75 percent interest per year on that. If you want to lock your money up for a little longer in a long-term CD, you can get about 2 percent if you promise not to touch that for five years. And then you come to individual stocks. And this is why individual stocks are attractive, Mark.
If you were to buy, say, a share of Apple stock right now, it is paying a 2 percent dividend per year. So then now there are risks involved in that, stocks can go up or down. But there is also a potential for that stock price to go up, and you will make more than your 2 percent annual dividend that you were making in a long-term certificate of deposit. So it is kind of a useful vehicle if you are willing to take a little more risk and ride through those rocky times.
Mark Hamrick: Well, I like the fact that you pointed immediately to dividends because that tends to be a little bit more of a conservative way of looking at the stock market. And certainly, there are mutual funds, ETFs, exchange-traded funds, that are heavily interested in equities that pay substantial dividend returns. What is the best way to try to find an equity that pays a dividend that could be rewarding?
A.J. D'Asaro: I think individual investors should probably stick to companies that they know. There is really a lot to learn for the beginner in the stock market. The best thing you can do is buy many stocks and diversify. You should be -- if you are trying to invest in individual stocks, you should be researching them, keeping up-to-date with them, and buying at least 20 to protect against any unforeseen disasters that might happen to your company.
And a good anecdote for this is British Petroleum, a great company, pays an annual dividend of over 4 percent. But in 2010, no one could have predicted the Deepwater Horizon oil spill. And if you were an investor in that stock, you would have lost half your money. And even today, four years later, you are still 10 percent below where you were in 2010. So that is an example of why you really need to know what you are buying and spread your money out across many different things and keep up-to-date and know what is happening with your stocks.
Mark Hamrick: Yeah, so obviously diversification helps to manage risk to some degree. And as you say, that was an event that was largely unforeseen, and BP investors are still, essentially, paying the price. Another key issue, particularly if you are holding a basket of stocks that is as large as you just suggested, is when to sell. Is that a decision you should make essentially when you are buying the stock, is to have a target as to when you would sell the stock, if at all?
A.J. D'Asaro: I would say yes. Yes, you should definitely have in mind a price where you would sell because the stock is overvalued. Stocks can be reasonably priced, but any stock can get ahead of itself, and it is good for an investor to take those profits when they can if your stock is shooting to the moon.
Mark Hamrick: Sure, and that gets into the question of how much appetite you have for risk that we just talked about. Obviously, there is an old line about nobody ever lost money selling a stock. Of course, if they sell at a loss, it is quite the opposite. But how do you avoid the problem that -- using the example of Apple there, selling too soon, where that is a stock that has performed remarkably well over a long period of time and now is one of the most widely held issues?
A.J. D'Asaro: I think most people make the mistake of buying when the -- selling at the exact wrong time, when the stock is going down, and buying at the stock's high, when it is going up. So I think patience is a virtue, and for many people it makes sense to use a mutual fund and outsource that decision to a professional.
Mark Hamrick: A.J., terrific advice there. Thanks so much for your time.
A.J. D'Asaro: You are welcome, Mark.
Mark Hamrick: A.J. D'Asaro, alternative strategies analyst with Morningstar. He spoke with us from his office in Chicago.
For more on investing advice, check out our website and apps, at Bankrate.com.
Talk about a changing financial landscape...
The way companies provide retirement benefits for their employees, when they do, has certainly shifted dramatically over the years. And the changes haven't always been for the better -- for the employees, anyway.
One new trend being seen involves changing the way companies match their workers' 401(k) contributions. A report from Bankrate's Doug Whiteman:
One of the attractions of a 401(k) retirement plan is that employers will match some of the money that workers put in. Now, some companies are providing that matching contribution in the form of a lump sum paid only once a year. Are there any drawbacks?
When you don't get the matching amounts from the boss periodically, you miss out on opportunities to compound interest throughout the year, and you also lose out on potential market gains. If, for example, you have to wait until December for matching money that you might have received as far back as January under the more traditional system, you're going months without that money working for you. Experts say you might make up for delayed matching funds from your employer by increasing your own contribution into your 401(k) or adjusting your asset allocation for better gains.
For more on 401(k) lump-sum matches, visit Bankrate.com. I'm Doug Whiteman.
This week in business history:
A casualty of the digital transition. There probably was no variety of film used in photography with a more iconic brand name than Kodak's Kodachrome. On June 22, 2009 -- five years ago -- Eastman Kodak company announced it was phasing out Kodachrome because of declining demand.
Hailed as the world's first commercially successful color film, it endured in Kodak's product line for more than seven decades. Digital photography now rules the day, and with it, the ability to instantly know how the image turned out.
You've been listening to "Your Money This Week."
For more on this and other personal finance issues, visit Bankrate.com. Thanks to producer Lucas Wysocki.
I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.
Home sales, home prices
It is a fair bet that the figures on sales of new and previously-owned homes won't turn a lot of heads. The consensus among economists is that both figures will show gains, more so for existing home sales. As for the gauge of home prices, the gains there are expected to moderate. Still, home prices are seen maintaining a double-digit year-over-year increase.
The steady rise in home prices has amounted to the proverbial double-edged economic sword. Scott Brown, chief economist with Raymond James & Associates, says higher home prices "push people back above water on their mortgages and help for consumer spending, but they make homes less affordable for the people coming up." As a result, first-time buyers "are having a harder time, and we're still seeing relatively stagnant wages," he says.
Even with home sales and prices going up, the housing sector is a "contributor" to overall economic growth, but the donation has become less significant. Economists at the National Association of Realtors say historically, housing has contributed about one-fifth of overall growth. In the first half of this year, they estimate it has contributed only about 15 percent.
Grading the housing sector? Mark that down under the "needs to improve" section.
GDP: Big downgrade?
The previous revision for "growth" in the first quarter showed a decline of 1 percent in gross domestic product. This week's updated revision is expected to mark further contraction, of perhaps around 2 percent. Part of this decline is expected because of a markdown in health care spending during the first three months of the year.
Economist Joel Naroff is among the experts who aren't too concerned about the continued downward revisions in first-quarter growth. As Naroff puts it, "The weaker the first quarter is, the stronger the second quarter." In other words, some of the economic activity that didn't occur over the severe winter was simply delayed until the spring.
Brown agrees: "The remainder of the year looks to be a lot stronger."
Even so, some damage has been done. For example, the Federal Reserve last week said growth for all of 2014 will be in the low 2 percent range, well below its earlier forecast.
Like the student who is failing to do well in class, the economy is recognized for having potential. Now it just needs to perform.
It was a huge casualty of the digital transition. Kodak's Kodachrome was an iconic brand name in the film world. But on June 22, 2009, Eastman Kodak announced it was phasing out Kodachrome because of declining demand.
Before fading to black, Kodachrome had endured as part of Kodak's product line for more than seven decades. Now, as we all know, digital photography rules the day.
Car models get phased out, too. Take a look at five discontinued cars disappearing this year.
Follow me on Twitter: @Hamrickisms