Money Minute: Harley's Less Hoggish Bikes; the New King of Mutual Funds

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Harley-Davidson is putting the Hog on a diet. That and more top money stories you need to know Tuesday.

Earns Harley Davidson
Nam Y. Huh/AP
Harley-Davidson (HOG) will begin selling a pair of new, smaller motorcycles in the spring. They're designed for younger, urban riders who favor maneuverability over power. The new bikes have lighter frames and a narrower profile.

There's a new king of the hill in mutual funds. Morningstar (MORN) has crowned Vanguard's Total Stock Market Index (VTSMX) as the world's biggest fund. That ends the five-year reign of Pimco's Total Return Fund (PTTRX), as investors have withdrawn $33 billion in investments so far this year. The Vanguard fund has returned 27 percent this year, while Pimco has a slightly negative return, due to weakness in bonds.

The Dow Jones industrial average (^DJI) gained 23 points Monday, the Standard & Poor's 500 index (^GPSC) added 6 and the Nasdaq composite index (^IXIC) rose 14 points.

Apple (AAPL) plans to hire 2,000 workers at a new plant in Mesa, Ariz. -- part of the company's effort to move production from China back to the U.S.

Keep an eye on these energy stocks Tuesday: Marathon Oil's (MRO) net easily topped expectations, but Anadarko Pete fell short of expectations, despite a 50 percent earnings increase. And Chevron (CVX) signed a $10 billion production-sharing accord for Ukrainian shale gas.

What's rising at a faster pace: the cost of college, gasoline, food, or child care? It's no contest. A nonprofit research group says the cost of child care centers rose eight times faster than family incomes last year. Oregon, New York, Minnesota and Vermont were the least affordable states for child care. Despite the high cost, the study finds that caregivers are among the lowest paid professionals.

Finally, this is a big day for gamers. Activision Blizzard's (ATVI) "Call of Duty: Ghosts" is now on sale. Analysts say the launch could rival the big numbers rung up last month by Take Two's "Grand Theft Auto V." It had a record $1 billion in sales in its first three days.

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Money Minute: Harley's Less Hoggish Bikes; the New King of Mutual Funds

Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.

Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.

Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it.

The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That's totally unknowable.

Earnings multiples reflect people's feelings about the future. And there's just no way to know what people are going to think about the future in the future. How could you?

If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.

Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."

Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund.

Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.

Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"

Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.

Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year's highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.

The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.

You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he'll receive, even though it makes him more likely to be wrong.

This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.

"Everything else is cream cheese."
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