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Making the Most of Your Money Archives

Can You Protect Your Investment Portfolio From Risk?

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I recently moderated a panel of experts whose job is to research investments for financial advisors and individual investors. This particular panel presented the results of its research on how to manage portfolio risk and in particular, tail risk. Tail risk means the holdings in a portfolio fall in value more than two standard deviations from the average. In simpler terms, tail risk happened to most of us in the fall of 2008.

The presenters discussed the research and they agreed that there is no easy or perfect way to reduce investment portfolio risk.

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Are ETFs Better Investments?

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So much has been written lately about exchange-traded funds (ETFs) and all their so-called flaws. Some complaints and warnings about ETFs include:

1.    ETFs do not always sell at the price that reflects the underlying value of the holdings.
2.    ETF investing faces bubble-like conditions. ETFs as a class may come crashing down.
3.    Sometimes ETF fees are just as high as those of actively managed mutual funds.

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Taxes For 2011: Pay Less Starting Now

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 As for taxes, it's time to think about the old adage, "It's not what you earn, it's what you keep." Now that you may have felt the pain of writing that tax check, you can consider the most tax-efficient ways to manage your finances in 2011.

1. First, when managing your personal portfolio of investments, be sure you differentiate your taxable account from your tax-exempt account, such as your 401(k) or rollover IRA. Certain investments will benefit you more in one account than the other. If you like to invest in the stock market yourself and you buy and sell shares often, then that kind of activity is best done in the tax-exempt account because otherwise the federal government will tax you at your full rate if you incur a gain on the sale of a stock within 12 months.

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5 Important Tax Savings Tips To Use Before April 15

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 1. Take advantage of tax credits.

Tax credits earn special attention as they not only reduce a tax bill, but they can earn you a refund. These include the Earned Income Tax Credit (EITC), Child Tax Credit, Recovery Rebate Credit and first time Homebuyer Credit.

Whether you have an employer or are self-employed, subject to income limits, you may qualify for these credits. You do not even need to itemize your deductions. For more information, contact the Internal Revenue Service.

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Tsunami In Japan: A Lesson To Keep Investments Diversified

As the aftermath of the tsunami unfolds in Japan, it has repercussions around the world and will for a long time. The overall effect on U.S. gross domestic product (GDP) is expected to be about 0.5 percent, which means that the U.S. economy will grow a bit more slowly than originally thought.

Nevertheless, if your investment portfolio is diversified, you should be seeing some areas perform while others decline. For example, oil and gas stocks have moved up as investors understand that Japan will increase its demand in other areas of energy as the government shuts down its nuclear plants.

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Facebook: How to Buy Stock in a Private Company

You too can now buy shares of Groupon and Facebook and other high growth companies that are not yet publicly traded. Here is how.

There are two new firms that connect buyers and sellers who are interested in trading private company stock such as Facebook, Twitter, Linkedln, and Tesla Motors to name a few. SharesPost and SecondMarket are the two main players in this business.

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Why You Should Include Indexing In Your Investment Portfolio

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 First you should note that I come from a long background of working with active portfolio management which means that my past firms managed money by actively picking stocks and bonds. Indexing was the enemy because if a client chose to index, it meant that they didn't hire us. However, as I watched the carnage in 2008 when actively managed mutual funds should have provided some protection, very few did so. To make matters worse, index mutual funds or index exchange traded funds (ETF's), many of which are weighted by market capitalization (which means higher PE stocks have a higher weighting in the fund) outperformed active managers.
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529 College Savings Plans vs. Groupon Deals. How Much Can You Save?

 A 529 plan is a college savings program where parents, grandparents and friends can put funds aside for a child's college that will grow tax-free. Think of it as similar to a Roth IRA, where you put away after-tax dollars in a designated fund and, so long as you meet the requirements, you do not have to pay taxes on the earnings.
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How Do Registered Investment Advisors and Brokers Differ?

 The differences between brokers and registered investment advisors can be quite confusing. Brokers will often call themselves financial advisors even though they are registered brokers.

The responsibility of a broker is to recommend only suitable investments for a client, but those recommendations do not necessarily need to be the best investments. Brokers generally earn a living through commissions on financial products they sell.
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So, Which Economist Is Right About The Economy?

On the Sunday after Thanksgiving, Ben Bernanke, the chairman of the U.S. Federal Reserve Bank, spoke on CBS' "60 Minutes." I watched, listened and walked away with the clear impression that he is really concerned about our economy's ability to move forward and beyond the issues that face us, including unemployment, mortgage defaults, the continual decline in real estate values, the threat of deflation and U.S. business' refusal to spend its large cash reserves. Bernanke expressed hope and reflected on some positive indicators; however, serious problems persist and he does not feel fully confident yet.

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Where Is The Economy Going In 2011?

 I recently had the opportunity to attend the annual Business Forecast put on by my business school alma mater, The University of Chicago. Three professors of economics, each having won numerous awards and one having worked for the Obama administration, presented the forecast. They predicted the 2011 economy would grow slowly, around 3.2 percent with little to no inflation. That percentage marks slower growth than the typical post-recession increase we experienced in the past.

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Governor Quinn. Higher State Taxes. What Can You Do?

Now that citizens reelected Governor Pat Quinn, what does that mean for you? It probably will result in your state income taxes increasing. Quinn has wanted to raise taxes and has been quite vocal about the need to do so. That increase, if he can get it passed, will most likely take effect in 2011.

So here is how you can take little of the bite out of the new tax rate and do something good for your children or grandchildren or nieces and nephews.

By investing some of your child's education funds in the state's 529 plan, those dollars will be exempt from Illinois state income tax, currently at 3 percent, and now expected to go to 4 percent in 2011. So you might just want to wait until January 2011 to make that investment.

To get the deduction, you need to invest in the Illinois 529 college savings plan. Morningstar, an independent rating agency, ranks it as one of the best programs and after researching 529 plans, I agree.

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Are You Guilty Of Investment Portfolio Neglect?

All week, CNBC has been running segments on the biggest investment mistakes that Wall Street's smartest investors have made. Among the experts who made mistakes: Pimco's Bill Gross, Berkshire Hathaway's Warren Buffett and BP Capital Management's T. Boone Pickens. Bill Gross refused a loan to Warren Buffett when Buffett was starting his own firm. He also passed when Sam Walton came to him with one Wal-Mart store and wanted to raise funds to expand his store.

In hearing about these mistakes, I thought about mine and what I could share with readers that would help them in managing their portfolio. I have certainly made many investment mistakes during the more than 20 years that I have worked in the industry, and believe that I have learned from every one of them to become a better investor. Perhaps the most costly one has been one that I think many of us are guilty of: portfolio neglect.

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Chasing High Yield Investments

Is it time to stop chasing investments that provide high(er) yields? But where else should you invest?

For many months now, investors have told me they want to find investments that can give them a yield that's greater than what they can get with treasuries or certificates of deposit (CDs). The business media has suggested high-yield bond funds, dividend-paying stocks, preferred stocks and master limited partnerships to name a few. Earning a higher yield seems to have become a national obsession.

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Is It Time To Buy TIPS?

As an investment advisor, I am constantly looking ahead as to how to position a portfolio for upcoming changes, both the expected and unexpected. However, one little gem that I have overlooked lately has been TIPS, Treasury Inflation-Protected Securities. These are bonds issued by the U.S. Treasury that offer a fixed yield plus the inflation rate to keep pace with changes in the Consumer Price Index (CPI). Investors typically buy individual TIPS or a TIPS fund to protect their assets in an inflationary environment.

So why would anyone want to buy inflation protection now when the Federal Reserve is dealing with real concerns about deflation?


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Fight Deflation With These Investing Tips

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There has been much talk about the U.S. economy heading into a deflationary period, which means falling prices on goods and services. We see some of it around us already where clothing prices have come down, auto prices, real estate and food.

A corporate attorney friend of mine has said that in order for him to compete for new business, he has to lower his prices. It doesn't seem to matter that he is with a prominent law firm and has 30 years of industry experience.

So are we really in a deflationary period? I believe so. If we were to look back to the beginning of 2010, many economists and market analysts were telling us to brace for inflation. How quickly things seem to change.

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Reduce Your Flash Crash Risk



May 6's flash crash shook markets and made headlines around the world. Most importantly, it impacted the individual investor who trusted the stock exchanges and their pricing efficiency. But when Apple (AAPL) traded at nearly $100,000 a share when it should have been around $235, investors can't help but wonder whether the market is no longer safe.

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Pay Off Mortgage Early - Earn Money On Cash

If you're in a situation where you have an emergency fund and feel frustrated by the low interest rates banks are paying on cash right now, I have a new option for you.

With an emergency cash fund, what should you do with your extra cash? You can pay off some of your mortgage early. While you'll lose the mortgage tax deduction, you can earn more on your cash by paying off your mortgage early than you can by buying a certificate of deposit (CD).

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Bond Funds or Bonds for Retirement Planning?

A recent issue of Barron's advised "Beware of Bond Funds." Should you?

If you are managing your own portfolio of investments, you may want to take a look at some different bond investments in today's market. Most portfolios have some allocation to bonds and for people who are closer to retirement or in retirement, they will typically have a higher allocation. The main reasons to increase your bond allocation as you approach retirement are that historically bonds have been less volatile and lower in risk than stocks and retirees like to live off the dividends that bonds pay out.

Let's come back to the July 10 issue of Barron's with its headline reading "Beware of Bond Funds." The author pointed out that as interest rates rise, the values of bonds decline. He went on to say if you are holding individual bonds, you can wait it out until the bond matures and then get your principal back. But if you are in a bond fund, the bonds don't mature and the value can drop.

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Bank CD: Consider Market-linked CD as Annuity Alternative

This alternative-to-an-annuity strategy allows you to participate in stock market gains but protects you from potential stock market losses-including providing FDIC insurance in some cases.I'm talking about market-linked CDs.

As with other investments, you can find a variety of types with different objectives and risk. One of the most common and popular is the market-linked certificate of deposit that tracks the S&P 500. These CDs do have limitations--however, for the risk-averse investor, this strategy is a far better option than investing in an annuity.

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How To Sell Gold Jewelry

With gold priced at more than $1,200 per ounce you may decide to bring your unworn gold jewelry to a gold party or respond to an ad offering cash for gold. In almost all those cases your 40 grams of 18K gold (translates into about 30 grams of pure gold) will get you about $110-$200 even though it is worth $1,100. Yes, you are getting ripped off.

Some companies ask you to mail your jewelry and then they'll send you a check. A quick Web search will show you the many scams that are out there.

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Annuities: High Fees Lower Investment Return

I have a client who invested his whole retirement portfolio in annuities, on the advice of his broker, who was also an insurance agent. When you buy an annuity, you give an insurance company money to guarantee you'll have ongoing income in the future--a promise that's often appealing to retirees. But your annuity's guarantee isn't without strings attached--usually high fees and low payouts.

In my client's situation, the broker walked away with a fat 7 percent or so commission and now the insurance company, which is well-known and highly-rated, charges the client more than 3 percent per year in fees. Due to these fees, the client's portion of the annuity that is invested in a money market fund has a return year to date of -3.5 percent. Yes, that is a minus sign in front of the 3.5 percent. Bear in mind that the appeal of money market funds is that their per-share value should never fall below $1.

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Gold May Not Hedge Your Investment Portfolio

Since my recent blog on why we should be avoiding domestic bonds (with interest rates going up in the near future, the value of your bonds will go down), I have been trying to find some alternative investments for my client portfolios that will offer the kind of downside protection in case we get a significant stock market decline.

In the past, I have been negative about gold, but when I look at the performance of gold (using the GLD exchange-traded fund) for the last five years, it has tracked the S&P 500 index nicely. During the 2008-2009 market declines, gold served as a wonderful hedge (an investment to offset losses) and performed handsomely. So, I thought, what can be better than this? Upon further research, I still remain skeptical.

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Sex and Money: What's the Correlation?

A or B.
A. There is a correlation between money and better sex
B. There is a correlation between money and more sex

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Financial Advisors: 7 Ways to Tell If Your Financial Advisor Is Doing a Great Job

Is your financial advisor doing the job for you?

Are you wondering if your financial advisor has your best interest in mind? Concerned that he or she isn't putting you first but perhaps forgetting about you? Here are a few reasonable questions to ask yourself or your financial advisor:

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Save on Taxes with the Right Cost Basis

If you haven't submitted your income taxes yet and you sold mutual fund shares in 2009, beware of paying too much tax because of reinvested dividends.

One common mistake: If you set up your mutual fund investment to reinvest dividends, then chances are the reinvested dividends were invested at a higher price than your original investment. So, when calculating your taxes, do not take your original investment as your cost basis against the proceeds from the sale. You are cheating yourself.

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Emergency Fund Short-term Cash: Keeping Up with Inflation

In my last blog, I discussed what you should consider when you're trying to decide how to invest cash for your emergency fund.

If you are looking for something with a higher return and are willing to take on a little more risk, you may want to consider a savings option that has limited price fluctuation (unlike a CD or money market fund that has a fixed value) and where the cash is readily available in case you have an emergency.
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Emergency Fund Cash: Where to Save Your Cash Now

Do you have enough cash in your emergency fund? Do you have enough cash separated from your other investments should you need it in an emergency? The rule of thumb for emergency funds used to be to have six months of cash to cover living expenses, should you lose your job. Since the financial crisis, many experts advise saving a year's worth of cash for your emergency fund as finding that new job can take a lot longer than before.

So where should you save or invest your emergency fund cash?

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