At the end of every year, I write a generic set of New Year's resolutions as that year's last Tip of the Week. This year, I thought it would be more meaningful to write my personal financial resolutions to share with everyone. My hope is that you'll see that, no matter who you are, you should take the time to plan.

As you know, I am a huge believer in long-term planning; at the same time, I also know that it generally takes many small steps to make the long-term plans pay off. Here are a few steps and goals that our family plans to take during the next year.

1. Revisit and update our estate plan. We did our trust in 1989. Many things have changed in ours live; both personally and financially since that time. Our current plan is inadequate to cover these changes.

2. Make an updated inventory of our belongings and place it in the safe deposit box. It's been a while since we've done our inventory. And, like everyone else, we've accumulated more belongings that need to be accounted for insurance purposes. Do you have everything you own committed to memory? I sure don't.

3. Begin planning the remodel on our home. Establish its design and initial budget.

4. Continue to maximize contributions to our retirement plan.

5. Begin tax planning for 2006 by comparing projections to the actual 2005 results. Review how taxes can be saved and what it would take to do so.

6. Stephen (my step-son) graduates from Cal Poly and goes from part-time to full-time at the office. Plan change in business budget to account for his moving from a part-time to full-time employee.

7. Continue to remind clients to refer friends and family. (Sorry, couldn't resist!)

This is not a complete list of our goals for 2006, but it is a solid start. I don't expect to fully accomplish all of my goals this coming year, as that's probably not realistic; however, I do expect to accomplish most of them. I'll share with you what happened at the end of the year.

In the meantime, Steve, Stephen and I wish you and your family a very happy and safe New Year! I thank you all for the continued confidence in our work. We look forward to being there to help you again in 2006.

All the best,

David

Apprvd.BBDP

Compare the cost of renting a given home with the cost of owning it. Such a comparison is effectively what current renters do when they weigh the costs of buying a home and leaving their landlord behind. Comparing the cost of owning a home to the cost of renting that same property serves as a reality check on home prices.

In order to make a fair comparison between renting and owning, you must compare the monthly cost of renting to the monthly cost of owning. If you compare the cost of renting a home for $1,200 per month to the cost of buying that same home for $250,000, you're comparing apples with oranges. That $250,000 is the total purchase of the home, not your monthly cost of owning it.

And when you calculate home-ownership costs, you must also factor in tax benefits. Your biggest home-ownership expenses - mortgage interest and property taxes - are tax deductible.

The following real-life example illustrates how to compare monthly rental and ownership costs. In the mid-1980s, three-bedroom homes on modest lots in popular communities on the San Francisco peninsula were selling for about $250,000. You could rent these same homes for about $1,200 per month. The cost of owning such a home (assuming a 20-percent down payment) amounted to approximately $1,300 per month, factoring in the mortgage interest and property tax write-offs.

Thus, at that time, you could have bought a home in this beautiful, economically robust and diverse area and have had monthly ownership costs about eqyal to the cost of renting the very same home. Not bad. And don't forget that, over time, the costs of renting would be fully exposed to inflation; whereas, if you had bought your home with a fixed-rate mortgage, the costs of owning would largely be constant. Buying a home at this time was a good deal, given these facts.

Now fast-forward to 1990. In the short span of just a few years, home prices in that area skyrocketed. Those $250,000 homes were selling for $400,000. Rents had risen slowly. Thus, the cost of owning such a home amounted to more that $2,400 per month, although the cost of renting remained at $1,300. Thus, in 1990, homeowners in this area were paying a substantial premium to own (versus renting) a comparable home.

This week's Weekly Tip Newsletter is from "Home Buying for Dummies" by Eric Tyson and Ray Brown, reprinted by kind permission of San Francisco columnist Ray Brown, a frequent guest on our show.

Apprvd.BBDP

What better day to consider saving income taxes on your 2005 return than December 9, 2005? Tomorrow marks the day your first installment of your property taxes is due. It also makes for a good day to make sure you leave no stone unturned when it comes to saving income taxes for 2005.

Here's a quick list of a few things you might still be able to do:

1. Call your tax preparer to check for any last minute strategies he or she may have for you.

2. Do any tax-loss selling you can to offset any potential capital gains or to take advantage of the $3,000 of ordinary income the IRS allows annually, or to potentially benefit from both.

3. Pay any additional California State income tax you may owe before the New Year. (In most cases, it will apply to your 2005 federal tax return as a deduction).

4. If you aren't planning on paying the second installment of your property taxes tomorrow, you might consider paying them by December 31st to get the deduction on this year's return, instead of waiting to use it on your 2006 return. After all, you'll be paying it in on April 10, 2006 anyway. Why not get the deduction now instead of waiting a year?

5. If you are self-employed, I suggest making any business expenses that you can before year-end. Anything you might be buying for your business in the first three or so months of the new year might be something you consider buying before December 31.

6. Some self-employed people have legal means to push income into the following year if that makes more sense from a planning perspective.

7. Keogh plans have to be established prior to year-end. (This includes profit-sharing plans, defined benefit plans, and money purchase plans). Keep in mind that they don't have to be funded or invested by year end.

8. Charitable contributions need to be made prior to year end.

9. If you know you will have a higher income and tax bracket in 2006, you may want to push some tax savings vehicles into next year.

Consider how your actions will affect your taxes for 2005 versus 2006. Sometimes it's best to take or use tax benefits in the upcoming year.

You've got three weeks left; make the most of it. Remember to consult with the appropriate experts before you act on these ideas.

Most of all, I wish you and your family a wonderful holiday season.


Apprvd.BBDP

Due to client request we are running a three part series on identity theft from May 2002.

What are some of the demographics of victims of identity theft? According to the Federal Trade Commission Identity Theft Hotline and Data Clearinghouse, most identity theft happens to people between the ages of 19 - 60. The average age of a complaint was a 41 year old. In fact, those between the ages of 19 - 50 years of age represent approximately 76.8% of all identity theft.

Logically, those age groups represent the majority of the working population of our country. They also suggest that identity thieves prefer stealing from people who are financially very active with respect to spending, earning power, and investing.

The first thing you can do to protect yourself from identity theft is to be aware of who is most likely to become a victim and be more alert.


Apprvd.BBDP

Due to client request we are running a three part series on identity theft from May 2002.

There are many types of crime associated with identity theft. Here are a few types of identity theft that are, in and of themselves, pretty frightening:

· Credit Card Theft / Fraudulent Credit Card Usage

· Unauthorized Phone, Cell Phone or Utility Service Theft

· Bank Fraud

· Fraudulent Loans

· Government Documents or Benefits Theft

· Using your personal information to gain employment, obtain medical records, evade legal sanctions or criminal records, obtain tax refunds, open or access Internet accounts, declare bankruptcy, lease residences, and purchase or trade in securities


Apprvd.BBDP

Due to client request we are running a three part series on identity theft from May 2002.

Identity theft is where a criminal somehow steals your identity for their financial gain. It's the New Millennium form of crime. Lately, I've seen a lot of press about this, and I feel it's important that people take better care of their personal financial information.

I personally know someone who had their identity stolen. She had to close all of her accounts, get a new Social Security number, obtain new IDs, change her phone numbers, and even move to a new home.

During this short series, I will try to educate you on different types of identity theft and give you a few ideas on how to better protect yourself.

Apprvd.BBDP

During the 1990s, investors trended away from dividend-paying common stocks and mutual funds to more aggressive investments; they were essentially looking for all the return of their investments to come from appreciation in the price of the mutual funds or stocks. Dividends did not play a role with these companies. There was a real risk that they would get nothing from these investments in a flat or down market - not even an income.

If we continue to see lower rates of appreciation in the financial markets over the next few years than we did during the 1990s, dividends will continue to play an important role in total return (appreciation and dividends combined), as part of a balanced, diversified portfolio. Based on an historical perspective, common stocks have averaged a total return of roughly ten percent per year. Of that total return, dividends have always represented a substantial part.

A couple of years ago, the government changed the tax laws in a way that gives favorable tax treatment to many dividend-paying companies. Under that new law, dividends (or income) paid by these companies are being taxed at either 10% or 15% Federally, as opposed to 15%, 28%, or higher; this allows the shareholder to be paid an income at reduced tax rates, along with the appreciation potential you get with owning stocks or common stock mutual funds.

As a result of all of the above, I have repositioned many clients' portfolios to make sure that they have what (I think) is an appropriate balance for the times we are in, to take advantage of the new tax laws, and because we're all getting just a little bit older every day.


Apprvd.BBDP

In a recent Los Angeles Times article, General Electric was quoted as saying that their global business grew 16% in the past quarter. In addition, they said that their profit was set to grow 10%-15% in the next year. They state that global growth provides as solid basis for these expectations.

As many of you know, I've been an advocate of global growth for 20 years. There are several primary reasons for my support of global investing.

1. You can truly diversify your holdings when you are a global investor.

2. There are so many great companies worldwide where you can invest your money.

3. There is tremendous growth worldwide as the emerging markets slowly plod towards becoming mature economies.

4. If there are problems in the United States, there may be other areas of the world where things are economically going well.

While we never know what's going to happen in the world or in the financial markets, we do know there is a tremendous amount of economic activity worldwide and to participate in it should bear fruit in the years to come.

If you have any questions about this or any other investment ideas, please give a call.

Apprvd.BBDP

If your credit report contains errors, the report may be incomplete or contain information about someone else. This typically happens because:

• You applied for credit under slightly different names (Robert Jones, Bob Jones, and so on).
  
  
• Someone made a clerical error in reading or entering name or address information from a handwritten application.
  
  
• Someone gave an inaccurate Social Security number, or the lender misread the number.
  
  
• Loan or credit card payments were inadvertently applied to the wrong account.
  

If you find an error, the credit reporting agency must investigate and respond to you within 30 days. If you're in the process of applying for a loan, immediately notify your lender of any incorrect information in your report.

This week's tip is an excerpt from "Mortgages For Dummies" by Ray Brown.

Apprvd.BBDPB

Exotic loans are a term we are reading about a great deal these days. They are loans that people are taking out on their real estate for three primary reasons:

1. They can't qualify for a traditional loan and are trying to find a way to buy real estate now because they believe they will forever be priced out of the market down the road.

2. They are planning to sell the property they are buying soon for big short-term profits. (They are speculating that the price will continue to rise quickly, as it has the past seven years).

3. They are refinancing their home at a very low rate, with plans to sell within a few years.

The most common exotic loans people seem to be using require little-to-no down payment. They also carry very low interest rates for the first one- to five-years (during this time, the loans are accruing interest which is increasing the balance of the loan); after the initial five-years, the interest rates on the loans will increase to market rates or higher.

(If you want to read more about exotic loans, you might reference the front page article in the Los Angeles Times - Business section (Monday, October 10, 2005).

There are tremendous risks here that could really hurt both the borrowers and the banks making these types of loans:

What happens when the real estate market slows down and the speculators can't afford to make the increased monthly payments or can't sell the homes? Do they go into foreclosure? (I bet some will default).

What happens to the homeowners if they can't refinance their homes when their payments go up as a result of higher interest rates?

What happens to some of the banks if they have too many of these loans? Will it affect their earnings or the bank itself?

It's difficult to know what will happen with the exotic loans that the banks are making and people are taking out today. You can be sure that the risks that some are taking today will find trouble down the road as interest rates rise and real estate prices lessen their rate of increase.

My advice for today is to use caution at this time - be fiscally prudent.

Apprvd.BBDPB

Regression to the mean is an economic concept used to explain why markets generally end up getting close to their average long-term rates of return when studied over long periods of time.

Let's explore the stock markets in this regard:

Common stocks averaged well over 10% per year during the great Bull Markets of the 1990s. Many experts say that common stocks average about a 10% annual rate of return, with dividends reinvested. During the past nearly six years, we've seen a slowing in the rate of return for common stocks; this, in the bigger picture, brings down the average rate of return for common stocks from 1990 - 2005. On October 1, 1990, the Dow Jones 30 Industrials Average opened at 2,489.36. It closed yesterday, October 6, 2005, at 10,447.37. This is an average annual rate of return of 10.03%. This means that the Down Jones 30 Industrials averaged almost exactly 10% per year during the past 15 years! I would be hard pressed to find a better example of regression to the mean.

This leads me to an interesting question: Will the local real estate market see some form of regression to the mean? We almost all agree that it cannot continue to rise at the incredible rates of appreciation we've seen over the past seven years or so. It seems that everyone I've talked to lately has said that the local real estate markets are slowing; where they go from here is anyone's guess. Either way, I am guessing we will see some regression to the mean in the local real estate market at some point, not too far off from now.

How could we experience regression to the mean in the local real estate markets?

1. We could see a slow down in the market's activity.

2. There could be a drop in prices.

3. Prices could flatten for a period of time, allowing regression to the mean to kick in.

4. There could be a prolonged slowing in rate of appreciation of real estate.

5. Some or all of the above.

It's always important to keep a good perspective on life; this absolutely includes investing. Regression to the mean generally shows its face at some point in any economic cycle. Is this the time it's beginning to show its face?

Apprvd.BBDPB

It's important to understand that investing is not a sprint, it's a marathon. Many investors strive to get "too good to believe" returns without considering what happens when that star investment has just a single bad year in four.

If you make 10% per year for three years in a row, you're average annual rate of return is 10%. What happens to your annualized rate of return when you lose ten percent (-10%) in year four?

Take a look at the following chart to see what happens when you lose money in year four. Note what you'll need to make in year five to get back to an average annualized rate of return of 10% for all five years.

1st Year 10%
2nd Year 10%
3rd Year 10%
4th Year -10%

Annualized rate of return after four years is 4.6%.

The fifth year return needed to get back to 10% per year is 34.4%.

The moral of today's story is to strive for consistant returns keeping the mathematics of loss to a minimum.

Apprvd.BBDPB

Some might find the above headline amusing or even unbelievable. How could China, a communist state, control long-term interest rates in the United States?

It seems there's a reason that long-term interest rates have not risen despite healthy economic growth, rising short-term interest rates, more borrowing by the U.S. government, and high energy and commodity prices. All of these factors should normally increase long-term interest rates. They tend to be inflationary. Higher inflation will generally be slowed by higher interest rates and less money being available to borrow.

Many economists believe that countries like China, who are selling us billions of dollars in goods, are taking that money and reinvesting it back into the United States in our bonds. The billions of dollars that are flowing back into our long-term U.S. Treasury bonds are creating a demand for them which, in turn, increases the value of the bonds. (This is a terrific illustration of the law of supply and demand: when the demand for an item is high, the price goes up; when demand is low, the price declines.)

Countries like China have a direct interest in the United States’ economy doing well, because we are such great customers of theirs. Higher interest rates might slow our level of economic activity which, in turn, could slow their economy as well; therefore, they purchase our bonds to keep rates low and sales up.

The end result could be interpreted as an artificially-low, long-term interest rate that really might need to be higher, in order to keep our inflation in check.

How this story will end remains to be seen; it is surely an interesting one, which could play out over many years to come.

Apprvd.BBDPB

Many investors make mistakes by incorrectly filling out or neglecting to fill out their beneficiary forms for their retirement accounts and/or annuities. Doing so can leave your heirs with some pretty serious problems.

Some of these can problems can include:

1. The family members, charity, or friends not receiving your account, as you would want them to.

2. The rightful heirs having to go to court to receive their inheritance. This can create a huge loss of time and/or potentially large unnecessary legal costs.

3. Additional taxes being paid when not necessary.

4. The distribution of the account over a shorter period of time than you or they had intended.

Do not make the mistake of leaving your beneficiary designation blank or incomplete. Do not simply put "my estate" as a listing. Make a change to a different beneficiary if you still have your divorced spouse listed and you don't wish it to be this way.

Finally, make sure you consult with your financial planner and estate attorney before making these crucial decisions, and then make sure your beneficiary information is kept current.

Apprvd.BBDPB

Many cities along the Gulf Coast of the United States are trying to recover from one of the worst natural disasters in the history of our country. Not even two weeks into this enormous task, it's clear that the scope of the disaster will hit everyone, physically and financially. The tragic loss of life leaves me speechless. The financial losses and costs are running into the tens of billions, which must include state and local entities that have issued municipal bonds in those areas.

We won't know for quite some time the full extend of the damage done to the Gulf Coast; we already know it's extraordinarily extensive. In time, we will find out how the destruction has affected the municipal bonds and bond issuers of these areas, and if the existing bonds will continue to pay interest due and (ultimately) the principal that will be due their investors. Anyone holding a municipal bond fund that might be specific to the Gulf Coast may have a real problem, as their municipal bonds or municipal bond fund could lose some - or all - of their value.

In California, we have the ever-present risk of earthquakes; we've seen earthquakes cause very extensive destruction in various parts of our state over the past four-decades, yet the experts say they are still expecting "the Big One" to hit our state one day.

The easiest way to try not to have these types of problems is to invest in nationally-diversified municipal-bond portfolios, as opposed to single-state portfolios. By investing in a mutual fund portfolio that is nationally diversified, you will not have all your money invested in the bonds of one state; it will be invested in the municipal bonds of issuers all around our country.

When you invest in single-state bonds or single-state bond funds, like California, you generally get double tax-free income (in other words, you don't pay taxes at either the federal or state level). If you invest in a nationally-diversified portfolio, you generally don't pay federal income taxes, but you will pay state income taxes.

Given the real risks of very bad things happening in our lifetimes, like "the Big One" hitting California, it may be worth paying a little state income tax in order to more-broadly diversify your municipal bond portfolio; the end result (in a case like this) is not having as much at risk if a large disaster truly hurts the ability of the bond issuers to pay the income on their debts - or even the principal itself.

The moral of today's story is that there are real benefits to diversification.

Apprvd.BBDPB

In the wake of the catastrophic disaster which Hurricane Katrina has left behind comes a stark reminder that very bad things really can happen to anyone; that's why it's important to make sure you are prepared.

Hurricane Katrina has summoned an immediate call to help from all over our country. People are mobilizing resources of all kinds to help victims of the storm. Non-profit organizations, like the Red Cross or United Way, are helping throughout this difficult time; I have volunteered through the CFP® Board to assist affected families who need financial advice via email.

This tragedy also serves as a reminder to make sure you are prepared for predictable - as well as unpredictable - events that can happen in our lives. I can give you a few things to consider from a financial standpoint that might help you to be better prepared, in case of an emergency:

1. Is your estate plan in order and current?

2. Do you have a durable power of attorney for financial matters?

3. Do you have a durable power of attorney for health matters?

4. Is your homeowner's or renter's insurance policy adequate?

5. Do you have life insurance?

6. Do you have medical insurance?

7. Do you have disability insurance?

8. Do you have long-term care insurance?

9. Do you have earthquake insurance?

10. Do you need and have flood insurance?

11. Is your property kept clear of weeds, etc. to protect it from fire or flooding?

12. Do you have a current inventory of your belongings that is kept outside of your home?

13. Do you have a little cash on-hand to take with you in an emergency?

14. Do you keep half a tank of gas or more in your car at all times in case you need to get out quickly?

This list is likely not complete, and each item does not apply to everyone; however, if you are not up-to-date with the issues that pertain to your life, let this serve as a reminder that you should do it soon.

I wish you all the best. Don't hesitate to call me if you have any questions.

Apprvd.BBDPB

Okay, you may call it your career, or (even better) one of your passions, but, to be honest, most people work to pay the bills. And a home and its accompanying expenses are one of the biggest sources of expenses that people have (hence, one of the reasons we end up working so many decades as adults)!

It stands to reason that the demand for housing and the ability to pay for housing is deeply affected by the abundance and quality of jobs in a community or area. From an investment perspective, an ideal area (where homes appreciate in value at a relatively high rate) has the following characteristics:

Job Growth: So what if an area has hundreds of thousands or millions of jobs if the number of jobs is shrinking? The New York City metropolitan area had millions of jobs, yet experienced declining real estate prices in the late 1980's and early 1990's, due to a deteriorating job base. Job creation is the lifeblood of a healthy local real estate market. Check out the unemployment situation and examine how the jobless rate has changed in recent years. Good signs are a declining unemployment rate and increasing job growth.

Job Diversity: No, we're not talking about political correctness, here. If a community is reliant on a paper manufacturer and an underwear maker for half of its jobs, you should be wary of buying a home there. If these two companies go in the tank, the real estate market will follow. This scenario actually played out in the early 1990's in smaller communities that were badly hurt when large defense manufacturers and military bases lost many employees due to defense cutbacks.

Job Quality: All jobs are not created equal. Which area do you think has faster appreciating real estate prices: an area with more high-paying jobs in growth industries (such as technology), or an area that's producing mostly low-pay, low-skill jobs (such as those jobs found at fast food joints)? As with food and entertainment, quality is just as important (if not more important) as quantity. If most of the jobs in a community come from slow-growing or shrinking employment sectors (such as farms, small retailers, shoe and apparel manufacturers, and government), real estate prices are unlikely to ride quickly in the years ahead. On the other hand, areas with a preponderance of high-growth industries (such as technology) should have a greater chance of experiencing faster price appreciation.

This week's tip is an excerpt from "Home Buying For Dummies" by Ray Brown.

Apprvd.BBDPB

The price of oil is now over $64 per barrel. This is essentially at an all-time high; however, when adjusted for inflation, it is not as high as it was during the Persian Oil Crisis in the early 1970's, when we all had to line up to get gasoline.

What have I been hearing from people, whom I interview on my radio show, or reading or thinking about this?

1. There is a pretty fair amount of speculation going on in the oil markets. People are playing oil like a chip at a casino, moving the price around in the futures markets and making money for themselves, while we all pay for it.

2. The United States has been filling its strategic reserves, causing unusual demands on supplies; when the reserves are filled, we will see reduction in demand and price too.

3. China is using a lot of oil to build out their infrastructure.

4. Oil will drop in price as the summer driving season ends.

5. Higher oil prices are causing more inflation and could hurt the economy.

6. China is doing a good job at creating more alternative energy resources that will keep the price down in the long term.

These are but a few of the things I've taken in over the past few months. One thing is clear: higher oil prices are not a positive for the global economy. Some expect the price of oil to decline and others expect it to rise. (So what else is new? Economists and investors tend to see things diametrically opposed.)

The bottom line is that the global economy seems strong and growing. The Federal Reserve seems to be doing a good job at keeping inflation tamed. While I don't pretend to be able to predict the future, I can say that the price of oil will matter at some point; for now, it doesn't seem to have meaningfully hurt the economy (though one day it could, if it keeps rising).

Apprvd.BBDPB

Are you disinterested in having telephone solicitations made to your home phone? I bet you're even less interested in having solicitations made to your cell phone.

I've heard that cell phone numbers will be in play for telephone solicitors in the not too distant future. Imagine having someone uninvited calling you trying to sell you something you're not inquiring about. Add to that the fact that they are burning up your minutes. It's a losing proposition for many of us.

Here's what you can do to help prevent these unwanted and uninvited calls:

1. Go online to www.donotcall.gov.

2. Log into "Register a Phone number"

3. Complete the process when they send you a link to activate your number.

They allowed me to register three telephone numbers in the National Do Not Call Registry. I entered my cell phone, my wife's cell phone, and our home phone. Doing so can save you time, money, and hassles.

Apprvd.BBDPB

Very shortly the U.S. government will start selling thirty year Treasury bonds again. If this is news to you, then you may be surprised to learn that they stopped selling them during the Clinton Administration years ago.

Why would the U.S. government want to start selling the thirty year Treasury bond again? And, why should this be good?

The Treasury Department is selling the bonds again because long term interest rates are at historic lows. Refinancing any debt at low rates is considered a good strategy.

It's good because the United States owes a lot of money and to have it at low rates means less financial pressure on the government and tax payers in the decades ahead. With the Baby Boom generation getting close to retirement it's likely our government will have more need to borrow. Doing so at low rates is a good choice if you have to make one.

Is now a good time to buy the new thirty year government bond?

It's always best to buy long term bonds when interest rates are peaking or about to decline. This means their value should rise. It's always riskier to buy bonds with interest rates rising. They are more likely to lose value under that scenario. I urge you to be careful about buying thirty year bonds when it looks like interest rates are going to rise.

Apprvd.BBDPB

Here's a useful idea to add to your cellular phone address book. This was thought of by a paramedic who found that, when they went to the scenes of accidents, there were always mobile phones but they didn't know which numbers to call. He thought it would be great if there was a nationally recognized name to file a "next of kin" under.

Following the recent disaster in London, East Anglian Ambulance Service has launched a national "In Case of Emergency (ICE)" campaign with the support of an English war hero, Simon Weston. The idea is that you store the word "ICE" in your mobile phone address book and, under "ICE", you would enter the number of the person you would want to be contacted "In Case of Emergency (ICE)". For more than one contact, enter the name and contact information under "ICE1," "ICE2," "ICE3," etc.

In an emergency situation, ambulance or hospital staff would quickly be able to find out who your next of kin are and would know how to contact them. It's so simple that everyone can do it. I suggest you make it a part of your emergency planning and tell your next of kin and friends about it as well. It really could save your life - or put a loved one's mind at rest.

Apprvd.BBDPB

Over the many years that I have been a Certified Financial Planner™, I have seen countless, remarkable to rather-regular things in this business.

One of the most common things that people do or think about is saving taxes. I am all for saving taxes; however, saving taxes should never take the place of making sound economic decisions.

Many people made investments in the early-to-mid 1980's, with very little regard for the true value or economic worth of the investments, because they got big tax benefits. The problem is that the investments lost much of their value when the federal government changed the tax laws; futhermore, as a result of the changes in the tax laws, people ended up paying too much for the investments going in.

In my opinion, it's almost never a good idea to make an investment decision based upon taxes first; once you understand if you are making a good investment decision, it's always a good idea to consider tax strategy next.

Apprvd.BBDPB

One of the great secrets to success in real estate is leverage. What do I mean when I talk about leverage? This is when you buy a piece of property as an investment, using a loan to finance the purchase. How does leverage make you more successful in a real estate investment?

Let's say you pay $500,000 for a piece of property. You use $100,000 as a down payment. Then, you borrow the balance or $400,000 to complete the purchase. Your amount of debt is four to one, or twenty percent (20%) your money and eighty percent (80%) the bank's money. If your property appreciates six percent (6%), it gains $30,000 in value ($30,000 is six percent of $500,000). It also represents 30% on your $100,000 down payment. This is how people can make lots of money on real estate in good times. They use very low down payments and lots of debt.

There are very real risks to doing this. Here are a few things that can happen when you have debt on investment real estate:

1. Lots of debt means a heavy payment. There is always the potential to not have enough income to cover it. Even with a tenant, you could not have enough income to cover your payments. This is called negative cash flow. You end up investing more in the property which, in turn, reduces your overall investment results.

2. Higher leverage or debt could be devastating if the tenant moves out and you have no income. This is also going to lead to negative cash flow and the same result.

3. If the real estate market drops, you could end up with no equity in the property or worse.

4. If you can't handle the payments, you could even lose the property (like many people did in the early 1990's).

One of the great ways to make money in real estate is through the appropriate use of debt on investment property. As the markets rise higher and higher, it becomes more difficult to make debt work in your favor. Today, you might need to use a 35% to 50% down payment to make the property just break even; we're not even talking about getting an actual income from your investment. This type of investment structure can be more speculative, which increases your overall investment risks; furthermore, the less leverage you use in a real estate transaction, the lower the potential return on investment.

Given that it's nearly impossible to find a good deal in San Luis Obispo County right now that makes true economic sense, I urge you to tread carefully when investing in real estate. No good thing lasts forever...just keep the late 1990's stock market as a reminder.

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Did you know that rental car agencies make a pretty fair profit on the money they charge you for their insurance in case you are in an accident with their car?

With summer vacations here, many of us will end up renting cars while we're away on a trip.

Before you go on vacation, make sure to ask your auto insurance agent if you would be covered by your current policy, should you damage a rented vehicle. Even if you are covered by your present automobile policy, make sure you understand the limits of your policy and if you would have any financial liability should you damage the vehicle you rent.

If your agent says you're in good shape and don't need the rental car agency's coverage, you should be free to sign the rental agency's waiver of coverage. This can save you $15 per day or more; however, do not sign the waiver before you know if your current policy adequately protects you. If you are not covered by your present insurance policy, waiving the rental agency's coverage for the rented car could be a very expensive way to save a few dollars a day.

One other fact to note, when renting a car, relates to which country you are traveling in while on vacation. If you are not going to be in the United States, I strongly suggest you check with your agent about the coverage your current insurance policies provide while driving in a foreign country, as well as checking with the automobile rental agency on their coverage and requirements. When traveling abroad, renting and driving cars can be an entirely different thing. You may find that your policy only covers you in certain countries. You may also find that there are different legal requirements for drivers from one country to the next. It's best to know all of this ahead of time.

Good luck and bon voyage!

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Ever wonder what happens to your overall return when your investments have a losing year? It's really quite remarkable to see what happens when you make money three years in a row and lose money the fourth year.

Here's an example:

• An investment that gained 10% for three straight years would have an average annual total return of 10%.
• If you were to lose ten percent in the fourth year, your average annual total return would drop to 4.6%
• In order to get back to an average annual rate of return of 10% per year, you'd need to earn 34.4% in the fifth year. This is well above how the financial markets have normally performed. In fact, a 34.4% return in a single year rarely ever occurs.

The moral of this story is to look for investments which are steady performers as opposed to investments which can be very hot and very cold. Consistency is important in the investment world far more than you would imagine. Remember the story of the tortoise and the hare next time you make an investment.

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If you own a home, a reverse mortgage allows you to tap into its equity (the difference between the market value of your home less the mortgage debt owed on it) to supplement your retirement income - while you still live in your home. Because these mortgages are so different from what most people expect, it generally takes a while for the most basic information to sink in. Even experienced financial professionals are often surprised to learn how these loans really work, how different their costs and benefits can be, and what you have to look out for.

A reverse mortgage is a loan against your home that you don't have to repay as long s you live there. In a regular or so-called forward mortgage, your monthly loan repayments make your debt go down over time until you've paid it all off. Meanwhile, your equity is rising as you repay your mortgage and as your property value appreciates.

With a reverse mortgage, conversely, the lender sends you money, and your debt grows larger and larger as you keep getting cash advances, make no repayment and interest is added to the loan balance. That's why reverse mortgages are called rising debt, falling equity loans. As your debt grows larger, your equity generally gets smaller.

A reverse mortgage merits your consideration if it fits your circumstances. Reverse mortgages may allow you to cost-effectively tap you home's equity and enhance your retirement income. If you have bills to pay, want to buy some new carpeting, need to paint your home, or simply feel like eating out and traveling more, a good reverse mortgage may be your salvation.

This week's tip is an excerpt from "Mortgages For Dummies" by Ray Brown.

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When common stocks were soaring at the end of the 1990s and in early 2000 I cautioned people not to be overly optimistic about their potential returns and getting rich quick. However, in the midst of a great market like the stock market had or the real estate market is having, it's important to keep perspective and that's very tough to do. Keeping perspective has been a mantra of mine as long as I have been in the financial planning world.

You might ask "where is he going with this?"

It seems to me that people are willing to pay almost any price for a piece of real estate these days. (Many investors were the same way about some stocks, particularly tech and dot.com stocks during the bubble.) I see little in the way of fundamentals involved in their purchases. That can work great, as it did with common stocks a few years ago, as long as the market is going in one direction, up. What is the likely result of this type of investing? I believe some people are going to get hurt when the real estate market begins to change direction or sees slowing in its rate of appreciation.

I was recently sent a newsletter by a local mortgage broker referring to an Office of Federal Housing Enterprise Oversight study. It showed how different housing markets had done between 1980 and 2004. Over that 24 year period, the California housing market has seen an increase of 426.1%. Extrapolating this information, you'd find that a house costing $100,000 in 1980 now costs $426,100. While this sounds terrific, you might want to note that this is a compounded rate of return of 6.23%. This is hardly the rates of appreciation we're seeing today of two and three times 6.23%, or more.

Just like the stock market, I can almost guarantee that the rate of return we are getting on real estate is going regress to the mean at some point. No market goes up or down forever. It's important to keep that in mind and in your perspective as you make important investment decisions.

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You would be amazed at how many well-educated people the rest of the world is turning out. While I can't verify this number, I once read that China was graduating 450,000 new engineers per year. That's an amazing number. Most of them work for less money than engineers in the United States and other developed countries of the world. What does this kind of thing mean to the people of the United States?

As the world grows, bringing with it amazing opportunity, competition for jobs grows. In order for the United States to compete, our children will have to be at least as well educated as children in other countries around the world, since our labor costs are higher. Why hire an engineer from the United States when you can hire one from India or China for less?

The globalization of the world's economies should better the standard of living for most everyone on the planet, eventually. This will make for a giant economic engine that will provide opportunity for billions of people and tens of thousands of companies. Higher standards of living should mean less strife and poverty. One benefit could be less war, as people are more satisfied with what they've got in life.

Anyway you look at it, we're seeing a long process of global evolution that will challenge the brightest of us to compete. As before, we need to be mindful of doing the best job we can while educating our children, so they will be able to succeed in this ever growing global economy.

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All my clients need to know how they spend their money on a daily, monthly and yearly basis - my family included. I've developed a spreadsheet that we use in the Cryden household to keep track of how we spend money. There are many reasons to do this, which can include:

1. Better management of cash flow to reduce overspending.

2. Finding ways to save more money for retirement, a special trip, a project or any other special need.

3. Knowing today's current family expenses may help to determine how those expenses might change upon retirement. (The spreadsheet becomes a basis for complete retirement planning).

I'd be happy to email a free copy of my Personal Expenses Spreadsheet to you; all you need to do is make a request. It's easy to use and will take the guesswork out of expense planning. I will include a guideline to help with its usage; I am also available to answer any questions you may have about the spreadsheet or to help with your financial needs.

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Indexes don't always work. Some people make the case that investing in an index fund is all you need to do. Here are a few thoughts that argue against such vague generalities.

In a flat market, an index will stay flat. In other words, if you are buying the market and it doesn't go anywhere, it's not likely you'll be making any money.

In a down market, indexes are vulnerable to the drop of the market. Indexes are what's called "fully-invested," which means that they have nearly every penny in the fund invested in the market. They are not allowed to hold a greater percentage of cash, as that's not what the index is made up of. An index is always fully invested; hence, when the market drops, so does the index.

Even in some "up"-markets, stock market indexes don't always work. Indexes are like a chef following a recipe: they invest in exactly what makes up the index and, if their individual holdings are not doing well (as in companies or the market is not interested in them), the index may under perform the market. Their mangers have no way to adjust this or buy the stocks they prefer, as they are stuck with the formula that makes up a particular index.

I believe we are in a period where a manager's ability to find great companies at the right price is very important. I do not see this as a period where the broad market does well automatically, which would be a better period for an index. I believe this is the period where great money managers earn their keep. Do you have great money management?

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No one ever really knows what the financial world will bring us. Simply put, there are too many factors which have an affect on the investment world on a daily basis; however, it's rare that watching any investment on a daily basis will carry any long-term meaning.

So what does matter, if no one knows?

" Solid fundamental money management can take you a long way. This applies to any investment be it securities or real estate.

" Taking that a step further, you can make the case that solid investment fundamentals make a big difference in the long term. As a friend of mine says, if you live on the cutting edge, you can bleed.

" Investment choice or location can make or break you. If you choose the right house in the wrong location, you might not make anything. If you buy the right company or stock at the wrong price, you could be up the same creek.

" Profit brings growth. When it comes to any investment, you want profits. Growing profits or income should equate to higher value. This usually happens over long periods of time (to better define "time," it's not days, weeks or even months; it's years).

Too many people forgot about these basic, long-term investment fundamentals during the 1990's by purchasing common stocks or mutual funds that were hot, had no income or profit, or were not managed fundamentally, looking for short term profit.

Many people today are buying real estate at very high prices while not looking at the fundamentals. It's fair to say that a great number of these properties have negative cash flow or no profit, which means that they are requiring additional investments on a monthly basis just to pay the bills. In my opinion, they are being purchased under the assumption that there will be a person who will buy them for more. With common stocks and real estate, the same holds true: it's the long-term that matters, but it's also the basics that matter. If you don't apply them, you take a higher chance of losing money. You almost certainly are taking on more risk.

When no one knows, I say: "Stick to the basics."

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Does this sound like a score of an Olympic event? It sure doesn't sound like it could be the rate of economic growth for the Chinese economy, does it?

That's exactly what we have. The Chinese economy most recently showed an annual rate of economic growth of 9.5%. This rate of growth is roughly two- to three-times that of the United States and other mature economies. It's truly an amazing number.

Think about it for a minute: This is a country with 1.2 billion people - roughly twenty percent (20%) of the world's population. It's staggering to think of the resources they are using to build their economy at this rate. This is one of the real reasons for the cost of oil, and the doubling of the price of steel and other natural resources, in the last 18 months or so.

What does this mean to us? Well, it means that we will likely see increased costs of natural resources; in addition, we'll eventually see China as the world's largest economy. The world will probably face increased challenges in dealing with pollution, as the transition of this emerging economy occurs. We'll also see millions of Chinese with better standards of living, which (many might argue) is not a bad thing.

It's likely that all of this will not play out perfectly for the world; however, we should see economic opportunity for thousands of companies to profit, and millions of people to make a better living, from helping to grow China's economy. This should make for a good time to be invested in the world's financial markets.

We are living in an extraordinary time in the growth of the world's economy. I suggest you watch what's going on, participate how you can, and learn from this amazing period.

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Are you thinking of getting into a smaller home? Many people like to at least consider selling the larger home they live in to simplify life. There are many reasons to do this.

Some people sell so they can reduce the amount of yard work and maintenance they have to do. Others sell because they don't need a large house for just one or two people. It's not uncommon for people to sell their larger family home to reduce the expenses of owning a home. Finally some people sell their homes because they wish to free up the equity in their home for investment and a higher income.

If any of these reasons ring a bell with you, I suggest you consider selling while the real estate markets are still hot and mortgage rates are still low. Low mortgage rates allow for buyers to pay more for a home since the cost to borrow is down. Typically, spring and summer are the best times of the year for the real estate markets. With children out of school, families are more likely to move.

This may be a great time to consider making a move with your home. If you'd like to talk about it, give me a call.


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There was a time, from 1995 to 1998, when the S&P 500 Index could seemingly do nothing wrong. It was the darling in every investor's eye.

An index fund should typically do well in a broad, rising market, which is the kind of market we had in the 1990’s. Most stocks went up in that environment. Since an index fund is fully invested - roughly 95% of the money to be invested is in the market - it does well in a strong, broad, “up” market. Generally, it does not do as well in a falling market, as it is fully invested; in other words, there is no cash on the sidelines to counteract falling prices. One other thing to keep in mind is that an index fund may not do as well in a market that isn't broadly rising, as it isn't selective about what it owns and what it pays to own the stocks in the index.

There are good, well-managed mutual funds that have beaten the markets and indexes over long periods of time. They can have several advantages that the indexes don't offer. Here are a few:

1. They are not always fully invested, which means that they may hold larger portions of cash when they can't find a stock they wish to buy at a price they like; the extra cash can be a nice cushion in a tough down market.

2. They are not given a recipe of stocks they have to buy so they can say they are "the index"; further, they are not told to buy them at any price simply because the money needs to be invested.

3. They have a much larger range of companies to choose from than an index fund. The S&P 500 Index is 500 stocks, period. A blue chip stock fund may have hundreds more companies to choose from and will generally be very careful about which it owns. Most blue chip stock funds have 100 or fewer holdings, not 500.

We seem to be in a market that requires strong research and selective money management. I don't believe that we are in the same environment that we saw in the 1990s, nor do I believe we'll get to that point anytime soon. While I could easily be wrong, I have always felt that investing is about buying great companies at good prices and participating in their growth as owners.

When selecting an investment, it's important to understand how it's managed and what the environment is like at that time. Don't hesitate to call if you'd like to discuss these issues.

Disclaimer:

As with any investments, there is no guarantee of results. It's important to choose carefully and read any prospectuses before investing.


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Doing some summer travel planning? Want to compare airline flight costs using only one website?

While interviewing Pauline Frommer of "Arthur Frommer's Budget Travel" last year, she gave me a terrific tip for comparing airfares on a website called Cheapflights.com.

Pauline's father, Arthur Frommer, is the well-known travel writer who has penned the "Europe on $5 a Day" books.

Check this site out:

Click here: Cheapflights.com - Compare cheap airline tickets

Travel well!


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Did you know that your life insurance policy is generally a part of your estate when you die? It could actually end up pushing some people's estate into a position of becoming a taxable estate.

Most people don't know that, when they die, the proceeds from their life insurance policies can end up as part of their estate. By taking additional planning steps, it's possible to eliminate this issue.

One way to try to keep your life insurance policy out of your estate is to establish what's called an "irrevocable life insurance trust," which allows your policy to benefit you but not actually be part of your estate.

Putting an irrevocable life insurance trust together is a complex process, requiring the services of an estate planning attorney; it should be done with proper planning and is not for everyone, but, for those with large estates, or estates that could be made large as a result of life insurance coverage, it is potentially a viable option.

Please consult with me before you begin the process of establishing an irrevocable life insurance trust with your estate planning attorney.


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This is Part Two in a two-part series about preparing your home for sale.

Curb appeal draws buyers into your house, but appealing interiors make the sale.

You don't have to spend tens of thousands of dollars on your house prior to putting up the "For Sale" sign. On the contrary, the little things you do generally give the biggest increase in value. Concentrate on the three Cs - clean up, clear out, and cosmetic improvements.

Clean, scrub, and polish everything: Your appliances, the walls, floors, bathtubs, showers, and sinks should be cleaned until they sparkle. Buyers will notice strong smells as soon as they walk through your front door, so eliminate smoke, mildew, and pet odors. Cleaning your drapes and carpets is a great place to start, but be thorough and clean your cat's litter box, remove ashes from the fireplace, and eliminate any signs of cigarette smoke from inside your house. Fix drippy faucets, and if your sinks or bathtubs drain slowly, unclog them. Buyers consider leaky faucets and clogged drains a sign of poor maintenance and, more often than not, they're right!

Get rid of clutter: Keep clutter off kitchen counters and dirty dishes out of the sink. Eliminating clutter and excess furniture makes rooms appear larger. Closet space sells houses, so create additional space in them by weeding out all those old clothes you never wear anymore. Like it or not, serious buyers will inspect your closets and open built-in drawers. Be sure they're neat and roomy.

Ironically, the clutter that reduces your house's value is far from worthless. On the contrary, your junk is someone else's treasure. Make a donation to your favorite charity and earn a tax deduction (be sure to ask for a donation receipt). Have a garage sale. Who knows? You may make enough from a garage sale to pay for your move!

Make cosmetic improvements: Painting isn't expensive if you do it yourself, but be careful when selecting interior colors. Avoid cherry red, canary yellow, cobalt blue, emerald green and other bold colors with strong visual impact. You may love the effect, but you aren't the buyer. Just because we recommend using neutral colors doesn't mean that you should turn your home into a bland boring blob of mush. Give it some spice by using area rugs, table cloths, napkins, sofa cushions, window curtains or drapes, bedspreads and quilts, bath and hand towels, shower curtains and so on - to create temporary color accents in rooms. Unlike the more permanent improvements, you can take these items with you for use in your next home.

Selling your house will be time consuming and could cost some money. However, the value gained through utilizing these key points could be the difference between your dream home and simply your next home. Stick to these and improvements and you'll be sure to get top-dollar for your house.

This week's tip is an excerpt from "House Selling For Dummies" by Ray Brown.

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This is Part One of a two part series about preparing your home for sale.

Getting your house ready to put on the market takes time. Exposing your property to the market before it looks its best gives buyers and agents who tour the house a bad initial impression. It's nearly impossible to get them back for a second look after you correct the showing flaws. After you read prepare your property for marketing.

Most buyers make snap judgments about your house. Their first impressions, good or bad, are generally lasting impressions. Buyers begin forming their opinion of your house long before they go inside. Curb appeal, the external attractiveness of your property when viewed from the street, is critically important.

No matter how magnificent your house is on the inside, many buyers will drive by your house without stopping if the property lacks curb appeal. Your house's exterior and landscaping will either attract buyers or repulse them. Here are some tried-and-true ways to enhance your house's curb appeal:

Painting: Painting your house's exterior before you put it on the market gives the biggest bang for your fix-up buck - if you use colors that conform to your neighborhood's decorating norm.

Lawn: A freshly mowed, neatly trimmed lawn gives your house a well maintained appearance.

Sidewalks: Sweep your sidewalks daily.

Shrubbery: Remove or replace any dead or dying trees, hedges, or shrubs and prune anything that looks scraggly or overgrown.

Flowers: Filling flower beds with seasonal flowers is an inexpensive way to add color and charm to property.

Repairs: Be sure that all gutters and down-spouts are in place and clean. Replace missing roof shingles and broken or cracked windows. Repair cracks in your driveway and remove large oil stains. Replace repair broken stairs, torn window screens, broken or missing fence slats, and defective doorknobs. Make sure that your front and back doors, garage doors, and all windows open easily. Check exterior lights to make sure they're working properly.

Windows: Keep you windows spotless inside and out throughout the marketing period.

Eliminate or hide Clutter: Clear everything you don't nee out of the garage.

If just reading this list makes you tired, you're not alone. You probably lack both the time and the desire to do all of this prep work yourself. If you can afford it, make your life easier by hiring competent folks to help you with these chores. Your real estate agent, if you're working with one, can probably refer you to people who specialize in this kind of work.

This week's tip is an excerpt from "House Selling For Dummies" by Ray Brown.

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(Today's tip is out to you early as we are closed on Friday in observance of Good Friday.)

Yesterday, the Federal Reserve raised its Fed Funds rate for a seventh time in this tightening cycle. As I written before, this is no surprise. I believe we should expect continued increases in short interest rates during the balance of this year. The Fed Funds rate is now 2.75%. This is still quite low. However, it is nowhere near as low is it was a couple years ago. That low was one percent (1%).

The reason for the continued interest rate increases is a growing economy displaying increasing inflationary pressures. There are several areas of activity which are putting this inflationary pressure on the economy. They include; increased energy prices and, upward product and services pricing pressure. The Federal Reserve wants to keep them under control.

The funny thing is that we are also seeing continued growth in corporate profits which is generally a good thing for common stocks.

It seems the financial markets don't know which way to go right now. We've had a modest adjustment in prices in the financial markets. This adjustment of approximately five percent (5%) may leave a nice buying opportunity. I've always said to long term investors, when the market drops five percent; add some money to your accounts. When it drops another five percent, add some more. (Long term investors can be people close to retirement who may draw on their accounts soon but keep them invested for years to come.)

There's a funny little tax called the "Alternative Minimum Tax" (or AMT) which exists in parallel to the US taxation system at both the state and federal level. Although it has traditionally been applied to the wealthy, it is a secondary way of calculating the taxes you owe.

What happens is that your income taxes are calculated the regular way and then are recalculated based upon AMT and, if the AMT calculation comes up showing that you owe more taxes, it's that calculation which you end up paying as your annual contribution to both the State of California and the U.S. Government's coffers.

Two of the items that trigger the AMT are capital gains and certain types of municipal bond income. More people are paying AMT today because the income brackets used to calculate it have not been adjusted based upon inflation; therefore, as a person's incomes rises, so does the AMT tax revenue gained by the government. With more people today selling assets with capital gains, they are becoming more subject to the AMT.

The lesson here is to do your tax planning for 2005 early - don't wait until this time next year. When you get your 2004 return, think about your 2005 return and start anticipating how AMT might affect you. Ask your tax preparer now about the Alternative Minimum Tax - and how to avoid it.

I ran a Tip of the Week about a year ago addressing homeowner's insurance and the need to review your coverage with the cost of building continuing to rise. Well, nothing has changed in this respect. The costs to build, remodel, or repair keeps going up. Therefore, I feel it is important to revisit last year's tip. Read the following and you'll know what I mean.

I'm meeting with my property and casualty insurance agent today to review and discuss my current coverage. The reason for the meeting is primarily because the cost to build, or rebuild, a home today is so much higher than it was when I first moved here in 1977.

Back in 1977, the cost to build an average quality home was usually around $60 per square-foot, and the cost to build a custom home was around $100 per square-foot; today, you might spend more than $100 per square-foot to build an average quality home, while custom homes can run upwards of $200 to $250 per square-foot.

Many homeowners' property casualty insurance coverage has not been changed in years, which may leave them without enough coverage to pay any claim needed to rebuild part or all of their home or investment property.

A 2,000 square-foot custom home might cost $500,000 just to rebuild; the same home, using average construction, might cost $200,000 to rebuild. If your coverage is not adequate to meet these potential costs, the fees might end up coming out of your pocket.

I suggest that you call you me or your property casualty insurance agent today to set up an appointment to review your insurance coverage. It could be the most valuable sixty minutes you've spent in a while.

As I awoke to today's economic news, the financial markets were reacting well to a better than expected employment report. There were over 262,000 new non-farm related jobs created in the economy during February 2005.

In addition to the better than expected employment gain, the economy displayed continuing low inflation. This is generally a good combination for the financial markets - particularly common stocks.

Certainly, there can be no guarantees when it comes to the economy and investing. That would be the wrong approach to take when considering how to invest. It can easily lead to unrealistic investor expectations.

However, we should be able to look at today's trends as being consistent with those many of the investment people I've interviewed over the past couple years. Their take on things is that we are in a low inflation, moderate growth rate economic environment. Some say we are in a period that is similar to that of the early 1960s. That kind of environment was good for the financial markets then. Let's hope they continue to be right.

Do you have any expensive jewelry in the house? Many people have all kinds of jewelry in their home that came into their possession as a gift, a purchase or an inheritance. The value of a piece of jewelry may surprise you. Does your insurance policy cover your jewelry collection or gold watch?

You may be surprised at the limitations of your homeowner's policy when it comes to the coverage of your jewelry and watches. Many insurance policies have very low coverage levels on the jewelry you may own. It's oftentimes very important to review this portion of your policy if you have a piece of jewelry or a watch that exceeds even $1,000 in value. There can also be limits on the total amount of jewelry a policy will cover for a given household.

The best solutions to this are pretty simple:

1. Call your agent to ask the coverage and limitations on your policy. (Make sure you understand this so there are no surprises, should you have a fire or burglary).

2. You may need to purchase a special rider for the jewelry or watch(es) that you own which will insure these valuable items properly.

3. Once you do this, you'll want to make sure the coverage is adequate, as some of these pieces could increase in value over the years; if so, you will periodically need to increase your coverage amounts.

Though these insurance issues are some of the most basic, many people overlook the risks they may take as a result of this oversight. I strongly suggest you give this consideration.

“The problem lies not in the science but in the cost.”

Who wrote that famous quote? I did.

All kidding aside, the problems we are going to face with Social Security will pale compared to those that we will face trying to fund Medicare when the Baby Boomers begin retiring in 2011. That’s when the first of the Boomers (born in 1946) will turn 65, the age where many Americans today begin collecting Social Security and Medicare benefits from Uncle Sam.

My suggestion to all of you is to be prepared to pay for your own retirement. Be prepared to potentially not get as much benefit from both Social Security and Medicare. If you take this stance, you are likely to come out ahead. (I am personally viewing the deposits I make to these entitlement programs as an additional tax).

I hope I am wrong, but it seems to me that the writing is on the wall: our country will be paying benefits to the Baby Boomers until roughly 2055. That’s a lot of years to go.

One way you can take care of yourself is to contribute the maximum amount available to your retirement plan every year. As of today, you can contribute to your IRAs for both 2004 and 2005. I strongly suggest you do just that, if you haven't done so yet.

Years ago, I interviewed a woman on my radio show who was a writer for the Morningstar Mutual Fund ratings service. She made a comment to me that I found very interesting: she said that the costs to buy and sell stocks and bonds inside a mutual fund were not a part of the mutual fund's annual operating expenses. (I suggest you review my Weekly Tip from October 29, 2004, for a more complete discussion on annual operating expenses.)

This means that every mutual fund in existence has higher annual operating expenses than shown in their prospectuses and annual reports because they are not required to count trading costs among their expenses.

How can you tell how much these extra expenses total? That's a very good question. For large mutual funds, it's likely a $1million question. One clue I look to when evaluating a mutual fund is the annual turnover ratio. The higher the annual turnover ratio of a mutual fund the higher the costs for the shareholders to trade the stocks and bonds within the fund. (I suggest you review my Weekly Tip from March 4, 2004, for a more complete discussion on annual turnover ratios.)

You all know that my favorite mutual fund group is the American Funds. Two of the reasons for my using them so much are their very low annual operating expenses and their equally low annual turnover ratios. When you have lower fees and the turnover within the funds are low, you end up with savings in trading costs, as well as lower short-term capital gains taxes.

There are funds with turnover ratios of 80% to as high as 700% in a single year. These are the kinds of numbers that generate higher trading costs to shareholders, as well as higher short-term capital gains taxes; in my opinion, they are also more speculative in nature. I suggest you review the turnover ratios in the mutual funds you're considering investing your hard-earned money in before you send in your checks.

A "Certificate of Depreciation" is generally viewed as industry jargon; in the real world, it is called a "Certificate of Deposit" (or a CD).

You might ask if I am just making fun of this inanimate investment vehicle; well, I am in one sense, but in another sense of the words, I am not.

A CD is a valid vehicle for your money - your short-term money. Another valid use for CDs are for people who are too uncomfortable with their money being invested in longer term vehicles with more risk, even moderately more risk.

I define "short-term money" as funds that might be used within the next couple of years.

When I call a CD a "Certificate of Depreciation," I am saying that it has a pretty fair chance of depreciating in value due to the effects of taxes and inflation. Here's what I mean:

1. Many CDs end up paying interest that is taxable to the account owner. Generally, if you pay taxes on CD interest, you end up with an after-tax return that is lower than inflation; therefore, your account is not keeping up with inflation through earnings.

2. CDs are guaranteed to return your principal through the bank's backing and the FDIC. (As many of you know, the FDIC limits its guarantee to $100,000 per account.) You are not guaranteed any increase in the value of the account; you only get back what you put in, plus interest. Inflation has been a constant for decades in our country; I don't see it going away anytime soon.

If you take these two points, you have a savings vehicle that only returns your principal - which depreciates over time through inflation's effect upon it - and pays interest that generally yields less than the inflation rate after taxes. This is why I call CDs "Certificates of Depreciation."

Want to get your home out of your estate while still living in it? There's a tool called a Qualified Personal Residence Trust (QPRT). If done properly, it's designed to do exactly that.

QPRT's are not for everyone. They are generally for people who have taxable estates. In other words, they will end up paying estate taxes upon their death. You will need an attorney to set it up. It is not a simple or uncomplicated trust. (As they say about sky diving, don't do this without the help of a professional.)

The QPRT allows a person to live in their home for a specified period of time. Once they pass that specified period, they will generally have to either move out of the home or rent the home from the beneficiaries of the trust (more often than not, the beneficiaries are the children of the person who owned the home). At the point that the specified period of time elapses, the estate is no longer in possession of the home.

By renting the home back from your children, you are also passing along assets of the estate to your children without estate taxation; however, the income will be considered taxable in the current year.

Putting a QPRT together requires a good estate planning attorney, accountant, and lots of thought. You should not do it unless you have looked at all the advantages and disadvantages.

Keep in mind that this Tip of the Week is only a very simplified outline of how QPRTs work. For a more complete picture, you should consult the appropriate professionals. I would be happy to give you more details.

In keeping with the tradition of making New Year's Resolutions, I would propose a resolution to review your financial well-being.

Here's a shopping list of things to consider reviewing:

· Have you had your estate plan updated or reviewed in the past five years or so. Perhaps 2005 is the year to do it. The estate tax laws continue to change. You want to make sure your desires after you're gone are properly handled and that you benefit as much as possible from the current estate tax laws. The only way to do so is with an up to date estate plan. Further, after two years of positive returns in the financial markets and a continued strong real estate, your estate may be worth more than you think. It's worth it to make sure your estate plan considered your increased net worth.

· When is the last time you had an accounting of how you spend your money? For most people, control of their cash flow is a primary key to financial success.

· It's time to take a look at your portfolio to see where you stand. I suggest maintaining that long term perspective while doing so. If you haven't been in to see me in more than a year, maybe we should have a review appointment. During 2004, I made more adjustments to clients' portfolio than I have in years. We've all gotten older, this is a good time to get together and potentially readjust your portfolio.

· Have you done a review of all your insurance policies to make sure they still serve you they way they were originally written? Perhaps you need more coverage in some areas and less in others?

· Now is the time to do tax planning. I say it over and over again; however, tax planning is a year-round issue, not just an April 15th issue.

· It's time to review your debts. If they are not paid in full, each one should be reviewed to determine if it's being handled in the best possible way.

· Lastly, it's time to make some short, intermediate, and long-term financial goals that can be worked on during 2005.

Ultimately, it's up to you to be responsible for your financial security. I am here to help and do all that I can; however, the more involved you are in the process, and working towards your financial goals on a consistent basis, the better the results can be. We all need a good financial team to be successful, and I believe that you are a part of it.

Happy New Year! I look forward to seeing you all in 2005.