Driving through Los Angeles the other day, I saw a bumper sticker on a car that read, “My child just got a scholarship to…” and named the University. Only in LA, right? Maybe there are some other cities in the country where one would advertise such a thing on the back of their car, but for those who have visited LA, it’s not exactly a surprise.

The one good thing about seeing this bumper sticker was that it got me thinking about whether or not that scholarship would be tax deductible. So, for those of you cruising around with these sort of bumperstickers, perhaps this brief article will help answer such a questions.

In certain situations, yes. If a scholarship is used to pay for college tuition, fees, books, or required equipment, it’s not taxable. But if the scholarship is used to cover room and board, travel costs, or optional equipment, or if it’s awarded as payment for teaching, research, or some other required service, then it is taxable.

With most scholarships, the recipient can decide how to apply the money. Your first instinct may be to have your child apply it to tuition, fees, or books (making it tax free). But be aware that this may impact your ability to claim the Lifetime Learning or the American Opportunity (formerly the Hope) tax credits. That’s because these credits are based on the amount of tuition and fees you pay, and any tuition and fees paid with a tax-free scholarship can’t be counted when calculating your credit.

This rule has the most impact on your ability to claim the Lifetime Learning credit, worth up to $2,000. Why? This credit is calculated as 20% of the first $10,000 of tuition and fees, so a hefty scholarship applied to these expenses may leave you with less than $10,000 in eligible tuition and fees to count toward the credit. The American Opportunity credit, worth up to $2,500, is calculated differently–100% of the first $2,000 of tuition and fees, plus 25% of the next $2,000 of such expenses. (You can only take one of these credits in a given year for the same student.)

If the scholarship has no restrictions on how it can be applied (and assuming you meet the income limits to take the credits–each credit has different income limits), consider running some numbers to determine your best option: (1) apply the scholarship to tuition and enjoy its tax-free status, but reduce the amount of eligible tuition that can be used to calculate the tax credits, or (2) apply the scholarship to room and board and pay income tax on the scholarship, but allow all tuition to be counted when calculating the credits. When running the numbers, keep in mind that generally a tax credit is more valuable than a tax deduction because it reduces your taxes dollar for dollar.

For more information, see IRS Publication 970, Tax Benefits for Education.

If your son or daughter gets a college scholarship, federal rules governing 529 plans allow you to withdraw from the account an amount equal to your child’s scholarship. You won’t owe the 10% penalty that typically applies to the earnings portion of any withdrawal not used to pay the beneficiary’s qualified education expenses. However, you’ll still owe income tax on the earnings portion of the withdrawal.

If you want to make a scholarship-related withdrawal from your 529 account, you must provide written notice to the plan manager, along with proof of your child’s scholarship.

But withdrawing money from your 529 account isn’t your only option. Another course of action is to simply leave the money in the account for your child’s future use–most 529 plans allow funds to be used for graduate school. Or, you can change the beneficiary of the account to another child or qualified family member with no income tax or penalty implications. Either way, the full sum can be left to grow tax deferred in the account, and you’ll enjoy the convenience of keeping the same plan.

If, though, you’re unhappy with your current plan (e.g., high fees, limited investment options, poor customer service), then this may be the perfect time to roll over your funds to a different 529 plan. Under federal rules, you’re entitled to roll over the funds in your 529 plan once per calendar year to a different 529 plan. You can keep the same beneficiary or name a new one. In the latter case, as long as the new beneficiary is a qualified family member, no income taxes or penalty will be due.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

The year was 2001. The top marginal federal income tax bracket was 39.6%, and the tax rate that applied to most long-term capital gains was 20%. Then came the Economic Growth and Tax Relief Reconciliation Act of 2001, followed two years later by the Jobs and Growth Tax Relief Reconciliation Act of 2003. By mid-2003, the top marginal tax rate was 35%, and the 20% capital gains rate had dropped to 15%. But this tax relief was designed to be temporary–the provisions that established lower rates were crafted to self-expire after a period of time. And now, in 2010, we’re only months away from seeing those provisions expire.

Federal income tax brackets

Right now, there are six marginal income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner:

As it stands now, these marginal tax brackets will expire at the end of 2010. There would be no 10% bracket for 2011, and the remaining bracket rates would return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.

Long-term capital gain tax rates

For 2010, if you sell shares of stock that you’ve held for more than a year, any gain is long-term capital gain, generally taxed at a maximum rate of 15%. If you’re in the 10% or the 15% marginal income tax bracket, however, you’ll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you’re a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you’d pay no federal tax on the gain.

However, these rates are also scheduled to expire at the end of 2010. Absent new legislation, in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won’t be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more.

Finally, while qualifying dividends are taxed in 2010 using the same capital gain tax rates described above (i.e., 15% and 0%), in 2011 they’ll be taxed as ordinary income.

Will Congress take action?

In the proposed 2011 budget submitted to Congress in February, President Obama asked for a permanent extension of the current 10%, 15%, and 25% marginal income tax brackets, and an expansion of the current 28% tax bracket. The current 33% and 35% brackets would be allowed to expire, resulting in the top two marginal rates for 2011 returning to 36% and 39.6%. The expanded 28% bracket would be calculated in a way that would allow individuals earning less than $200,000 (less the standard deduction amount and one exemption) and married couples filing jointly earning less than $250,000 (less the standard deduction and two personal exemptions) to escape taxation at the top rates.

The President also proposed making the current tax rates that apply to long-term capital gain (i.e., the 0% and 15% rates) permanent, but adding a new 20% rate for those in the newly reestablished 36% and 39.6% brackets.

Will Congress act, or will it simply let current rates expire? There’s plenty of time before 2011, so stay tuned …

I can’t decide which was more painful: shredding my ACL playing hoop, a chatty dentist drilling into my nerve or spending the last five months applying for a mortgage.

While it should seem the former two would bear the most pain, it was actually the latter that takes the cake. Keep in mind: I have good credit, an attractive loan to value ratio and reliable income. For those with a different package, I can’t imagine the experience they’d have to go through. As a result, I asked my loan officer Dan Spitz at Wells Fargo to assist me with providing some helpful insight and tips that can improve one’s chances for success.

To begin with, understanding various options could certainly help.

Let’s take a closer look…

1. Government Loans

Government FHA loans offer some of the most flexible loans on the market today. For owner occupied borrowers, these programs require a minimal down payment of around three-and-a-half percent and lenders do consider approving borrowers with below average credit.

Thankfully, this program is not just for the low money down or poor credit crowd.  Government loans also consider high debt to income ratios. For borrowers outside the more stringent requirements of other programs below, FHAs loans can be a fantastic option.

As opposed to other programs, if various elements of a borrower’s package fall outside the guidelines but still seems to make sense, these loans could still maintain a reasonable chance for success. For example, a borrower’s income might be low but the person might have good credit with the ability to make a reasonable down payment. In the private sector, such a borrower might not get approved whereas here success could still be achieved.

Lending limits on these loans can go as high as $729,750 for a single unit. As for rates, percentages will vary according to the originator but should fall within a quarter-percent of a more conventional loan below.

The main drawback to FHAs is the agonizing paperwork process as well as costly fees, specifically mortgage insurance premiums that have an up front cost equal to 2.25 percent of the loan. For anyone getting a loan through these programs, you will also have ongoing Private Mortgage Insurance payments as well.

2. Conventional Conforming Loans

Traditional “conforming loans” (up to $417,000) typically offer the lowest rates. Lenders are typically setting rates according to the same benchmark so if you see a big difference in the rate, it’s usually a sign of a higher fee built into the loan itself.

Rates in these programs vary according to the specific scenario. Condos and multi-units are generally going to have higher rates than those seeking loans on a single family residence.

Credit scores in these programs bear significant impact. In these loans, one might find a mere twenty point difference in their credit score could easily equate to a half-point higher closing cost.

Minimum down payment requirements for these loans are typically five percent, though this number will vary by county.

Income guidelines in these loans are quite strict. If a borrower has a high debt to income ratio, the application is likely going to be rejected even if it seems that the loan should otherwise be approved.

In these types of programs, many would think a lender’s biggest concern is whether or not the borrower will actually continue to pay. These days, however, lenders are equally concerned with something called “buybacks,” which is when a loan gets rejected by Fannie Mae or Freddie Mac, causing the originator to “buy back” the loan.

Buybacks can happen for any number of reasons and when it does, the lender is stuck carrying the loan. Certainly, they can try selling it to a third party but doing so will typically cost the originator somewhere around four to five percent of loan amount itself.

It’s for this reason that endless requests for documentation during the underwriting period can seem so utterly ridiculous thereby making a ripped ACL or drilled nerve by a chatty dentist a far more pleasurable experience.

3. High balance conforming loans

Back in the recent real estate train wreck, investors ran amuck from mortgage backed securities and the only market available for loans was typically through Fannie or Freddie.

Only problem was, these entities were not able to purchase loans above $417,000. Faced with the possibility that the housing market would completely shut down, Congress created one of the many stimulus packages and increased this limit to $729,750.

The limit is actually based on prices in a particular county and guidelines for these loans are more restrictive versus the more conventional loans above. In addition, rates on these loans are slightly higher compared to their counterparts, typically to around an eighth of a percent.

4. Jumbo Loans

“Jumbos” are sometimes called “portfolio loans” because these days, lenders are often forced to keep them in their portfolios. Because of the risks associated with the higher loan amounts, one might find the costs of these programs significantly higher than the alternatives above.

Lending guidelines on these loans have tightened the most. One of the major guidelines a lender will closely analyze is that of liquidity. Lenders want to see how much access to cash a borrower will have after a down payment is made.

The good news on jumbos is that as a result of tighter underwriting, lenders are now generally originating quality loans. As a result, the investment world is starting to recognize the reduced risk and buyers coming back into this market have led to lower rates when compared to the recent past.

A FEW QUICK TIPS

• Low advertised rates? Might sound good but rates are only part of the equation. Be sure to ask about origination and lender fees as well as the rate lock period. Lowest rates typically have a thirty day lock and you may need more time to fund your loan.

• “No fees or closing costs?” Good luck. There are always fees associated with closing a transaction. If you are being offered ‘no cost’ it means the lender is picking up the tab and giving you a slightly higher rate.

• Be sure to check your credit around ninety days before you apply for a loan. This gives you enough time to pay down debt and/or take care of credit problems to improve your profile and thereby reduce your rate.

• To accelerate the underwriting process, be sure to prepare copies of your last two tax returns, income and asset statements as well as bank, brokerage statements, W2s, K-1s and if you are self-employed, don’t forget to include the last two years of business tax returns as well.

• Self employed and taking many write offs? Be prepared to likely get qualified for a lower loan amount.

Playing weekend hoop? Be sure to stretch out before making the run and as for friendly chatty dentists, I would very strongly suggest keeping the conversation to a minimum.

I hope this and the above will be of help to you .

I was sitting in Starbucks earlier and the Barista making my drink made a comment that  he thought buying into the stock market right now was a great idea. I asked him why and he said because of all the fear in the world.

Not a bad thought. Historically, those that trend against the grain of conventional wisdom have likely done pretty well for themselves. However, that could have been plain ‘ol dumb luck, gutsy calls or signs of great intelligence.

Personally, when it comes to investing in the markets, I’ve never considered myself all that lucky and as for gutsy calls I’m a pretty conservative guy with my money. That brings my chances for market success to choice three above: the occasional signs of at least some intelligence.

There’s a lot of ways one can evaluate stocks and bonds. Today I’m going to share with you one way that isn’t all that common, a bit technical but often effective.

Let’s take a closer look:

A core consideration for income investors is an investment’s yield, which indicates the value of the payments you’ll receive. Yield can be a useful tool in considering whether you’d rather try to generate future income from bonds or stocks, and whether its price is appropriate.

Dividend yield

Dividend yield reflects how much of a company’s value gets passed on to shareholders. To calculate it, divide the annual dividend by the price for a share of the company’s common stock. For example, if a stock offers a $1.75 annual dividend and its share price is $50, its dividend yield would be 3.5%.

A stock’s yield also can help you determine whether a stock is undervalued or overvalued relative to its projected income. The dividend discount model uses dividend yield to calculate what the current value of a stock should be based on its anticipated dividends in the future. If dividends are expected to grow rapidly, the present value of a stock should be higher than if dividends are expected to remain relatively static.

Dividend yield only goes so far as a valuation tool. Obviously, a company isn’t necessarily worthless just because it may not pay dividends, and the calculation is only as good as the assumptions it’s based on. A company can always cut its dividend (just ask shareholders of the nation’s banks), in which case the present value of that income stream–and presumably the stock’s price–would also drop. A company’s growth rate may vary over its life cycle; trying to guess when dividends might change and by how much makes the dividend discount calculation even more challenging.

Bond yields

There are many different measures of yield on a bond. Current yield can tell you what your periodic interest payments represent as a percentage of your initial investment. However, for purposes of comparison with other investments, you may also want to consider the value of those interest payments over the life of the bond, including what you could earn by reinvesting those payments at the yield available when you bought it. That’s measured by a bond’s yield to maturity.

Comparing stock and bond yields

In addition to being a tool for evaluating individual stocks and bonds, yield can be used to assess the relative value of the stock and bond markets as a whole. A method informally known as the Fed model can help you estimate whether stocks are overvalued or undervalued relative to bonds. (However, the so-called Fed model is not officially endorsed by the Federal Reserve.)

Though there are variations on the method, the original model compares the yield on the 10-year Treasury note to the forward-earnings yield per share of the S&P 500. Earnings yield is calculated in much the same way as dividend yield is: by dividing the per-share earnings forecast (rather than the anticipated dividend) for the next 12 months by the current share price. If the result is lower than the yield to maturity on a 10-year Treasury note, stocks might be overpriced. Why? Because the Treasury note offers a higher yield that involves less risk. On the other hand, if the forward-earnings yield on stocks is higher, then you’re at least being compensated for the higher risk involved with stocks.

Chart calculated on 10-year Treasury yields and 12-month actual operating earnings for S&P 500 as of December 31 of each year, plus current yield and forward earnings forecast as of April 2010. Data sources: Standard & Poor’s, U.S. Treasury.

However, for the average investor, the model also has flaws. If earnings prove weaker than predicted, actual stock yield might not be as high, which would throw off the comparison. Also, using trailing earnings over the previous 12 months rather than forward earnings as your yardstick would give you a different result. Dramatic swings in Treasury prices can make stocks seem less expensive than they might be when compared to their historical performance. And even if equities or bonds appear cheap, there’s no guarantee either one won’t be an even better bargain in the future.

Yield shouldn’t be the only factor in your decision, but it can help you compare apples and oranges.

Married?

Collecting or thinking about soon collecting Social Security?

Here’s a little known strategy that could really put more dollars in your pocket, courtesy of your uncle and mine, Uncle Sam.

…If you’re married and looking for opportunities to increase retirement income, you may want to look closely at your Social Security benefits. One opportunity for maximizing Social Security income, called “file-and-suspend,” may enable a married couple to boost both their retirement and survivor’s benefits.

What is file-and-suspend?

Generally, a husband or wife is entitled to receive a Social Security retirement benefit based either on his or her own earnings record (a worker’s benefit), or on his or her spouse’s earnings record (a spousal benefit), whichever is higher. But under Social Security rules, a husband or wife who is eligible to file for retirement benefits based on his or her spouse’s record cannot do so until his or her spouse begins receiving benefits. However, there is one exception–someone who has reached full retirement age may choose to file for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.

File-and-suspend is a strategy that may be used in a variety of situations, but is commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse’s earnings record. (A husband or wife’s spousal benefit may be as much as 50% of what his or her spouse is entitled to receive at full retirement age.) Using this strategy not only allows the eligible spouse with lower earnings to immediately claim a higher (spousal) retirement benefit, but can also increase the amount of available survivor protection. The spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70. Because a surviving spouse will generally receive a benefit equal to 100% of the retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death, suspending a benefit to accrue delayed retirement credits may substantially increase the survivor’s benefit.

Example

Let’s look at one hypothetical example of how filing for, then suspending, Social Security benefits might help a married couple increase their retirement income and survivor’s benefits.

Henry is about to reach his full retirement age of 66, but he wants to postpone filing for Social Security benefits. At full retirement age his monthly benefit will be $2,000, but if he waits until age 70 to file, his benefit will be $2,640 (32% more) due to delayed retirement credits. However, his wife Julia, who has had substantially lower lifetime earnings than Henry, wants to retire in a few months at her full retirement age (also 66). Based on her own earnings record, Julia will be eligible for a monthly benefit of $700, but based on Henry’s earnings record she will be eligible for a monthly spousal benefit of $1,000 (50% of Henry’s entitlement).

So that Julia can receive the higher spousal benefit as soon as she retires, Henry files an application for benefits, but immediately suspends it. That way, he can also continue to earn delayed retirement credits, which will result in a higher monthly retirement benefit for him later.

Using the file-and-suspend strategy not only increases Julia and Henry’s retirement income, but it also offers increased survivor protection. Upon Henry’s death, Julia will be entitled to receive 100% of what Henry was receiving (or was entitled to receive) at the time of his death. So by suspending his own retirement benefit in order to increase it through delayed retirement credits, Henry has ensured that Julia will receive a survivor’s benefit that is up to 32% higher for the rest of her life should he die first. (Note, though, that this hypothetical example is for illustrative purposes only and does not account for cost-of-living adjustments or taxes.)

Points to consider

• Deciding when to begin receiving Social Security benefits is a complicated decision. You’ll need to consider a number of scenarios, and take into account factors such as both spouses’ ages, estimated benefit entitlements, and life expectancies. A Social Security representative can help explain your options.

• Ask a tax professional to help you weigh the tax consequences of delaying Social Security income.

• Using the file-and-suspend strategy may not be advantageous when one spouse is in poor health or when Social Security income is needed as soon as possible.

• The spousal benefit will be reduced if the spouse claiming it is under full retirement age.

Got a crystal ball? I don’t, but if I did I’d shake it up a few times, wave my hands over and try and see what’s next for this crazy market we’re in. After all, it seems these days boardwalk Madame Marie’s ball has as much of a chance as predicting the future than anyone else does.

With that little disclaimer aside,  Mark Twain said it best: “History doesn’t repeat itself; at best it sometimes rhymes.” Past performance is no guarantee of future results, and history can be an uncertain guide in terms of what might happen with stocks this time around as the economy begins to stagger out of a recession.

That said, it’s fascinating to look at how various subsegments of the stock market have behaved relative to one another. Particularly interesting is the comparison between the performance of small-cap stocks and that of large caps after each of the last six recessions. In each case, small caps led the way out of those downturns. During the 12 months after the recession came to an end, as declared by the National Bureau of Economic Research (NBER), small caps beat large caps every time.

The average difference over the six recovery periods was 14.5%. In some cases, the difference was dramatic; in others, small caps were barely ahead. Here are the percentages by which small caps beat the S&P 500*:

• December 1970-November 1971: 1.3%

• April 1975-March 1976: 23.2%

• August 1980-July 1981: 28.4%

• December 1982-November 1983: 14.4%

• April 1991-March 1992: 14.8%

• December 2002-November 2003: 5.2%

Will history rhyme this time? It’s hard to say. Many economists feel the current recession ended sometime in summer 2009. Small-cap stocks have certainly done well since then, but some experts feel large caps are best equipped to navigate a credit crisis. However, until the NBER retroactively declares an official end to this recession, there’s no way to know for sure. And don’t forget that small caps historically have involved greater risk from market fluctuation, so a double-dip downturn could hit them hardest.

*Percentages calculated based on data from Ibbotson SBBI Market Results for Stocks, Bonds, Bills, and Inflation for small company stocks and the S&P 500 Composite Index.

A bear market, typically defined as an overall stock market decline of at least 20% over an extended period, historically has lasted an average of a little over a year.* On average, bull markets tend to last almost twice as long as bear markets, but sometimes the differences can be even more dramatic. For example, the bear market that began in January of 2002 lasted almost nine months; it was followed by a five-year bull market from October 2002 to October 2007.

The shortest bear market on record lasted only about six weeks, from mid-July 1998 to the end of August. The longest? October 1939 through April 1942 (almost 30 months), beating out April 1930 to June 1932 (just over two years).

However, defining bear markets and subsequent recoveries from them isn’t as straightforward as it might seem. For one thing, a long-term bear market can be interrupted by one or more shorter-term bull markets (or vice versa). For example, was the period between March 2000 and October 2002 a single 30-month bear market with a roughly 3-month “bear market rally” from September 2001 to the beginning of 2002, as some market technicians argue? Or was it two independent bear markets–one from March 2000 to September 2001 and a second from January 2002 to October 2002–that were separated by the shortest bull market since the Depression summer of 1932?

By definition, you only know you’re in either a bear or bull market in retrospect, once the market has moved consistently in one direction or another. And the past isn’t necessarily a good predictor of what will happen in the future. Since investing is about the future rather than the past, it may make sense to focus more on factors such as asset allocation than on the timing of a recovery you can’t control.

*All time frames based on data from the Stock Trader’s Almanac 2010 on the Standard & Poor’s 500, a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.

As I sit here writing this:

• Oil is spilling all over creation.

• The markets are getting hammered.

• Hungary appears to be joining Greece and Spain’s debt problems with Italy, Portugal and even the UK possibly coming next.

• Many economists say the problems above are a foreshadowing of things to come here in the US.

• And worst of all, on Friday night I lost fifty bucks to a friend’s straight flush.

What could be worse than that?

During these days of uncertainty and historically low interest rates, I’m often asked “how can I get attractive returns on investments that also keep my money safe?”

Let’s take a look at some of the common choices that fit such a mold:

• CDs: these days, the average one year CD pays around 1.5 percent while longer term CDs don’t return much better. Toss in taxes and inflation and at these rates, an investor is lucky if they’re breaking even.

• Fixed Annuities: some folks are turning to plain vanilla fixed annuities with guaranteed rates and finding earnings in these accounts aren’t much better than the CDs.

• Bonds: earnings from government or corporate bonds can be a bit better but not by much. In high credit quality, shorter term bonds, one can expect to earn anywhere from two to maybe 4.5 percent per year.

So, is all hope lost?

Don’t give up. There could be some hope. While no product is perfect by any means and no investment should ever be made without first knowing all the facts, investing for safety and decent earnings these days requires a bit of exploration and creativity.

With that, here are a couple of ideas that could help:

CDs That Pay 12 Percent?

It’s not guaranteed, but it’s possible.

Back in the bad market of 2001, many people sold stocks and threw their money into cash. Afraid of jumping back into the market, they went searching for new products, one of which was something called an “index annuity.”

Offered by insurance companies, this version of a fixed annuity links its returns to the performance of an index such as the Standard and Poor’s 500. If the index goes down, contributions and prior year earnings are protected from loss. But if the index performs well, earnings are determined by the performance of the index, often with a “cap” or by some other means of measuring the interest credited.

As many investors started putting their money into these products, banks scratched their heads, wondering how they were going to compete.

In some cases, the answer led many banks to replicate the concept of an index annuity, but do it within the framework of a CD with some differences thrown in, thus giving birth to “structured products,” often referred to as “Growth CDs.”

Many of these so-called Growth CDs offer the backing of the Federal Deposit Insurance Corporation (FDIC). The big difference between these CDs and ones commonly found at retail banks is that in a typical CD, one knows exactly how much interest they’re going to earn before investing in it. It’s the “bird in the hand” scenario. Regardless if it’s a three-month or five-year CD, etc., one knows exactly what they’re going to get.

The interest one receives from a Growth CD, however, is not pre-determined. Somewhat similar to the means by which index annuities earn their returns, the earnings on a Growth CD are determined by the performance of a stock market index, such as the S&P 500 or many other indexes now available in these type of products such as various European indexes, Asian indexes, commodities, gold, oil, currencies and other market sectors that could help round out an entire portfolio with these instruments.

If the chosen index goes up, one has the opportunity to earn more interest than the “bird in the hand” bank CD offers. Similar to the index annuity, however, these CDs often come with a limit on earnings, but I’m finding some offered these days have no limits. On the other hand, if the selected index goes down in value and you hold the CD until maturity, you’ll get your money back. Some Growth CDs not only guarantee you’ll get your money back, but also provide a minimum rate of return even if the index goes down over the period of time it’s held.

Keep in mind: if you break the Growth CD prior to maturity, you may be subject to a penalty and furthermore, you’ll get fair market value for it, which could be more or less than the amount put in. But again, if held to maturity, the assurance one has in these type of CDs is that in worst-case scenario, you gave your money a shot at market returns but instead got some minimal interest and your money back, which these days to many is quite an attractive package.

For risk adverse investors who want to keep their money safe and also have the possibility of earning market returns, these unique CDs could be something to consider.

Other Choices?

Especially when I lose to a straight flush, I usually have a mouthful of things to say and in this column, things aren’t much different. For some closing thoughts, here are two other areas where clients might look for attractive returns:

• Dividend stocks: with the markets down, finding solid companies that pay attractive dividends is not difficult to do. From companies with long and steady track records of paying dividends, I’m seeing rates anywhere from three to somewhere around twelve percent per year. Instead of investing in one company where in this world anything could happen (such as bankruptcy or a cut/elimination of a dividend), I would recommend looking into instruments such as low cost Exchange Traded Funds that often offer the benefit of diversification in a single position with the ability to sell at any time. Remember, however, here I’m talking about stocks that obviously will go up and/or down in value. However, the benefit of investing in a basket of dividend stocks within an ETF is that while the value of the position will go up and/or down, the cash-flow from dividends could help buffer the volatile markets we’re now seeing and probably will be here for some time to come.

• Insurance policies: Life insurance policies with the added benefit of accumulating cash? Sounds nuts but many people I’m meeting are finding buried treasures in these things. In a policy designed with the consumer’s best interest at heart, it’s something some may want to consider. Contrary to the typical policy that could be loaded with fees and all sorts of fees and unnecessary expenses, there are some unique policies out there that offer no surrender fees and access to all contributions at any time without penalty. As for earnings, current rates I’m seeing are at around five percent or more per year. Furthermore, earnings are tax deferred and withdrawals can be potentially taken out tax free as well. Not too bad.

CONCLUSION

Financial armageddon or economic prosperity?

My poker hand or my neighbor’s?

These days, questions such as these can be tricky to answer and in this age of uncertainty, hopefully some of the ideas above are of help.

*As with any product discussed on this site, do not make any investment until all facts are known. The CDs discussed in this column can be complicated and will require a thorough understanding before any investment is made.

With a new war about to begin, I figure it’s best to hurry up and post a new article.

I’m not talking war in Afghanistan, a war between North and South Korea, the Hatfields and the McCoys or another war somewhere in the Middle East. I’m talking about the war between the Celtics and the Lakers, which, as far as I’m concerned, is the most interesting of all.

As the big screen warms up, the beverages get cool and the friends prepare to come over for tonight’s first game, a few people have recently asked me whether or not they should think about re-fi’ing their mortgages. With this topic fresh on the mind, I figure it’s a good time to address this common question….

Mortgage rates on 15- and 30-year fixed mortgages are at all-time lows. So, is now a good time to refinance your existing mortgage? That depends on several factors.

The first, of course, will be your loan-to-value ratio. In no-cash-out refinancing (where the amount of your new loan doesn’t exceed the balance of your existing loan, plus points and closing costs, if applicable), you may be able to borrow as much as 95% of your home’s value. However, if the value of your home has fallen below the amount of your existing mortgage balance, you may be unable to refinance at all, except through the American Recovery and Reinvestment Act of 2009′s Home Affordable Refinance program (see “sidebar” items in BLUE below). But let’s assume your loan-to-value ratio is still “above water”–that is, the value of your home is still greater than your mortgage balance.

If you refinance your mortgage to a lower interest rate, you may save a substantial amount on your monthly mortgage payment– which will give you more money to put toward your savings goals or reducing your other expenses. This is one of the main reasons people consider refinancing their mortgages. But what other factors do you need to consider?

How much will it cost?

The cost of refinancing can include both points you pay and other expenses (called “closing costs”) related to refinancing.

One point equals 1% of the amount to be financed. So, if the refinancing costs will include an up-front charge of 0.5 points and you’re refinancing $200,000, you will incur a charge of $1,000 (special tax treatment applies to points).

Closing costs typically include an application fee, attorney’s fee, appraisal fee, credit report fee, loan origination fee (which can be 1% or more of the amount you refinance), title search fee, and title insurance. These costs can vary from state to state. Get a “good faith estimate” from each potential lender and compare both closing costs and interest rates.

Be careful about lenders that advertise “no points, no closing costs” refinancing deals. Often these plans simply roll the closing costs into the amount to be refinanced, or come at a higher interest rate.

How long will it take to recoup the costs?

To determine your break-even point (the point at which you’ll begin to save money after paying fees and closing costs), divide the amount of your monthly mortgage payment savings due to refinancing into the cost of refinancing; the result is your break-even point, expressed in months.

Example: If you’re saving $100 per month on your refinanced monthly mortgage payment, and your refinancing costs totaled $3,700, your break-even point is in 37 months.

It makes sense to refinance if you’re certain that you’ll be able to recoup your refinancing costs while you’re still living in your home. Ideally, you should recover your costs in one year or less.

A matter of term

In many cases, refinancing may mean taking out a mortgage with a new term equal to the original term of your refinanced mortgage, not equal to the remainder of the term on that mortgage. Depending on when you refinance, this can make a significant difference in the amount of interest you’ll pay overall.

Example: You have a $200,000 30-year fixed mortgage at 6%, with a monthly payment of $1,199. After 6 years, you have paid $69,131 in interest on that mortgage. At that point, you refinance your remaining principal balance of $182,796 for a new 30-year fixed mortgage at 5% with a monthly payment of $981. Over the life of that new mortgage, you will pay $170,468 in interest. So, your total interest payment will be $239,599 ($69,131 + $170,468). If you had stayed with your old mortgage at 6%, you would have paid a total of $231,676 in interest. Instead, by refinancing when you did, you’ll pay an extra $7,923 ($239,599 – $231,676) in total mortgage interest.

Because of this, you may want to consider applying the monthly mortgage payment savings after refinancing toward additional principal payments. By doing so, you can reduce both the term of your mortgage and the total interest you’ll pay.

Crunch the numbers first In many cases, refinancing looks attractive in the short term because your monthly mortgage payment will be lower–and that can be important to your monthly budget. But will it really save you money to refinance, both in the short run and in the long run? That depends on many factors. Look at them all before you make your decision.

(“SIDEBAR” BELOW):

The Home Affordable Refinance program allows the refinancing of certain Fannie Mae or Freddie Mac mortgages so long as the new mortgage doesn’t exceed 105% of your home’s current market value. Additionally, if your existing mortgage payment doesn’t include private mortgage insurance (PMI), you won’t be required to buy it when refinancing.

Other considerations:

● The interest you pay on a no-cash-out mortgage refinancing is tax deductible only to the extent as was the interest on your original mortgage.

● Refinancing may allow you to switch to a different type of mortgage (e.g., from an ARM to a fixedrate mortgage) and/or a shorter mortgage term.

These days, I’d prefer worrying more about whether or not it’ll be the Lakers or Suns playing The Celtics in the finals. But with the way the global stock markets are, it’s hard to neglect what appears to be some dark clouds on the horizon.

As a result, if you haven’t done it already, it’s around this mid-point time of year that represents an ideal time to take a look at your finances, because the demands on your time may be fewer, and the planning opportunities greater, than if you wait until the end of the year. Here are a few tips to get you started.

Identifying your needs Financial plans often need to be modified when personal circumstances change. Answering these questions can help you identify the financial issues you want to address within the next few months.

Are any life-changing events coming up soon, such as marriage, the birth of a child, retirement, or a career change?

• Will your income or expenses substantially increase or decrease this year?

• Are you concerned about the performance of your investment portfolio?

• Do you have any needs or concerns that you would like to address?

Tax planning

Completing a mid-year estimate of your income tax liability can reveal tax-planning opportunities. You can use last year’s tax return as a basis, then make any anticipated adjustments to your income and deductions for this year. Check your withholding, especially if you owed taxes when you filed your most recent income tax return or if you received a large refund. Doing that now, rather than waiting until the end of the year, will help you avoid a big tax bill or having too much of your money tied up with Uncle Sam. If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.

One of the easiest things you can do right now to help avoid missed tax-saving opportunities for the year is to set up a system for saving receipts and other tax-related documents. This can be as simple as dedicating a folder in your file cabinet to this year’s tax return so that you can keep track of important paperwork.

Retirement planning

If you’re working and you received a pay increase for this year, don’t overlook the opportunity to increase your retirement plan contributions by asking your employer to apply a higher percentage of your salary. This year, you may be able to contribute up to $16,500 to your retirement plan at work ($22,000 if you’re age 50 or older). If you have a traditional IRA, you may also want to weigh the benefits of converting it to a Roth IRA this year, when you may be able to take advantage of a special deferral rule that applies only to 2010 conversions. This deferral rule gives you the option of reporting half of any resulting taxable income that results on your 2011 tax return and half of the income on your 2012 return.

If you’re already retired, take a new look at your retirement income needs and whether your current investments and distribution strategy will continue to provide enough income.

Investment planning

Have you recently reviewed your portfolio to make sure that your asset allocation is still in line with your financial goals, time horizon, and tolerance for risk? Though it’s common to rebalance a portfolio at the end of the year, if the market is volatile, you may need to rebalance more frequently.

Insurance planning

Do you know exactly how much life and disability insurance coverage you have? Are you familiar with the terms of your homeowners, renters, or auto insurance policies? If not, it’s time to add your insurance policies to your summer reading list. Insurance needs frequently change, and it’s possible that your coverage hasn’t kept pace with your income or family circumstances.

Conclusion

Lakers vs. Boston?

or Suns vs. Boston?

Bull market or Bear Market?

I’d be curious to know your picks.

The last time I was on the Cyclone at Coney Island was when I was around eight years old, and all I can basically remember is refunding the Nathan’s hot dog I recently ate all over my sister’s lap. It was an ugly experience.

Fast moving, many ups and downs, hair pin turns and a seedy operator who didn’t seem like someone I could trust.

Sound familiar?

If you’re investing in the stock market these days, it just might.

If you’re like most people, you probably evaluate your portfolio in terms of the return it earns. However, as we were all reminded in 2008, returns aren’t the only factor you should consider when determining whether your portfolio is allocated appropriately. Also important is the level of risk you take in pursuing those returns.

There are a number of ways to estimate the level of risk in a portfolio. The term “risk” is often used interchangeably with “volatility” (the tendency of a portfolio’s value to rise or fall sharply, especially within a relatively short period of time). However, for most people, a portfolio is simply a means to an end–paying for retirement or a child’s college tuition, for example. In that context, “risk” also means the risk of not meeting your financial needs.

Volatility measures

One of the most common measures of volatility is standard deviation, which gauges the degree of an investment’s up-and-down moves. It shows how much the investment’s returns have deviated from time to time from its own average. The higher the standard deviation of an investment or portfolio, the bumpier the road to those returns has been.

Another way to assess a portfolio’s volatility is to determine its beta. This statistic compares a portfolio’s ups and downs to those of a benchmark index, such as the S&P 500, and indicates how sensitive the portfolio might be to overall market movements. An investment or portfolio with a beta of 1 would have exactly as much market risk as its benchmark.

The higher the beta, the more volatile the portfolio. A beta of 1.05 means the portfolio involves 5% more market risk than the benchmark to which it’s compared. If the benchmark rises 10%, a portfolio with a beta of 1.05 should theoretically rise 10.5%; a fall of 10% in the benchmark should mean a corresponding 10.5% decline in the portfolio.

A 0.95 beta means a portfolio has 5% less market risk than that index; in theory, the portfolio would rise and fall 5% less than the benchmark. (However, remember that investments also have unique risks that are not related to market behavior. Those risks can create volatility patterns that are different from the underlying benchmark.)

The risk of not achieving your goals

Another way to evaluate risk is to estimate the chances of your portfolio achieving a desired financial goal. In this case, “risk” means not volatility but the odds that your portfolio will succeed in meeting a specific financial liability. A technique known as Monte Carlo simulation uses computer modeling based on multiple scenarios for how various types of investments might perform based on their past returns. Though past performance is no guarantee of future results, such a projection can estimate how close your plan might come to meeting a future target amount.

Let’s look at a hypothetical example. Let’s say Bob wants to retire in 15 years. A Monte Carlo simulation might suggest that, given his current level of saving and his portfolio’s asset allocation, Bob has a 90% chance of achieving his retirement target. If he chose to save more, he might increase his odds of success to 95%. Or Bob might decide that he’s comfortable with having an 85% chance of success in reaching his target amount if that also means his portfolio might be less volatile. (However, be aware that though a projection might show a high probability that you’ll reach your financial goals, it can’t guarantee that outcome.)

Are you getting paid enough to take risk?

Another approach to thinking about portfolio risk involves the reward side of the risk-reward tradeoff. You can compare a portfolio’s return to that of a relatively risk-free investment, such as the inflation-adjusted return on a short-term (3 months or less) U.S. Treasury bill. Modern portfolio theory is based on the assumption that you should receive greater compensation for taking more risk (though there’s no guarantee it will work out that way, of course). A stock should offer a potentially higher return than a Treasury bond; the difference between the two returns is the equity’s risk premium. A small-cap stock that’s relatively new should offer a higher risk premium than a well established, dividend-paying stock. While understanding risk premium doesn’t necessarily minimize risk, it can help you evaluate whether the return you’re getting is worth the risk you’re taking.

Coney Island Cyclone?

The Monster at Magic Mountain?

Or Wall Street?

Whatever your approach to portfolio risk or roller coasters, understanding the nature and level of the risks you face can be critical in sticking to a long-term strategy.