A lease option agreement can be a great way to finance the purchase of an investment property, assuming you’re working with a seller who deals aboveboard, and you have a great plan in place for obtaining cash or alternative financing by the time your option to buy the property rolls around.

So how does a lease option work? The monthly payment consists of rent plus some additional money that’s applied to the purchase price. In other words, if the going rate for rent on the property is $1,000 per month, you may have a monthly payment of, say, $1,500 with the extra $500 being added to your down payment. This ensures that you’re building equity in the property during the lease part of the agreement, and it provides the seller/lender with some security in the event that you back out of the deal.

Make sure that the lease option agreement is very specific regarding the application of payments and terms of exercising your option. Otherwise, you may lose a lot of money in rent that you assumed was being applied to the purchase price or lose your option to buy on some minor technicality. Have a qualified real estate attorney look over the agreement before you sign it, and make sure you understand it completely.

Stocks and bonds complement each other like peanut butter and jelly. Bonds are the peanut butter that can keep your jelly from dripping to the floor. They are the life rafts that can keep your portfolio afloat when the investment seas get choppy. Yes, bonds are also very handy as a source of steady income, but, contrary to popular myth, that should not be their major role in most portfolios.

Bonds are the sweethearts that may have saved your grandparents from selling apples on the street during the hungry 1930s. They are the babies that may have saved your 401(k) from devastation during the three growly bear-market years on Wall Street that started this century. Bonds belong in nearly every portfolio.

Almost all bonds these days are issued with life spans (maturities) of up to 30 years. Few people are interested in loaning their money for longer than that, and people young enough to think more than 30 years ahead rarely have enough money to lend. In the parlance of bond people, any bond with a maturity of less than five years is called a short bond. Bonds with maturities of 5 to 12 years are called intermediate bonds. Bonds with maturities of 12 years or more are called long bonds.

In general, the longer the maturity, the greater the interest rate paid. That’s because bond buyers generally demand more compensation the longer they agree to tie up their money. At the same time, bond issuers are willing to fork over more interest in return for the privilege of holding onto your money longer. It’s exactly the same theory and practice with bank CDs: Typically the two year CD pays more than the one-year CD, which pays more than the six month CD. The difference between the rates you can get on short bonds versus intermediate bonds versus long bonds is known as the yield curve. Yield simply refers to the annual interest rate.

Individual bonds offer investors the opportunity to really fine-tune a fixed income portfolio. With individual bonds, you can choose exactly what you want in terms of bond quality, maturity, and taxability. For larger investors investing in individual bonds may also be more economical than investing in a bond fund. That’s especially true for those investors up on the latest advances in bond buying and selling.

On the other hand, I’m a big advocate of bond funds — both bond mutual funds and exchange traded funds. Mutual funds and exchange-traded funds both represent baskets of securities (usually stocks or bonds, or both) and allow for instant and easy portfolio diversification.

Benjamin Graham’s arrival on Wall Street in that summer of 1914 was not much more than a chance encounter. There were no telltales that Graham would live in that world for the next four decades, synthesize a dominant theory of value investing, and in the process create a class of thousands of superinvestors like himself.

Among the chief disciples is one-time student and employee Warren Buffett, who graces Graham with the ultimate accolade. Graham has been dead for more than three decades now, but there are still uncanny touches of his style in the discipline that has made Buffett and dozens of other disciples very rich men.

What did Graham so lastingly teach this school of brilliant portfolio managers? The simple hardheaded principle that is at the heart of value investing: the need to cut through market prices to reality. When you buy a stock, you are not buying a piece of paper; you’re buying part of a business.

There is often a huge spread between the “intrinsic value” of the business and the price that a frequently manic stock market is putting on the paper. Buy a stock significantly above intrinsic value and you court a loss. Buy below intrinsic value and you have a good chance of making money over the long haul, with little risk of taking a permanent hit on your capital. The basic bet is that market value and intrinsic value will ultimately converge.

In one of a number of lead articles he wrote for Forbes, Graham thought of his strategy as “buying dollar bills for 50¢.” It was a strategy that enabled him to survive the bad years of the 1929 crash while others were sinking and it brought him returns of 20 percent or more over many good years. In his last years, Ben Graham distilled six decades of experience into ten criteria that would help the intelligent investor pick value stocks from the chaff of the market.

1. An earnings-to-price yield of twice the triple-A bond yield. The earnings yield is the reciprocal of the price earnings ratio.
2. A price/earnings ratio down to four-tenths of the highest average P/E ratio the stock reached in the most recent five years.
3. A dividend yield of two-thirds of the triple-A bond yield.
4. A stock price down to two-thirds of tangible book value per share.
5. A stock price down to two-thirds of net current asset value — current assets less total debt.
6. Total debt less than tangible book value.
7. Current ratio (current assets divided by current liabilities) of two or more.
8. Total debt equal or less than twice the net quick liquidation value as defined in No. 5.
9. Earnings growth over the most recent ten years of seven percent compounded — a doubling of earnings in a ten-year period.
10. Stability of growth in earnings — defined as no more than two declines of five percent or more in year-end earnings over the most recent ten years.

Together, Ben’s ten points construct a formidable risk/reward barrier. The first five point to potential reward by pinpointing a low price in relation to such key operating results as earnings. The second five measure risk by measuring financial soundness and stability of earnings.

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In their purest forms, hedge funds are about reducing risk. A hedge fund is structured to reduce the risk of the portfolio without sacrificing return. Financial research has shown that investment return is closely related to the risk that an investor takes. In most cases, a hedge fund investor has other investments outside of the fund that carry market risk. The different risk-and-return profile of the hedge fund can offset the risk in the other investments, making the investor, as a whole, better off.

Helping You Weather Market Conditions

Political turmoil, natural disasters, and economic upheaval, for example, all are reflected in the daily machinations of stocks, bonds, currencies, and commodities. Hedge funds are set up to work through this upheaval for two reasons: (1) They have access to a wide array of risk-management techniques that can help limit the effects of market downturns, and (2) They have less oversight and more freedom in their operations, which allows them to move quickly to profit from the wild swings in markets. A hedge fund manager simply makes a trade when the time is right.

Increasing Your Total Diversification

Diversifying your portfolio is an easy way of hedging. A hedge fund increases the amount of diversification in a portfolio because it has a different risk-and-return profile than other investments you may have. A fund also has more freedom to invest in other types of assets. A good hedge fund manager stays plugged into the market, maintaining access to currency swaps, commodity pools, private offerings, and other types of investments that may be hard to own otherwise. A hedge fund manager can generally use investments and investment techniques that would be impossible for individuals to try.

Increasing Your Absolute Return

If you remove market risk, which is the goal of many hedge funds, you still need some return, which is why hedge fund managers look for investments that can bring them alpha. In their search, they may find offbeat investments that can generate a greater return than what they have available from other types of investments. Hedge funds also increase potential return by using leverage. Because a fund can borrow money in ways that other types of investments can’t, it can look for an asset with a relatively low return and relatively little risk that can become an asset that offers a much higher return.

Increasing Returns for Tax-Exempt Investors

Hedge fund managers often invest without concern for the tax implications of its investment positions. That’s perfectly fine for major hedge fund investors, because they don’t pay taxes. For them, the aggressive and offbeat investment techniques that some hedge funds use are a perfect fit, because they don’t have to worry about the friendly revenue collector taking the profits away. If you’re working for a large tax-exempt investor, it makes sense for you to investigate hedge funds as a way to increase your portfolio’s overall rate of return.

Helping Smooth Out Returns

A fund may not go up as much as the stock market during a year when the market is unusually strong, but the fund shouldn’t perform as badly as the market during years when the market isn’t so hot. This baseline may make returns more predictable. An investment in fixed-income securities, like U.S. government bonds, generates a predictable return, albeit a relatively low return. Many hedge funds can offer increased predictability at higher rates of return.

Giving You Access to Broad Asset Categories

Hedge funds have a broader charter. The fund manager doesn’t need approval to try a new investment strategy. She doesn’t have to report to fund investors daily, weekly, or even monthly, so she doesn’t have to worry about how an investment will look on some report card. Private equity deals, complicated currency hedges, and strange commodity plays all have time to work, free of the messy oversight of people who aren’t intimate with the market’s machinations.

Exploiting Market Inefficiencies Quickly

Hedge funds have the ability to move quickly in changing markets. If a fund manager sees an investment opportunity but doesn’t have the necessary cash on hand to make a transaction, he can borrow money from a bank, a brokerage firm, or even a loan shark to make the purchase. Hedge funds are also free to sell short. The ability to sell short increases the opportunities to make money, even in a down market. Another opportunity for hedge funds is merger and acquisition financing. The private-partnership structure limits the number of people who have to approve a capital commitment. A hedge fund can move quickly to make money on even a small difference between the market price of a company’s bonds and the price that an acquirer is willing to pay.

Fund Managers Tend to Be the Savviest Investors on the Street

Hedge fund managers tend to be really smart, are passionate about investing, and care about making money, period. Making you money is their drive, meaning they don’t show interest in sales and marketing, management, and the niceties of business etiquette. Many of the brightest people on Wall Street run hedge funds. When you invest in a hedge fund, you’re more likely to have a sharp manager than if you choose another vehicle for your money. Of course, brainpower is no guarantee of great results. But smarts are a good start!

Incentives for Hedge Fund Managers Are Aligned with Your Needs

Investing in a hedge fund is a great way to ensure that your interests are taken as seriously as the fund manager’s. Although they take a hefty cut of the fund’s profits, they receive that money only if the fund sees profits. If the fund has a losing year, a fund manager can’t collect a performance fee until the fund gets back to the level it enjoyed before the losses occurred, a level called the high water mark. A mutual fund manager, by contrast, takes home a nice salary even if the fund’s performance is poor. In addition to adhering to the pay-for-performance policy, hedge fund managers often manage money for themselves and their families.

You may not consider yourself to be rich but if you have an estate in excess of $2 million, you certainly need an estate plan. Here are five common mistakes that are made in relation to estate plans, along with simple solutions to avoid them.

Not Having an Estate Plan

It’s a fact -– most people do not have estate plans. They have living trusts and wills — but these are not estate plans. Unfortunately, most people believe that their estate planning process is completed merely with a living trust and a will but nothing could be farther from the truth for wealthy individuals. A living trust helps rid your estate of probate but it doesn’t solve your estate planning needs. Likewise, a will may help in expressing your post-mortem desires but it is not an estate plan.

This is a crucial mistake. For example, John Wayne didn’t have an estate plan, he had a will. Yet 25 years after his death, his estate is not yet settled. Again, trusts and wills are not estate plans. Some people recognize this mistake and take the necessary step of going to an attorney and having an estate plan developed. However, it is only too common that they then fail to actually implement the plans, such as putting their assets in a trust or follow-up on other aspects of the plan.

The solution is straightforward: Find a competent professional, get an estate plan and implement it.

Not Maintaining an Estate Plan

People may have completed estate plans when real estate values were less, when stock or other investment portfolios were dramatically different, or when family members were different. For example, divorced in-laws may still be in the estate plan -– is that what you really desire?
It is important to recognize that changes in the value of your estate need to be regularly evaluated. Many parents want to assure equity in division of assets but unknowingly set the stage for an inequitable division of assets because of the directives of the estate plan. Your plan needs to be reviewed regularly for such updates.

Also, the laws may have changed in many areas of the tax code. Estate plans need to be reviewed for such potential ramifications. If anyone thinks that estate taxes will be eliminated, it is foolish planning. There is a “sunset provision” in the tax code that is scheduled to disappear after 2010. It will be tax suicide for the government to not have some type of implementation of estate taxes. As individuals continue to accumulate wealth, rest assured that the government will continue to find ways to tap into it.

On another note, like anything else, change happens – we get older, we may have different values or philosophies, and we might decide to distribute our estate differently than we felt at the time when our estate plan was written. The solution is to put on your calendar to evaluate your estate plan once a year. Do this on a regular basis and you may surprised at how frequently major or minor aspects of your estate plan need to be updated.

Not Involving Your Adult Children in Your Estate Plan

Failing to involve your adult children in your estate plans is a huge mistake because ultimately it is your children who will be writing the check to Uncle Sam. Yet since people don’t like to talk about their mortality, or want to avoid sticky subjects such as inequitable division of assets, they avoid the discussion totally with their heirs.

It is very common for parents to pass away and then the children scramble around to determine what are the estate’s assets, what is their value and what to do with them. For example, children may find something in a safe deposit box and not know what to with it. Or they find a trust deed for a piece of raw land that no one seems to know about. This happens all the time and it is a big mistake.

The solution is to communicate with your kids. Tell your children what you have done and how to implement your estate plan. Discuss the value of your assets. Your children will find out eventually so why not take the time now to tell them something that will help them, is of potentially great value, and you can express how you want it handled.

Not Understanding the Asset Mix in an Estate

It is common for someone to think “I’ve got plenty of money in my estate, let the kids handle the estate taxes.” This is a mistake because people often do not have the amount of liquid assets that might be necessary to pay estate taxes in the best manner.

When we die, the government requires that within nine months of the second death the estate must be settled. In many cases, estate taxes must be paid. You are then asking your children/heirs to write a check to the government. The mistake that people make is that they have assets that are very illiquid, which cannot easily be converted to cash in a short period of time. I call this scenario “liquidity confusion” because people are confused about the liquidity of the assets in their estate.

Other examples include businesses, private placements, private stock investments, personal loans, which are all highly illiquid assets that add to net worth but are difficult to convert to cash without a potentially significant loss in value of the asset and/or difficulties in converting the asset to cash within the required nine month time frame. Do you want your kids to be forced to sell your business in order to pay the estate tax?
It is very important to understand how you can achieve liquidity in enough of your estate in order to pay any necessary taxes. The solution is to understand the assets in your estate and what portion is truly liquid.

Estate Tax is a Voluntary -– We Choose to Pay or Not

Too many people believe that the estate tax is inevitable. However, the truth is that it is truly a voluntary tax. An individual can choose to set up different estate planning techniques to limit estate tax liability – or he/she can fail to do so and thereby “donate” a sizable portion of a life’s work to the government.

It is truly incredible what a well-designed estate plan can accomplish in terms of estate tax minimization. For example, Joe Kennedy had an estate in excess of $600mm. Ordinarily that would equate to around $300 million in estate tax liability. However, his heirs paid less than $200,000 because he chose to deal with the problem of estate tax.

The solution is to employ the help of estate planners. Numerous estate planning scenarios can be developed to limit the estate tax. Each situation is different, so seek professional advice.

Chances are, you have owned a term life insurance policy for years. You probably purchased the policy to provide for a beneficiary after your death. However, for many term life insurance policyholders, the purpose and value of the policy begins to change with each passing year or the policy is about to expire and conversion would be too expensive. A life settlement is the solution that can add flexibility to your estate plan.

A life settlement is a financial transaction in which a life insurance policy owner sells an unwanted or unneeded policy to in institutional investor for a lump sum dollar amount. The institution becomes the new owner and beneficiary of the policy and is responsible for all subsequent premium payments. It gives you cash to use however you like: pursue a dream, travel, help a grandchild with college tuition, etc.

While life settlements have become an integrated part of estate planning for people over 65, recently Early Life Settlements have now become available for people who are 56-70 years old. The sale of an existing term life insurance policy transforms what is often seen as a liability or a necessary evil into a resource that can and should be managed as part of an overall financial plan. This new avenue will help you see greater value from your expiring term life insurance policy and begin to realize your goals sooner.

It’s estimated that approximately 73 million Americans currently have life insurance policies, yet many people don’t realize how powerful an asset your policy can be in the battle for maximum wealth appreciation.

Instead of letting your term life policy expire without paying a benefit, you can use an Early Life Settlement to your advantage. Here are some reasons to leverage this new opportunity:

• Turn an expiring asset into liquidity for your estate
• Take advantage of other investment options
• If premium payments are no longer affordable
• The status of your estate has changed, and life insurance is no longer needed to pay estate taxes
• An individual prefers to discontinue a current policy in favor of survivorship coverage
• To realize an immediate gain from your future asset

Many savvy investors now see the true value of their term life insurance policies. Given the current decline in traditional assets, like stocks and bonds, now could be the best time ever to realize the power and flexibility that has been locked away in your term life policy.

The early warning signs of financial trouble can be as obvious as a lost job, a layoff, or a huge medical bill, or as secretive as an addiction. In either case, you and your partner (if you have a partner) should remain on the lookout for these warning signs and work together to build a strong financial foundation that can protect you from foreclosure:

Budget

Make sure you have at least as much money coming in as is flowing out each month. If you have a partner, you and your loved one should agree, upfront, on how much to spend and what to spend it on. When partners are off spending money on their own pet luxuries, problems often arise.

Pay Your Bills

When the bills arrive, prioritize them and pay them as soon as possible, so they don’t stack up. If you have a partner, pay your bills together. Blaming your spouse for overspending is easy when you don’t know how much it costs to heat your house or feed your family. You both need to be aware of where the money’s going, so you can hold yourselves, and one another, accountable.

Audit Your Books

Add up all the money you spend each week on nonessentials and try to trim the fat. If you’re teaming up with a partner, determine how much you’re responsible for and how much your partner is responsible for. This shouldn’t be a blame game, but it can open your eyes to any potential spending problems that could leave the checkbook short when it comes time to make the mortgage payment.

Watch for Addictive Behavior

Any addiction can be a problem, including alcohol, drugs, or the Internet. Anything that takes time, energy, and resources away from a paying job and your family (if you’re supporting a family) could cause financial problems. Identify addictions early and nip them in the bud.

If you and your partner can’t have an honest discussion about household finances and troublesome behaviors, then your entire relationship is in jeopardy. Communication is key to avoiding the problem in the first place and recovering from it if avoidance isn’t possible.

Although bankruptcy may be that miracle cure you sought for your financial woes, you may encounter some unpleasant side effects. The disadvantages of filing bankruptcy are:

You can lose assets. Depending on how much your home is worth and where you live, it is possible, but unlikely, that you’ll lose it by filing bankruptcy. In most bankruptcies, debtors don’t have to give up any of their belongings, but…

Bankruptcy is a matter of public record. As more and more records are stored on computers and accessible on the Internet, searching that data becomes easier and easier for anyone who’s interested. In other words, if your nosey neighbor wants to know whether you filed bankruptcy, how much you owe, and who you owe it to, the information may be just a few mouse clicks away,

Bankruptcy affects your credit rating. Bankruptcy may have a negative effect on your credit rating, but that fact may well fall into the “So what?” category for you. Even with a bankruptcy on your record, your odds of obtaining credit are very good. With a little work and perseverance, you can reestablish credit almost immediately. Some credit-card companies actually target folks right after bankruptcy because they know that these people are free of all their existing debts and probably won’t be eligible to file another bankruptcy any time soon.

For a few years after bankruptcy, you may have to pay higher interest rates on new credit, but this result will ease over time, even if your credit report still shows a bankruptcy. So, don’t pay too much attention to the horror stories bill collectors tell you about the disastrous effect bankruptcy has your credit.

Friends and relatives can be forced to give back money or property. If you repaid loans to friends or relatives or gave them anything within the past year, they can be forced to repay a trustee the money they received, if you don’t know what to watch out for. You can usually avoid these kinds of problems by carefully timing your bankruptcy filing.

Bankruptcy can strain relations with loved ones, especially parents who were raised in a different era.

A stigma may still be attached to filing bankruptcy. This drawback is especially true in small communities, but is much less likely to be a problem in cities, where newspapers rarely bother printing the names of non-business bankruptcies.

Bankruptcy may cause more problems than it solves when you’ve transferred assets to keep them away from creditors.

You can suffer some discrimination. Although governmental agencies and employers aren’t supposed to discriminate against you for filing bankruptcy, they may still do so in a roundabout way. Prospective employers may also refuse to hire you.

With the following savings options, the principal is guaranteed (or close to guaranteed), and the rate of return should keep you even with or slightly ahead of the inflation game:

Local Savings Bank

There’s something to be said for keeping at least a small balance at the neighborhood bank. I do. Need a loan someday? It may be easier if you are a regular customer. Local businesses are also more likely to accept a check drawn on a local bank. Then there’s the “bank experience,” which may be especially important if you’re a parent. Each of my two children has a saving account at the corner bank, and they love going there for the free plate of cookies.

At all savings banks in the United States, deposits are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). Even if the bank goes under, you’re covered. The interest rates paid by local banks tend to be very modest, more modest than those paid by most bonds.

Certificates of Deposit (CDs)

The longer you’re willing to commit your money to the bank, the higher the interest rate. Generally a 6-month CD may pay an interest point more than passbook savings, a 12-month CD may pay a bit more, and an 18-month CD yet a wee bit more. If you have one to several thousand dollars sitting around, perhaps you might put one-third into each. That way, you’re not tying up all your money for the entire time, and if interest rates go higher in six months, you’ll be free to take part of your money and upgrade to a higher-yielding CD.

Shop for the best rates at www.bankrate.com or www.money-rates.com. And especially if you’re dealing with a local bank, ask to talk to the manager and see if you can negotiate something higher than the advertised rate. CD rates are usually comparable to very short-term bonds but are not on a par with longer-term bonds.

Internet Banking

Consider opening an account with a Web-based, FDIC-insured savings bank, such as www.emigrantdirect.com or www.ingdirect.com. The rates on savings accounts are often comparable to one-year CDs, and you don’t need to tie up your money at all.

Money Market Funds

Money market mutual funds are not insured by the FDIC so they aren’t quite as safe as bank accounts or U.S. savings bonds, but they are almost as safe. They tend to offer a slightly higher return than bank accounts but not as much as a bond portfolio. If you hold one of these funds outside of your retirement account, you may want to choose a tax-free money market fund, especially if you are in a higher tax bracket.

Note that with money market funds, your principal is secure but the interest rate is not; it can, and often does, vary from day to day. That’s just the opposite of a bond, by the way: With a bond, your interest rate is fixed, but the value of your principal can vary day to day.

Short-term, High Quality Bonds

Short-term bond mutual funds and exchange-traded funds, both taxable and tax-free, are similar to money market funds and often pay a bit more.