Magician David Copperfield made the Statue of Liberty disappear. David Blaine levitates a few feet off the ground and Chriss Angel walked up the side of Caesar’s Palace.While these all seem virtually impossible, this one may seem far more unbelievable: I have a handful of clients with CDs that earned more than 20% last year.And making matters even more unbelievable, this wasn’t done through a magic trick. While I do admit to having a couple of good card tricks up my sleeve (I can even smash a coin through an unopened soda can), when it comes to these CDs, there’s no need to use any smoke and mirrors. In the case of delivering a CD that earned more than 20%, however, all I merely used was something called “Structured Products.”

“Structured Products” is the technical term for what some media refers to as “Growth CDs.” For purposes of this blog where I try to keep things simple and to the point, I’m not going to get into all the technical details of how these complex, derivative based investments work. I’m writing this merely to inform you that these things are out there and you may find them interesting enough to further investigate.

The following are some common features:

• Guaranteed protection of principal if the Structured Product is held to maturity.
• Maturity is typically 3 - 5 years.
• The guarantee is backed by FDIC insurance.
• The return one earns from a Structured Product is typically determined by the performance of a stock market index. This is exactly why the returns on the CDs mentioned above earned greater than 20% last year.
• Market indexes returns are based on might include any one of the following:
  • S&P 500
  • Dow
  • Nikkei Index
  • Various European indexes
  • Commodities indexes
• Typically, a calculation will determine how the interest is credited to the account. Figuring out returns is not always as easy as saying “The S&P 500 went up 10% so I’m getting 10% on my Structured Product.” Different Structured Products calculate interest different ways and it’s obviously important to have at least some measure of understanding as to how the calculation works before an investment is made.
• In many cases, it is possible to “break” the Structured Product early. If one breaks the Structured Product early, they will typically get fair market value for it (and that fair market value can be more or less than the original investment). In addition, there could be early withdrawal penalties and withdrawals might only be permitted once or twice a year.
• In some cases, a minimum rate of interest is guaranteed at maturity even if the indexes don’t perform well.
• Interest earned is fully taxable, just like any other CD.
• Structured Product are almost always invested in through a brokerage. Local banks don’t typically offer them.

Bottom line: if you like the idea of protecting your money while investing in the stock markets, a Structured Product could be a welcomed part of your well diversified investment portfolio. And after seeing the impressive returns a handful of my clients earned last year in these investments, for the risk adverse investor understandably fearful of loss, there’s no doubt I’ll occasionally continue recommending them for some time to come.

I can only think of one thing better than getting a brand new Ferrari: getting it for free. Same thing for a Long Term Care policy, a large pizza or an iTunes gift certificate.

Take, for example, a real nice woman in her early 60s looking to purchase a Long Term Care policy. Although she really wanted it, the big problem was she claimed she couldn’t afford it. And as a result, she declined the coverage.

I asked her a few questions about her investments and learned that most of her money was invested in individual growth stocks. Thankfully, her portfolio was well diversified and the companies she was investing in were well known, high quality corporations.

So far, so good. But when it came down to her desire to get a Long Term Care policy that “costs too much” there was some opportunity being lost here.

Scanning her stocks, she had plenty of companies that weren’t growing all that much and paid no dividends. For those of you unfamiliar with these things called “dividends,” they can truly offer investors a handful of magical things.

To begin with, a dividend is a taxable cash payment made to those who own company stock. As an example, if I owned 1,000 shares of XYZ Company stock and XYZ pays a dividend of $1.00 per share, then obviously I’d receive $1,000 dollars in cash (1,000 shares * $1.00 = $1,000 dollars). Some people decide not to get the cash, but to use the cash to purchase additional XYZ company stock. The practice of using dividends to purchase additional company stock is commonly referred to as “re-investing” the dividend.

It is also important to realize that the amount of cash one receives as a result of a dividend payment has little to do with the value of the stock. The amount of dividend received has to do with the quantity of shares the investor owns. So, whether the stock goes up or way down in value, the dividend generally remains the same (it should be well noted that dividends are not guaranteed. At any time, a company can decide to raise, reduce or eliminate a dividend all together).

That said, there are many companies out there in industries such as finance, utilities, real estate trusts and many other sectors that have long, impressive histories of paying consistent and reliable dividends.

Recognizing all of this, I recommended to the woman above that she sell some stocks that weren’t growing and weren’t paying a dividend. With cash on hand, I then recommended she invest in a well diversified portfolio of other blue chip stocks that not only showed better signs of growth but of equal importance, paid her cash dividends.

The result?

She’s still invested for growth and now gets enough cash from dividend payments to afford the Long Term Care policy she once thought was too expensive. For her, all it took was a simple and subtle re-allocation of her portfolio to give her what she truly wanted.

So, whether for you it’s a large pizza, Ferrari or a couple of downloads from iTunes, who knows? Maybe you too will find that sometimes the best things in life truly might be “for free.”

Legend has it that just before the Great Depression a well-known investor knew it was time to take his money out of the market when the shoeshine boy gave him stock tips.

This weekend reminded me of the same thing. I was busy buying a big chicken for a few friends coming over for a Sunday bar-b-q and while waiting on the checkout line, the guy helping bag groceries recommended I buy stock from the company that made buns.

Nothing against market baggers or bun companies, but the event did make me think that I should double-check my diversification just in case of a correction.

Many people are talking all about stocks these days. While I’m certainly a big fan of a market that at the moment seems to be going no where but up, the laws of gravity will catch up to us. And when they do, if you heeded some past advice of this blog, you’ll be quite happy knowing your investments were well diversified not only in various sectors of the stock market, but the bond market as well.

Many people unfortunately ignore bonds, and personally, I consider the returns they provide the “bird in the hand” portion of your investment portfolio, especially for those that are getting closer to retirement or are already in it.

Whether you consider me an outcast on Gilligan’s Island or a bit of a contrarian, I do believe the recent run-up in the market provides a fantastic time to sweep some profits off the table and invest them into a handful of boring, uninteresting but highly efficient bonds.

When investing in bonds, bond mutual funds are a mainstay of many investors seeking some measure of safety or income to their portfolio and with good reason: bond funds provide professional management and diversification into a number of different bonds, which could help cushion a portfolio from a bond “defaulting,” which is a kind word for “going out of business.” But should interest rates rise, the value of the bonds in the fund will likely fall, as will the fund’s value — and a bond fund, unlike an individual bond, doesn’t have a maturity date when you know you’ll get your principal back. But you can reduce this risk by investing in something commonly referred to as a “bond ladder.”

A bond ladder is simply a portfolio of bonds with different or “staggered” maturities (whereby absent of a default, “maturity” refers to the date in which the bond returns the investment to the investor). So, as a hypothetical example, if you have $100,000 to invest in bonds, you might have 10 bonds with a face value of $10,000 each, or 20 bonds with a face value of $5,000 each. In a ladder, all of these bonds would have different maturities. With one bond maturing in a year, another in two years, another in three years, and so on, the portfolio would look very much like a ladder.

The main benefit to a bond ladder strategy is that by staggering the maturity dates of the bonds, you won’t be locked into any particular bond for a significant period of time. In addition, when compared to a bond fund, should interest rates rise and the value of the bonds likely fall, with a ladder you have a maturity date when you know you’re getting your money back, which would obviously be a good thing. With a bond fund, if interest rates went up and the value of the fund went down, it’s anyone’s guess when you’ll get your money back.

As an example, let’s say you invest your $100,000 into a single bond with a 5 percent yield and a 10-year maturity. During the 10 years until the bond matures, interest rates are likely to rise and fall along with the value of the bond as well. (Remember, the value of a bond moves opposite to interest rates.) But if interest rates are low at the time your bond matures—and you’re ready to invest in another bond—you’ll be stuck buying a bond with a low interest rate (or investing the money into something such as a money market while waiting for the investment environment to improve, which obviously may take longer than you planned.)

On the other hand, if you have a bond ladder, only one of many bonds in your portfolio will mature at any given time. Interest rates might be low when one bond matures, but chances are that the interest rate environment will be a little different when the others mature.

Bond laddering is particularly beneficial in a rising-interest-rate environment because it allows you to readily move your money out of lower-yielding bonds and into the higher-yielding bonds as interest rates rise. One could argue that if you buy a bond fund the portfolio manager within a mutual fund would do this for you, but some investors like myself want as much control over the process as possible.

A secondary benefit of bond laddering is that it allows you to adjust your return based on your exact needs. In general, bond ladders can often be fine tuned any number of different ways to provide the return an investor requires, which can obviously be a good thing given it increases the chances personal objectives will be met.

Many financial advisors overlook bond ladders because it’s easier for them to drop a client’s money into a bond fund than research and purchase a number of individual bonds.

But for those looking to diversify and preserve their principal as much as possible, especially during upcoming or in retirement years, a bond ladder can be an excellent strategy to consider. In a well diversified ladder, where credit quality is strong and not a lot of money is invested into any one bond, the peace of mind a quality ladder brings to the income investor can be a big win.

So, as the old saying goes, “you make your money in stocks and keep it in bonds.” And during this recent run-up in the market, it most certainly could be an excellent time to be thinking about preservation, not perspiration during what could possibly be some turbulent times ahead.

It’s the eternal question of every investor, “How can I buy low and sell high?“The answer isn’t as difficult as you think. In fact, the answer is actually quite simple. But what makes things immensely difficult and nearly impossible for many isn’t the process but rather the emotions that typically get in the way of success. As soon as emotion is injected into the process, chaos, uncertainly, frustration and regret often enter the picture and that’s not rewarding or efficient by any means. I believe an efficient investor is one who admits that with extraordinarily rare exception, few people can consistently out-perform the market. Since the days stocks were traded under Wall Street’s Buttonwood Tree, millions of people have tried and only a tiny fraction have actually been able to pull it off.

With that in mind, there has to be an answer to help get us where we want to go, and one of the most powerful strategies is as follows:

• Create a well diversified investment portfolio that contains the fundamental and timeless market sectors such as:
  • Large Cap Domestic Stocks
  • Mid Cap Domestic Stocks
  • Small Cap Domestic Stocks
  • International Stocks
  • Bonds
  • Real Estate
  • Technology
  • … and any other sector you’d like to own and hold for some time to come.
• Use a low cost index to represent each sector you choose.
• Recognize you chose the sectors because they belong in a well-diversified portfolio.
• Also recognize that at any moment, some sectors will perform well while others won’t perform so well. In addition, recognize it is very difficult to predict which ones will be “hot” or “cold” at any given time.
• And lastly, recognize there is great opportunity during various times when certain sectors aren’t performing so well.

With all that in place and in mind, the unemotional art of Re-Balancing then gives us strong chances to buy low and sell high. Re-Balancing is simply the art of keeping the portfolio in balance, and it is typically done once or twice a year.

Why is Re-Balancing so effective and important? Here’s a simplistic and hypothetical example of why:

Suppose it’s the roaring 90s and for sheer simplicity, you decide to establish your investment portfolio using five market sectors in equal proportions below:

1. Domestic Stocks: 20%
2. International Stocks: 20%
3. Bonds: 20%
4. Technology: 20%
5. Real Estate: 20%

As 2000 rears its head, the balance of the portfolio might have shifted to look something like this:

1. Domestic Stocks: 30%
2. International Stocks: 10%
3. Bonds: 10%
4. Technology: 40%
5. Real Estate: 10%

If you ignored the fundamental, timeless rules of re-balancing, you would have most likely been thinking: “Tech is making a fortune. Real Estate and International is doing awful. Why don’t I sell Real Estate and International and invest those losers into Tech?”

But the emotionless investor who realizes no one can predict the market would be saying: “Fantastic. Tech has done great, and Real Estate and International hasn’t done so well. I need to re-balance the portfolio and fill up the important sectors that have gone down in value.”

The gambler often rides Tech to the crash and presumably had sold off Real Estate and International to chase its returns. The investor who didn’t let emotion get in the way re-balanced Tech and Domestic stocks back to their original allocation of 20% each. And what did they do with the profits? They used them to re-fill the sectors that weren’t doing so well (i.e.: Real Estate and International) back up to their original allocations of 20% each.

By doing that, what did the unemotional investor accomplish? They sold Tech at a high, and they bought sectors such as Real Estate and International at their low. Tech crashes, the market causes all sorts of chaos, and as the dust settles, what typically happens next? Often, the ice-cold sectors no one was paying attention to come back into vogue, very much like Real Estate and International did during the years following the infamous Tech crash of 2001-2002.

The investor took emotion out of the equation and mechanically sold off gains from sectors that were surging in value. They used these gains to re-fill sectors that had gone down in value and thereby “sold high and bought low” thanks to the timeless art of re-balancing.

Sounds easy, right? It really is but only when you take emotion of the process. Just think: as Tech was surging, how many people were brave enough to sell profits and invest them in sectors that weren’t doing so well? Answer: the investors that realize it’s impossible to know what’s going to happen next - and to achieve the best chances of sustained success in the markets, one has to have a system to try and ensure success.

My advice: stick with the timeless basics of re-balancing and don’t deviate - doing so typically gives you the best chances of consistent market success.

So, leave the gambling to a small portion of your money and let the unemotional investor take care of the rest.

Here’s a trivia question: when is the one time someone giving you money is a terrible thing?

Any idea what the answer is?

… Think about it for a moment …

… A bit tricky, right? …

… Any ideas? …

… Could there ever be a time when someone giving you money is a bad thing?

… Here’s a hint: for many people out there, it’s about to happen. In fact, coming up very shortly, millions of people across the country will be getting checks in the mail. And in many cases, those checks will be for hundreds of dollars. Maybe even many thousands of dollars.

Will you be one of the many unlucky people in this country to get a check?

By now you might be thinking, “Is this guy nuts? Why the heck wouldn’t I want to get free money?”

As crazy as it may sound, I say, “Trust me. You don’t want to be one of these people.”

And why is that? Why wouldn’t it be a good thing to get a check in the mail with no strings attached? Is it Ed McMahon’s doing? Did all those unlucky people just win Publisher’s Clearing House Sweepstakes?

No, silly… the checks I’m talking about is something called a “Tax Refund.” And while getting those checks in the mail might first sound like a great thing, this is the one time when it’s really not.

And why is that?

Simple: because you aren’t getting a gift, and you’re certainly not getting free money. You’re getting your own money. Sadly, many people don’t realize this and it’s a real shame, because think about it: all a tax refund really means is that during the year, you “loaned” the government your own money, they received interest on it and all you got back was your own money. Great deal for Uncle Sam, bad deal for you.

Would you give me $5,000 dollars of your money, only to get the same amount back eight months later? (these numbers are all hypothetical, just conceptual to make a point).

Would anyone volunteer to do that?

No one would unless they also got interest, but ironically, when it comes to paying taxes, many people make that interest free loan to Uncle Sam year after year. Getting a refund simply means you overpaid your taxes, simple as that. You either had too much money taken out of your paycheck or you overpaid your estimated taxes, and that’s not a good thing. Your money went working for Uncle Sam, not for you.

So, if getting a refund check this year, don’t go spending it so fast. You’ll only be spending your own money (well, ok – who couldn’t resist a little treat, right? A new pair of Hi-Tops, a big bag of Famous Amos cookies and personally, I’m all set).

To make things more efficient for yourself, don’t kill the messenger bearing the bad news here – if you’re getting a refund this year, be sure to review your estimated taxes or your withholdings with a qualified tax advisor. With little exception, you’d be far better off keeping that money for yourself and investing it whereby you get to reap the rewards, not Uncle Sam.

After all, when it comes to saving for retirement, over time, every last bit definitely helps.

I feel like Dorothy awakening after the storm. But instead of waking up with Toto asking “Are we in Kansas,” these days I’m finding myself watching CNBC asking “Are we in Pamplona?”

For those of you unfamiliar with Pamplona, every July 13th an event known as “The Running of the Bulls” takes place. It all starts with a large gathering of brave souls filling up narrow streets and once everyone in place, a barrier is pulled and dozens of unruly bulls run amok, steam rolling anything in their path.

To protect themselves from ending up with an eight inch horn stuck in their rear end, the crowd does any number of things including running as fast as humanly possible, climbing street signs, leaping over guard rails, playing dead or my personal favorite site - pushing someone else in front of a charging bull.

While we may not be in Pamplona these days, we’re definitely busy running amongst our own bunch of bulls running through Wall Street. To protect ourselves, we thankfully don’t need to climb lampposts or toss someone else in front of us. We merely need to adapt any of the following ideas to help accomplish the task:

• Sell some winners: a good thing happened last time I was in Vegas – I actually won playing Craps. All it took was a few lucky rolls of the dice to pay for the trip due to one thing: I was busy taking profits off the table and not letting it all ride.

• Re-balance: failing to re-balance a diversified portfolio only means one thing: you will most likely wind up giving up your earnings not if but when the downturn for a particular sector takes place.

• Set stop-losses: while a stop-loss doesn’t guarantee a position will be automatically sold when it reaches a pre-determined price, it does give you a likely chance that you’ll bank the earnings.

• Buy Put Options: options are one of the most reliable ways to protect your individual stocks from a downturn. “Buying a Put” simply means that if a stock goes down in value, you are giving yourself the right to sell it to someone else at a date and price established when the option is purchased. Although Buying Puts is at first a bit tricky, it’s immensely worth the education.

• Inverse Funds: including an inverse fund in a portfolio could help stabilize losses should a downturn take place. For those of you that haven’t heard of inverse funds, the concept is simple: these funds make money when the market goes down. For more information, click here or check out leading providers of inverse funds such as Rydex or Profunds. (As good as an Inverse Fund might sound, I would strongly consider a well diversified portfolio in its place - something I’m about to mention more of coming up).

• Consider investing in defensive stocks: there’s been a lot of chatter recently about an expected downturn coming up. Will it happen? When will it take place? No one really knows, but when re-balancing or selling some of your recent winners, it could be a good time to use some of this money to start investing in defensive stocks. As for which company to invest in, leave that to the gamblers. Instead, be an investor and make it simpler for yourself by considering a low cost index that typically fares well during a downturn such as: food, utilities and consumer product companies.

• Check your diversification: boring it may be, but a well diversified portfolio covering the major asset classes is often the best way to protect yourself from getting hurt in any one particular sector. Anyone remember “Tech 2002?”

And finally…

• Do you have too much risk? - Keeping in mind the old adage, “you make your money in stocks, you keep it in bonds,” I’ve met plenty of people that have way too much money invested in the stock market. Depending on your personal situation, given the overall run up in stocks, now might be a great time to consider moving some money from stocks to bonds.

… So, forget tossing someone in front of charging bulls. Include any of the above strategies in your portfolio and you’ll most likely find yourself better protected while running amongst the current wave of Wall Street bulls.