What a way to welcome the year: the market is down, a recession appears to be imminent (if not here already) and worst of all, I still can’t find myself a Nintendo Wii.

As we enter the New Year, things may look a bit bleak, but a few resolutions I plan on keeping will help ensure my year is a success.

What about you? What have you resolved yourself to do? If you’re still looking for a few ideas, here’s a couple of scattered things to help get you on your way:

Reduce Those Taxes. Investing in managed mutual funds? Chances are you’re paying more tax than you should.

While I’m all for paying my share of tax, I prefer not paying more than my share, and that’s why I like to minimize the tax I pay by investing in index funds. Are you investing in managed mutual funds? If you are, there’s a decent chance your fund managers are actively trading stocks and as a result, they could be causing you all sorts of unnecessary tax.

Do you have an idea whether or not your funds are causing you excess taxes? Take a moment to do something really boring but effective: take out last year’s tax return, look on the first page, line item 8a and 9a under “Taxable Interest” and “Taxable Dividends.” If there are dollar amounts on these line items, and you aren’t using this money for income, then you are paying more tax than you should.

If this is the case, don’t take your portfolio to Jiffy Lube for a tune up, rather, take it to a knowledgeable investment or tax advisor. They should be able to give you a few ideas on how to save you some taxes such as investing in index funds or other options not mentioned here.

Rebalance Your Investments. Statistics don’t lie. When it comes to mutual funds, they tell us that last year’s winners are often next year’s losers. Did you make some nice gains last year in things such as international and emerging market stock funds? Congratulations. That’s great news. But just like a good roll at the dice table, it could be time to take some money off the table and put it into your pocket or somewhere else.

Save a Couple of Bucks. Invest a hundred dollars a month into an S&P 500 index fund and ten years later what do you get? At a hypothetical return of 8% per year, here’s what you get: very little taxes to pay along the way, diversification into the 500 largest companies in the country across several different industries, low fees and at the end of the day, around $17,000 dollars towards your retirement. … How good is that?

Review Your Risk. The markets are pretty bumpy these days (to say the least), and the experts out there are fighting each other as to whether we’ll spend the year running with the bulls or getting eaten alive by hungry bears. Are you invested heavily in stocks? Maybe it’s time to take a breather. After all, for a portion(s)of your money, a 5% rate of return in something such as a boring CD could be much more appealing at the end of the year than losing some money in the stock market.

Make That Contribution. Grandma sport you a few extra C-notes for Christmas? Consider using that money for a nice gift: tuck some of that money into an IRA by April 15^th, get a nice tax deduction and watch it (hopefully) grow tax deferred. By the time retirement rolls around, chances are pretty decent that you’ll be able to get yourself not one nice Christmas gift but more than a few.

 

Pay Off That Debt. Before making that IRA contribution or investing a few dollars, this one should be at the top of the list… Want to lock-in an attractive rate of return?

Many people can do so by paying down their credit card debt. Some cards I’ve seen charge an astronomical interest rate and by paying it down, congratulations – you just “banked” yourself this high rate of “return.”

Explore. I just recently evaluated a software program that could potentially revolutionize the way people pay off their mortgages. Although I haven’t completed my total due diligence yet, it appears this system could help you pay off your mortgage in about half the time. And get this…. paying off the mortgage in less time does not appear to require any additional out-of-pocket payments. … Fascinating? … Absolutely. … Accurate? …. It appears that way. … Care to know how to do this? … Give me some more time to complete my due diligence.

Write Something. Have a great idea? Why not share it with me and many others?… My new book came out in November and I can honestly say, it’s changed my life. Although I’ve written quite a few things before, this was my first major release and it’s done wonders for me on many different levels. Regardless of the profession you’re in — whether you are a plumber, painter, full time mom, or even out of work — writing about something you’re familiar with helps you stand out amongst the crowd.

If there’s any advice I’d give anyone about creating a much welcomed milestone in their life, it would be to write a book, or even simpler, a blog, a newspaper article, … anything at all. Chances are, there’s an audience out there for your thoughts and with a little time and dedication, there’s little doubt your work will find its audience.

Read. Care to tune up your investments? Learn a few things? There’s no better place to start than by reading a good book. Here’s couple of my personal favorites that come to mind:

• You Can Never Be Too Rich (how can I resist recommending my own book?)
• The Millionaire Next Door (fantastic read)
• The Intelligent Investor (the all-time classic book on value investing)
• You’ve Lost It, Now What? How to Beat the Bear Market and Still Retire on Time (practical advice from the Wall Street Journal columnist you shouldn’t miss)
• The Little Book That Beat The Market (a great read for a technical investor)
• The Automatic Millionaire (very simple, but very effective)
• Exchange-Traded Funds For Dummies (never heard about these ETFs? Start reading about them now!)
• Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (Classic book on understanding mutual funds)
• Blood on the Street (Where did your money go in the tech crash of 2001? Here’s a great inside view on Wall Street you won’t want to miss)
• You Buy, You Die, It Pays (Life Insurance? Check out this book for some truly creative ideas)
• The Science of Getting Rich (Ever hear of Napolean Hill’s classic “Think and Grow Rich?” If you haven’t, then you probably heard of people such as Anthony Robbins and a long list of other personal-power gurus that can all trace their roots back to Wallace Wattle’s classic book that serves as a foundation to all)

Send Cards. I don’t know about you, but it’s pretty rare when I get a card from someone these days. While my email in-box is constantly stuffed, last year, a buddy of mine did something from way back in the stone age: he sent me a “thank you” card. In our age of technology, that thing really stood out; so much so, that the other day I purchased a box of thank you notes and vowed to use at least one every month.

In Conclusion. Did I miss any good ideas? … I’m certain I did. … Drop me a line. … I’d love to hear some good ones. After all, good market or bad market - there’s nothing like a good resolution kept to ensure your year is a success.

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There’s the “12 Days of Christmas” and there’s also my twisted version, the one I refer to as the “12 Things The Holidays Teaches Us About Investing.” Check it out:

The holidays: While I’m all for the big holiday parties and lavish events, looking back at our most memorable holiday moments, I bet many would agree it’s the simple moments spent with family and friends that are typically the most rewarding.

Investment lesson learned: Learn from the holidays. Simple investments such as the S&P 500 (that typically outperforms most professional money managers) teach us that it doesn’t have to be complicated for it to be effective.

The holidays: Turn on a holiday newscast and there’s a decent chance you’ll see a story about a handful of frenzied shoppers searching all over creation to find that one last Wii. … Who scored them? That’s simple: the persistent ones who refused to give up.

Investment lesson learned: Just like the holiday shoppers who scored this year’s Elmo, it’s those who don’t give up that often find the treasure. Whether it’s a great opportunity or a creative investment with returns that would make even The Donald proud, finding the good stuff takes time, education and, of course, a willingness to never give up.

The holidays: Did you hear about the holiday shoppers going to Target at 4am? Maybe you were one of them. Understanding the value of bargains, many holiday shoppers take their time to start early, compare costs and find the deals. Doing so accomplishes one key thing: give them a better bang for their buck.

Investment lesson learned: Who thought Warren Buffet and my Aunt Harriet would be so much alike? When it comes to finding undervalued stocks, sifting through the market bins of Wall Street for discounts gives you the best chance to maximize upside while trying to reduce investment risk.

The holidays: When it comes to opening holiday gifts, there’s little worse than seeing a kid who regretfully discovers “not all pieces shown are included.”

Investment lesson learned: Learn from Little Billy gone wild. Whether it’s the presents you give or the money you invest, avoiding the surprises is a job well done. Before investing, read the fine print; that stuff is always more important than the window dressing itself.

The holidays: What holiday would be complete without Auld Lang Syne, It’s A Wonderful Life, Times Square and a hangover to boot? There’s a reason those things and more have lasted the test of time: because they do a timeless job of bringing the true meaning of the holidays into our hearts and homes.

Investment lesson learned: Whether it’s Ben Graham’s legendary “Intelligent Investor” or many other timeless principles of prudent investing, the holidays teach us that if it isn’t broken, why try and fix it?

The holidays: High School, New Year’s Eve, 1982. With my mane of hair, A Flock Of Seagulls, Jordache jeans and one beer too many, falling over Crazy Julie and landing in the hospital to get a head of stitches proved that yes, too much of one thing really can hurt you.

Investment lesson learned: The history of investing is ripe with examples of over-indulgence. Whether it was tulips, dot-coms or the current real estate mess, the holidays teach us that while too much of one thing may not give you a head of stitches, it can easily render you broke.

The holidays: While toaster ovens, dishes and socks have their place under the tree, it’s the creative gifts — the thinking out of the box — that is often remembered the most.

Investment lesson learned: Market gone bad? Selling your stock? Remember: every time you sell, there’s someone on the other side to buy. … who’s doing such a thing? Aliens from another planet? … Not quite. Those buying your stocks obviously think differently, take educated chances, get creative and could wind up reaping some great buys.

The holidays: Want to ruin your girlfriend’s gift? Have me wrap it. … To avoid such despair, here’s a better suggestion: take it over to the mall wrapping station. With precision creases, perfect bows and curly color laces, giving your girlfriend a gift with their touch makes a big difference in showing her you really do care.

Investment lesson learned: Want to ruin your investments? Don’t pay attention to fees and taxes. Neglecting those important details will accomplish one key thing: lower your returns. So, the next time you invest, take a moment to think of those nice people over at the mall. Doing so should remind you that whether it’s gift-wrap or your investments, it’s the details that count.

The holidays: Leaving town for the holiday? Whether it was pricing tickets, figuring out a route or making hotel reservations, what trip would be a success without taking the time to plan it?

Investment lesson learned: Looking forward to retirement? In markets like these, I certainly am. And just like planning a trip, not having a financial destination often leads to nothing but regret. After all, this is your life we’re talking about, remember?

The holidays: While a front row ticket to Springsteen, a Pug or a Costco-sized case of Famous Amos are all gifts I couldn’t turn down, the holidays teach us it’s the gifts we give – not the ones we receive — that bring us the most reward.

Investment lesson learned: While charitable donations and tax deductions might be all well and good, it’s a daily act of random kindness that personally turns me on the most. Want to make someone’s holiday? Try my personal favorite: pick a random table at a restaurant and pay for their meal. …Want to really blow them away? … Don’t let them know it was you who did it.

The holidays: The experts on resolutions, whoever and wherever these people may be, tell us the more resolutions you make, the less likely you are to keep them. To make them work, keep them short, simple and attainable. Otherwise, they’ll rarely be kept.

Investment lesson learned: Listen to those nutty resolution experts. Pick one or two investment ideas for the New Year, and if you can’t think of one, try this: save $100 dollars per month and invest it into a low cost, tax efficient and highly productive stock index. At a 7% hypothetical annual rate of return, in 10 years you’ll have roughly $17,000. … How good is that?

The holidays: I don’t know about you, but eleven months, three weeks, six days and a few hours into this year, I need to finally get some rest. With that, the holidays are a perfect time to take a moment to kick back, watch the Jets lose another one, eat lots of unhealthy stuff or do whatever it takes to make you happy.

Investment lesson learned: Recession? Higher oil prices? Inflation? More sub-prime mess? For one fleeting, quick and luxurious moment, take a profound breath to say, “who cares?” … After all, there’s nothing wrong with taking a moment to live this wonderful thing some call “life.”

See me discuss these tips on Fox Business Network 12.24.07

I want to wish you and your family a very happy and successful New Year.
See you next year…

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Have you ever dated your financial advisor?

Most people haven’t, and judging by myself and a few other advisors I’ve seen out there, that’s perfectly understandable. But in a way, whether you like it or not, you are sort of dating the person looking after your money. After all, you most likely speak to this person quite often, see them once in a while and on occasion, might even join them for a trip to Tibet.

Most financial advisors I know out there are honest, decent and completely trustworthy. Unfortunately, however, as in any profession, there’s always a few sour apples in every bunch.

As such, forget the Iranian nuclear threat, Bin Laden at large, the sub-prime mess, the war in Iraq and the planet about to dry up like a Sun Maid raisin. When it comes to making the world a better place to live, the first place one should always start is by learning a few inside tips some financial advisors might rather you didn’t know about.

Keep in mind: in some cases, these ideas are not necessarily dishonest things, rather, they might simply relate to “industry acceptable” business practices I’m generally not a big fan of.

So, as you and your money hopefully continue a pleasurable experience dating your advisor, here’s a few inside tips to keep in mind along the way…

Is your advisor dependent or independent, and why would this matter?

Typically, a dependent advisor is one that works for a firm that also “manufactures,” promotes and distributes their own investment products, otherwise known as “proprietary investments.” For example, the advisor you’re dating might work at XYY Brokerage that “manufactures” XYZ Mutual Funds. While in some cases these proprietary funds might be perfectly fine, inexpensive and perform very well, in some cases, these proprietary investments not only under perform their peers, but they could potentially cost more in terms of fees as well.

While such a case is not a certainty by any means, if you have money at (for example) “XYZ Brokerage” and are invested in their XYZ Mutual Funds (or any other proprietary investment “manufactured” by that firm), I would highly suggest you at least take a second look at these investments in terms of their performance and fees. You’ll either be pleasantly surprised or, perhaps, want to divorce your advisor and start having you and your money date someone else.

Have you ever heard the phrase, “There’s no cost to invest in this fund?” If you have, and you invested because of what appeared to be a free lunch, then you were likely told only half the story.

When investing in funds, even funds that are deemed “no load” (no commissions), just know this: you’ll always pay a cost while your money is invested in a fund. I’ve seen (what’s known as) “internal fees” as high as 4%, and in one case, a mind-boggling 8%, which will obviously do one thing and one thing only: reduce your returns and get your money upset that so much of it is going unnecessarily down the drain.

If you’re curious to know the cost of maintaining your “no load” (or other) fund, be sure to check out www.morningstar.com, or, better yet, Lipper’s www.personalfund.com. Another great source is FINRA’s mutual fund expense analyzer that can be found at www.finra.org/investorinformation.

So, next time you hear those poetic words, “There’s no cost to invest in this fund,” make sure you get the rest of the story; otherwise, it could wind up being one bad and expensive date.

Forget boating, shrimps on the Barbie, Jimmy Buffett music, getting eaten by sharks and if you’re me, stepping on hot coals buried in the sand. When it comes to “anchoring” an account, the term typically means there are investments or ancillary services embedded in the account that could help “keep it in place.”

Let me explain this a bit further…

Keeping in mind item number one above, suppose I am invested with XYZ Brokerage and along with other mutual funds, my account contains those proprietary XYZ Mutual Funds nested somewhere inside it.

Suppose, hypothetically, that I no longer want to date my financial advisor; there’s someone else my money wants to go see Scorsese’s latest movie with. So, I go to this “someone else” who attempts to “transfer” my account from XYZ to their firm.

Typically, transferring the account to this other advisor would be easy, but with those XYZ Mutual Funds nested in the account, it’s a bit trickier. In most cases, these XYZ Mutual Funds first have to be sold off before the account can be moved (proprietary funds have to be sold because in general, the new advisor wouldn’t be allowed to sell these funds; they can only be sold by what’s known as “captive” representatives)… And what does this mean? It means you’d have to first call the advisor at XYZ Brokerage to sell them off, and this gives the advisor one last chance to try and “save” the divorce from happening (which, in some cases, might actually be a good thing given it could give you one last opinion — for better or worse — that moving the account to your new advisor is in your best interest).

Another popular “anchor” in accounts are all those extra services some brokerages offer. An extra service might include, for example, bill pay. Imagine this: you go to a new firm, you are offered bill pay services, and for convenience, wind up changing the address of all your bills to go to the brokerage account (for on line bill pay and direct debits from the brokerage account itself).

Sound convenient? Some firms hope so. In the case where your life is running through the brokerage account, you might have a harder time accepting the fact that if you move the account elsewhere you’ll have to re-do tedious things such as setting up your bill pay services. The more extra-curricular services you “take advantage of,” the less likely, some firms believe, that you’ll want to move the account.

The answer to all this is to take your time making sure the advisor is the right person for you to date. Only after you’re sure the relationship has legs would I recommend taking advantage of all those extra services.

Paying a management fee to an advisor to watch over your money? … In many cases, I have no problem with that, and, presumably, neither does your money. But when you’re paying an advisor to manage your account and the advisor has your money invested in managed mutual funds, then guess what…. You’re now paying two (or more advisors) to manage your money; the advisor you are dating, and, the advisor(s) at the fund.

As such, I would highly recommend the advisor (you’re paying a management fee to) consider using low cost investments such as index mutual funds or Exchange Traded Funds. This way, you are truly only paying one advisor, not several along the food chain that, once again, could likely result in one thing: lowering your rates of return and getting your money upset at you.

Managed money accounts can be a good thing but what happens if the relationship turns sour? What happens if your money wakes up one bad market day and says to you, “get me out of this relationship!” In the case where your money is acting up and begging for a divorce, to transfer the account to another advisor you might have to first sell all stocks and positions in the account. This could cause excessive fees, and if that’s not bad enough, taxable events as well.

Imagine: you want out of the relationship and to do so, you have to pay fees and taxes for the divorce. Such a requirement can obviously be pretty painful, and if you are entering into a relationship with a fee based advisor, although it could hopefully be the start of a beautiful friendship, just be sure to know the rules of engagement before you marry your money off to the person who’ll hopefully spend a long time watching over it.

This thing called “money” is pretty important, to say the least. Therefore, when finding someone for you and your money to dine, go to the movies or Tibet with, hopefully keeping in mind a few of the tips above will help make the relationship successful for many years to come.

(PS: thanks to my new book now out, I can finally devote more time to this blog. Stay tuned for new posts generally on a weekly basis).

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Where do you go for investment advice?

A financial advisor? CPA? Jim Cramer? Suze Orman? Maybe the retired guy down at the pool?

What about Yoda? Ever consider him?

As surprising it may sound, when it comes to getting good advice on investing, for a moment, forget The Wall Street Journal and everything else out there. That two-foot, nine-hundred year old creature surprisingly offers some decent advice on investing. In fact, as crazy as it sounds, the entire Star Wars series itself offers some fantastic suggestions to get us on the right path towards success. Only problem is, few people have taken the time to do something as ridiculous as I have: ponder how the classic tale can teach us a few things about making money.

Mind you, this wasn’t exactly done on purpose. A couple of nights ago, in the deep, dark hours of a California night, I found myself out on the couch flicking through channels for something to lull me to sleep. After watching the Met highlights on ESPN (total disappointment), a re-run of Mad Money, then surfing past Happy Days and Charles In Charge, I landed on Star Wars only to soon realize the classic movie and all those that followed really can teach us a few important things about prudent investing.

Here’s a few examples:

Investing: I recently took a moment to do something most normal people would never do: search through a stack of magazines to analyze the financial ads. Between Fortune, Money Magazine, Smart Money, BusinessWeek and a handful of others, the results were undeniably clear: in my brief study, when it came to ads for financial products, by a long-shot, it was the costly, managed mutual funds that advertised far more than anyone else.

What relevance does this have? … Let’s continue …

Star Wars: Imagine being Luke. You just crashed in a dark, musty swamp where a two-foot tall creature named Yoda revealed himself to be the Jedi master. If that wasn’t odd enough, a little while later the thing tells you to start lifting rocks with your mind. Having little choice but to go with it, you heroically manage to satisfy master, but when he tells you to lift an x-wing fighter with your head, that’s a different story:

LUKE:
Master, moving stones around is one thing. This is totally
different.

YODA:
No! No different! Only different in your mind. You must unlearn what you have learned.

Lesson Learned: I totally agree with Yoda. After all, who wouldn’t? The creature not only managed to live nine-hundred years, but he beat the pants off an Evil Emperor four times his size.

When it comes to learning a few things about successful investing, the first place many folks should start is not by learning complicated investment formulas that ultimately few wind up remembering, but with a willingness to do what Luke was basically forced to do: unlearn some of the things you perhaps already know.

What baggage are you reading this article with? Is it scores of ads from costly mutual funds trying to get your hard earned dollars into their pockets? You know, the ads showing happy people who all seem to be putting Bill Gates to shame? Based on the vast number of ads out there from the costly fund companies, chances are your sub-conscience is carrying a few of those fancy advertisements in your head and you may not even know it.

So, to begin with, start by listening to Yoda. Being a successful investor often means willing to unlearn some of what you know. While your mind may not wind up lifting an x-wing fighter from a dark, musty swamp, you just might be able to open a window to a few new interesting concepts about successful investing.

Here’s the first example that comes to mind…

________________________________________________________

Investing: Some of the more interesting investment concepts can either be traditional in nature or somewhat unique. Although they’ve been around for ten years or so, a low-cost investment product such as Exchange Traded Funds are relatively new and are just starting to explode with popularity. On the more unique side of the spectrum, who would ever think something as bland, boring and unappealing as Life Insurance would provide some retirees with better returns than their stocks have ever produced? In today’s marketplace, investors selling their life insurance policies are experiencing some of the greatest profits I have ever seen. Who’s doing these things? It’s not sophisticated actuaries nor is it Noble Laureates that have figured out how to beat the system; it’s main street retirees that opened their minds to one of today’s hottest concepts, that of something called “Life Settlements.”

Star Wars: In real time it took a few months but in movie-time it took just under two hours for Luke to truly open his mind to new concepts. By fully opening his mind and entrusting The Force, he turned a targeting computer off and wound up landing one right into the Death Star’s exhaust port. … End result? Death to the Star and birth to inter-galactic celebrations across the universe that changed our movie-going lives forever.

Lesson Learned: Whether it’s the willingness to turn off a computer tracking system or explore innovative concepts such as Life Settlements, it’s those with open, educated minds that often find the success they seek.

________________________________________________________

Investing: Who would you rather be? A sock puppet on national TV promising those that own its stock boatloads of money or a cup of coffee that costs 3 bucks? While at first being a puppet seemed like the way to go, it was just a matter of time before Starbucks double-Frapps put the Pets.com mascot to shame. As most people that experienced the .com bust can attest to, investing into hype often leads to nothing but regret.

Star Wars: Who would you rather be? A seven foot master with a deep voice, impressive ship and a mind that melts men or a skinny blue eyed farmhouse kid chugging around the galaxy in a worn out jalopy? While at first glance sporting a cool black helmet and long cape could seem like the way to go, Star Wars proved to us that in the end, staying away from the hype can wind up saving you from the dark side of things.

Lesson Learned: Save the sock puppets for your kid’s next birthday. Flashy ads, slick brochures and fast-talking salesmen isn’t what counts, it’s what’s behind the window-dressing that does. Next time you’re confronted with a hyped-up investment that seems a bit “too good to be true,” keep in mind Han Solo’s classic line, “I got a bad feeling about this.” Think smart, double-check the hype and remember: this is your hard-earned money we’re talking about.

________________________________________________________

Investing: Some of the most successful investors I’ve ever met started out with nothing. Thinking back to these people, those with the most often started out with the least. Somehow, some way, fearless persistence, dedication and that occasionally annoying thing called “time” steadily built them their success. While diversifying your investments, reducing fees, minimizing taxes and budgeting yourself to save a few dollars every month may sound painful, dreadfully boring and slow paced, remember: when it comes to trying to get rich quick, the longer you play the game, the less chance you typically win. On the flip side, when investing smart, the longer you play the game, the greater the odds you’ll come up a success.

Star Wars: Have a good idea for a movie? George Lucas did. To follow in his footsteps, first lock yourself in a room with a legal pad and for the next year or so, do nothing but write an outline to a science fiction story. Then, over the next year or so, expand the outline into a screenplay, and once that’s done, spend the next year re-writing it. With the script finally complete, spend another year raising money to produce it. With financing in place, spend another year filming it, the year after that editing it and once that’s all finally done, take a deep breath, sit back and make a billion dollars.

Lesson Learned: Don’t think success could happen to you? That could be your first problem. Whether it’s building wealth or creating the second most successful movie ever made (behind Gone With The Wind when inflation is factored in), remember: the journey to riches rarely happens overnight. Take, for example, Henry the Electrician, a friend of mine who once made $4 dollars an hour fixing fuse boxes. Tired, worn out and wanting a better life, he one day had the guts to scrape together a few dollars, purchase an apartment on the dark side of town and rent it out. Half a lifetime later, with hundreds of apartments to his name, his personal Star Wars is now a reality, and with a little time and dedication, I’d bet anything one day yours will one day be as well.

________________________________________________________

Investing: There’s nano-tech, bio-tech and gen-tech. Derivatives, floaters, collars, straddles and a long list of many other complex investments. While some of these might be all well and good, it’s probably best you listened to Warren Buffet who once wisely told us mere mortals to stay away from things we can’t understand.

Star Wars: There’s tall creatures, short creatures and monsters buried beneath the trash. Blubber-filled giants, underground slugs, women with thin heads and a long list of other bizarre things. While some of these might be all well and good, it’s probably best you listened to Yoda who once wisely told Anakin to stay away from things he can’t understand.

Lesson Learned: Who knew Warren Buffet and Yoda would be so alike? Until this moment, I for one never did. Whether your journey is about destroying an evil empire or building wealth, staying away from things you can’t understand is often a first rule of success.

________________________________________________________

Investing: Want to outperform most mutual fund money managers? I do. That’s why when it comes to investing my own money, I often stick with index investing and put my money into things such as the S&P 500. Somewhat sad but irrefutably true, over time, you’ll most likely make more money investing into the simple and mindless S&P than most mutual funds. And if returns aren’t enough to inspire you, what about fees and taxes? Fees in most indicies are typically around two tenths of a percent and investing in indicies rarely causes capital gain taxes until you decide to pay them, not someone else. How good is that?

Star Wars: Legendary effects, wild robots, fantastic chases and places that few people could ever imagine made my popcorn dance, but when stripping away all that cool stuff, what do you really have? A simple and familiar storyline that follows Joseph Campell’s classic thesis that proved all timeless stories can be boiled down to the same, simple storyline that’s been re-hashed a thousand times through heroes wearing many different faces.

Lesson Learned: Forget phone books of investments many investment accounts contain. Who has the time to keep track of those things anyway? Whether it’s creating a movie few will ever forget or making money, remember: it rarely has to be complicated for it to be effective.

I had fun pondering how Star Wars can teach us a few things about our money, and in fact, there were a handful of other “lessons” I wound up editing out. But who knows? Given the examples above, next time you see Star Wars, perhaps you too will realize some of the valuable lessons the classic tale teaches us not only about money, but about life itself.

May The Force be with you.

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On a plane back from New York, someone sitting next to me noticed I was writing my next blog, and asked me what my “10 Commandments of Investing” would be. A quick conversation led me to rapidly type my thoughts. So, consider this my extremely abbreviated summary of the things you should never forget when investing and planning your future.

Please be advised: these commandments are not listed in any order of priority, so don’t think of “number one” as being the most important. At some level, they are all very important.

Drum roll, please. Here they are, my 10 Commandments of Investing:

1. Stick with the indexes
Leave the individual stock picking to gamblers and speculators. Very few people really understand how to successfully pick individual stocks, and if they do, the news that drives markets today is totally unpredictable, making individual stock picking a highly risky venture. Reams and reams of statistics prove index investing almost always outperforms the financial advisors, money managers, and stockbrokers. Stick with the indicies and you’ll likely wind up far ahead of the game. Care to speculate a bit on some individual stocks? Do it with a small portion of your money, but certainly not the bulk of it.

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2. Watch those fees
Wall Street loves investors that don’t watch their fees. For those investing in funds, check out www.personalfund.com. You might be shocked to find out the total cost your funds are charging you to own them year after year. Especially over the long haul, fees can destroy your returns.

Minimize fees as much as possible by investing in low-fee, highly diversified investments such as one of my personal favorites, Exchange-traded funds such as those offered by www.ishares.com

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3. Create a bond ladder
For income, bond funds are the favorites among many advisors. They’re simple, quick, and unfortunately, sometimes loaded with fees. Consider laddering bonds instead. Why? Mutual funds containing bonds have no maturity dates. If the value of the fund goes down, good luck trying to guess when your principal will “come back.” With a laddered bond portfolio, as long as the bonds don’t default, you have a date when your money will be returned to you.

Creating a bond ladder is not as easy as choosing a few bonds funds; it usually requires the assistance of a skilled advisor. But the next time an advisor recommends bond funds for income, be sure to suggest this as an alternative. Some advisors don’t construct ladders, and if they have little or no experience doing so, I would suggest getting an opinion with someone else before leaping into the funds.

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4. Diversify
You’ve heard it a thousand times, but it’s amazing how few people actually do it. Diversification saves lives and prevents disasters, especially when you don’t put too much money in one place. Also be certain to understand the concept of “rebalancing.”

That’s important stuff, and if you don’t understand it, go back and read a quick intro to the concept at Wikipedia. Rebalancing, together with diversification, will likely one day save your investment life.

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5. Watch your money
No one else will ever keep track of your money like you will.

Don’t get lazy and stop paying attention.

Read your statements every month and monitor your progress and returns.

This is your hard earned money we’re talking about, and don’t ever forget that.

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6. Don’t rush in
You’ve likely heard the saying “only fools rush in.” On every level, rushing into things can cause great harm. Whether it’s rushing in to get high returns, rushing out as a result of emotion, or rushing into a decision as to where to invest, before diving in pause, take a deep breath, sleep on it, and then make your decision. As a “subset” of this commandment, I would also include: Be careful when listening to others. What’s good for one person is terrible for another. The media does a great job of generalizing advice and investments, and I think that’s an awfully dangerous game to play.

Unless someone really understands your personal situation and goals, I firmly believe it’s nearly impossible to make conclusive and general statements as to “what’s good” and “what’s bad” for you. No good doctor could ever diagnose a problem without getting the answers to some basic questions. If they fail to do this, prescribing a pill can literally kill you. The same is true with investing. Only when a few key questions are answered could anyone really give prudent advice on “what’s good” or “what’s bad” for you. So the next time someone tells you to “stay away from this” or “you should invest in that” be careful. Educate yourself, assess the advantages and disadvantages of the advice you’re getting, pause, then make your decision. By doing so, chances are you’ll make the right one.

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7. Don’t take the risk if you don’t need the return
Many people would do perfectly fine getting 7-10% returns on their money, yet their portfolios are invested in things that strive for well beyond that. Especially if you’re a retiree, if you doubled or tripled your money overnight, would you go out and buy a fancy new sports car? A mansion on the hill? Few of us would. And for that reason, always ebb towards the safer side of investing as much as you possibly can.

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8. Get out if something isn’t working
The greatest investors I’ve ever known are the ones who don’t get emotional about their money. I’m not talking about the Warren Buffets of the world. I’m talking about highly successful investors I’ve met who were schoolteachers, electricians, and small business owners. Some of the best investors I’ve met are those who understand that becoming emotional about an investment often leads to disasters. Easier said than done, I know, but this one is very important: Don’t ever fall in love with an investment. It doesn’t love you as much as you love it. So if it isn’t working, cut it off before you really regret it.

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9. Understand tax consequences
I’d place this right alongside number two above. Over time, the tax ramifications of your investments can really help or hurt you. It’s been said that “It’s not what you earn, it’s what you keep.” Amen. You absolutely, positively need to understand the very basics of what happens with your taxes when you move money around, especially if you are investing in mutual funds that often create taxable events beyond your control.

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10. Keep it simple
Only one more commandment? That’s too bad. I can think of so many more favorites — start saving as early as possible, take advantage of compounding, max out your qualified plans, etc. But if I had to pick only one more point to complete this quick “off the top of my head” list, it would have to be to keep it simple.

I once met a very successful investor who did quite well for himself over many years. His entire portfolio consisted of literally three positions: a Standard & Poor’s (S&P) 500 index fund, a low-cost bond fund and a low-cost international stock fund. Other than some cash sitting on the sidelines, that’s it, and not surprisingly, he did better than most investors I’ve met with phone books of investments that re difficult, if not impossible, to keep track of. While I certainly don’t endorse keeping your entire portfolio in three positions (given that I don’t know your personal situation), I can say that keeping it simple is a universal lesson of life itself, and in the world of investing, it allows you to do one very important thing: keep track of what you have and how it’s doing. The more complicated things get, the more room there is for disaster. It really is as simple as that.

IN CONCLUSION

It’s a bit tricky narrowing down an entire investing universe to ten points. Perhaps if I was flying from Los Angeles to Florida instead of New York to Florida I’d have more time to think about this. I’m sure as soon as this is posted I’ll regret not including some other things that will come to mind. So, consider the above a random sampling of my mind that in the matter of a few minutes, conjured up the above over two small bags of Delta’s Roasted Peanuts and a Diet Coke (that just spilled all over my Sports Illustrated magazine. What a bummer).

Stay tuned for my next post on the lessons Star Wars teaches us about investing. I’m having fun with that one.

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3 little ideas that can mean big things for investors

Although there’s plenty of bad press and dark clouds over the housing market these days, it’s hard to argue that real estate will remain a foundation of many people’s wealth for a long time to come.

Building wealth with real estate can be as simple as buying a house, living in it for many years and eventually selling it for a profit. Building wealth with real estate can also be as “simple” as investing in a commercial property such as a shopping center and collecting an income from it while it presumably appreciates in value.

That said, the purpose of this article is not to address the more familiar scenarios above, rather, to summarize three often overlooked concepts that could be helpful to quite a few people:

• 1031 Exchanges
• Tenants In Common programs
• Using IRA money to buy real estate

Let’s take a closer look at each…

1031 Exchanges

In its simplest form, a 1031exchange provides a real estate investor with the opportunity to defer payment of capital gains tax when selling one property for another. By deferring taxes owed on a sale of a property, an investor basically has more money available to purchase a new property, essentially receiving a “tax free loan” from Uncle Sam on the amount of money that would have ordinarily been lost to taxes.

Although 1031 exchanges are relatively simple to implement, there are a handful of important points to understand:

• 1031 exchanges do not apply to primary residences. Only property held for investment or business purposes can qualify.

• The property being bought and sold must be of “like kind.” Generally, “like kind” simply means exchanging one investment or business property for another. Although the definitions of “like kind” is generally liberal, state laws could differ so be sure to take a closer look at the state(s) in which the property(s) are being bought and sold.

• The property being purchased must be of equal or greater value than the one being sold. In addition, the equity and/or debt of the new property must be equal to or greater than the equity and/or debt of the property being sold as well.

• For a qualified exchange to take place, one must identify the new property within 45 days and the transaction must be complete within 180 days.

• The exchange must be conducted through a Qualified Intermediary; the real estate investor cannot take possession of the proceeds from the sale nor can they maintain any control of them. If any of these important criteria are not met, the exchange does not qualify as a 1031.

• Multiple properties can be included in a 1031 exchange. For example, one can exchange several smaller properties for a single property and vice-versa.

• Cost basis is carried-forward from the property being sold to the one being purchased. The newly purchased property does not take on its own cost basis.

• Any taxable gain from depreciation recapture is deferred as well.

There are many other important issues that need to be addressed before any transaction takes place, but hopefully the above summary demonstrates that a 1031 exchange can certainly be a worthy benefit to consider before someone sells an investment property.

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Tennant In Common Programs

One of the main problems I’ve come across with 1031 exchanges has nothing to do with the process itself. Rather, a common problem I’ve seen is simply not being able to identify a property worthy of purchase after the original property is sold.

In such a case, one might consider one of the many Tenant-In-Common programs available in the country. Otherwise known as a “TICs,” “fractional-ownerships” or “co-ownerships,” these programs provide real estate investors with the opportunity to purchase a partial, or proportionate interest in an existing property instead of owning the entire property itself.

Although a 1031 exchange can take place when “rolling” the proceeds of the sold property into a TIC, some investors shy away from these programs given the lack of controlling interest. Conversely, some investors might actually prefer a TIC program given the management of the property is off-loaded to a third party, obviously at a cost.

 

That said, when a 1031 is desired and a property cannot be identified, one might consider a TIC program in order to defer paying the capital gains. (IMPORTANT NOTE: TICs are a complex procedure. Be sure to consult with a qualified CPA or tax advisor before any actions are taken).

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Using IRA money to invest in Real Estate

When it comes to building wealth with real estate, this is without a doubt one of the biggest surprises out there…. Unbeknownst to many, it is entirely legal to purchase real estate using IRA funds, but there are a handful of restrictions and important details to consider before doing so.

Technically speaking, IRAs cannot invest in things such as artwork, rugs, antiques, metals, gems, stamps, coins, beverages, stock in an S corporation, life insurance, and other tangible personal property. Other than these items, everything else is generally fair game, including real estate such as land, commercial property, residential property, real estate options and real estate loans.

Although using IRA funds to purchase real estate is generally simple to implement, there are a few restrictions and important details to consider such as:

• The custodian of the property: most IRA custodians will not allow real estate to be purchased within their accounts. Only a select few custodians in the country specialize in these types of arrangements.

• The purchase of real estate can be for investment only. Real estate such as a primary residence cannot be purchased using IRA funds.

• The IRA cannot buy real estate from a “disqualified person.” A disqualified person is defined as the IRA owner itself, a spouse, a direct descendant or ascendant (for example: a daughter, son, mother or father). To simply this important point, it is completely legal to use IRA funds to buy real estate from a stranger or parties generally outside the family bloodline.

• An investor cannot personally guarantee a loan when IRA money is being used to purchase a financed property. For those asked to personally guarantee a loan when using IRA money to purchase a property, various banks do specialize in loaning money to IRAs to help finance such a purchase. However, when financing is necessary, a simpler way to buy real estate using IRA funds might be to purchase the property in partnership with money held outside the IRA, with a third party or even as part of an LLC which is completely legal as well.

• An investor using IRA funds to purchase real estate could incur Unrelated Debt Financed Income. UDFI is the income and/or capital gains tax attributable to the financed portion of the property. UDFI must be paid by funds within the IRA and for various reasons not addressed here, taxes incurred by using IRA funds to purchase a financed property are typically greater than taxes incurred from a property purchased with funds outside an IRA.

• If at all possible, when using IRA funds to purchase real estate, it’s ideal to buy property that does not require financing. If financing is required, one should consider purchasing the property in partnership with third parties (as stated above, third parties such as money held outside the IRA or as part of an LLC). In the arrangement where no financing is required when buying the property, the major benefit is that no UDFI would likely be incurred.

Needless to say, the above covers only the general concepts of using IRA funds to purchase real estate. But when it comes to building wealth from investing in real estate, if there is one concept many investors are not aware of, hands-down, I’d say this one is it.

As with all concepts mentioned above, before taking any action, be sure to review your unique personal situation with a qualified tax advisor. After all, when it comes to investing, taxes and just about everything else, it’s the details that always count the most.

Alan Haft offers securities through Workman Securities Corp., Eden Prairie , MN . Member FINRA/SIPC. This investment is offered to Accredited Investors only. Consult your financial representative for more information about qualifying as an Accredited Investor.

Bad date last night? Don’t despair. It’s not as bad as you may think. Here’s some good news: you may not know it, but when it comes to your money, that bad date can teach you an awful lot about successful investing.

Think I’m joking? Think again. Although I was a far cry from being the King of Dating, I did have a few occasional lucky streaks in me. And looking back over those rare few times, my moderate success on the dating circuit did teach me quite a few things about prudent investing.

Here’s a few quick examples…

1) DON’T JUDGE A BOOK BY ITS COVER

Dating: The guy was over a half-hour late, his outdated shirt barely matched his Taco Bell stained pants, the rain gave him a lethal dose of bed-head and back then the busboy was making more than he was. If that wasn’t bad enough, his humor was a bit stale and the car he drove had a weird putter that attracted nothing but aliens from the evil Planet X. While at first the girl thought it was going to be a dinner date from fiery hell, little did she realize that guy was I, and I’d soon wind up being the one she’d marry.

Investing: The receptionist was sure nice, but the carpets were dull and the musty furniture reminded you of grandma’s place in Brooklyn. You were ready to take your money to that Private Wealth Management Firm — the one with the white marble staircase and baby grand — but when the well-mannered financial advisor appeared, you figured you’d be courteous and give him a few minutes of your time. A little into his pitch, you were most pleasantly surprised when he touted low cost, tax efficient investments with attractive rates of return that perfectly matched your goals. It was then you realized there’s a reason the furniture in his place is a bit out-dated, mainly, because the guy most certainly isn’t paying for it out of your own pocket.

Lesson Learned: First impressions can easily get the best of us. Whether it’s a date or your money, taking a step back to peek behind the curtain will typically put both your money and heart in a much better place.

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2) COSTS COUNT

Dating: She liked Dylan Thomas, idolized Ginsberg, despised the conformists and was clinically depressed that she missed last year’s Monterey Pop Music Festival. The perfect 10 from down in the Village strummed an acoustic, wrote poetry and even donated your favorite Levis to a homeless guy on the street. While at first lust got the best of you, months after helping her pay the rent, her organic meals and for all those Warhol movies you pretended to like, you were finally worn out, leading you realize that when it comes to dating, costs most definitely do count.

Investing: The mutual fund was barely moving. Five years into it, you just couldn’t quite figure out why you weren’t making much money. Then, one fine day, you wisely took the time to research the fees you were paying, only to realize the fund was charging you well over 5% per year in annual costs and causing you all sorts of taxes.

Lesson Learned: When it comes to investing and dating, costs most definitely do count. Taking the time to evaluate how much you’re paying for your dates and funds is an essential part of anyone’s success.

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3) IT DOESN’T HAVE TO BE COMPLICATED FOR IT TO BE EFFECTIVE

Dating: For many people, the best dates are the simple ones such as times spent on the couch during a cold winter night, wearing soft flannel pajamas under a fluffy blanket watching a classic Bogart movie with, of course, hot green tea and a hearty bag of Fritos nearby. While dining at Nobu certainly has its place in time, looking back on all the great dates we’ve had most likely reminds us it’s the simple ones that scored the best.

Investing: When it comes to investing, many of the most successful investors I’ve helped are those with the simplest portfolios. On the other end of the spectrum are investors that spend every waking hour chasing returns, analyzing complicated charts, dissecting corporate balance sheets or scouring the market on a daily basis searching endlessly for a perfect buy.

Lesson Learned: There are roughly 15,000 mutual funds in the country with approximately two professional fund managers each. Of those 30,000-ish fund managers, guess how many have beat the static, mindless S&P 500 index more than ten years in a row? Answer…? …. Get this: Just one. The legendary Bill Miller from Legg Mason. Undeniable statistics prove that the S&P typically out-performs over 80% of managed mutual funds year after year, leading the sharp ones to realize that when it comes to efficient and successful investing, it rarely has to be complicated for it to be effective.

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4) CUT THE LOSERS, RIDE THE WINNERS

Dating: The first handful of dates were the stuff legends are made of, but by the time mid terms rolled around, Crazy Mindy crashed my college roommate’s car, emptied his bank account, torched his classic Dark Side of the Moon poster, caused him to miss the Macro Economics final and managed to give him one very fat lip. By the time graduation took place, my roommate ended up blowing his entire senior year trying to turn Crazy Mindy into the person she once appeared to be.

Investing: On paper, the company looked like a true winner. Not only was the stock going through the roof but even Madonna used its products. At first the investment took off, but no thanks to a deadbeat CEO and a few federal regulations tossed in, the stock began its perpetual downward spiral. Convinced it would come back, you held on, only to wake up realizing you would have been far better off giving Crazy Mindy your money to invest.

Lesson Learned: Crazy Mindy could care less about my roommate and likewise, stocks could care less about you. They don’t know who you are and only you can fall in love with them. Love or money, when something isn’t working, get out. Just cut the losses, move on and live to fight another day. The quicker you do that, the better things typically turn out.

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5) DON’T GIVE IT UP ON THE FIRST DATE

Dating: Dinner at The Palm was better than if your Mets won another Series. The guy made you laugh, he held the door and a Grey Goose made him look like Brad Pitt. But back at your place, just as the room sweltered to high noon out on the Serengeti, your mother’s voice politely whispered to you, “Not on the first date.” Wisely, you pushed back and let something important called “time” nurture the relationship.

Investing: The financial advisor seemed like a nice guy. He showed you attractive rates of return, sported a Tom Cruise smile and even served cappuccino in fancy bone china with lace doilies to match. So you rolled the entire 401k into an IRA, only to later realize it cost you a huge upfront commission on high fee investments that caused you nothing but losses to boot.

Lesson learned: Treat your money like you’d treat your body: Don’t give it up on the first date. Taking time to nurture a relationship will not only make your mother proud, but it will certainly provide you with one of the most important keys to financial and dating success.

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6) DIVERSIFICATION IS THE KEY TO SUCCESS

Dating: Adam looked like Alan, Alan acted like Arnold, Arnold smelled like Arnie and Arnie reminded you of Alex. And just when you thought you found the Perfect-A, Aden stood you up just like Albert and Abe once did (or was that Alfonse or Aaron?). It was then, in one fleeting moment of revelation, you finally realized the problem had nothing to you, but everything to do with guys whose first names start with the letter “A.”

Investing: Dot-coms. … Late 90s. … Need I say more?

Lesson Learned: Diversifying your investments is a critical key to investment success. Load up in one sector or stock and it’s not a question of if disaster will strike, it’s usually a question of when. Spread the risk, diversify your investments into the prudent, timeless fundamental asset classes and of far more importance, consider dating guys whose names start with anything but the letter A.

CONCLUSION

Bad date? Who cares? Next time something doesn’t turn out so well, simply shake hands with your date and thank them for making you a richer person.

After all, when it comes to love and money, hopefully here you’ve learned that at the end of the day, it’s all very much the same.

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During this time of market-meltdown, it’s a good time to remind investors out there about the critical need to re-balance a portfolio. In its most simplistic form, “re-balancing” a portfolio simply means maintaining its original balance.

Let’s take a closer look at what this really means.

Failing to re-balance a diversified portfolio is like forgetting to cook a pizza. Without this critical step, what would typically be my personal all-time favorite food would easily turn out to be the worst meal I could ever consume.

Here’s why:

Suppose we turn back the clock to the late 1990s. For simplicity, suppose I listened to prudent advice at that time and diversified my investment portfolio into five sectors of the market, dividing my money up equally among them:

• US Stocks: 20%
• International Stocks: 20%
• Technology: 20%
• Real Estate: 20%
• Other: 20%

Given the gains and losses of various market sectors, suppose a year later the value of my diversified portfolio (in percentages) wound up looking like this:

• US Stocks (up in value): 30%
• International Stocks (down in value): 10%
• Technology (surged in value): 40%
• Real Estate (down in value): 5%
• Other (down in value): 15%

True, I may have been diversified, but do I just end the process there? Not if I want to give myself the best possible chances for sustained and consistent investment success. If I just “held” my portfolio above without re-balancing it, as the market later crashed in 2001-2002 I would have very likely “given back” the gains I made within the US Stocks and Technology sectors.

But if I left my emotion out of the process, I would have realized that I needed to re-balance the portfolio. With re-balancing in mind, I would have noticed that Tech and US Stocks had gone way up in value, while the value of International and Real Estate stocks were greatly reduced.

To re-balance the portfolio, I would have ignored my emotions and mechanically sold the profits in the Tech and US Stock sectors to reduce them back down to their original percentages, that of 20% each. And what would have I done with those profits? If I left my emotion out of the process and didn’t listen to the neighbors who might have thought I was nuts, I would have reminded myself that every sector in a well-diversified portfolio will have its day, we just can’t be sure when.

With that important thought in mind and some courage to boot, I would have used the profits of the Tech and US stock sectors to “re-fill” those sectors that went down in value. In the above example, I would have added the profits from the Tech and US Stock sectors to the Real Estate and International sectors. Selling a percentage of the successful sectors, taking the profits and using them to re-fill those sectors that went down in value would have returned my entire portfolio back to its original starting percentages of 20% each.

And in doing so, besides the neighbors thinking I was a bit crazy for selling profitable shares in the red-hot Tech sector, what have I really accomplished?

…A little while later, I would have realized that I accomplished what every investor dreams of: sold high and bought low.

Let’s take a look:

After the re-balance was complete, Tech and US Stocks eventually wound up crashing and burning, the market finally settled down and what happened next? What happened next was something very few people could have ever predicted: stocks within the sectors of Real Estate and International took off like a rocket, earning highly impressive rates of return.

And thanks to my mechanical dedication to re-balancing my portfolio, I would have reaped great rewards given that I not only held those once ice-cold sectors, but also because I added money to them when they were at their low.

I typically re-balance a portfolio just over a year after the last re-balancing. The reason for waiting just over a year comes down to one thing: minimize taxes. Assuming some sectors went up, when you sell profits after holding the stocks for a year, you will pay long-term capital gains on the earnings instead of short-term gains. For those not familiar with taxes, long-term gains are currently taxed at 15% whereas short-term gains are taxed at your current tax bracket (which is typically higher than 15%).

Needless to say, a portfolio might need to be re-balanced sooner than just over a year since the last re-balancing. Due to significant market gains or downturns, it might make practical sense to re-balance earlier as a result of unforeseen economic conditions.

Sound easy? It is, but what makes re-balancing difficult for some people are when they let their emotions get in the way. Just think: late 1990s, you’re making significant paper profits in Technology and I come along to tell you, “Time to re-balance. Sell off those profits and invest them in sectors that aren’t performing well.”

It’s at this moment that your emotions could prevent a re-balancing from taking place. But those who remember that what goes up always comes down — we just don’t know when — will not let their emotions get in the way. They will let the highly efficient and timeless art of diversification and re-balancing do the efficient guesswork for them.

The “Other” Sector

You might have noticed a line item in the simplistic diversified portfolio above labeled “Other.” What is this sector? This is the only sector within a diversified portfolio where we can let our emotions reside. This is the sector that allows us to “gamble” our money in areas outside the diversified portfolio. Within this sector, I sometimes deviate from the basic rule to diversify and invest in whatever I desire (more on this in the next chapter).

So, the next time you post some impressive gains in your account, the first thing you should do is not sit back and think about whether that new car should be a Lexus or a Mercedes, but instead consider the critical and important need to re-balance.

After all, as we all know, what goes up always comes down. With rare exception, it’s the unemotional investor that understands the importance of diversification and re-balancing that gives themselves the best possible chance of coming out ahead of the investing game.

As a financial advisor, speaker and columnist there is one fundamental goal I share with my many clients, audience and readers alike…the goal of creating very simple, very efficient and very powerful investment strategies. Everyone wants it. Everyone needs it. But where does one start?

For me, after spending years as a child helping family in an investment advisory business, my official start was in none other than Hollywood. It was within the powerhouse studios of Disney, Universal and Warner Brothers that I played a proud role in some of the largest movie productions around, working alongside actors, directors and producers such as Tom Cruise, Tom Hanks, Oliver Stone, Dolly Parton, Barry Levinson, Michael J. Fox and a long list of many others.

What I clearly found was that beneath the power of creativity, there was a very strong foundation of highly efficient financial strategies. Nowhere was this more apparent than when I later partnered with my close friend, the indomitable Oscar nominated actor James Woods to launch a successful production company at Universal Studios.

Having helped raise money, plan productions and obsess over every last detail to ensure profitability, I found that the road to success in Hollywood in many ways mirrors the prudent principles of successful investing.

The programs and movies we watch on TV or in theaters are examples of either prudent decision making based on proven principles or short-lived failures hastily born of poor planning. Ironically, all it takes is a little creative insight to realize that the movies, studio execs and high-profile actors can teach the public an awful lot about the universal laws of successful investing.

As you’re potentially seated in the comfort of your own private theater awaiting the Feature Presentation, I bring to you “The 10 Lessons Hollywood Teaches Us About Investing” with an extra bonus thrown in at the end.

So, raise the curtain and start the projector, because here we go…

LESSON 1 — DIVERSIFICATION IS THE KEY TO SUCCESS

Hollywood

The typical Hollywood studio releases somewhere around 20 films per year. Does Paramount release 20 horror films each year? Not quite, the studios are much smarter than that. Most studios cover all genres — romantic comedies, science fiction, drama, action, teenage comedy, etc. Why? They know it’s impossible to predict which genre will be hot at any given time. Some will win, some will lose, but one thing is certain: reducing risk through diversification always provides the best recipe for success.

Investors

Forget the line Oliver Stone wrote for Michael Douglas in ‘Wall Street’. Greed is not good. Greed can kill you. If you need proof, ask anyone who was too heavily invested in technology during the late ’90s.

Lesson Learned

Whether it’s the lineup for this year’s releases or a decision on where to invest, diversification among the standard asset classes is the first rule of investing successfully and consistently.

LESSON 2 — IT DOESN’T HAVE TO BE COMPLICATED FOR IT TO BE EFFECTIVE

Hollywood

Years ago, I pitched many film projects to studios and learned the hard way that if you can’t tell your story in a few minutes or less, you’ll never get one made, let alone make it through the pitch. Every classic movie can be summarized to a single, simple sentence. If you make it any more complicated than that, forget it; you’ll never get it made. Learn from ET: “it’s a story about a bunch of kids that help a stranded alien get back home.” One sentence, $756 million dollars… just the way Hollywood likes it.

Investors

Here’s a simple sentence: the S&P 500 index typically outperforms most managed mutual funds. Period. Statistically, those who invest in the S&P 500 and nowhere else have a better chance of consistently making money than those who invest in a phone book of individual stocks, which are typically complicated and quite difficult to keep track of. For those who think trading individual stocks by themselves or through professionals earns more dollars, I offer a humbling fact: there are thousands and thousands of mutual funds in the country. Each fund has at least one, two or even more professional money managers who trade stocks all day long, trying to pick the winners. Of those many managers, guess how many have successfully outperformed the static, untraded, mindless S&P 500 more than 10 years in a row? Answer: just one — the legendary Bill Miller from fund company Legg Mason, whose extraordinary streak just recently ended.

Lesson Learned

While it makes little sense to put all of your money in one place such as the S&P 500, the concept prevails: you don’t need a complicated portfolio for it to be effective. Some of the most successful and rewarding investment engines I have ever built or tuned up are extremely simple to understand, easy to monitor and more rewarding than most people can possibly imagine.

LESSON 3 — IT’S THE DETAILS THAT COUNT

Hollywood

James Woods once told me that while shooting the epic ‘Once Upon a Time in America’, legendary director Sergio Leone shot a few dozen takes of a dinner scene just to get a spoon in the right place. Screenwriter Peter Shaffer wrote a few dozen full-length drafts of his masterpiece ‘Amadeus’, then another dozen or so to refine it. Writer/Director Cameron Crowe once said he spent well over a year doing absolutely nothing but writing one of the truly great screenplays in modern years — ‘Jerry Maguire’.

Investors

A financial advisor touts an appealing investment. It sounds decent, so without checking the facts, you agree to move money in, only to realize a month later that it’s an illiquid limited partnership managed out of Estonia that can’t be sold for another 18 years.

Lesson Learned

The fine print of any investment is more important than the window dressing itself. Ask questions and be sure to read the details; and if the spoon isn’t in the right place, take your time to get it right.

LESSON 4 — COSTS COUNT

Hollywood

An actor’s last movie grossed more than the Gross Domestic Product of Norway. He pitches his pet project and the studio green lights it. While everyone works hard for it to be a hit, the budget skyrockets out of control and the movie ends up $250 million in the hole before anyone ever lays eyes on it.

Investors

A star money manager with a fantastic track record takes over the reins at a popular mutual fund. The offices are filled with expensive furniture, great food, good looking women, a couple of espresso machines, fine art and a magnificent pool table. Who is paying for all this stuff? You are — whether you realize it or not, they are taking it right out of your account. It doesn’t matter whether the money manager makes or loses you money, it’s you who’s funding his salary and lavish overhead, and that’s not a very efficient use of your money.

Lesson Learned

Fees kill returns. The less they take, the more you make - a simple, yet extremely important rule for investment success. Take, for example, an investor I recently met who couldn’t understand why he wasn’t making much money. A review of his holdings led him to conclude he was paying a whopping 6% in annual fees and taxes on an investment portfolio worth $600,000. Over the seven years he’s been in it, that’s over $250,000 in fees and taxes alone. Ouch.

LESSON 5 — PLANNING IS KEY

Hollywood

Once “green lit” into production, a screenplay is broken down into extremely precise, line-item movie making elements: costs, schedules, camera shots, make-up, hair, costumes, props, scenery, stunts, transportation, and a thousand other things. On the set, minutes can cost tens of thousands of dollars, if not more. Regardless of how good or bad the script is, a well-planned production is an incredible, well oiled machine of extremely intelligent efficiency, with thousands of people who often know exactly what they are doing every moment of the day all building towards one definitive, concrete goal — the date of release.

Investors

A few years from retirement, you suddenly wake up wondering how you are going to generate enough income off your savings to support the lifestyle you always wanted. After a few last minute calculations, your advisor realizes you’re not going to make it. In a last ditch effort to save you, the advisor moves your money into the risky stuff and starts rolling the dice. Throwing for a high rate of return, unlucky 7 comes up and you unfortunately find yourself crapped out. Dejected, you realize that your working life is going to drag on a few years longer than you anticipated.

Lesson Learned

Most movies take many years to plan. The smart guys realize that success just can’t be rushed, it has to be nurtured. If your investments are to end up with an Oscar, hardcore planning always provides the greatest chance for success. Remember, this is your life we’re talking about, not some trashy two-hour drive-in movie.

LESSON 6 — CUT THE LOSERS, RIDE THE WINNERS

Hollywood

By 7 p.m. on opening night, movie studios can predict with incredible accuracy the revenue a film will likely generate. Even more startling is the DVD market. Due to sales tracking systems at Wal-Mart, it’s possible for the studio to accurately predict how much revenue it will earn by approximately 3 p.m. the day the DVD is released. What will the studio do if the film is looking like a dog? Do they pour endless money into advertising, hoping everyone will start loving it as much as they once did? No way. Advertising and marketing expenses are immediately cut, and in some cases, they are completely eliminated.

Investors

You buy a stock because you just love the company. For a while, it climbs… then the downward slide begins and it dips, and dips, and dips even more. You sit back and watch it do nothing but drop some more. But you just love that company. Your broker reinforces your emotions and keeps telling you “it will come back,” but it rarely quite does.

Lesson Learned

As much as the studio execs might love a film, they rarely let their emotions get the best of them. If something isn’t working, they just cut their losses and move on. When it comes to your investments, you need to do the same. A stock doesn’t know who you are; it could care less about you and it certainly has no emotional bond with you. Only you do. And as soon as you let your own emotions get in the way, bad things typically happen.

LESSON 7 — EXPERTS FOCUS ON REDUCING RISK, NOVICES FOCUS ON RETURN

Hollywood

Many films have nearly bankrupted their creators. ‘Hudson Hawk’, ‘The Last Action Hero’ and ‘Cutthroat Island‘ are just a few examples that come to mind. As a result, partnerships on expensive features are now the norm. Take ‘Titanic’, for example. James Cameron wakes up one day with an idea to make a film about two people that fall in love on a sinking ship. One short sentence, over $200 million to produce. So what does Fox do? They partner with Paramount to reduce the risk. It’s easy to look back and say they should have taken all the risk so they could have received all the return, but who would have thought Titanic would go on to become the most successful film ever made?

Investors

A few years back, The New York Times ran a feature article reporting where retired Federal Reserve Chairman Alan Greenspan invests his money. He stated that he invests 95% of his money in U.S. Treasuries. In another interview, Suze Orman said most of her money is tucked away in triple-A rated insured government municipal bonds. Each is focused on only one thing: keeping their money, not losing it.

Lesson Learned

It’s simple: If you don’t need the return, why take the risk? Don’t ever forget that. It could be one of the most important lessons you’ll ever learn.