Robin from Vermont asks:

Your neighbor is dispensing some pretty lousy advice. If you had a neighbor who didn't save for their son's college tuition, but had a very lucky weekend in Las Vegas (where they parlayed $1,000 into room and board for a four-year private college), would you listen to them if they said the best way to save up for college was to get lucky at gambling?

While you have a shot at bigger winnings the more concentrated your investment — one stock being at the far extreme of concentrated portfolios — you have an equally good shot of having no money at all for school.

While Warren Buffet, the great investor, pokes fun at diversification, the drag of diversification also leads to more predictable returns. ...read the rest of this article»

Lana from Indianapolis asks: They say a dollar saved today is much more valuable than a dollar saved 10 years from now. So if that's true, if I manage to save only a small amount between now and the time my child is ready for college, will she have to borrow that much less for tuition?

The short answer is yes — saving now makes paying for anything later easier because time works to your advantage when saving. Save $1 today, and in ten years you'll have about $2.

The above math is a bit simplistic, because in ten years a dollar will only be worth about $0.78 because of inflation. It will be about as easy to come up with $1.28 in ten years as it will be to put aside $1 today — inflation means you'll be earning about 28% more in ten years without getting promoted. So why not wait to save? Problem is, college tuition will also be 28% more expensive in ten years — if not more than 28% given recent trends. ...read the rest of this article»

CW asks: 'A while back you helped me with my 401(k). Although it's only been a short time I was very satisfied with your services. I have since moved on to another company and I hope once again you can assist me with my new 401(k) options. Do you have any advice on what I should do with my old 401(k)?'

Would you leave your personal belongings in your old desk? Take your retirement money, along with the pictures of the kids, when you move on to bigger and better things.

The best choice for your old 401(k) is to roll it over into a low-fee broker like Firstrade where you can buy any number of funds, or to a fund family like Vanguard with a wide selection of low-fee funds.

Moving your old 401(k) plan – or 403(b) – is better than leaving your 401(k) at your old employer with their limited selection of often high-fee funds or even moving the old plan to your new employer’s plan, as the new plan will likely have the same shortcomings.

While you can't combine this old 401(k) with a ROTH, you can combine it with other traditional IRAs and maintain the account’s tax-deferred status. The downside of combining it with other accounts is that you can’t move it back to a 401(k) at a later date – it’s been sullied by the other money, so to speak. ...read the rest of this article»

Much of the volatility in the stock market in recent months relates to investors’ fears about the Federal Reserve’s decisions on short-term interest rates. Until very recently, the big questions were, ”When will The Fed stop raising rates? Will they overdo it and cause a recession? Will they fail in trying to stop the climbing inflation rate?”

On August 8th The Fed didn't raise rates, ending a campaign that started back in June 2004, yet some fear they are not done yet – while others worry that the damage was already done.

The Federal Reserve gets a lot of play in the financial press, but the reasons behind the fed raising and lowering interest rates are not clear to most people. We thought it was high time for a short primer on why the Fed does what it does. ...read the rest of this article»

After a multi-year plateau, rents are finally rising again. Rising rents can make buying a smart move, but with inflated home prices, renting and investing in mutual funds could be a better move.

Renters are watching closely, and asking themselves if now is a good time to buy a home. Rents are currently going up faster than home prices, reversing a multi-year trend of homes price increases far outpacing rents.

Unfortunately, many so-called “rent vs. buy” calculators on the Internet can lead you down the wrong path. For one thing, they should be called “rent & invest vs. buy”.

For the last few years, home prices have climbed, but falling interest rates (and creative mortgage products) have made homes almost as affordable (in terms of monthly payments) as they were before the big run-up. Recent increases in interest rates — notably shorter-term rates that are used to set many adjustable rate mortgages — have made the current home price levels unaffordable for many new buyers. This increases demand to rent, which, coupled with decreases in the supply of rental units from condo conversions, can raise rents. But do rising rents make buying a smart decision now? ...read the rest of this article»

The good news about the Fed bringing interest rates back up is that investors no longer have to make due with pitifully low yields on the cash they have lying around.

Trouble is, many poor souls with accounts at the nation’s premier brokers are STILL earning rock bottom rates of around 1% (and lower) a year. In today’s 5% world, this just shouldn't be. The culprit is the innocuous sounding “sweep” account. At the big four “discount” brokers – E*TRADE, TD Ameritrade, Schwab, and Fidelity – investors parking cash often get carjacked.

How are the brokers sticking it to customers, and what can customers do about it?

When you are not in stocks, bonds, or mutual funds, your cash is swept into the broker’s “interest bearing” account.

Many investors keep a good chunk of their account in cash at any given time – not just between trades but often for years at a time. Recently E*TRADE customers had total cash deposits of $10 billion in sweep deposit accounts – the largest single place customers park cash, more than money market, savings accounts, and CDs combined. E*TRADE paid out an average rate of 0.74% on this $10 billion last quarter. ...read the rest of this article»

The top of the great emerging markets run will likely be very close to the levels hit on May 16, 2006. That’s the day Dreyfus filed with the Securities and Exchange Commission to launch another emerging market stock fund – to be named Dreyfus Emerging Markets Opportunity Fund.

With billions of new money flooding into emerging markets funds (after a massive three-year rally that has seen most funds in the category triple in value), Dreyfus is getting tired of sitting on the sidelines while competitors bring in all the loot.

Can you blame ‘em? Emerging market funds are about the last area where a fund company can make an honest buck. Management fees for your typical emerging market stock fund are double domestic stock funds – even the ETFs in this area have high expenses. iShares MSCI Emerging Markets Index (EEM) charges 0.75% a year. As this ETF recently peaked at around $14 billion in assets, Barclays Global Investors (the company behind the popular ETFs) rakes in more money from this fund than any other they run. ...read the rest of this article»

Ray and Margaret ask: 'We are a 26-year-old couple getting married and want to invest our wedding money in the best way possible. (We estimate receiving 25k.) My fiancé is still in grad school, and I am paying off student loans. Should we put the money toward paying off our educations? Or should we invest it in a mutual fund?'

As an investment advisor, I should tell you to pay off all debts before investing because it's unlikely you'll earn more investing than the rate on your debts — especially after taxes, commissions, and the like. Plus, it's a lower risk strategy — imagine your investments go sour, you lose your job (the two can be correlated with the economy) AND you still have your debts.

That said, I'd only pay off high interest rate debt like credit cards (and then only if you WON'T rack the debt right back up). Student loan interest is acceptable debt to carry. For one, unless you earn a lot of money ($65,000 per year single filers or $130,000 for joint filers) the interest is deductible on your taxes (thank you Bill Clinton). Credit card interest is not deductible (thank you Ronald Reagan). ...read the rest of this article»

Robin asks: 'I am retired and widowed. Since the stock market has been so up and down, should I just put my savings (less than $100,000) in a savings account paying 3%? I feel that I am too old to always be keeping an eye on the stock market.",

The stock market is always up and down. The key is to only invest an amount of money that you can stand to see go up and down. The single biggest mistake investors make is investing too much of their portfolio and panic selling after an ordinary 10% - 20% drop in the market — often right before the market turns around.

Consider putting some of your money in a low fee stock index fund like Vanguard 500 Index (VFINX) — perhaps just 25% if you are nervous about losing money. A larger chunk, say 50%, should be in lower risk investments. A low fee bond index fund like Vanguard Total Bond Index (VBMFX) is a decent choice with limited downside (perhaps 10% in a down market for bonds) and a roughly 5.25% yield. The rest (25%) could be in a virtually no risk investment like a Vanguard money market fund — the Vanguard Prime Money Market Fund, currently yielding just under 5%. Fidelity has an equally good and cheap lineup of similar funds.

Buy these funds through Vanguard to save on commissions that an ordinary broker may charge.

As for earning 3% in savings - shoot higher. I've linked my checking account to HSBC Direct and ING's Orange Savings account (both are “online” savings accounts — FDIC insured with no risk). You can sweep money in anytime and earn over 4% (these are not teaser rates but current rates will change with swings in shorter term interest rates). HSBC Direct currently yields a whooping 5.05%. Your bank branch can't come close to matching these rates on liquid FDIC insured money with no minimum or transfer fees. ...read the rest of this article»

Nobody hates mutual funds fees more than we do. At MAXfunds.com, we absolutely hate loads, deplore high expense ratios, and barely tolerate 12b-1 fees. So you'd think when the Securities and Exchange Commission ruled last year to continue to allow mutual fund companies to charge shareholders for selling shares of a fund (up to 2% in redemption fees) that we'd be hopping mad. But we're not. In fact, we're actually tickled pink. Redemption fees, you see, are the ones we absolutely love.

Redemption fees are charged by some funds if an investor sells a position held for less than a certain period of time. The amount of the fee and the redemption fee period varies from fund to fund, but a common redemption fee is 1% of sales made within 90 days after purchase.

Redemption fees do bear a strong resemblance to back-end loads (or contingent deferred sales commissions or CDSCs), which we hate. So why are we in favor of a fee that seems to do just about the same thing? Because redemption fees discourage short-term investing - the practice of hopping in and out of a fund to benefit from quick rises in NAV prices. ...read the rest of this article»