Of late, you can’t watch cable news for a day without seeing more advertisements about owning gold than you used to see in a year. That should tell you something. Because whenever an “investment” concept or idea gets so hot that it pays vendors to spend hugely increased advertising budgets—to get while the getting is good, as it were—you can be pretty sure that concept is in full-on bubble mode.

You will not have failed to notice that you never see wall-to-wall ads for something which is deeply out of fashion, with its price falling and therefore its long-term potential value increasing sharply. Last March, for example, you saw not one ad trumpeting a “50%-off sale on the great companies in America! Buy now—this sale can’t last!” That would have been (a) true, and therefore (b) a total waste of advertising dollars, as equities were so cheap precisely because they were universally considered an instant, fast-acting carcinogen at that time. That’s why they were such a good buy. Ad dollars are best spent on the easiest sale; the easiest sale is always whatever is most in vogue; in investing, the phrase “in vogue” is always interchangeable with the phrase “too late.”

Gold is quite wildly in vogue these days, as the apocalypse du jour—the next crisis which is sure to envelop us all—is popularly held to be inflation: literally, the depreciation of paper currency, and a concomitant rise in the price of hard assets like precious metals. And, like all possibilities that get spun into cataclysmic certainty in the mainstream media, there is even some basis in fact for this.

The United States, in running unprecedented deficits, does indeed threaten the debasement of the dollar, and in fact the dollar’s trend has been down against the other major world currencies—and against commodities—for some time. What’s astonishing is not this premise, but the conclusion that people draw from it: that because an increase in inflation may happen, it will certainly happen. And that gold—making “new historic highs” every day—is the sure bet to get inflation working for you instead of against you.

There is a certain childlike quality to this “reasoning”—as indeed there is to all investment bubbles. It’s a sweet, logical little story that anyone can understand. And all you have to do in order to subscribe to it is completely to ignore the entirety of the historical record.

Let’s begin with the notion of gold as an inflation hedge. In a very long-term sense, gold has, in fact, been a mildly efficient antidote to the erosion of purchasing power. It is axiomatic that an ounce of gold has historically bought a good men’s suit. It did so in London in 1700 and 1800, and in New York and London in 1900 and 2000. I checked the bespoke suit department at Barney’s here in New York over the Christmas shopping season, and found this relationship to be holding, though just barely.

But the idea that gold has a good record in more recent periods—and that equities have a bad record—is simply ludicrous.

Return with me now to that thrilling day of yesteryear: January 21, 1980—very nearly thirty years to the day before you read this. (You want to start training yourself to think in thirty-year clips, by the way, because that’s about the length of the average two-person American retirement that’s starting around now.) That was the day gold hit its previous bubble peak—its “record new historic high,” as journalism likes to call it—the last time around. It topped out at $850 an ounce.

Now here’s the really fascinating part. If gold had functioned as an efficient inflation hedge in the interim—that is, if its nominal dollar price had risen in lock-step with Consumer Price Index inflation, thereby offsetting it—it would have to be selling today at about $2266 per ounce.

It isn’t. As I write, a few days before Christmas, it’s $1110, and the “all-time record new historic high” of recent headlines was about $100 an ounce higher than it is now. Just to give gold the benefit of the doubt, do you want to call it $1250 an ounce?

Fine. At $1250 an ounce, the real price of gold, adjusted for CPI inflation, has fallen about 45% in the last thirty years. At $1110, of course, it’s down over half. (If you want to perform this calculation for yourself, go to the wonderful website www.measuringworth.com/uscompare. It lets you calculate by calendar year, so I did 1980 through 2008, and then added two percent as a plug number for 2009 CPI inflation.) Classics Illustrated comic books were a far better inflation hedge than that.

As were—hold on to your hat—common stocks. On January 21, 1980, the S&P 500 closed at 112. To have hedged against inflation—to have gone up in lock-step with the CPI, thereby offsetting inflation—the S&P 500 would have needed to rise to a tad more than 300 by year-end 2009. As I write, it’s 1100. That is, the real price of equities, adjusted for CPI inflation, has risen something like three and a half times in the last thirty years.

And of course, equities paid dividends. You had to pay to store gold.

What does any of this prove? Probably nothing, in the sense that the past—and especially any thirty-year clip of the past—doesn’t prove anything about the future. But it is highly suggestive of a couple of important truths. The first is that, if you’re going to invest in something that’s supposed to be a near-perfect inflation hedge, you’d better make real sure that it has, in fact, hedged inflation with some consistent efficiency. And the other is that there’s nothing like buying into investment fads to insure wildly substandard returns for years, and even decades, to come.

Next time you see six different ads for gold in one broadcasting day, these might be two really good things to bear in mind.

© 2010 Nick Murray. All rights reserved. Reprinted by permission.

Stocks, bonds, and cash are fundamental components of an investment portfolio. However, many other investments can be used to try to spice up returns or reduce overall portfolio risk. Socalled alternative assets have become popular in recent years as a way to provide greater diversification.

What is an alternative asset?

The term “alternative asset” is highly flexible; it can mean almost anything whose investment performance is not correlated with that of stocks and bonds. It may include physical assets, such as precious metals, real estate, or commodities. In some cases, geographic regions, such as emerging global markets, are considered alternative assets. Complex or novel investing methods also qualify. For example, hedge funds use techniques that are off-limits for most mutual funds, while private
equity investments rely on skill in selecting and managing specific businesses. Finally, collectibles are included because the value of your investment depends on the unique properties of a specific item as well as general interest in that type of collectible.

Each alternative asset type involves its own unique risks and may not be suitable for all investors. Because of the complexities of these various markets, you would do well to seek expert guidance if you want to include alternative assets in a portfolio.

Hedge funds

Hedge funds are private investment vehicles that manage money for institutions and wealthy individuals. They generally are organized as limited partnerships, with the fund managers as general partners and the investors as limited partners. The general partner may receive a percentage of the assets, fees based on performance, or both.

Hedge funds originally derived their name from their ability to hedge against a market downturn by selling short. Though they may invest in stocks and bonds, hedge funds are considered an alternative asset class because of their unique, proprietary investing strategies, which may include pairs trading, long-short strategies, and use of leverage and derivatives. Participation in hedge funds is typically limited to “accredited investors,” who must meet SEC-mandated high levels of net worth and ongoing income (individual funds also usually require very high minimum investments).

Private equity/venture capital

Like stock shares, private equity and venture capital represent an ownership interest in one or more companies. However, unlike stocks, private equity investments are not listed or traded on a public market or exchange, and private equity firms often are involved directly with management of the businesses in which they invest.

Private equity often requires a long-term focus. Investments may take years to produce any meaningful cash flow (if indeed they ever do); many funds have 10-year time horizons. Like hedge funds, private equity also typically requires a large investment and is available only to investors who meet high SEC net worth and income requirements.

Real estate

You may make either direct or indirect investments in buildings–either commercial or residential–and/ or land. Direct investment involves the purchase, improvement, and/or rental of property; indirect investments are made through an entity that invests in property, such as a real estate investment trust (REIT). Real estate not only has a relatively low correlation with the behavior of the stock market, but also is often viewed as a hedge against inflation.

Precious metals

Investors have traditionally purchased precious metals because they believe that gold, silver, and platinum provide security in times of economic and social upheaval. Gold, for instance, has historically been seen as an alternative to paper currency and therefore
may help hedge against inflation and currency fluctuations. As a result, gold prices often rise when investors are worried that the dollar is losing value, though prices can fall just as quickly. There are many ways to invest in precious metals. In addition to buying bullion or coins, you can invest in futures, shares of mining companies, sector funds, and exchange-traded funds (ETFs).

Natural resources

Direct investments in natural resources, such as timber, oil, or natural gas, can be done through limited partnerships that provide income from the resources produced. In some cases, such as timber, the resource replenishes itself; in other cases, such as oil or natural gas, it may be depleted over time. Timberland also may be converted for use as a real estate development.

Commodities and financial futures

Commodities are physical substances that are fundamental to creating other products or to commerce generally. Commodities are basically indistinguishable from one another. Examples include oil and natural gas; agricultural products such as corn, wheat, and soybeans; livestock such as cattle and hogs; and metals such as copper and zinc.

Commodities are typically traded through futures contracts, which promise delivery on a certain date at a specified price. Futures contracts also are available for financial instruments, such as a security, a stock index, or a currency. Though the futures market was created to facilitate trading among companies that produce, own, or use commodities in their businesses, futures contracts also are bought and sold as investments in themselves, and some mutual funds and ETFs are based on futures indexes.

Futures allow an investor to leverage a relatively small amount of capital. However, they are highly speculative, and that leverage also magnifies the potential loss if the market does not behave as expected.

Art, antiques, gems, and collectibles

Some investors are drawn to these because art, antiques, gems, and other collectibles may retain their value or even appreciate as inflation rises. However, those values can be unpredictable because they are affected by supply and demand, economic conditions, and the quality of an individual piece or collection.

Why invest in alternative asset classes?

Part of sound portfolio management is diversifying investments so that if one type of investment is performing poorly, another may be doing well. As previously indicated, returns on some alternative investments are based on factors unique to a specific investment. Also, the asset class as a whole may behave differently from stocks or bonds.

An alternative asset’s lack of correlation with other types of investments gives it potential to increase or stabilize a portfolio’s return. As a result, alternative assets can complement more traditional asset classes and provide an additional layer of diversification for money that is not part of your core portfolio, though diversification cannot guarantee a profit or ensure against a loss.

Tradeoffs you need to understand

Alternative assets can be less liquid than stock or bonds. Depending on the investment, there may be restrictions on when you can sell, and you may or may not be able to find a buyer. Performance, values, and risks may be difficult to research and assess accurately. Also, you may not be eligible for direct investment in hedge funds or private equity. The unique properties of alternative asset classes also mean that they can involve a high degree of risk. Because some are subject to less regulation than other investments, there may be fewer constraints to prevent potential manipulation or to limit risk from highly concentrated positions in a single investment. Finally, hard assets, such as gold bullion, may involve special concerns, such as storage and insurance, while natural resources and commodities can suffer from unusual weather or natural disasters. A financial professional can advise you on whether alternative assets have a role in your portfolio, and which types might be appropriate for you.

Copyright 2006-2010 Forefield Inc. All rights reserved.

Securities and advisory services offered through Mutual of Omaha Investor Services, Mutual of Omaha Plaza, Omaha, NE 68175-1020. The information provided is general in nature. It has been obtained from sources believed to be reliable, but no warranty is made as to its accuracy, timeliness or completeness. The information is not intended, and should not be construed as legal, tax or investment advice, or a legal opinion. Consult with your legal, tax or investment professional before taking any action based on this information. This information is not an offer to buy or sell any security. Past performance is not a guarantee or prediction of future returns. Potential investors should review all prospectuses before investing. There is no contractual relationship between Family Wealth Management Advisory,LLC and Mutual of Omaha Investor Services

For parents with investment dollars to spare in deflated college-area real estate markets, there’s never been a better time to invest in condos or single-family homes to house a student during their undergraduate or graduate years while providing tax breaks and potential investment appreciation for the folks.

But, it’s very important to consider pros and cons because the potential rewards of buying housing for a student carries many risks. Over the past decade, the once-galloping real estate market made condo and home purchases in college areas attractive to parents looking for an actual return on the room and board expenses they would otherwise throw away to their kids’ schools. With the double-digit home appreciation of the 1990s, parents looked at buying property as a way to essentially house their kids for free.

Today, in most markets, home values have fallen, which makes for a better investment proposition. But it’s critical to talk to tax and financial experts such as a CERTIFIED FINANCIAL PLANNER™ professional. As a starting point, parents need to consider the following:

How responsible is your kid?

If your kid thinks you’re buying them a crash pad or party palace, you’re already in trouble. He or she will have to be responsible enough to act as an onsite landlord making sure the interior and exterior of the property stay in livable and salable condition. That’s not a job that every child can handle, so unless you can afford housekeeping and maintenance help, any doubts on your part should dissuade you from such a purchase. Also, if you have ANY suspicions that your child might drop out, take a break or transfer from her chosen school, do you want to risk becoming a landlord yourself or paying for an empty property?

How’s your cash flow?

If you are already a homeowner, you know what owning a home costs – mortgage payments, property taxes, insurance, homeowners or condo association dues, maintenance costs – can you cover these things in a remote residence (including emergencies) without batting an eye? And keep in mind those costs are going to be considerably higher for your kid’s property in downtown Chicago than they would be in Omaha. Also, keep in mind that it will cost considerably more to insure this property because even though it’s your kid, you’ll essentially need to be insured as a landlord based on the damage that can occur in rental properties.

When would you have to sell?

Most people think in terms of owning a kiddie condo for four years – the term of a standard degree. A decade ago, that was a relatively easy commitment to make as housing prices were skyrocketing and buyers always seemed to be circling. Today, however, owners have to consider that it may take them considerably longer to sell the property at a profit with necessary investments in maintenance along the way, and a big 5 to 6 percent slice off the top to pay a selling broker.

Location, location, location:

Buying a property in the immediate vicinity of campus might be great for your kid who rolls out of bed late for class, but bad for you if you’re expecting your property to appreciate. In most markets, on-campus real estate is notoriously low on appreciation (think how you’d feel buying next door to Animal House). This is why investors do better buying in established, off-campus residential areas or developments that are near but not on campus. Your child will have to miss the experience of living with their peers, though, and that’s a big consideration.

Can the property do double duty?

Students are pretty possessive about their space and privacy in college, which is why you don’t see many parents crashing in their kids’ dorm rooms for the weekend. But if you have regular business or vacation plans in the city where your kid goes to school, see if that might be one more incentive to invest as long as it doesn’t cramp your style or your kid’s.

Might your investment become your kid’s investment?

Again, this requires sensible planning and the full cooperation of a responsible child, but if your child is planning to stay in the city where they’ve graduated, parents might consider a plan to sell the property to their kids at graduation. This could give the grad a great start on their finances during their first earning years.

November 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP, CLU, AEP, a local member of FPA.

In the seven months since it recorded its panic low close of 676, the S&P 500 has risen over 60%, and stands substantially higher than it did a year ago.No one seems to want to believe it.

Set aside for a moment the economic backdrop of this remarkable and even historic recovery (which, like the crash that preceded it, has no precedent since the 1930s). That discussion will get us nowhere, since no one can agree on what the economic backdrop is, much less on an economic forecast. Concentrate, if you will, on equities themselves, on the fortunes of the companies they represent…and on the rather odd response of investors to this marvelous upsurge in equity prices.

It would take a heap of skepticism to regard a 60% rise in stock prices as anything other than a new bull market, however one defines that term. And such skepticism certainly appears to be in bounteous supply. Consider cash, for example.

It will be forever remarked upon by future market historians (who will shake their heads in wonder that anyone could have missed this signal) that for several months surrounding the panic lows, the sum of cash in bank savings accounts and money market funds exceeded the total market capitalization of the Wilshire 5000. That is, Americans could have reached out and, using only their cash on hand, bought the American equity market in its entirety. This, however, they declined to do, as they had become convinced that the world was coming to an end.

When the world once again stubbornly refused to end, and instead the buds of spring returned to its trees, this wall of cash began to crumble. Indeed, something like $400 billion dollars has exited money market funds over these seven months. Surely this one-time surge is behind the equity market’s wild runup, say the skeptics; surely cash has shot its bolt.

This argument is extremely compelling, right up until you discover where the money actually went. Because it seems largely to have gone not into equities at all, but into bonds. Indeed, the well-regarded research firm Strategas recently noted that over the last three months eleven dollars in net inflows have gone into bond funds for every net dollar into equity funds.

This just makes sense. You may conclude—as apparently most people have—that the world is not ending without going so far as to actually become, in any real sense, optimistic. You just think the radiation levels have declined sufficiently that you can get out of near-zero-yielding cash equivalents, and inch your way cautiously up the yield curve. But that’s still money which hasn’t entered the equity market…yet.

Nor—and in the long run this may turn out to be an even more important point—is the individual investor’s cash the only cash around. Far from it. For as JPMorgan Global Wealth Management’s chief investment officer Michael Cembalest recently noted, “Cash and liquid securities on corporate balance sheets are at the highest levels since 1951.”

He went on to say that another measure of corporate cash flow net of capital spending and inventories has only been higher on a few occasions in the last half century. The recent spate of merger and acquisition activity—Abbott/Solvay, Unilever/Sara Lee, Dell/Perot Systems—may be the opening round in a major strategic deployment of this corporate cash hoard. For it is too easily overlooked that, even as the financial sector went into the recent crisis hideously overleveraged, the rest of corporate America (ex-autos) was keeping its powder bone dry.

And, as economic activity cratered, companies moved aggressively to protect those assets, through production shutdowns, inventory runoffs, and (most notably) layoffs. Mr. Cembalest at JPMorgan estimates that for every dollar of reduced revenue in the recent cataclysm, S&P 500 companies cut expenses by 88 cents. That’s precisely where the huge spike in unemployment came from.

But it’s also why just about every earnings report you’ve heard so far in the third quarter has been ritually prefaced with the phrase “better than expected.” It’s operating leverage, and we may see a lot more of it as production recovers. So much so that the emerging consensus earnings estimate for the S&P of $75 in 2010 looks a bit less far-fetched with each passing day—and each earnings report.

And still, no one seems to want to believe it. This is perfectly understandable if one panicked out of the market on the way down, and is still out. With the S&P 500 at 1100, everybody who fled the market since the first week in October of last year—when the $700 billion bailout bill finally passed, and global markets crashed to new lows in celebration—is under water. Can’t blame them for wanting to believe that this recovery is unsustainable: it’s about the only hope they’ve got left.

But of late one has begun to hear of people who stayed the course, suffered through the worst decline in our lifetimes, participated in the greatest rally—and now want to fly into cash and gold. Dow 10,000 has become for these people, in some mysterious way, the financial equivalent of the sound barrier. And one is hearing those stories a lot.

It is axiomatic, in Wall Street lore, that a bull market climbs a wall of worry. But this bull market is something special. It’s climbing a wall of sheer, systematic, single-minded and impenetrable disbelief.

Which, for some of us, becomes just one more powerful reason to believe.

© 2009 Nick Murray. All rights reserved. Used by permission.

Though grandparents are among the millions who have taken a big hit to their portfolios in recent years, careful planning can ensure a healthy contribution to the education and financial future of their grandchildren.

The first step involves a talk between grandchildren and their adult children. According to 2008 research from The Hartford Financial Services Group, 65 percent of grandparents surveyed reported that they plan to contribute financially to their grandchildren’s college education, but that less than one third of all survey participants talked with their adult children about those plans.

Statistics show the amount of money that changes hands between grandparents and their grandchildren is substantial even before the kids head off to college. Hartford reports that more than 40 percent of grandparents spend more than $2,000 annually on their grandchildren before they reach 18 years old. And once it’s time for the kids to head off to school, over half of grandparents who plan to contribute will give more than $10,000, with a quarter of those planning to give more than $30,000.

A visit to a CERTIFIED FINANCIAL PLANNER™ professional can help grandparents and their adult children coordinate a gifting strategy that makes sense. In the meantime, there are several options to consider:

Talk: Adult children and their parents might find it difficult to talk about money issues in general, but discussing a positive goal like funding a child’s future can pave the way to make discussions later about the grandparents’ estate issues and end-of-life care a little easier to handle. But initially, these discussions will hopefully deliver a reality check. The Hartford survey points out that 60 percent of the grandparents surveyed believe that financial aid will be the most likely way their grandchildren will pay for college in an era where federal aid is declining and grants and scholarship cover only an estimated 15 percent of total college costs.

Start early: While many families don’t turn to relatives for help until there’s an immediate need, earlier planning almost always produces better results. Grandparents already know that saving for a child’s college education is easier if it starts at birth. The same is true for the next generation, so grandparents or adult children need to set a plan in place as early as possible for maximum benefit.

Coordinate college support with overall estate planning: Grandparents should look at their support for their adult children and grandchildren as an overall part of their estate strategy. A CFP® professional, in concert with estate and tax experts, can help grandparents and their adult children settle a series of estate issues at one time, saving time, money and worry later.

Consider the 529 plan option: A 529 college savings plan is an investment vehicle operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Service Code, which created these plans in 1996. If parents have set up a 529 plan for their child, grandparents can contribute to that plan or they can set up their own 529 plan account with their grandchild as the beneficiary.

Watch the fees: No matter what savings or investment options you choose, make sure you’re not overpaying fees. A stock mutual fund may charge in excess of 1 percent of assets; you can certainly find quality mutual funds that charge less. Two good resources: Morningstar.com can provide you a general review of most mutual funds you might be considering. The second is the Security and Exchange Commission’s online Mutual Fund Cost Calculator () which can help you determine how the fees and other costs associated with the fund will add up over time.

Offer some investing training wheels: Grandparents have a unique relationship with their grandchildren. They can teach without “lecturing” like their parents, and for that reason, they might consider setting up an investment account with a small balance that the kids can monitor and discuss under the supervision of the grandparent.

Make the grandkids beneficiaries: Naming your grandchild as the beneficiary of a retirement account or insurance policy can be a tax-smart way to provide financial support for college or possibly a first home.

October 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP, ALU, AEP, a local member of FPA.

Investing can be very emotional. When the market is up, people tend to pour their money in. When the market is down, many investors “take their money and run.” Talk about counterproductive. Regular investing—also called “dollar cost averaging”—instills discipline to the process. If you have $1,200 and invest it all at once, depending on where market prices go, you could be ecstatic if the shares bought at $10 suddenly go up to $14. But, you could be shell shocked if the price goes to $5 and become paralyzed into not investing again. Whether the market is at a high or a low—or anywhere in between—dollar cost averaging keeps you investing. Automatic investment plans, whether through your employer or one you set up, are an easy way for you to take advantage of dollar cost averaging.

Systematic investing does not assure a profit and does not protect against loss in declining markets. Investors should evaluate their long-term financial ability to participate in a systematic investment plan.

The latter part of 2007 and 2008 will likely be remembered by many as a time filled with great uncertainty and volatility in the global markets. But, remember, investing regularly is a smart way to hedge against uncertainty. Simply put, it’s not WHEN you invest, it’s WHAT you invest. Many investors know there are two phases of investing: accumulation and distribution—or loosely put: building up and using up. During the accumulation phase, the primary goal is to build up shares. In our chart, we show that if a hypothetical investor makes a lump sum investment of $1,200 at $10 per share, the investor would have 120 shares. If the investor opts to dollar cost average $100 per month for twelve months, the portfolio would have more shares—144. These may seem like small numbers, but if you build a retirement nest egg over decades, it could mean the difference between being able to sell 12,000 shares versus 14,400.

Dollar cost averaging works especially well in volatile times. Making investments in a fixed dollar amount at regular intervals buys more shares when prices are lower and fewer shares when prices rise. So, over time dollar cost averaging may lower the average price per share paid and can help smooth out the effects of volatility in a portfolio. In our example, the lump sum investor paid an average of $10 per share while the one who bought shares monthly paid closer to $9 per share. Dollar cost averaging isn’t just for novices—this shrewd portfolio-building method is great for seasoned investors as well.

Invest $1,200 All at Once or Over Time?
Regular Investing May Smooth the Ride

Past performance does not guarantee future results. This chart is shown for illustrative purposes only and is not intended to represent the performance of any Oppenheimer fund. Systematic investing does not assure a profi t and does not protect against loss in declining markets. Before investing, investors should evaluate their long-term financial ability to participate in such a plan.

Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting www.oppenheimerfunds.com or calling 1.800.525.7048. Read prospectuses carefully before investing.

At no time since the Great Depression have college students worried more about money. Tuition continues to rise, financing sources continue to contract. So why should a student worry about finding money for, of all things, retirement?

Because even a few dollars a week put toward a Roth IRA can reap enormous benefits over the 40-50 years of a career lifetime that today’s average college student will complete after graduation. Take the example of an 18-year-old who contributes $5,000 each year of school until she graduates. Assume that $20,000 grows at 7.5 percent a year until age 65 – that would mean more than a half million dollars from that initial four-year investment without adding another dime.

Consider what would happen if she added more.

There are a few considerations before a student starts to accumulate funds for the IRA. First, students should try and avoid or extinguish as much debt – particularly high-rate credit card debt – as possible. Then, it’s time to establish an emergency fund of 3-6 months of living expenses to make sure that a student can continue to afford the basics at school if an unexpected problem occurs.

Certainly $5,000 a year sounds like an enormous amount of outside money for today’s student to gather, but it’s not impossible. Here’s some information about Roth IRAs and ideas for students to find the money to fund them.

The basics of Roth IRAs: It’s good to start with describing the difference between a traditional IRA and a Roth IRA and why Roths might be a better choice for the average student. Traditional IRAs allow investors to save money tax-deferred with deductible contributions until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If someone leaves their savings in the Roth for at least five years and waits until they’re 59 1/2 to take withdrawals, they’ll never pay taxes on the gains. For someone in their late teens and early 20s, that offers the potential for significant earnings over decades with great tax consequences later.

Getting started is easy: Some banks, brokerages and mutual fund companies will let an investor open a Roth IRA for as little as $50 and $25 a month afterward. It’s a good idea to check around for the lowest minimum amounts that can get a student in the game so they can plan to increase those contributions as their income goes up over time. Also, some institutions offer cash bonuses for starting an account. Go with the best deal and start by putting that bonus right into the account.

It’s wise to get advice first: Every student’s financial situation is different. One of the best gifts a student can get is an early visit – accompanied by their parents – to a financial advisor such as a Certified Financial Planner™ professional. A planner trained in working with students can certainly talk about this IRA idea, but also provide a broader viewpoint on a student’s overall goals and challenges. While starting an early IRA is a great idea for everyone, students may also need to know how to find scholarships and grants and smart ideas for borrowing to stay in school. A good planner is a one-stop source of advice for all those issues unique to the student’s situation.

Plan to invest a set percentage from the student’s vacation, part-time or work/study paychecks: People who save in excess of 10 percent of their earnings are much better positioned for retirement than anyone else. Remarkably few people set that goal. One of the benefits of the IRA idea is it gets students committing early to the 10 percent figure every time they deposit a paycheck. It’s a habit that will help them build a good life.

Get relatives to contribute: If a student regularly gets gifts of money from relatives, it might not be a bad idea to mention the IRA idea to those relatives. Adults like to help kids who are smart with money, and if the student can commit to this savings plan rather than blowing it at the mall, they might feel considerably better about the money they give away. At a minimum, the student should earmark a set amount of “found” money like birthday and holiday gift money toward a Roth IRA in excess of the 10 percent figure.

August 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

One day in the late nineteenth century, the steel magnate Andrew Carnegie was being toured around his company’s newest plant by his chief operating officer, Charles M. Schwab. Even as Schwab extolled the plant’s modernity, Carnegie sensed a hesitancy that wasn’t characteristic of his normally ebullient lieutenant, and inquired as to its source. Schwab admitted that there had been significant technological advances since they had started building the plant, and expressed the wish that they’d built it even six months later, so as to capture the new cost-saving capabilities. Carnegie asked how much that would have lowered the cost of production, and Schwab said, “At least four dollars a ton.” Carnegie instantly said, “Tear it down, Charlie, and build it again as it should be.”Andrew Carnegie’s genius (like John Rockefeller’s in oil) was to know that the low-cost producer of any commodity will dominate the market. He knew that if he ran his new but imperfect plant, someone would sooner than later undercut his price, such that instead of recovering the cost of the plant, he’d end up throwing good money after bad by having to run it at a loss.

Welcome to the essential economic concept of sunk costs: the idea that, regardless of what you paid for it, the only real value an asset has is what it will sell for today, or what it will earn (and thus sell for) in the future. The past, you see, is irrelevant to today’s and tomorrow’s value, and your cost, at some point in the past, is the ultimate irrelevancy.

If your parents bought a particularly happy Renoir from some ruined French aristocrat in 1946 for $50,000, and you sold it to the Japanese in 1989 for $80 million, that’s one kind of experience. If you, on the other hand, were the $80 million buyer in 1989, and recently found that the painting couldn’t be sold for more than $60 million, that’s a different kind of experience. But the painting is still the same ineffable, luminous and inexpressibly beautiful work of art it’s always been.

These analogies, though imperfect, may at least suggest a vitally important truth, and one which will become even more important as the equity market continues its recovery toward its levels of a year—and then two years—ago. To wit, your investments do not know what you paid for them, and would not behave any differently if they did. Making investment decisions based even partially on your own (sunk) costs all but insures that you’re going to make mistakes; the only real question is how big the mistakes are going to be.

Near the depths of The Great Panic earlier this year, a friend in his late 40s mentioned to me that he was thinking of moving from a balanced mutual fund (one that contains both stocks and bonds) to an all-equity fund, for its greater appreciation potential over the balance of his working lifetime. I agreed with his reasoning, as who could not. He then asked, “So do I wait until I get even on the balanced fund, and then switch?”

I said, “Tell me again why you would want to do the switch in the first place.” He said again, “Because an all-equity fund has more long-term growth potential than a fund with a significant percentage of its assets in bonds.” Then while you are waiting for your balanced fund to “break even,” I asked, what will probably have happened to the all-equity fund you want to own? After a long silence, he said, “It will probably have gone up even more.”

However anecdotally, this true fable suggests the power of one’s own cost basis to short-circuit rational thought. In this instance, if the thing my buddy wanted to own really had more potential than the thing he wanted to sell—and of course it did—he would in all probability have lost some incremental return by waiting for his balanced fund to return to the price he paid for it. As soon as he stopped focusing on his cost, and started focusing on what he was trying to accomplish (more long-term appreciation for retirement), he saw that.

The reason this issue will become more pressing as the equity market continues its recovery is the intensely human impulse—driven entirely by a morbid obsession with one’s cost—to “get even and get out.” This is, in effect, the act of punishing yourself for the heroic act of hanging on throughout a bitter decline. Once the market (and/or your investments) come all the way back, and emerge into the bright sunshine of new high ground, you cut yourself off from all the marvelous wealth-building opportunities that an expanding economy, restored to health and vitality as it has always cyclically been, has to offer. This has all the elements of tragedy.

Investing, for most of us, is fraught with more than enough emotional peril. Try not to bring any extraneous emotional baggage to the process. Your cost, as intensely personal as it may feel to you, is no factor in what your investments—on their own merits, and compared to other available investments—will do today, next year, and over the balance of your investing lifetime. Try, to the greatest extent possible (and always with your financial advisor’s wise coaching), to think as if the current market price is identical to your cost.

Then simply ask, “Is this the portfolio I would buy today, if I were holding nothing but cash, and if today were the first day of the rest of my investing lifetime?” However you answer that question, the resulting outcome will almost have to be clearer, more rational and more productive than any decisions you make under the cloud of regret that always hangs over an obsession with your cost.

© 2009 Nick Murray. All rights reserved. Used with permission.

With so much cash on the sidelines, Certificates of Deposit (CDs) can be alluring in
today’s market. The interest rate is likely better than most savings accounts and CDs
are insured by the FDIC (Federal Insurance Deposit Corporation) up to $250,000.
This combination is attractive to investors looking to reduce the risk of potential
short-term losses in the stock market.

Before you invest in a CD make sure you understand the potential pitfalls. CDs may
lock you in at a low interest rate. The chart shows as of March 31, 2009 the national
average on a six-month CD was about 1%. Additionally, an early withdrawal penalty
is typically charged if you want access to your money before a CD matures. Lastly,
make sure you also understand the “real return” on a CD, which means how taxes
and inflation may erode what you’ll take home. Indeed, the chart shows CD holders
frequently suffered negative real returns over the past decade.

Is there a place for CDs in an investor’s portfolio? Yes, as short-term investments
that act as a base of a diversified portfolio. But you should keep in mind that a
portfolio needs to include other investments as well that have the potential to keep
pace with inflation and taxes to help you achieve your long-term financial goals.

Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. Lower rated “junk” bonds are more at risk of default than other bond investments and are subject to liquidity risk. Value investing involves the risk that the market may not recognize that the securities are undervalued and they may not appreciate as anticipated. Foreign investments may be more volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, and political and economic factors. Growth and technology investments may be especially volatile. Diversification does not guarantee profit or protect against loss.

Source of chart data: Ned Davis Research, 3/31/09. Inflation rates are represented by the change in the Consumer Price Index (CPI) and CD Rates are six-month certificates of deposit rates as tracked by an average of dealer offering rates on nationally traded Certificates of Deposit. Returns are net of 28% federal income tax rate. Real rate of return is equal to (CD rate minus inflation rate) minus (CD Rate x Tax rate). This chart is for illustrative purposes only and does not predict or depict the performance of any particular investment.

Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting www.oppenheimerfunds.com or calling 1.800.525.7048. Read prospectuses carefully before investing.

An old and particularly annoying Wall Street adage holds that “a bull market climbs a wall of worry.” It’s nettlesome for a couple of reasons: (a) it’s undeniably true, but (b) it still doesn’t tell you when or even if your worry is misplaced.Perhaps you’ll prefer the late John Templeton’s more elegant (and more complete) formulation: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Any way you state it, this fundamental truism suggests that markets often go up quite a bit when many or most people are still firmly convinced that they have no business doing anything of the kind.

The plain fact is that it’s easy to be pessimistic when the economic data are dreadful and the market is falling. A crashing economy feeding the flames of a crashing market just feels right to most people. Regardless of what we end up deciding to do (or refrain from doing) with our portfolios in response to the bad economy/bad market feedback loop, at least we feel that we understand what’s going on.

It’s when the economy and the market seem to be seriously diverging that our anxiety levels start rising again. At such times, it’s not just that we don’t know what to do. It’s that what’s going on doesn’t seem to make any sense. This summer, investors may very well feel themselves to be in just such a pickle.

Gross domestic product is—or certainly was at last report—still falling. Despite massive federal stimulus that has no precedent by any measure since World War II, unemployment continues not just to rise but to soar. States are teetering on the brink of insolvency; California was recently paying its bills with IOUs. Home foreclosures are still rising, and home prices still falling. Even though a couple of the more successful banks have noisily repaid their TARP money, the banking system as a whole remains on life support.

Two of the three major auto makers have gone bankrupt; they are now largely owned by the government and their unions, and have thus transferred their huge unfunded pension liabilities to the taxpayers—who are also, through the nationalization of Fannie Mae and Freddie Mac, on the hook for the vast preponderance of the shaky mortgage debt in this country. And, oh yes, we have recently been giving very serious consideration to nationalizing health care in some form or fashion, with deficit and tax consequences no one seems to be able authoritatively to quantify.

All of this would make perfect (and perfectly awful) sense, except for one very bothersome fact. To wit, the stock market, at this writing in late July, is soaring. And that’s the verb, friends: soaring. It’s not rallying, it’s not recovering, it’s not creeping back. Up 44% (on a closing basis) in a heck of a lot less than five months? Excuse me: that’s soaring, or else there’s no such thing. There is surely a wall of things legitimately to worry about. And this market is certainly doing a bang-up job of climbing it.

People who rode out the horrific market decline of 2007–09—because we knew from bitter experience that we didn’t know where to get out, and would never know where to get back in, so we might as well just stay put—may regard this apparent contradiction with a certain amount of bemused detachment. (We paid in blood for that luxury, and you’d better believe we’re going to enjoy it.)

But the bad economy/rising market dichotomy can only be of very pressing concern to people who either removed their long-term investment capital from equities during the decline, or who have been holding back considerable new money—money which must at some point be committed to equities—waiting for some clear signal that the economy has meaningfully (and lastingly) turned. That’s historically the problem with either getting out of, or standing back from, a falling market: you get to be gratifyingly right for a relatively little while (in the context of an investing lifetime), but then you’re under the gun to be right a second time, with regard to getting back in.

The psychological pressure of that second decision is compounded, of course, by the largely self-imposed burden of regret at having “missed it.” How can I get back in the 970s on the S&P (this line of thinking runs) when I didn’t in the 670s…or the 770s…or the 870s…even when I kept reading that things might still be bad, but that they didn’t seem to be quite as bad as they were back when snow was on the ground. With my luck, I’ll get back in here in the 970s, and it’ll go right back down again…

This is a formula for paralysis. The way to break out of it—with the empathetic coaching of your financial advisor—is to begin thinking of the problem not in terms of the market but in terms of your goals. If you’re like most of us, money market yields are not going to get you where you need to go. They’re probably not going to be enough to secure a long retirement full of dignity and independence; they’re probably not going to get your granddaughter through college; they’re probably not going to keep your mother in a decent nursing facility, and they’re probably not going to fund meaningful legacies to the people you love and must leave behind in the world.

Try to formulate the problem as follows: every day you stay in cash at money market rates of interest is probably a day when you get further from, rather than closer to, the ability to fund your most cherished financial goals. Accepting that stark realization, rather than remaining mired in the bottomless anxiety of when and where to get back in the market, may—if you let it—move you toward a sensible long-term investment decision.

Warren Buffett, perhaps the greatest equity investor who ever lived, said, “The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

He said that in the issue of Forbes magazine dated August 6, 1979—just about thirty years to the day before you’ll be reading this. It may interest you—and, much more to the point, it may help you more comfortably to reach a good decision—to learn that on that day the S&P 500 closed at 104.

© 2009 Nick Murray. All rights reserved. Used by permission.