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I don't think that putting I-bonds inside of a Roth IRA -- or any other tax-advantaged plan -- is a good idea. I-Bonds already have a tax-deferred advantage, and you're wasting that if you place them in a Roth IRA or Traditional IRA. Furthermore, the purpose for I-Bonds is defeated by placing them in a Roth IRA. I-Bonds are supposed to be a guarantee against inflation. If you place them in a Roth IRA, then you can only access your initial contributions. You'd probably be better off putting more aggressive, long-term investments in your Roth IRA (which is a retirement account). Meanwhile, you can invest in I-Bonds outside of your Roth IRA. I'd suggest you consider them alongside Series EE bonds as short-term, low-risk investment vehicles. You can even use them as an alternative to placing money in a savings account, with their paltry interest rates, though you'll have to keep the money in for at least one year. By purchasing I-Bonds with a cash-back credit card, if you pay all your balances off in full each month, you can create a 0.5% - 1% discount, depending on your credit-card's cash-back options. It is true that you will have to leave your money in I-Bonds for at least one year, and will be penalized 3 months interest if you cash them in before 5 years. If you can leave your money in there for a year, then it is probably worth it over a savings account, money-market, or CD. Even with the penalty, you will probably be better off than had you invested in a money-market or CD, depending on the interest rate on the money-market or CD. The penalty becomes less and less relevant as you approach 5 years. Also, you should consider that there are additional tax-benefits (0% income tax) you may qualify for if you use I-Bonds for qualified higher education. If you're looking at an I-Bond, you should also seriously consider Series EE bonds. Depending on how severe inflation is, Series EE Bonds can be better options than I-Bonds...because you can cash both of them in after a year at face-value (minus 3 months of interest if before 5 years), you can switch from one to another if one obtains a significant advantage over the other. You may find the following links helpful: Official Series EE bonds page Official Series HH bonds page As you can see, at this time, I-Bonds (4.66%) are a better deal than Series EE bonds (2.66%).

Like John says, Dollar Cost Averaging is no miracle solution. It does, however, help mitigate risk, and help you avoid the market-timing mentality. If you have $3,000 to invest at the beginning of the year, it may be wise to invest that (and get the profits off of it throughout the entire year). Id suggest putting it in your RothIRA in a conservative mutual fund or money-market, and then transferring 1/12 or 1/52 of it to a more aggressive long-term fund every month or week, respectively. Youre right to be concerned about "financial gurus" who write about all kinds of brilliant strategies, but have nothing to show for themselves as far as their own investment. One thing to watch out for is anyone who says they have a "technique" that will allow you to earn above-average returns easily. It is easy to earn average returns. However, consistently earning above-average returns is more difficult than it looks. It requires a lot of hard work, some intelligence, and a little bit of luck. Benjamin Graham and Philip Fischer were very successful investors. Warren Buffet -- who doesnt write financial books himself, but only essays -- has said of The Intelligent Investor that it is "By far the best book on investing ever written." He has also given high marks to Common Stocks and Uncommon Profits. Indeed, Buffet has said in and interview that he's . Buffet also gave a famous lecture, The Superinvestors of Graham-and-Doddsville, in which he discussed Graham’s investment approach. You can find a brief biography of Ben Graham, the founder of value investing, from Fool.com. A noteable quote: "Between 1929 and 1956, a time period spanning the Great Depression and several major wars, Grahams investments grew an average of about 17% per year." Finding a biography on Fisher, the founder of growth investing, was a little more difficult. Fool.com overviews Fisher. In Fishers Common Stocks and Uncommon Profits, he goes over 15 key points for good investment, all of which require substantial research to determine. His most important, and last, point is an absolute point he flatly states: If the trustworthiness of company management is questionable, investors should sell. also has a rundown of some of the most successful investors...but be weary of the return-rates over 40%. You can copy and paste it into a spreadsheet program, sort first by tenure, second by return, and cut off anything below 10 years, as Ive done. P.S.: You may be interested in The Essays of Warren Buffet. It's a collection of his essays on investing. You can probably find them all online separately, but it's convenient to have them in one binding for $25.

In light of the above comment, the following books may be of interest. References on investing wisely irrelevant of the business cycle The Intelligent Investor, by Benjamin Graham. A trying book to read, because it is written dryly, but excellent analysis. It often talks about the mis-investments made by individuals who try to time the business cycle: The best way to avoid this folly is to use dollar-cost averaging, which means that -- no matter what -- you invest a certain amount monthly in stocks or stock mutual funds. This approach averages out the highs and lows of the business cycle. Profit from other people's folly, don't participate in it. Of course, using dollar-cost averaging you won't buy as much as you could when the market was at a low, but who can time the market well enough to predict when it's really at a low? (see above quote, apply it's logic in the reverse). , by Phillip Fischer. Doesn't really cover the business cycle specifically; but you can't mention The Intelligent Investor without mentioning it's complement. This is also another one you won't read in one sitting. , by Peter Lynch. A pretty easy book to read, for the more common person. There is also an interesting summary of Lynch' investment style online, based on his books. The Perils of Market Timing, from Fool.com. Punchline: Two of the most successful investors that are still among the living, Lynch and Buffet, say that market timing is humbug. References discussing the business cycle. These books are economics-focused, rather than investment focused. They focus on the macroeconomics of the economy. Almost all of these focus on the relation between the business cycle, monetary instability, and inflation. None of these books will allow you to tell when a crash is going to happen. No respectable investor or economist claims to accurately forecast when a crash will happen. They will, however, help you understand that market crashes are unavoidable, and why that is so. A main point in many of these books is that during boom periods, hypsters will often declare such harmful humbug as, "we're in a new economic period, where there will be ever-lasting growth with no depressions". They said it during the 20s booms and during the 90s boom. This is kind of fallicious "it is now, thus it will be forever" thinking is part of what leads to the paranoid attitude among speculators which prevents them from speculating during a bear-market. [*]On The Manipulation of Money and Credit, by Ludwig von Mises. [*]The Panic of 1819: Reactions and Policies, by Murray Rothbard. A dissertation on the Panic of 1819. [*]The Austrian Theory of Trade Cycle, compiled by Richard Ebeling. A collection of essays on the cycle. [*]Where we are and where we are headed (mp3). [*]The mechanics of the business cycle (mp3). [*]The sociology of panics and crashes in American history (mp3).

John's advice is a good primer to get you jump-started. However, after you do that, you should ask yourself why you've been pushing off dealing with important financial matters, and give yourself an honest answer. Then, you should work to resolve it. If you don't resolve that issue, then you will continue pushing off important financial matters, like when the time comes (next year) to contribute more money to your Roth, or your yearly analysis of your investments. After you've figured all that out, you may want to re-examine your choice for your RothIRA index-fund or funds. Here is a listing of low-expense ratio funds, sorted by expense ratio. Note: The Fidelity Fidelity fund is not an index fund.

A basic overview of the Roth: Contribute up to $3,000 in 2003. Scheduled to increase to $4,000, then $5,000...thereafter to be adjusted according to inflation in $500 increments. Contributions are not tax-deductable. However, you may be able to obtain a tax-credit for contributions. It will show up as the Retirement Savings Credit on your 1080. Contributions can be withdrawn at any time, completely tax-free (because you've already paid taxes on them). Earnings can be withdrawn completely tax-free once you're 59.5. Thus, you get to keep all of the money you earned. All things equal, it is for the most part hands-down a better choice than a Traditional IRA, because earnings are not taxed at all. However, a 403(b) or 401(k) is a better first option in so-far as you invest as much as is needed to max-out employer contributions. The assets in your RothIRA may or may not be protected from court-rules and the claims of creditors. It depends on your state. Talk to an attorney. A fringe benefit: RothIRA's and other retirement vehicles can help you stay out of debt. For most people, spending -- and debt -- rises in proportion to their earned income. Which means that as they earn more and more money, they find more and more "creative" (e.g., useless) ways to waste it. Putting aside a certain portion of money makes you see less money, which means your spending -- and thus, probably your debt -- is reduced. There are very few restrictions on what you can invest in. One thing, however, that you can't invest in is life-insurance (a bad investment anyways, for most people).

If you wish to take advantage of the mentioned strategy, you will have to meet IRS requirements for being eligible for Form 2555. If you don't meet these requirements, you shouldn't plan on obtaining the benefits of this strategy; alternatively, if you are disqualified because of a technicality, you may wish to modify your behaviour. To summarize relevant instructions for Form 2555 in a shorter and more easily readable format: Overview of Form 2555 Can exclude up to $80,000 of foreign income. Can't exclude or deduct more than your foreign income. Can claim a housing exclusion or deduction. Does not include income earned in US possessions or territories. To qualify for Form 2555, all of the following conditions must be met... Your tax-home must be in a foreign country or countries* throughout your bonafide period of residence or physical presence, for 330 full days. Your tax-home is your regular place of business. If you have no regular place of business, your tax home is where you regularly live. (* All cases refer to country or countries, so I will just say "country"). You must have either bonafide residency or physical presence in the foreign country: Bonafide residence. You must either be:A US citizen who is a bonafide resident of a foreign country from Jan 1 - Dec 31, uninterrupted...or... A US resident alien who is a citizen or national of a country that has an income-tax treaty with the US and who was a bonafide resident of a foreign country from Jan 1 - Dec 31, uninterrupted. [*]Physical presence. A US citizen or resident alien physically present in a foreign country for 330 full days 12 months in a row. Periods in which you are are not in a foreign country do not count. [*]You must have earned income from sources other than the US government as it's employee. [*]Minimum time periods may be waived if you had to leave a foreign country due to severe adverse conditions, and can show you would have otherwise been there for the required time-period. The IRS lists the countries and time-frames during which it thinks citizens had to leave due to adverse conditions. Some other notes Foreign earned income -- compensation received for work in a foreign country. Does not include: Amounts that are a distribution of corporate earnings or profits. Pernsion and annuity income. Interest, ordinary dividents, capital gains, alimony, etc. Portion of previous year's moving expense deduction allocable to this year that is included in this year's gross income. Amounts paid to you by the US government or its agencies, if you were its employee. Amounts received after the end of the tax-year. Amounts that must be included in gross income because of employer contributions to a nonexempt employees' trust or a nonqualified annuity contract. [*]Income is earned in the tax-year you performed the services you were paid for.

Some good mutual fund companies to look at are Fidelity, Vanguard, and T. Rowe. If you're into bonds, you should investigate PIMCO, though I don't like bond funds, because they turn otherwise stable, predictable investments into unstable and unpredictable investments. There's also Royce. For a detailed review of some Fund Families, take a look at Kiplinger's Personal Finance, August 2003, p32. Fidelity probably offers the most choices, hands down. It's the very biggest mutual fund manager in the US. Vanguard offers the lowest expense-ratio funds. Be aware that if you're looking at funds in Vanguard other than their index funds, a lot of them require large initial investments (e.g., $10,000), though they are often well-managed and offer stellar expense-ratios (Vanguard Primecap has 14% return over the past 10years at an expense ratio of just 0.49%). T. Rowe also deserves strong consideration. Some things you should look at are the diversity of funds offered (how many), the quality of the funds, the expense ratios of the funds, minimum initial investments, and if the mutual fund firm allows you to invest in other Fund Families without penalizing you. Also, when looking at specific funds within a Fund Family, be very wary of funds that have an initial front load or a back-load. I wouldn't ever invest in a fund with a front or back-end load (this i where they charge you a certain percentage just to get into or sell the fund). Also watch out for short-term trading fees. These aren't particularly important if you're dedicated to stick with the fund. Right now, the most important thing for you is to look at the initial investment required by Fund Families, and if they offer exceptions for Roth IRA's. When inquiring with Fidelity or Vanguard, ask if they will allow smaller initial investments, contingent upon a regular investing schedule.

A follow-up note. After inquiring through a legal firm in New York, I have found that Roth IRAs -- at least in New York -- are exempt from lawsuite (other than divorce) and thus exempt from the claims of creditors. RothIRAs are exempt from the judgement in a lawsuit, because they are considered a public or private pension, and public or private pensions are exempt from lawsuit claims. In this regard (public/private pension), there is no distinguishment between a Roth IRA and a traditional IRA. Thanks to Tim Spoele of Feldman, Cramer, and Monaco for finding that information for me.

Thanks for the info BPicker. I'll try to find some specific cases. BPicker says: That's pretty outrageous. Basically, the guy was punished for following the law. If such a possibility weren't there, he wouldn't have done that. So Congress gets to steal 10% of his money because they -- our overpaid politicians who vote on their own undeserved pay-raise each year -- screwed up. Retroactive law is the stuff of totalitarian government's, like the government of China and the former government of Iraq. It has no place in democracies that supposedly respect the rights of their citizens. All this shows to me is that our system isn't that great after all.

mbozek, Do you know the reference/USSC case where the court decided that retroactive taxation was constitutional? The exact words of the decision would probably shed much light on what Congress can and can't do, according to the USSC.

Whether or not they can do it, it is still a lie (dishonest) to do such. If Congress tells you that $3,000 you put in a RothIRA now (and pay taxes on) will be allowed to grow tax free, and that distributions won't be taxed, that is a promise they are making (within the law) to the public. If they later say, "oh, that $3,000 you contributed to your Roth back in 1998, we're going to tax the distributions on that now" then there is no question that they were lying the first time around. Yea, GH Bush made a big mistake by saying "no new taxes". Part of the reason he wasn't re-elected. That, and the fact that Clinton was a politician's politician, and he didn't take Clinton seriously (can't blame him there).

MGB, I think that there are some very troublesome legal problems with taxing distributions on RothIRA's, for the following reason: * They tell us that they put in $3,000 now, the earnings on that won't be taxed (though the $3,000 will) * Then, if they later decide that they're going to tax the earnings on that $3,000, they have effectively violated a contract with the public. This seems of questionable constitutionality. Of course I think that this would be wrong. If they do this, then they would be lying to the public (previous statements that earnings on Roth IRA contributions would not be taxed would have been lies). If they just said that the earnings on all future $3k contributions to Roth IRA's would be taxed, that wouldn't present the same problems. They aren't going back on their word.

The relevant question here is can they retroactively revoke Roth IRA's. I would think that retroactively revoking them would violate the US Constitution and Amendments, but I'm no lawyer. I just have the blanket-sense that retroactive laws are undemocratic (imagine retroactively making smoking illegal, then locking up everyone who smoked).

I used to think that people who had their children model or act were exploiting them. However, now that I realize that enormous tax-advantages and eventual education-expense advantages that such children can get, it is conceivable that parents could do this for their child's benefit (indeed, certain, if the parents use that money for these education benefits). Some other considerations. I trust that most people are thinking mostly of education for their children when saving. Here's some information I've acquired on saving for children's education: Uniform Gifts to Minors Act/Univform Transfers to Minors Act (UGMA/UtMA). Tax-free gifting of money/assets to children. You manage the money until the child reaches the "age of maturity" (ha). Taxes on gains are negliigible until the account reaches $1,400, at which point it is taxed at the parent's highest maginal income-tax rate. When the child reaches 14, the gains are taxed at the child's lower rate. UTMA's are better, as the parent can retain control until the child reaches 25, depending on the state. Drawback: Colleges expect a higher percentage of the assets in a UGMA to be contributed to yearly tuition than the percentage of a parents assets they expect to be contributed. Thus, there is a benefit to keeping money in your own account (and not in your child's name), as it allows your child to get more financial aid. Tax deduction: If your AGI is less than $65,000 for single ($130,000 for joint filers), then you can deduct up to $3,000 ($4,000 in 2004) for education expenses. Hope scholarship: Deduct up to 100% of the first $1,000 of your child's education costs, and 50% of the next $1,000 of your child's education costs. It is deducted directly from the tax you pay, not your taxable incomoe and is, thus, very valuable. You can claim this deduction for each freshman or sophomore in your family. Phase-out range: $40k to $50k for single parenst, $80k to $100k for married parents filing jointly. Lifetime Learning Credit. Deduct 20% (40% in 2003?) of the first $5,000 of tuition expenses for your student. This one applies for juniors and seniors, and is only a per-family deduction from the taxes you pay. Phase-out range: $40k to $50k for single parenst, $80k to $100k for married parents filing jointly. Education IRA. Can contribute $2,000 for every child under 18, per year. Contributions are not tax-deductible, and have no affect on the amount you can contribute to traditional and/or Roth IRAs. Any single person who makes less than $110k or married who makes less than $220k can set up an education IRA. Maximum contributions are phased out at the upper limits. Distributions from an Education IRA are not taxed if they are used for qualified higher-education expenses. Distributions are subject to a 10% penalty and the income tax if not properly used. A beneficiary must be designated, and the Education IRA must be used before the beneficiary is 30; however, the beneficiary can be changed. If you are making contributions to a qualified state tuition program or a Section 529 plan, you cannot contribute to an Education IRA in the same year for the same child. Thus, it is important that family members providing for the education of a child coordinate efforts, so that the maximum benefits can be provided. Starting 2002, you can use an Education IRA without giving up the Hope Scholarship or Lifetime Learning Credit. Education IRA's may make it harder for your child to qualify for financial aid. Roth IRA. All the advantages of the RothIRA. Among others, you can withdraw original contributions at any time for any reason, no penalty, no tax. Can qualify for Hope Scholarshipo or Lifetime Learning Credit while child is receiving Roth IRA distributions. Child has better chance of qualifying for financial aid than with an Education IRA. By the time your child goes to college, you will be able to take your original contributions to a Roth IRA (assuming they were maximum) and pay for a significant part of the child's education. A Roth IRA will not affect your ability to fund a 529 plan. It will not reduce your child's chances of qualifying for financial aid. However, using a Roth to fund your child's college education detracts from your retirement savings, though it may save you money overall, because you child can get more financial aid. You can use your RothIRA to contribute to your child's education (by deducing original contributions). If your child has any earned income, then create on for him or her as well. If s/he doesn't, get him or her an earned income. Prepaid tuition plans. Invest in plan, and investment buys certain number of tuition credits at your state's college or university system at today's prices. This locks the price. Size of payments is determined by child's age. Typically, anyone with an interest in the educational future of the child can contribute to a prepaid tuition plan. Prepaid tuition plans qualify as completed gifts for federal gift-tax purposes. Can be used along with Hope Scholarship and/or Lifetime Learning Credits in one year. Earnings portion of these plans are exempt from federal taxes. State taxes are deferred while the money is in the plan. Payments may be deductable from annual income. Drawbacks: How do you know your child wants to go to state-school, or that you want them to go there? Only tuition is prepaid, nothing else. And investment grows merely at the rate at which school-tuition increases. Section 529 savings plans. State-run, tax-deferred savings plan allowing you to set aside money for your child's education. You can invest in a tax-advantaged manner. Anyone can put money into a 529 plan for anyone else -- even for yourself in the future. Contibutions are taxed as ordinary income, but earnings are exempt from federal taxes ifused to pay for college expenses. In some states, the taxes on earnings are tax-deferred. Colorodo, Iowa, Kansas, Louisiana (partial match), Michigan, Missouri, Montana, New Mexico, New York, Ohio, Utah, Virginia, and Wisconsin offer a state tax-deduction. You can invest in 529 plans in any state, but you only get the state tax deduction by investing in one in your own state. Money contributed to a 529 plan can be used at any accredited US college/university and even some foreign universities. There are some state-to-state variations. Typically, you can contribute $100,000 to $150,000 per student per year in a typical 529. Varies from state to state. Amounts greater than $50k/yr may be subject to the gift-tax. The plan investment is managed by the state. As of 2002, you can roll over your account to different 529 plans every 12 months, if you are dissatisfied with performance. See SavingForCollege.com. You retain ownership of the money at all times, but it must be used for education costs, or you will pay a penalty and income taxes. If your child is awarded a scholarship and you have a 529, you will usually be given back the money (earnings will be taxed). If your child doesn't go to college, the 529 can pay for any other child's college education. You can request a refund, but earnings will be taxed and assessed a 10% penalty, and if you took the state deduction you will have to repay the state. Does not disqualify you from a Hope Scholarship or Lifetime Learning Credit. Does not reduce chances of getting state financial aid, but does reduce chances of getting federal gov't aid or aid from college. Thus, consider eligibility for financial aid *before* opening a 529.

BPicker, some great stuff. Regarding child-actor/model, how strict are the requirements? I mean (if I had a child) I would pay my child $3,000 dollars to "star in a home movie" doing what s/he does everyday. The more difficult thing is that the pay the child gets must reflect the market value of those services. How is a child going to provide services to you that you could justify giving them enough money to make a dent in their future retirement or college expenses? How is fair market value determined? After all, it is very possible in the real world that someone can get paid alot more money than the fair-market value of what they do, yet that is fine and dandy. In other words, how strict is the IRS about this type of thing? I agree with you that, economics aside, it is a good thing to give children responsibilities and rewards for fulfilling those responsibilities. It is pretty sad that some young people can't properly answer phones and take messages. One of many skills being lost (they now offer classes on politeness). Another thing that bothers me is that things like managing one's financial life aren't taught at all in school. Classes about std's are mandatory, but classes about how to balance a checkbook and otherwise properly manage one's financial life aren't even available in high school, nor are classes on reading and understanding laws.

pax writes: Interesting question. I'm no lawyer, and I'm not inclined to look these things up, so I'll pose questions for more legally knowledgeable people to answer: Can a 4-year-old have an earned compensation? If so, for doing what? If so, is paperwork necessary? If so, how much compensation can he have? I remember reading in a magazine that a certain self-employed couple employed their son over the summer to do trivial things, paying him $3000, which they put in a RothIRA.

(1) Though I don't recall where, I remember reading that with Roth IRA's, it wasn't a question of what you can invest within them, but of what you can't. So, what are the investment vehicles that can't be invested in Roth IRA's? (2) How valuable is the ability to withdraw initial contributions to Roth IRA's? From what I've read, it appears that the withdrawal of contributions is not adjusted for inflation.

John, you ignore almost all of the important issues in my post, and continue to -- from what I can see -- insist that individuals cannot intelligently manage investments, so should just put their money in an index fund. You claim to simply be sharing facts, yet it seems to me like you are discouraging individuals from bothering to look for well-performing portfolios or invest in stocks, on the rationale that index-funds outperform 80% of all other funds (over the long-run) and there's no way to make an intelligent prediction on which funds will outperform the index', or which stocks will. To me, that sounds like the same kind of scare-tactic that you accuse Fidelity, M. Lynch, and others of using.

BPickerCPA writes: To explain it a little bit clearer...For each year, you can contribute 3k to a RothIRA (increases to 5k in the next couple of years). Though that article is talking about traditional IRA to Roth's and then back again, information on Roth IRA => traditional IRA can be extracted from it. Aug. 15th is the deadline to recharacterize a Roth IRA to a traditional IRA, which is the 8th month of the year. In other words, you have 8 months from the time you contributed to the deadline for recharacterizing that contribution to a traditional IRA, and get the tIRA tax-deduction...if your investment goes down significantly, this may be a good choice. * Depending on circumstance, you can get a tax-break for RothIRA contributions. Some individuals can get a tax-credit for a RothIRA contribution, traditional IRA contributions, and elective/voluntary contributions to other retirement plans, which -- though not equal to the amount contributed -- are still significant (I believe up to half of the contribution). If you file a 1040, it's line 49, the retirement savings contribution credit. Form 8860 can be used to determine if you can take a tax-credit for your RothIRA contribution. The restrictions on this tax-credit, though are prohibitive. AGI must be less than 25k, 37.5k, or 50k if single, head of household, or are married and filing jointly. You also can&#39;t take it if you were a student. ** I forgot to mention that this is from the 2002 forms. The rules will probably be similar for the 2004 forms, but it's worth it to check. With Bush in office, we've received a number of generous tax-gifts. John G write: Ok, I thought when you said event-driven, you were referring to stock-price movements. (they do have an impact on when to buy, but it is usually the inverse of what most people use...if a stock price drops). There are also some dangers to event-driven moves. For example, while many will move stock out of a company experiencing a strike, that is often the optimal time to invest in it (because a strike is a temporary event). There is also a danger when people respond to events they have no understanding of. The SCO vs. IBM lawsuit is a perfect example. I don&#39;t think it&#39;s had any affect on IBM&#39;s stock (IBM could buy out SCO for what would be the equivalent of a few cents to them, and this lawsuit is at most a nuisance). However, the lawsuit has had an enormous impact on SCO&#39;s stock-price, which has risen almost 6-fold. But, anyone who understands the lawsuit knows that it is completely bogus and has no merit what-so-ever (I won&#39;t go into the nasty details of that). SCO&#39;s just blowing smoke in a last-ditch desparation effort to avoid bankruptcy (because, if you know their company and the industry they&#39;re in, you know that they have no product that&#39;s worth using and no business model other than lawsuits). This little example only illustrates that one should really thoroughly know something about the company one&#39;s investing in and it&#39;s industry. Now, does this little tidbit of knowledge allow me to make a good investment? No. IBM&#39;s stock has not been affected by this bogus lawsuit, and since I don&#39;t understand how Linux companies make money, I can&#39;t invest in any of them that may have been hit by the suit. But, at least I can avoid SCO&#39;s stock, which is inevitably going to collapse when the market in general realizes that this lawsuit is bogus (certainly, this will happen in a couple of years when the suit is laughed out of court, but maybe earlier). PS: I don't know what's up with this post. Sorry about it. I continue having issues with posting on this board (mostly because it uses some wierd non-html standard, with instead of <a>. I'll clean up this mess when I have time.

Looking at various index funds, I do not think that they accurately mimic the performance of the index they're trying to match. In many cases, they exceed the losses, and the wins, of the index. Of course, it all depends on how accurately you want to mimic the performance. I would consider less than 0.25% points to be an accurate mimic. Regarding managing a personal index-portfolio vs. using a DJIA-index, I did not say that it was a good option for everyone...just that in some cases, the value may be questionable. There's also the fact that the people "managing" the fund are getting rich for basically doing nothing. Regarding the irrationalities of Wall-Street, I am not brining any bias. People act irrationally. Irrationality is one reason why the stock-market cycles as it does. Growth to unrealistic highs, and then sinkings to irrational lows. This is because of the typical investment model that most people follow -- to always try to buy when the market is going up, and usually when it is going up at the craziest pace. Then, when the market is low, they stay out of stocks and sell. That is, they are overly optimistic when they should be most cautious, and overly pessimistic when there is the largest room for growth. Yes, the market is a reflection of investors -- us. And we -- most of us, maybe all of us -- are irrational. Buffet made a simple observation on this in an interview: "That's the way the stock market behaves. It overshoots in both directions because people get entranced with the rear view mirror. And they go to excesses in both directions." If ignoring current fundamentals because of past-performance and under or over-valuing a stock isn't irrational behaviour, I don't know what is. (the interview also has some other interesting stuff...it's really admireable that, despite having billions of dollars, Buffet basically lives like the average person). I am not suggesting that anyone can determine the 20% of funds each year that will beat the index. I'm suggesting that people can make intelligent decisions with long-term impact -- not perfectly, but certainly better than random. Naturally, in regards to mutual funds, a rational person would place their money with a manager who has proved over the long-haul that s/he can outperform the applicable index, and not in an incompetent one that is slaughtered over the long-term by the index. Are you suggesting that there is no reason for people to look for quality management when placing money in a mutual fund? By the way, if you argue that you have no way of picking the mutual funds (thus, necessarily the stocks) that will beat the index', then I don't see what business you have picking stocks. Sounds like a futile effort to me. Moving money to top-performers in the dot-com era would have been disastrous because you wouldn't be paying attention to long-term records (which they didn't have, because dot-com was new). It also would fly against common sense. The idea that companies can somehow make money by giving stuff away for free online, and paying for it by advertisements, or hoping that people will pay for "upgrades", or whatever other crazy business models these "give-stuff away for free" dot-coms had is absurd. Most people investing in those companies were trend-hopping, and had no idea of the business plan of these companies. In general, if you don't understand how a company makes money, you probably shouldn't invest in it. I never got how dot-coms (some exceptions, like Amazon, which actually has a real business model) were going to make money. I still don't understand the convoluted schemes. The idea that you cannot avoid bad investments is also questionable. If you can't avoid bad investments, then why bother to look for companies with good fundamentals (e.g., low debt, quality management, etc)? Through a number of quantitative and qualititative methods, you can find companies which are likely to be good investments, or at least avoid those that are likely to be losers. Would you advocate investing in a company with insurmountable debt-problems, for example? You can't always pick stocks that will be the winners. That's impossible. But what's more important than that is realizing when you've picked stocks that are losers, and not holding onto them out of sheer hope. Simplistic quantitative screening approaches won't make your investments winners, but they can at least filter out a lot of crap that you shouldn't even waste your time bothering with. From what's left, more qualitative analysis can be done on the quality of management, products, etc at companies. A simple analogy would be basketball. I can't tell you who's going to win the next NBA championship (though I'd place the best odds on the Lakers), but I sure as hell can tell you who doesn't even have a shot (Heat, Wizards, Bulls, etc). This is because I can look at the members of those teams -- coaches and players -- and say that they are nobodies with little talent and a track-record of failure (Pat Riley aside). The same kinds of analysis make sense in the corporate world. Would you even think about investing in a company managed by Gary Wennig, the unrealistic dreamer who bankrupted Global Crossings)? You seem to be distorting my argument. I am not arguing that anyone -- even the greatest investors like Buffet and Lynch -- can pick only the winners. (Indeed, Buffet admitted in his latest letter to investors of Berkshire that he made a mistake in investing in a certain insurance company). If they can't do it, then certainly no-one else can. What I am arguing is that every investor can -- through careful examinations of investments -- reduce the number of losers picked and increase the number of winners (compared to random investment, which would over the very long-haul mimic applicable indexes). If people spent the same time evaluating stocks and mutual funds when buying into them as they do cars, then there would be alot less excesses on Wall-Street. This would eliminate the opportunity for above-average performance. Of course, that isn't going to happen. The majority of investors will continue investing in stocks like they buy clothes or the latest fashion items, leaving opportunity for those who take the time to thoroughly analyze stocks of companies that they can understand.

I did make two incorrect statements regarding index funds. (1) I was thinking of something else when speaking of high turn-over rates. Index funds do not have a high turnover rate. (2) I was thinking of the entire NYSE when saying "it's impossible to make an index fund of that", not the DJIA (which is only 30 companies, and can easily be made an index-fund of). The larger the list of stocks that you want your index fund to mimic, the more difficult it will be to mimic that list. Perhaps not impossible. I do not see how, given the huge number of stocks you'd need to invest in to mimic the NYSE, one could accurately mimic it's performance. If one wants S&P 500 performance, it may make sense to have an index fund. However, why waste time with an index fund for the DJIA? Since it's only 30 stocks, any individual can handle that himself or herself, probably at even lower expenses than an index fund. So, the question becomes, why would anyone pay any expense ratio for a DJIA index fund, unless the cost of stock-transactions is higher than the yearly fund-expenses? Index funds are very much tied to the irrationalities of Wall-Street. True, there is no subjective emotionality in managing an index fund; it can essentially be done by a computer. However, the value of an index fund is very much affected by the irrationality of wall-street. They have no chance of escaping the irrational highs of wall-street. Your praise of index-funds is also difficult to understand. Index funds essentially create an average. They will beat half of the stocks in the index in which they invest, and lose out to the other half. Maybe they do beat 80% of all actively managed funds. That's still no reason to take them over the 20% of funds that they don't beat (I assume the 80% figure compensates for the higher expense ratios of normal funds). History has shown that value-investing produces impressive results that beat the index' (see the school of investors who followed Graham's principles). And even fund-managers with other strategies have beaten the index' over long-term periods (e.g., Lynch). There are funds today -- managed by the same manager for the past 10 or more years -- that have beaten the index' applicable to them over the past 10 years. Considering that the managers have been there for significant periods of time, and outperformed their index', this is not "chasing hot performers". It is choosing to invest in competent management. Some people don't believe in that. They think that those who have beaten their index' just happened to luck out. This is the Vanguard philosophy. I don't really buy that at all, because many fund-managers have beaten their index' over very long periods of time, and it's very unlikely that they did it by pure chance. But if you do buy that philosophy then you should be questioning the value of mutual funds. Why make mutual-fund managers rich when their work is done almost entirely by computers? It is probably necessary for large index', but I don't see it as necessary for a DJIA index (which usually outperforms the S&P 500 anyways). I did not say that the Nasdaq is all growth stocks. I said it is mostly growth stocks. Look at the Nasdaq's chart -- outrageous growth over a 1yr or so period, then decline just as rapid. This reflects stocks growing way beyond their intrinsic worth.

First, it assumes that a taxpayer knows in advance if something is a short term or long term investment. Reasonable stock-market investing focus' on long-term results. If you want to take your money out in 1, 3, 5 years, the stock market is not a good place for you. Look at the past 5 years as an example of that: the DJIA has just broken even. The 10-year time-frame is critical in the stock-market. There has never been a 10-year period in which stocks haven't outperformed every other major investment vehicle, and only one 10-year period in which they declined (during the Great Depression). That's a pretty good indicator of the future. Obviously, nothing is for certain. True, there are many times when stocks and stock mutual funds will rise extremely rarpidly over a very short period of time, making selling them reasonable. I do not agree that "event-driven investing" is a credible alternative approach to holding onto stocks for long periods of time, since I don't see how that's different than market-timing. Obviously, it may be reasonable to have some rules when investing in individual stocks, such as to sell if they decline by 20% or whatever the individual sets; to sell incrementally when enormous profits are realized over short time-frames, so as to lock those profits in; and to sell when the stock's price reaches an unrealistic price. One may not know whether individual stocks -- or even mutual funds -- will reach a point where they should be sold by reasonable people in the short-term or long-term. However, overall, investing in the stock-market and stock mutual funds is long-term. Second, if you buy something and it rises rapidly, you may have good reasons to sell. There are no consequences in an IRA or Roth for selling with less than a one year hold. This is true. I would not say that just because something rises rapidly, however, you should sell. You may want to lock in some of the profit and sell off some of your stake in it. However, the time to sell is when the stock is no-longer something you would have invested in in the first place. Basically, the time to sell is when the answer to "Would I buy this stock if I was looking at it fresh today?" is no. Third, you say your should "invest short term when you need the money short term". This seems to confuse two subtle issues: the length a specific investment is held and the period of time when you are actively investing. Different investments are very likely to produce positive results over different time-frames. The point I was trying to make is that if you're saving to buy a house in 5 years, you should not invest in something (like the stock-market) that has a significant possibility of going down in 5 years. If you are investing for a house in 5 years (let's say you want to buy it up-front), you should ask yourself a couple of questions. (1) How much money can you put aside each year for that purpose? (2) How expensive is the house you're planning on? (3) What is the difference between the summation of my yearly investing for a house and the cost of my house, compensated for inflation? From this, you can figure out how much your money needs to grow to meet your objectives. Once you know that, you need to find an investment that is very likely to meet that growth-target over 5 years (e.g., over 5-year period, has almost always showed enough growth for your required needs). If you can't find an investment that has almost always met your required growth over 5 years, then you are being unrealistic (e.g., if you need 17% per year to meet your 5-yr objective). You either need to find a way to put aside more money each year, or find ways to knock down the price of your house, or both. I do not believe that anyone should have a lot of confidence that their view of the future has a high probability, especially with regard to specific investments. Sorting investments by accounts based upon your predictions will often be wrong. More wrong over long time periods. I'm talking with regard to general investments. Stocks and mutual funds are not a reliable 5-year investment, especially if there's a bear-market. The 10-year time-frame is critical. Short/medium-term bonds, however, may be a reliable 5-year investment. In any event, outside of emerging-market bonds, bonds will not produce the kinds of returns that stocks produce over 10-years. Thus, it makes sense to put your aggressive stock investments and mutual funds, into tax-sheltered accounts, where they will benefit the most from tax-deferred growth. While the stock-market requires a longer time-frame (10yrs) to be a reliable investment than the bond-market, it has always produced greater returns than the bond-market over 10yrs. People investing in stocks are looking for high rates of returns, 8%, 10%, or better. Tax-sheltered plans, like 401/403/Roth, will provide the most benefit to these kinds of investments in terms of growth. You also said: "Because the earnings in RothIRA's are tax-exempt, your most aggressive investments should be in your RothIRAs (if they lose money before the end of the year, you can always turn them into traditional IRAs so you don't get stuck paying taxes on $3000 contributed that's now only worth $2000). You can then -- at the soonest possible time by IRS regulations -- convert the Traditional IRA back to a RothIRA, still be able to contribute $3k that year." Perhaps the accountants can evaluate to what extent your proposal is legal. I can not recommend this approach on a number of practical grounds. You can't convert prior year Roth assets back and forth. For most folks, prior year assets should be greater than the current contribution (if any), so this statement is limited in scope. In a normal investing environment, it is rare to see a stock drop 50% in a year. If your picks are doing this, you have more fundamental problems than your taxes. Not everyone can qualify for a Roth every year. It is an administrative mess. I don't think anyone should make investments using this concept as a backstop. This approach is indeed legal. You can convert back and forth from Roth IRA's to traditional IRA's. Even more aggressive conversion strategies (e.g., individually converting each mutual funds) have been proposed. See Roth IRA Conversions -- An Aggressive Strategy. Your assumption that for most people, the assets should be greater, is very questionable. If one is heavily invested in the stock market, that is very possible one could lose money, especially in a bear-market. In any situation where your RothIRA value declines over a year, it is valuable to convert it to a traditional and then reconvert asap to a Roth. The best strategy is to modularize conversions, as the article I mention suggests. Individual investments within a RothIRA that decline over a year should be converted to a traditional IRA, then reconverted back the next year asap by law. This allows one to reap maximum tax-benefits. Of course, this is only possible if you qualify for a Roth IRA. It's only an administrative mess if you keep sloppy records and don't understand what you're doing. Otherwise, though complicated, it is pretty clear. Blanket recommendations about investing often miss the mark. My point was not that I-bonds are the best investment for everyone's needs, but that I-bonds are a superior alternative to money-market's, CD's, and other ultra-short-term investments that are being crucified by inflation at the moment. If you want a zero-risk investment (in terms of not losing money to inflation) I-bonds are the best investment at the moment, so far as I can see. I-bonds are hardly zero risk. You run a long term risk of your assets not providing enough return to reach your goals. I-bonds are not necessarily long-term. They can be redeemed after 1-year, albeit a 3mo interest penalty up to the 5th year. However, this becomes increasingly insignificant as 5-years approaches, and they would still be vastly outperforming CDs and money-markets in the current environment, and many other environments. I-bonds are, at the moment, a superior alternative to CDs and money-markets (for money that you need in less than one year, you should put it in a money-market...though at less than 1%, the returns are barely better than a savings account). Furthermore, CDs and money-markets also run the risk of not reaching your goals, so there is no reason to invest in them, when they have inferior returns to I-bonds.

Regarding the new tax-laws, I don't think they warrant major shifts in your retirement investment. Many have advocated shifting asset-allocation -- or more specifically, what accounts assets are allocated under -- so as to minimize the percentage of money that the IRS gets. The problems with these strategies is that they place high-yield investments like stocks outside of tax-sheltered plans (401/403/Roth) and into normal taxable accounts, placing the shorter-term investments into tax-sheltered plans. The rationale behind this is that the long-term investments are now taxed much more favorably, and that you can avoid the unfavorable tax on short-term investments by placing them into tax-sheltered accounts. This is a great strategy, if your only goal is to screw the IRS out of as much percentage of your money as you can, even if that means you get less money in the end. Would you want to make $7,000/yr instead of $700,000, just because the government gets a smaller percentage of your money at $7,000/yr? Another thing is that placing short-term investments in retirement plans doesn't make sense. You should invest short-term when you need the money in the short-term. For retirement investments in 401/403/Roth, you won't get the money until retirement. And why would you place your longer-term investments outside of your retirement plan, giving you temptation to not stick with the long-term plan? Your objective should be to place money such that your overall portfolio can grow the quickest. The objective is to appreciate enough money to live up to your standard of living in retirement, not to screw the IRS out of as much money as possible. Your portfolio will grow much faster if you have your aggressive long-term investments in tax-sheltered plans. Because the earnings in RothIRA's are tax-exempt, your most aggressive investments should be in your RothIRAs (if they lose money before the end of the year, you can always turn them into traditional IRAs so you don't get stuck paying taxes on $3000 contributed that's now only worth $2000). You can then -- at the soonest possible time by IRS regulations -- convert the Traditional IRA back to a RothIRA, still be able to contribute $3k that year. When converting a traditional IRA to a Roth IRA as part of such a tax-plan, it is good to convert when it's at a low-point (so you'll pay less taxes). "Most aggressive investments" in this case would mean the portion of your portfolio that is seeking long-term average gains of 15% or greater, probably aggressive-growth/value-blend investments. RothIRA's are also the place to invest in your own personal stocks, if you choose to do so. Your slightly less aggressive investments should be in your 401k or 403b. These are still, of course, aggressive investments -- still mostly stocks, or maybe high-yield junk bonds or international bonds (emerging markets bonds have performed in this caliber). "Less aggressive investments" would probably mean investments returning 8-14% long-term. If you make considerable money, annuities may also be a consideration; though I think that new tax-law makes them less valuable, since initial contributions into annuities are taxed, though growth is tax-deferred. In any regards, tax-sheltered plans (for now, while they require you to wait until 59+) should be long-term investments (or at least as long term as is the difference between your age and when you can start taking from them). Other tax-sheltered plans that make sense -- if you have, or are planning on having children -- are college-savings plans. There is a education IRA, and there are also state-sponsored savings plans. When saving for a child's education, you may want to place the money in the name of someone that you trust, other than yourself, to be used for your child. Any assets your or your child has may detract from potential financial aid. Outside of tax-sheltered plans, it makes sense to invest for pre-retirement goals first. Eliminating debt, paying current expenses, a car, a computer, a house, and so-on and so-forth. In general, if you need your money within a certain time-frame -- say by 1, 3, or 5 years -- then you should invest in something which is almost sure to outpace inflation over that time-frame. I think that many government bonds are a good place to start. I'd recommend investing in individual bonds as opposed to bond-funds, if you want a safer more stable investment. I-bonds, EE-bonds, and HH-bonds are government-guaranteed bonds, and government mortgage bonds are also good-yield bonds. Consider the benefits of gov't-guaranteed tax-advantaged bonds when deciding between that "low-yielding" gov't bond and a "higher-yielding" corporate bond: by the time taxes have been taken into account, the gov't bond may be just as good, plus the added security. Regarding I-bonds, I think that they're a good option right about now, with rates of around 4.66% (alot better than anything offered by money-markets or CDs, even if you're penalized 3mo interest for withdrawing before 5 years). I've calculated a (png-versaion) increase in value over time, compensating for inflation. Several articles on Fidelity.com may be of interest: Ask an Expert: Retirement Investing and the New Tax Law James Cramer: Critical Opportunity With New Tax Law How the New Tax Law Affects Trades

Regarding Index funds, your points on them are right. They are simple to understand and have very low expense ratios. The reason I dislike index funds is that they tie you to the irrationalities of Wall-Street more so than other funds (in technical terms, beta). Aggressive growth-oriented funds are even more turbulent than is Wall-Street as a whole (e.g., the Nasdaq). I think that over the past 5 and 10 years, value funds have typically outperformed aggressive growth funds enough to justify purchasing them instead. The Nasdaq -- which is basically all growth stocks -- illustrates the dangers of buying stocks that are over-priced, in the hope that they will grow into their current price. Nasdaq stocks soared to astronimical highs, then came crashing down almost as fast. Of course, ideally, one wants to invest in companies that are both selling at a discount (low PE, PEG) and that have a huge potential for growth. Determining funds that do this, however, may be difficult. One thing clear to me is that index funds have no potential to be anything but average, and will always be hit about as hard as the market overall by economic fluctuations. The performance of the DJIA -- barely breaking even over the past 5 years -- is hardly impressive, compared to the 8+% offered by many value and even aggressive growth funds (alot of the select-funds in specific areas like electronics, health-care insurance, etc, have had impressive growth over the past 5 years, though experiencing volatility greater than the Nasdaq). Furthermore, the performance of the S&P 500 over the past 5 years has been disappointing, as it actually underperformed the DJIA. Of course, it is almost certain that over the long-run (10, 15, 20, 25 years), index funds will have impressive average yearly percentages (7-8%). However, value, growth, and value/growth blend funds could have even more, while avoiding some of the stings of the down markets.

If you have an earned income, a Roth IRA is a good plan. If you don't have an earned income, get one. Even working as a librarian at your university counts (plus, after a year or two of working at a University part time, you may get free courses). If your parents are self-employed, they can employ you. As for investing in that RothIRA, other's here are right. Keep it simple, and focus on your studies. The stock market may go up, it may go down; you have no control over that. If you can leave your money in long enough, you'll probably have a gain (there has never been a 10-year period in which stocks haven't outperformed every other major investment vehicle; and there has only been one 10-year period during which the market went down, during the Great Depression). The best investment you can make in your future is doing well in college. But, you should still invest your money. I've run some numbers, and at the current inflation rate (3.54%/yr), by the time you are done with 4 years of college, your $3,000 will only be worth $2,600 in today's dollars. If you have it in a money-market making 2%, it will only be worth $2,800. The longer you let it sit earning little or no interest, the more inflation munches away (so there is a risk if you do nothing). But, keep it simple. I'll diverge from most people here, who tend to recommend index funds. Look for value-oriented funds, which tend to be less risky and more solid than the market as a whole. You want a fund with a low risk and a high return, given the investment medium (e.g., obviously low risk in the stock market is still a lot more risk than a money-market). As a general guideline, if you want your money out in 1, 5, 10, or 20 years, you should pick a fund that has never been outpaced by inflation in any 1, 5, 10, or 20 year time frame during the manager's tenure, respectively. Once you narrow down the list of acceptabler funds for your time-horizon, you want to look at the top-performers among the remaining funds. Once you've found the top-performers, pick the one's that have the least volaitlity. What you want is a fund with a high return to risk ratio. Also consider the type of fund, and if you're comfortable with it. Don't invest in something you're not comfortable with or don't understand.