Is your 401(k) back on track? Are you putting more of your money back into the stock market? Or are you investing less?

How has the last year changed your ideas about investing?

Globe reporter Megan Woolhouse wants to hear about where your long-term investment strategies stand. Contact her via e-mail by clicking here, or by phone at 617-929-3292.

What are Build America Bonds?

A Build America Bond (BAB) is a type of municipal bond created under the American Recovery and Reinvestment Act of 2009. Similar to other municipal bonds, BABs are issued by state, local, and county governments to finance capital improvements, governmental expenditures, and local projects. Unlike municipal bonds which are typically exempt from federal income taxes, BABs are taxable. For state and local income tax purposes, BABs are similar to other municipal bonds in that they are generally exempt from state and local taxes (especially if you live in the state where the bond was issued).

One of the key differences between BABs and other municipal bonds is that they are subsidized by the federal government. These federal subsidies are intended to help create jobs and make it easier for state and local municipalities to borrow money to fund local construction projects. From an investor’s standpoint, the federal subsidizes should translate into higher coupon rates offered by the issuers when compared to the rates offered on other municipal bonds.

My husband is considering investing $10,000 dollars in a mutual fund which invests in GNMA securities. I am worried about the safety of the mutual fund. Do you know if it is FDIC insured?

Mutual funds that invest in GNMA securities are not FDIC insured. These bond mutual funds invest mainly in mortgage backed securities (which are bond investments backed by the Government National Mortgage Association (GNMA or “Ginnie Mae”). These mortgage backed securities (MBS) are formed by aggregating residential mortgages, mainly from the Federal Housing Authority (FHA) and the Department of Veterans Affairs (VA). While Ginnie Mae does not buy, sell, issue, or even aggregate these MBS, they do guarantee the timely payment of the interest and principal associated with the MBS if the underlying mortgages are in default.

Ginnie Mae is a government corporation that is a part of the Department of Housing and Urban Development (HUD). It deals in the residential housing and mortgage markets similar to government-sponsored enterprises, such as the Federal National Mortgage Association (FNMA or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHMLC or “Freddie Mac”). However, unlike Fannie Mae and Freddie Mac, Ginnie Mae is not a publicly traded company. Ginnie Mae securities are also the only ones that are federally guaranteed by the full faith and credit of the U.S. Government – like U.S. Treasuries (e.g., T-Bills, T-Bonds, T-Notes, TIPS). If the underlying owner (of a mortgage) in a Ginnie Mae MBS, defaults on the loan, the U.S. Government will continue to pay the investor of the MBS the interest and principal earned on the MBS investment.

I purchased I-Savings Bonds in 2001 and 2002 at around 6.35 percent and 7 percent, I believe. Are the bonds still paying that or are they now at 0 percent?

I-Bonds are U.S. Savings bonds that incorporate inflation protection into the rate that is earned on the bond. The rate earned on an I-Bond is comprised of two separate components – a fixed interest rate component and an inflation rate component. This composite rate is updated in May and November of each year and applies to newly purchased I-Bonds during that period as well as to outstanding I-bonds at the time of the rate change.

For example, if you purchased an I-Bond on June 1, 2001, you would start to accrue interest on the bond at the rate of 5.92 percent – which was the composite rate in effect at that time. In November 2001, the composite rate was updated to 4.4 percent to reflect the new fixed rate and the then-current inflation rate. For the six months starting on November 1, 2001, you would accrue interest at the 4.4 percent rate. On May 1, 2002, the composite rate would be updated again and that would be the rate that you would earn for the next six month period. This continues until you redeem your bond.

As of May 1, 2009, the composite rate on the I-Bond was 0 percent. This rate dropped from 5.6 percent in November 2008 to 0 percent in May 2009 because the inflation rate component, as measured by Consumer Price Index for Urban Consumers (CPI-U) for March, was a negative 2.78 percent (-2.78 percent) and the fixed rate was 0.10 percent. While the combination of these two rates (from a mathematical standpoint) would result in a negative composite rate, the U.S. Treasury does not allow the composite rate on I-Bonds to be set below zero.

Despite the 0 percent return, current holders of I-Bonds should consider several additional factors before rushing off to redeem them. First, this rate will adjust again in November and depending on inflation, it may exceed the current 0 percent rate. Secondly, there are tax considerations associated with redeeming I- Bonds. Interest earned on I-Bonds are taxable at the federal level. And finally, there may be penalties incurred for early redemption, such as the loss of some accrued interest, if you redeem the I-Bond within 5 years of your purchase.

For more information about I-Bonds, visit the U.S. Treasury’s savings bond web site at:
http://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

I own GM stock. If the company goes bankrupt can I claim a loss on my income taxes or do I have to sell it now for pennies to claim that loss?

In order to take a tax deduction for a worthless security without having to sell first, the security must be considered entirely worthless. A company's stock does not necessarily become entirely worthless if they file for bankruptcy. Under Federal bankruptcy laws a company can file for Chapter 7 or Chapter 11 bankruptcy. If a company files under Chapter 7, it means that the company ceases to operate and goes out of business. The company's assets will be sold and the proceeds generated from that liquidation will be used to pay back the company's creditors and investors. If the company files under Chapter 11, which is what GM is expected to do today, it means that the company continues to operate on a daily basis and tries to reorganize its business with the goal of eventually emerging from bankruptcy as a profitable company.

A company's stock may continue to have value and trade on a public stock exchange even though it is in bankruptcy. Stocks that do not meet the requirements to be listed (and thus traded) on one of the major exchanges like the NYSE or the NASDAQ, may trade on other public exchanges like the OTC or the Pink Sheets. Generally, if the company's stock retains some value the only way to capture the loss and receive a tax deduction is to sell the stock and record the capital loss based on the cost basis of the shares you sold.

I am considering taking an early retirement package which would have me retired by July. Can and should I contribute to my Roth? Can I contribute the maximum with only half a year of work? What type of mutual fund would be the best to fund in this climate?

Contributing as much as you can to your retirement plans always makes sense, and retiring mid-year won't necessarily affect that strategy. As long as you have earnings in 2009 you can contribute the lesser of $5,000 ($6,000 if you are age 50 or older) or an amount equal to your earnings. You can even make the contribution after you retire in July, as long as it is made before you file your 2009 income taxes next year.

Roth IRA contributions have a few other restrictions: the amount you can contribute begins to phase out if your income is above $166,000 for joint filer taxpayers or $105,000 for single taxpayers. Contributions are not allowed at all if your income exceeds $176,000 for joint filers and $120,000 for single filers.

Roth IRAs are a wonderful savings vehicle. As long as you are age 59 1/2 or older and your first withdrawal is at least 5 years after your first contribution, all of the interest, dividends and capital gains accrued in the account, in addition to your contributions, come out tax-free. In addition there is no required minimum distribution after age 70 as there is for traditional IRA owners.

If you are able to, you should consider also making the maximum contribution to your company retirement plan before you retire too.

As far as choosing a mutual fund, that is difficult to advise without knowing the rest of your portfolio. Your contributions should be invested in alignment with your other retirement savings, in a diversified portfolio of stocks, bonds and cash. Consult a financial advisor if your portfolio needs a check-up or rebalance before retirement.

My husband received 100 shares of stock from his grandmother back in the 90s. The stock split, and a company spun off, and that company was acquired by a private Japanese company in 2007. The Japanese company paid cash for the stock, and we received this cash payment in December 2008. Now we have to declare capital gains on this cash. How on earth do we figure out those capital gains? I understand we're supposed to figure the difference between the sale price and the purchase price all the way back when the stock was purchased by his grandmother, but we have no way to get the initial purchase price. Can you help us figure this out?

The capital gain or loss on the sale of a stock is computed by taking the difference between the proceeds received from the sale and the tax basis of the stock. The tax basis of the stock is the original purchase price plus any associated costs to purchase the stock such as brokerage fees or transaction fees. The difficulty in your situation (as you have alluded to) is determining the tax basis for stock that may have been purchased years or decades ago before your husband received it. The tax basis for your husband’s stock will be determined based on how he received it from his grandmother. In general, if his grandmother gifted the stock to him, the tax basis will be the tax basis that she had before she gifted it or the fair market value of the stock on the date of the gift. If your husband inherited the stock from his grandmother, the tax basis will generally be the fair market value of the stock on the date of her death.

Let’s take a look at each of these situations in more detail starting with the easier of the two. If your husband inherited the stock from his grandmother, you can look up the historical stock price on his grandmother’s date of death and use that as the starting point for your tax basis. In general, inherited securities receive a “step-up” or “step-down” in basis to the value on the date of death so you won’t need to go all the way back to his grandmother’s original purchase date(s) to determine the tax basis. Once you’ve determined the date of death value you can make adjustments to the tax basis from that date forward to account for any capital changes that may have occurred since you inherited the stock. If there were no capital changes, the date-of-death value becomes your tax basis.

For tax purposes, capital changes are changes that the company goes through that effect the value of their stock price and your tax basis in that stock. Examples of capital changes include stock splits, stock redemptions, mergers and acquisitions, etc. There are several ways to find out what capital changes have occurred for a company and how they affected your stock. Some publicly traded companies provide details on their corporate web site. If the company is no longer publicly traded or the information is not available through their web site, the task becomes more difficult and will require more work to find the information you need. There are reference materials that track the capital changes of companies. These materials can be expensive and difficult to find but some libraries may have them. If you use a tax preparer to do your return, see if they have access to this information. I believe many of the larger CPA firms and tax law firms have them. Another source may be your or your grandmother’s broker. Brokers may have access to this type of information through their research departments but I don’t know how easy it is for their clients to access this information.

Note: the current I-Bond rate was incorrectly noted in the original entry and has been corrected.

I-Bonds are inflation-adjusted savings bonds issued by the government. Holders earn a combined interest rate with 2 components; a fixed rate and an inflation rate. The base rate is fixed for the life of the bond. The inflation rate, which is based on the current CPI-U, is good for 6 months. The Treasury issues a new fixed rate and a new inflation rate every six months, on May 1st and November 1st, which reflect current market rates for both components. Holders of existing bonds will keep their original fixed rate but have the inflation component adjusted to reflect the current CPI-U.

As an example, current I-Bonds issued between November 1, 2008 and April 30, 2009 earn a combined rate of 5.64 percent. That is an attractive rate in today’s environment, and is due to the high inflation we experienced last fall as oil and food prices soared.

“I have stock that I bought in 2000 during the tech craze. It’s sitting in my brokerage account and has no value. I don’t think I can sell it, so can I write it off?”

It’s tough to make an investment in a company you think has great potential, only to watch the stock go to zero. Worse yet is being reminded of it every month on your brokerage statement. If you’re not willing to wait around for the company to turn around, you can get rid of your “near-worthless” stock.

What is the difference between a money market mutual fund and a money market deposit account?
Good question! As investors continue to move money into more conservative holdings such as cash and cash equivalent investments, it is important to understand the difference between a money market mutual fund (sometimes known as a money market fund or a money fund) and a money market deposit account.

Money market funds and money market deposit accounts are similar in that they both usually invest in short-term, fixed income investments such as U.S. Treasuries. By definition, short-term, fixed income investments are those with maturities of less than one year. Both money market funds and money market deposit accounts usually offer higher rates of return than traditional savings accounts due to the fact that the short-term investments they use have the potential for higher returns. Both types of investments offer flexibility and liquidity as you can often write checks against these accounts and make ATM withdrawals from them.

"Where should I put my money right now? I don't feel comfortable investing in stocks, and I've heard that Treasury bonds are paying next to nothing. Is there any place else that is safe to invest?"

How come there are not a lot of people controlling risk with option strategies?

Stock, bonds and mutual funds are the investments that are more commonly held in the portfolios of most investors. However, there are many other investments out there including futures, options and other derivatives. While these investments can provide investors with additional ways to manage risk and generate profits within their portfolios, they are generally complex investments that are more expensive and risky than stocks, bonds and mutual funds.

Options are investments that an investor purchases to give them the right to buy or sell an underlying security (such as a stock or bond) at a specified price on or before a future date. The investor is not obligated to exercise the option, however, if the investor exercises the option he/she is agreeing to purchase or sell the underlying security based on the terms in the options contract. If the investor does not to exercise the option, the option will expire and the investor would have only lost the amount of money he/she used to pay for the option (i.e., the options premium).

I have a small portfolio of mutual funds that have lost a good 33 percent during this crisis. If I have my broker sell $5,000 dollars of that portfolio and contribute it to my Roth IRA, would I be able to claim a loss for my 2008 taxes? Then, when the market gains, would those gains be taxable in the Roth?

Roth IRAs are great retirement vehicles but they can be confusing. Your question does not specifically mention if your portfolio of mutual funds is in a taxable account or in a retirement account so I am reading into your question a little and assuming that it is in a taxable account.

Generally, if you sell your mutual funds at a loss, you will be able to use that loss to reduce any taxable gains realized in that same year. If you do not have any gains during that year or if your losses exceed your gains, which may be more likely given the state of the financial markets this year, you can claim up to $3,000 dollars of net capital losses on your tax return. Any net losses above $3,000 dollars can be carried forward to your 2009 tax return.

My husband has Alzheimer's Disease. He's been living in a Memory Care facility for three months. He is 82 while I am 64 and just retired. Between us, our portfolios have dropped in value over 25 percent. We do not have many years ahead of us to recoup our losses. I think we should contact our broker and sell everything and put our money in CD's. Should we close out our accounts?

A big market downturn is scary for everyone and it is especially scary for new retirees. I totally understand your wanting to move to the safety of cash but I urge you to not do anything in haste. As many advisers say: "panic is not an investment strategy."

Your husband is 82 but you are only 64. You can reasonably expect your retirement to last for 25 to 30 years. In order for your retirement assets to keep up with the effect of inflation, you will likely need some allocation to equities (stocks). I can't say what allocation is appropriate for you because I don't know enough about your particular situation. But the odds are good that you need at least a small allocation.

Selling everything now and moving to cash will simply lock in your losses and, once you are in cash,how much can you earn? Very little over the long term. And, to add insult to injury, you would likely be falling behind once you account for the effects of inflation.

Furthermore, once you are in cash, you need to be able to tell when to get back into the market. If you are scared of the market, there is a good chance that you will wait too long and miss most of the run-up in the market when it does eventually happen.

All this being said, if you find yourself unable to sleep at night and consumed with anxiety about what is going on in the market, you may be more risk averse than you thought and maybe it is appropriate to ratchet down your allocation to equities. If this is the case, I would consider lowering your stock allocation over time. Consider selling a certain percentage each month until you are at a level that you feel better about.

"Switching to Cash May Feel Safe but Risks Remain" is a great article. Check it out.

Good news! The limits on several retirement plans are due to increase in 2009. Be sure you visit your payroll/benefits office to sign up for the maximum contribution permitted.

In 2009, you can contribute $16,500 to your 401(k). That is $1,000 higher than in 2008. If you are age 50 or higher, you will be able to contribute $22,000 - an increase of $1,500. These increased limits also apply to 403(b) plans and 457 plans.

Unfortunately, there are no increases in the amounts you are able to contribute to traditional and Roth IRAs. Those limits remain at $5,000 and $6,000 if you are age 50 or older.

While these increased limits are good news, there is also some bad "tax news" to throw into the mix. That bad news comes in the form of a higher Social Security wage base in 2009. In 2009, wages up to $106,800 will be subject to 6.2 percent in FICA taxes and 1.45 percent in Medicare taxes. In 2008, the limit was $102,000 so this increased limit causes an extra $298 tax bill for employees.

People will frequently ask me about Securities Investor Protection Corporation (SIPC) coverage. Most people have the vague notion that it is like FDIC coverage for brokerage accounts. That description is not too far off, but there are big differences between the two.

First, SIPC is not a federal government agency. SIPC is funded by the member brokerage firms. Second, SIPC does not offer the same blanket protection that the FDIC offers.

It is extremely important to note that SIPC does not provide protection against market declines. Instead, SIPC replaces missing stocks and other securities. Basically, SIPC helps people whose money, stocks, or other securities are either stolen by a broker or put at risk when a brokerage house fails for other reasons. Investments that are not covered by SIPC insurance includes such things as commodity futures contracts, fixed annuity contracts and currency.

Like FDIC insurance, SIPC is also subject to coverage limits. Currently, SIPC coverage is available up to $500,000 per customer including $100,000 in cash. If your accounts exceed those limits, don't be too concerned -- most brokerage houses carry supplemental private insurance as well.

Visit the SIPC website for more details.

I don't know much about finance. My spouse and I only make $80,000. We have no debt but we also have only a small 401(k) and a small savings account. I am concerned that we are not well prepared for retirement but I'm not sure what we should be doing. Is it worth it for us to hire an adviser?

Great question. From your brief description, it seems like you probably don't need anyone to manage your money for you but you could definitely benefit from some professional advice. There are a good number of financial planners that work with people on an hourly or per-project basis. Good places to find these planners include:

The National Association of Personal Financial Advisors' website,
The Financial Planning Association's website, and
The Garrett Planning Network website.

When you call someone that you might like to hire, ask them if they do hourly or project-based work. Expect these individuals to charge approximately $100 to $200 per hour. Since you are paying by the hour, you should be as organized as possible. Have all of your statements and documents assembled before the meeting and prepare a list of questions or topics that you would like to cover. Sending your list of questions in advance of the meeting is also a good idea.

If you just want to get an idea of how well prepared you are for retirement, you can check out some of the many retirement calculators that are available on-line. You can also visit the investor centers of many of the national brokerage companies like Fidelity and Schwab.

I have a small cash windfall. I'd like to invest it in a mutual fund but I am concerned about immediately losing value. You've been saying "stay the course" to people already in the market. But what about someone just thinking of getting in?

My first question for you is "do you have an adequate emergency fund?" The definition of adequate varies from person to person but generally speaking a decent sized emergency fund would cover three to six months of your "must pay" expenses like the mortgage, your car payment, utilities, etc.

Assuming you are all set in the emergency fund department, I would then ask you when you will need the money that you are considering investing. If you will need it for a major purchase in the next 3 to 5 years, the stock market is not an appropriate place to be. CDs or high yield savings accounts would be better.

If this is long term money, or money you definitely won't need in the next 5 years, I think investing in an equity mutual fund would be totally appropriate. There is no way to "call the bottom" of the market so you have to be able to get past the possibility that you might lose a little bit of money in the very near term. We simply can never know in advance when the market has hit its bottom.

However, many professions think we are at or near the bottom which would signal a good buying opportunity. In an op-ed piece in Thursday's NY Times, Warren Buffet declared that he was investing his personal money in the market right now even though he had previously owned only government bonds. I'd say that if Warren Buffet is investing his own personal money in US equities right now, that is a signal worth paying attention to.

So, last week the markets dropped like a rock. The following losses were recorded for the Dow Jones Industrial Average:

Monday: Down 369 points
Tuesday: Down 508 points
Wednesday: Down 189 points
Thursday: Down 678 points
Friday: Down 128 points

For those of you keeping score, that's a total point drop of 1,874 or 18% in a single week. Pretty gut-wrenching wouldn't you say? If you are like a lot of people, you didn't get much sleep last week.

But what happened yesterday? Up 936 points. Almost 1,000 points in a single day! The percentage increase of 11.6 percent was the biggest since 1937 and it was the biggest one day point gain ever. The next closest was a 499 point gain in the year 2000.

What does this tell us about the markets? Have we reached a bottom? The honest answer is "who knows." No one has a crystal ball. And in fact, we will probably see our fair share of "down" days in the weeks to come even if we are firmly on our way to a recovery.

What it does tell us is that market timing is not a strategy. No one can call the slides or the rebounds with any degree of accuracy. The only reasonable strategy is to build a portfolio that meets your individual needs and stick with it. There will be good days and there will certainly be bad days, but on a long term basis you will be rewarded for hanging in there. Give yourself a pat on the back if you were worried last week but you stayed with your carefully designed portfolio. I'm sure it wasn't easy.

All you can do is try to remove as much emotion as possible from your decision making process. As many professionals were advising last week: "panic is not an investment strategy." Try not to make any significant financial decisions in the heat of the moment.

For example, if the events of the past few weeks have left you consumed with anxiety, maybe you should consider some changes to your portfolio, but you should make those changes gradually and with a cool head. If you really want to increase your cash or fixed income allocation, do so over a time period of several weeks or months to eliminate emotional decisions that you might regret later.

And, if you already have a well thought out plan, stick with it. Rebalance as needed, but stick with your plan. Don't run from stocks because they can be volatile. Volatility in the short term is the "price" you pay for the higher long term returns of stock. As Nick Murray, one of my favorite investment authors once said "the greatest long term risk of stocks is not owning them."

OK, there's no doubt about it, this has been one heck of a week. People are worried and very nervous. In today's blog entry I am listing some articles that I have read over the past week or so that I think are particularly helpful and insightful. These are really great articles and I won't even attempt to summarize them -- you should read them in their entirety. Hopefully they will make you feel less anxious about all the recent market turmoil.

"Switching to Cash May Feel Safe but Risks Remain" by Ron Lieber of the NY Times

"The Depression of 2008? Don't Count on It" by Jason Zweig of the Wall Street Journal

"As Dire as the Times May Seem, History Isn't About to Repeat Itself" by Karen Blumenthal of the Wall Street Journal

The American Association of Retired Persons (AARP) conducted a survey last month of over 1,600 baby boomers (defined to be those age 45 and older) and found that 34 percent of the participants are considering a delay in their retirement age and a full 20 percent have stopped contributing to their 401(k) plans over the past year.

That's unfortunate because with the market hitting new lows on what seems to be an everyday basis, now is very definitely the time to keep buying and, if at all possible, increase your contributions. I know that that is easy to say but sometimes hard to do as it does take some faith and a belief in the capital markets.

It also requires some confidence in your personal financial situation. The AARP study further revealed that 27 percent of those surveyed were having difficulty making their rent or mortgage payments and that 13 percent had taken a premature withdrawal from their IRA or 401(k). If your situation is that dire, it probably does make sense to turn off the 401(k) contributions for a while to get yourself back on more solid financial footing. The taxes and penalties associated with a premature withdrawal make it a last ditch option. However, if you are simply worried about the market because it keeps dropping and you have an adequate emergency fund and a well diversified portfolio, the thing to do is keep contributing. Two or three years from now, you will look back on all this market turmoil and wish you had bought more.

For more information about the AARP study, check out this article in the Wall Street Journal.

A recent Wall Street Journal article suggests that as the big banks get bigger, the best deals for savers might be found at the smaller banks. For example, the average yield for a six month CD is just 2.09 percent but if you are willing to shop around and consider out-of-state and internet banks, you can quite easily find rates that approach and possibly exceed 4 percent.

What many people are doing is keeping a small checking account at the large institutions so they can have easy access to a branch office and large ATM network but they also have accounts in far-flung locations to capture more favorable CD and money market rates.

Credit unions are also becoming more and more popular and they often offer the best rates on CDs and consumer loans. Like regular bank accounts, deposits at credit unions are insured for up to $100,000. Many people don't even consider credit unions because they think the membership criteria is very narrow and they incorrectly believe they won't qualify. Years and years ago, it might have been somewhat difficult to join credit unions, but these days, the membership base for most credit unions is very broad. You might be surprised to find that you are probably eligible to join at least one or two credit unions based simply on where you live or where you work.

I am 60 years old and only have a small amount in my 401k - approximately $90,000 (in a Fidelity Freedom 2015 account). I know I will never be able to retire on what I have but I don't want to lose the little bit I do have. I want to know, given how the market is going down, should I continue to contribute 15 percent of my salary to my 401k or contribute less and put some after tax money in a savings account?

I would urge you to consider continuing your 401(k) contributions. I know that it can be scary when the newspapers are splashed with headlines about one crisis after another, but you need to stick to your long term plan. If you continue to contribute to your 401(k), the shares you are buying on the days that the market is down 450 or 500 points are incredible bargains. Literally, everything you buy is on sale.

The only real way to "win" the investment game is develop a well diversified portfolio and make a promise to yourself that you will stick with the plan in good times and bad. You have to suffer through the bad in order to capture the good. You can't just have the benefit of equity market returns without also accepting the volatility that comes along with it.

The Fidelity Freedom 2015 is probably a good choice for you if you will be retiring in your mid to late 60s. It gradually becomes more and more conservative so you don't have to think or worry about changing your investment mix.

Monday was definitely a nail-biting kind of day. The Dow was down over 500 points and a lot of that loss came in the two hours the market was open. Panic was a word you heard on TV and saw on the Internet, and in all the newspapers. It was certainly hard not to feel anxious about the market, your retirement, your savings, and your future financial security. Many people wondered if it was time to move to all cash.

However, those who hung in there were rewarded in Tuesday's market which saw the Dow up 141 points or 1.3 percent and the S&P up 20.90 points or 1.75 percent. It just goes to show that you can't make important financial decisions based on emotions. You have to be able to tune out the fear-inducing headlines and stick with your long term plan. Remember, newspapers and magazines have to lead with the scare tactics or no one would buy the paper.

If you have a properly diversified portfolio, no action is required when the markets are falling -- except that you might want to buy more. If your portfolio has large and small company stocks, growth and value stocks, international exposure and alternative asset classes, you are all set. Sit back and watch what happens. There will be ups and there will be downs. You don't get the higher long term returns of stocks for free -- you have to be willing to soldier through the down days to capture the historically much higher performance of equities.

We don't know what the market will do today, tomorrow or the next day but we do know that in the long run, stocks are your best bet for beating inflation and earning a rate of return that will enable you to meet your long term financial goals.

I'm 26 years old, I bought a condo last year, I have a 6 month emergency fund saved and now I've been getting more and more interested in stocks. I've followed the market very closely for the last 6 months and in the last month or so I've been investing in a few stocks here and there with my extra money. I was curious if you had any books that you would recommend, not only for beginners but also for people that are starting to feel more comfortable researching and buying stocks.

For reading that is not too analytical, I like the "Little Book" Series. The best books in this series include:

The Little Book of Value Investing by Christopher Brown
The Little Book That Builds Wealth by Pat Dorsey
The Little Book of Common Sense Investing by John Bogle
The Little Book That Saves Your Assets by David Darst

To learn more about how to pick specific stocks, you should check out the series of books by Morningstar. Book 1 is "How to Get Started in Stocks" and it is pretty informative. Book 2 is "Diversifying Your Fund Portfolio" and is about Mutual Funds.

If you want to kick it up a notch in complexity, I truly love "The Four Pillars of Investing - Lessons for Building a Winning Portfolio" by William Bernstein. Other investing classics would include "The Intelligent Investor" by Benjamin Graham and "A Random Walk Down Wall Street" by Burton Malkiel.

The market has been very volatile lately and most long term investors are experiencing a "negative" 2008. The Standard & Poor's 500 Index is down approximately 15 percent year-to-date and the financial news seems pretty dismal at times. However, there is one bright spot -- tax loss harvesting opportunities are plentiful.

Basically, if you sell individual stocks or mutual funds for less than you paid for them, you will recognize a loss and you can subtract the loss from gains you might have somewhere else in your portfolio. If you don't have any other gains, the losses are still valuable because they can be used to offset up to $3,000 in ordinary income and the balance can be carried over to future years. (It might seem obvious, but we are talking about gains and losses in your taxable accounts, not your IRAs.)

As with most things in life, there is one "catch" and that catch is known as the wash sale rule. Under the wash sale rule, the IRS will deny your tax break if you have purchased the same (or a substantially identical) security in the 30 calendar days before or after the sale. The rules on what constitutes a substantially identical security are not always very clear, so if you want to make a "replacement" purchase within 30 days, it is probably best to consult your tax advisor or financial advisor. Also, it is important to note that if you do have a wash sale, the disallowed loss is not lost forever. Instead, your disallowed loss is added to the basis of the replacement security.

Tax loss harvesting really can be well worth your effort. If you are in the 33 percent tax bracket and you have a $3,000 loss that you can use to reduce your ordinary income, you will save almost $1,000 in taxes. However, there is a popular saying in our field: "don't let the tax tail wag the dog." In simple terms, this means that you shouldn't go crazy selling investments simply to capture a loss. A buy and hold strategy is still the best for most investors. You should simply be aware that if you find yourself holding an investment that no longer has a place in your portfolio, there may be some tax advantages to selling it.

From an investment standpoint is it better to put $3,000 in a flex account to cover my medical/child care or put the $3,000 in a tax deferred 401 plan? If I put it in the flex, I will save $900 in income taxes, but I don't know how to figure if that is really the way to go. Thank you.

I actually don't think this is an either/or question. You would only consider allocating $3,000 to a medical and/or dependent care flexible spending account (FSA) if you knew that you would have medical or childcare expenses that total at least $3,000. If it is a "given" that you have those costs, you will be paying $3,000 in expenses one way or the other. If you can use before tax dollars to cover the expenses by paying for them using an FSA, that is a pretty good deal because you will be getting a "discount".

Your question suggests that you might have $3,000 "extra" to invest. Contributing that amount to your traditional 401(k) would be great and doing so would reduce your taxable income by $3,000 -- just like contributing $3,000 to your FSAs. In addition, the $3,000 contributed to your 401(k) will grow tax deferred for many, many years

FSAs are a great employee benefit and nearly everyone who is eligible should consider participating. In a nutshell, FSAs are tax advantaged programs offered by employers that allow employees to pay eligible medical and childcare expenses using pre-tax dollars.

When you use an FSA to pay for these types of expenses, it is like getting a free discount on expenses you would be paying anyway. The discount is equal to the tax you would have otherwise paid on the money you contributed to the FSAs.

In this example, the person's taxable income is reduced by $3,000 and the "discount" they capture is equal to the tax they would have paid on that $3,000. The exact savings will vary from person to person depending on their marginal tax rate.

You can use a medical flexible spending account to get reimbursed for eligible medical expenses and you can use a dependent care flexible spending account to get reimbursed for qualified childcare expenses for children under the age of 13.

There are no statutory limits on contributions to medical flexible spending accounts, but employers often impose their own limits of $3,000 or $5,000. The limits for dependent care flexible spending accounts are $5,000.

These accounts really are worth the added headache of the associated paperwork. For example, have you ever considered laser eye surgery? This procedure can cost as much as $5,000 and it is not generally covered by insurance. If you can plan ahead and allocate $5,000 to your medical FSA, you can "save" $1,650 on this procedure if you are in the 33% marginal tax bracket. That's probably worth the cost of submitting the required reimbursement forms.

Should I take the money I have invested in mutual funds and start a 529 plan for my 18 month old daughter? What will the tax implications be?

529 accounts can only be funded with cash, so if you wanted to open a new 529 account using money that is currently invested in mutual funds, you would need to sell the mutual funds first.

If you have held the funds for more than one year and they are currently worth more than what you paid for them, you would have a long term capital gain. The highest rate that would apply to these gains would be 15 percent and it is possible that a 0 percent rate could apply (depending on your current tax bracket). If you have held the funds for less than a year, any gains would be taxed at ordinary income rates.

If the shares are worth less than what you paid for them, you would have a loss. This loss could be used to offset other gains and then up to $3,000 in ordinary income. Whatever losses you couldn't use this year could be carried over to future years.

It might be better (and easier) for you to simply open a new account and sign up for automatic monthly contributions. Many plans waive all fees if you commit to making monthly contributions of $25 or $50.

Remember, there is no guarantee that your daughter will attend college. The odds may be good, but if she never goes to college and there aren't any brothers or sisters to transfer the money to, taxes and a 10 percent penalty would be due on any earnings withdrawn from the 529 account that weren't used for qualified education expenses.

One of the advantages of saving for college using a 529 plan is that earnings will not be taxed until they are distributed and if the earnings are distributed to pay qualified education expenses, no federal taxes will ever be due.

For gift tax purposes, contributions to 529 plans are considered to be a gift so in 2008, you can contribute up to $12,000 to an account without the contributions being considered a taxable gift. If you want to make a larger gift, contributions of up to $60,000 are possible if you file a Federal Gift Tax return and elect to treat the deposit as if it were made over 5 years.

I have my retirement fund in a CD which comes due next month. With CD rates being low, I was looking into rolling it over into a mutual fund where you pick the date closest to your retirement date. What do you think of these funds?

You are talking about target date funds. Target date funds have names like:

Fidelity Freedom 2015
Vanguard Target Retirement 2035
T Rowe Price Retirement 2040

Target date funds consist of a diversified portfolio of stocks, bonds and cash. As the fund gets close to its target date, it decreases the allocation to stocks and adds more bonds and more cash. The end result is a portfolio that gets more conservative over time.

The idea is to invest in the fund that most closely matches your planned retirement date. So, for example, if you are 49 now, you will be 65 in 2024. You would probably invest in a fund that has 2025 in its name if you wanted to retire at age 65. Alternatively, if you consider yourself more aggressive than most, you could also invest in a 2030 fund because that fund would have a higher allocation to stocks for a longer period of time. Similarly, if you are exceedingly conservative, you can invest in a target date fund with an earlier "due date".

My opinion of these funds is mixed. If you know that you are the type of person to select funds once and then never re-visit the choice, target date funds might be a good option because it puts your retirement savings on "auto-pilot". In essence, all the future investment choices get made for you.

However, this auto-pilot feature is also what bothers me about target date funds. These funds basically treat all investors the same -- with the only differentiating factor being age. And all investors of the same age shouldn't be treated the same. For example, I am the same age as Melinda Gates. Melinda and I might share a similar investment philosophy and tolerance for risk, but that doesn't mean that our assets should be invested in exactly the same manner. I am stretching this popular analogy a little here, but you get the picture.

As is the case with all funds, beware of expenses because they can vary widely across fund families. You should also look at the composition of several funds with the same target date. You will find that even funds with the same target date can have noticeably different allocations to stocks, bonds and cash. Pick the fund that most closely matches your risk tolerance.

Finally, you need to know that target date funds are not guaranteed in any way like your CD. You could lose money.

I am a federal government retiree and 68 years old. I currently have $122,500 in my Thrift Savings Plan. I did not yet roll it into an IRA. What is a good company to roll the TSP into -- Vanguard? T Rowe Price? Fidelity? Which company might have the lowest fees?

All three of the companies you mentioned would be solid choices. However, I would probably put in a plug for keeping your money where it is. The government's Thrift Savings Plan (TSP) is as close to perfect a plan as you will likely find.

There are only five fund choices available but those five include a government securities fund, a fixed income fund, a common stock fund, a small cap fund and an International stock fund. All five are index funds and all of them have a rock-bottom expense ratio of .015 percent or 1.5 basis points. That means the fees are only 15 cents for every $1,000 invested! You would be hard pressed to find lower expenses in many other places.

The plan also now offers 5 lifecycle plans, so if you are retired and want to put your retirement savings on "autopilot", you could choose one of the 5 target retirement funds. If you have an average risk tolerance, you would choose the lifecycle fund that most closely matches your year of retirement. If you wanted to be more aggressive, you could choose a lifecycle fund with a date later than your retirement date. This is a wonderful plan and you probably shouldn't be in a rush to leave it.

TJ writes:

I am 28 years old. I started working 3 years ago and I am saving 2 percent of my pay in my 401(k). My employer does not match my contributions at all. What are my options for maximizing my retirement savings? Would I be better off with IRA accounts?

TJ, it is wonderful that you are looking at how you can maximize your retirement savings. Even though your employer does not offer a match, the 401(k) is probably your best opportunity to sock away the largest amount of money. At your age, you are able to contribute up to $15,500 to your 401(k). IRAs are also a great option, but the contribution limits on those accounts are $5,000. Keep in mind that you can contribute the max to both the 401(k) AND the IRA, so it is possible to be saving as much as $20,500. If you can save at least 10% of your salary now and throughout your working career, you will be in great shape for retirement when the time comes.