When most people think about being pitched an investment opportunity, two things probably come to mind. One, they conjure up an image of a slimy salesman type selling snaked oil, or two, they think of a balding, middle-aged stock broker calling to give them the latest hot stock tips. Easy enough to recognize, easy enough to resist, right? Unfortunately, most get-rich-quick investment opportunities aren’t pitched by a stereotypical scammer. We are constantly bombarded with “hot stock tips” from the mainstream media, can’t-miss business opportunities from family members, complex triple universal awesome whole life insurance from  your insurance rep, real estate schemes from neighbors, and who-knows-what from coworkers. Who do you trust? How do you know who has your best interests at heart and who doesn’t? More importantly, how can you tell when somebody who does have your best interests at heart have really just fallen under the spell of some external scam arts and have been recruited to bring in new victims? It’s rough, but these tips should help.

How To Evaluate An Investment Opportunity

First off, it should be stated that at least 95% of the time, you’re better off just saying no. Yeah, there are a few legitimate non-mainstream investment opportunities out there, but the chances of you hearing of one of them from your coworker are slim. When in doubt, just say no. Still, if you have plenty of money to lose (and I do mean it should be money you can afford to lose), it might not hurt to at least consider a legitimate pitch. Who knows, you might strike gold and if you don’t, well, it was money you could afford to lose anyway (right?).

Why do they need you?

This is a huge one. Say somebody has figured out a way to earn 50% per year in the stock market with no risk. Why would they tell you? Such a person, if she could afford to invest just $10,000, would be worth over $33 million in 20 years. Why do they need your capital when they could so obviously make more money just keeping their system to themselves and cranking out 50% returns year after year? The answer can’t be “to raise the initial $10,000″ because, well, a person smart enough to come up with such a market-beating strategy should have no trouble earning $10,000 some other way. The only reasonable answer is that they want to “help” poor everyday Joe’s to get rich. And if you believe that, I’ve got some prime swamp land to sell you.

On the other hand, if this is a short-term business loan and your buddy just needs $10,000 in bridge financing to get a new product off the ground and the product has a proven market and you think your friend is a competent businessman, that might be a legitimate investment opportunity. That’s not to say you’ll turn a profit or even get your money back, but at least it’s probably not an outright scam.

The point is, companies only take on investors when they need money for some reason. They wouldn’t give away part of their future earnings unless they believed they were able to earn even more money than what external investors would demand. If you can’t find an obvious need, it’s probably a scam.

What does the person pitching you the investment stand to gain?

Beware conflicts of interest. If a person is pitching you an investment, he or she probably stands to gain something. Try to figure out what it is. Do they receive a commission? If so, you most likely aren’t going to get unbiased advice. Remember, a salesman’s job is to get you to give them money. They aren’t your friend and they probably don’t have your best interests in mind. If they don’t gain anything as obvious as a commission, dig deeper. Is it a multi-level marketing situation? Are you purchasing a product from them in the hopes that it will help you make money (such as a stock trading or forex trading course)? If so, are you able to find any honest feedback about the product on the internet? If you can’t think of any obvious benefit to the pitchman, it’s probably scam. People don’t pitch investments for karma.

What’s the risk?

This is a very, very tough question. And you know what? If you aren’t equipped to intelligently evaluate the risk of a potential investment, you shouldn’t be investing in it. Period. And if you are so equipped, you probably don’t need my advice to begin with. If you don’t even know where to start, skip it. Just don’t take anybody’s word for it that it’s a “low risk” investment! If you can’t independently come to this conclusion on your own, don’t invest.

Is it easy to understand?

There’s an old saying in business that you should never invest in what you don’t understand, and truer words have never been spoken. Most business and investment opportunities are actually pretty straightforward. Are there profitable complex investment schemes out there? Of course there are. But those investments are best left to the professionals who are better equipped to navigate their ins and outs. No matter how enticing, it is never wise to invest in something you don’t fully understand.

Can you follow the price in a newspaper (or the internet)?

Liquidity is a very desirable thing in the investment universe. Yes, the prices of legitimate investments such as real estate and private businesses aren’t quoted in real time on the internet, but most mainstream investments are (including commodities, gold, stocks, bonds, currencies, and derivatives). If an investment opportunity being pitched for you can’t be easily followed on a daily basis, that should throw up a red flag. That isn’t to say that fraud can’t happen with publicly-traded securities, but it is far, far less prevalent. Small, illiquid, thinly-traded markets are much easier to manipulate. Buyer beware.

Does it sound too good to be true?

Pretty much every crappy investment opportunity is easily recognizable as being too good to be true after the fact. The trick is realizing this upfront. I’ll help: nobody can predict the stock market, real estate prices, or pretty much anything else having to do with the economy. Anybody who says they can is probably selling you something. Keep that in mind and you’ll probably be fine.

Further reading:

Guide to Identifying and Avoiding Securities Fraud on the SEC website

Avoiding Investment Scams on the FINRA website

Holly Mangan is the managing editor of Money Crashers Personal Finance, a blog that provides tips for saving for retirement, building wealth, and utilizing investment strategies.

When it comes to planning for retirement, far too many people feel intimidated or are simply uneducated on the matter. For these reasons, they save next to nothing. In fact, one-third of all Americans have nothing whatsoever set aside for retirement, and half have less than $2,000. This is obviously a recipe for disaster, especially considering that the current U.S. Social Security system is in peril.

If you are among the large percentage of Americans lacking a solid retirement fund, don’t fret. With a little guidance and common sense, you can create a solid retirement portfolio – and you don’t need to be an investing expert to do it.

1. Start Now
Regardless of your age, you should begin investing now if you haven’t yet. Even if you have credit card debt, set something aside into a Roth IRA or your employer’s 401k. It doesn’t have to be a large amount, but a developed investing habit will serve you well once you pay off that pesky debt and have more to save. Plus, the real benefit to long-term tax-deferred investing is the benefit of compound interest. Since you aren’t required to pay taxes on your gains, the interest those gains can earn far exceeds a taxable account.

2. Start Simple
If you’re offered a 401k plan through your employer, take advantage of it, especially if your employer offers to match a percentage of your contributions. An employer match is basically free money to you. Plus, if you contribute the maximum to your 401k ($17,000 for 2012), your employer’s match will take the total annual contribution above this amount.

Furthermore, check if your employer offers a Roth 401k – like the Roth IRA, you can’t deduct contributions into this account, but they will grow tax-free, and you can take withdrawals tax-free during retirement. If you’re only offered a regular 401k, you may want to supplement it with a Roth IRA.

A Roth or traditional IRA is easy to open via a discount broker. To qualify, you must meet income requirements. However, these requirements are waived in most cases if your employer does not offer a retirement plan.

3. Educate Yourself
There’s a good chance you never took an investing course in high school or college. Fortunately, it’s never to late to learn. You already know you need to save money for your golden years, and you’re familiar with the standard vehicles in which to do it: a 401k, a Roth IRA, and a traditional IRA. But do you know how much you’re allowed to contribute annually to each of these accounts? Do you know when you’re allowed to make withdrawals? Do you know in what situations you will and won’t be penalized for making early withdrawals? The answers to these questions will affect which accounts make the most sense for you.

Beyond understanding the vehicles you’ll use to invest, you’ll want to investigate your investment options. First lesson: Keep it simple. In other words, stick to mutual funds. Mutual funds offer an array of advantages for folks who simply don’t have the time or head-space to analyze a slew of individual securities.

The next choice you must make is whether to invest in actively managed funds, which strive to beat a benchmark index like the S&P 500, or index funds that strive to replicate their benchmark index. There are advantages and disadvantages to both. Perhaps the most compelling reason to go with index funds is lower expenses. You’ll typically pay a lot more for an actively managed fund, which can eat away every year at your gains.

4. Evaluate Risk Tolerance
Now that you’ve determined which type of retirement plan or plans you want to invest in, you must decide which specific investments (which mutual funds) to purchase with your contributions. Fortunately, mutual funds – including index funds – offer automatic diversification. However, even after you choose between actively managed funds or index funds, you need to determine how aggressive you want the fund or funds you choose to be. Not only will this be determined by your comfort with taking risk, but also by your age.

For example, if you prefer to play it safe, but have a good 30 years until retirement, you’re going to want to push yourself to take some measure of risk in your retirement portfolio. Perhaps a mix of stocks and bonds via a balanced fund would be best for you. Alternatively, you could purchase an S&P 500 index fund and a conservative bond index fund to strive for a mix of risk and safety via the passive management approach.

On the other hand, if you’re nearing retirement and micro-cap growth stocks are more your style, you may want to tone it down by only allocating a small portion of your portfolio to these and the rest to blue chip stocks and bonds.

Complement this exercise with additional research to find out what level of risk makes sense for your age and the size of your retirement portfolio relative to your goals.

5. Save More Money
Make saving money a state of mind. Simple tips and practices can save a lot in the long-run: Turn off all lights when you’re not in a room, and unplug appliances and electronics when not in use to minimize the constant drain of power. Examine your bills to see where your money goes, and see if you can find ways to trim monthly expenses. Reduce heating and cooling costs by insulating your house and windows, and by lowering or raising your thermostat as appropriate. And always ask yourself if you really need what you want to buy. For example, the $100 you want to spend on new gadgets could eventually generate $1,000 if properly invested.

Next, start couponing. Try it for a month and compare your grocery bills to what they previously were. You can use convenient mobile apps like The Coupon App or you can go with the tried and true Sunday paper ads. If your grocery store still offers double coupon days, don’t miss out. Depending on the amount of food you buy, grocery savings could easily reach or exceed $50 per month. That might not seem like much now, but it could mean tens of thousands more to ultimately pad your retirement.

Final Thoughts
The number of years you have until you retire, how much you’re contributing, your current retirement assets, and your risk tolerance all play a vital role in determining how you’ll want to invest. Figure out approximately how much you’ll need for a nest egg by projecting what your expenses will be when you retire. Based on that, calculate what type of return and contributions you’ll need to get you there. Use a search engine to seek out “online retirement calculators” to help you with this. Also, look into life and long-term care insurance to protect that all-important nest egg in the event of the unexpected.

Getting started and getting the money into a proper savings account is the most important step. Once you’ve gotten your savings off the ground, be sure that your investments are protected and in line with your situation and goals.

Have you begun saving for retirement? If so, can you save more?

Most W2 employees will find this post boring, but 1099 contractors, business owners, and the self-employed know all about the importance of paying their quarterly estimated taxes. You see, the IRS prefers to be paid quarterly throughout the year rather than all at once at the end. This means that in most cases, you can’t simply wait to pay what you owe until you file your taxes in April.

Paying Your Quarterly Estimated Taxes Is Easy

While annoying, actually making your quarterly estimated tax payments online is really simple once you get things set up. First, you’ll need to sign up for the Electronic Federal Tax Payment System (ETFS). Once you’ve signed up, the IRS will send you a packet in the mail with an electronic pin and instructions for setting up an internet password. I’m not entirely sure why this couldn’t all be done securely in real time over the internet, but it takes a week or so to get your packet in the mail, so be sure not to wait until the last minute to sign up.

If you don’t want to use the internet for some reason, you can also make your quarterly estimated tax payments through the mail. Most tax software such as TurboTax will calculate how much you should pay every quarter and even print out quarterly tax payment coupons you can mail in with your check.

What Happens If You Forget?

If you forget to pay your estimated quarterly taxes, you may owe a underpayment penalty to the IRS. There are a series of safe harbor rules that protect you from penalties if you meet certain conditions.

You qualify for safe harbor if you meet the following criteria:

• You had no tax liability last year – If you got a refund last year, you are safe from the underpayment penalty this year. Of course, if you underpay this year, you are vulnerable next year.
• Your underpayment is less than $1,000 - If the amount of your underpayment is less than $1,000, you’re safe. The IRS isn’t worried about such small amounts. Example: if you end up owning $5,000 total and only pay $4,500 over the course of the year, you’re safe because $500 is less than $1,000.
• You paid 90% of more of your actual current year tax liability - This rule seems pretty redundant in light of the $1,000 rule above, but you are generally safe from penalties if you end up paying at least 90% of what you end up owing. Example: you end up owing $10,000 to the IRS this year and have paid at least $9,000 in quarterly estimated taxes throughout the year. If you only paid $8,999, however, you’re out of luck.
• You paid at least 100% of what you ended up paying in taxes last year (110% if your Adjusted Gross Income is $150,000 or greater) - The easiest way to avoid underpaying is just to pre-pay at least what you paid last year in taxes. Assuming your income didn’t drop significantly, this shouldn’t be too difficult. If you do this, you’ll be safe from the underpayment penalty regardless of how much you make this year.

Even if you don’t meet the above safe harbor rules, you might still be able to avoid and underpayment penalty if you meet either of the following conditions:

1. Your failure to make sufficient estimated tax payments was due to a natural disaster, disability, or some other extenuating circumstance. This one leaves a lot of leeway.
2. You either retired (after age 62) or became disabled the previous year and the underpayment wasn’t due to willful neglect.

So You Owe A Tax Underpayment Penalty

Despite your best efforts, suppose you owe an underpayment penalty. What do you do? You’ll need to download Form 2210 (opens as pdf) to figure out how much you owe. As with everything having to do with the IRS, the calculation isn’t always completely straightforward. Or, if you happen to use an accountant to do your taxes, make them figure it out. It’s probably their fault, anyway. Good luck!

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File online with TurboTax: #1 rated and #1 selling tax software!

This post is part of the Roth IRA Movement started by Jeff Rose of GoodFinancialCents.com. Click the link for background info on what it’s all about.

To commemorate the occasion, I have composed a brilliant sonnet. Bathe in its glory.

Roth IRA, how do I love thee? Let me count the ways.
Thy tax-free distributions a path to retire,
financially secure, never to be mired
in dreadful labor til the end of my days.
Forever the tax man will you keep at bay,
thanks to you old age to me will not be as a blight
upon the noble tuber, nor will I have to fight
til the end, laboring ever to earn my pay.
Something something something something use
something something – something something shelf,
and to the IRS I have already paid my dues,
they shall have no further access to my wealth,
and if leaving my Roth IRA to my heirs is what I choose,
no taxes shall be paid on its earnings, not even after my death.

I am sure the epic romanticism of my awesome sonnet has convinced you to run out an open a Roth IRA immediately, but just in case you have no soul, I will out-line the most awesome of Roth IRA benefits below in a form more befitting you poor inartistic souls.

Why Roth IRA’s Are Awesome

Tax-free income - No taxes when you withdraw your money. Ever. So long as you avoid triggering any Roth IRA penalties, of course, which means you need to keep your grubby mitts of it until you’re 59 1/2 years old. And yes, I know using 59 /12 is a ridiculously stupid number, but that’s the government for you.

You can open one for practically nothing - While Vanguard imposes a $1,000 minimum to open a Roth IRA, plenty of companies will let you open one for practically nothing.  T Rowe Price will let you start a Roth IRA for $50, for example.

The government limits how much you can contribute, which automatically makes it cool - Under article 3, section 14 of the Constitution of the United States of America, the federal government is required to limit the use of totally awesome things such Roth IRAs, the reason being that too much awesome has been shown to cause people’s friggin’ heads to explode. Since too many exploding heads would impede the progress of certain Important Government Projects,  citizens are currently limited to only $5,000 in Roth IRA fun per year. Think of it this way: if you don’t max out your awesome potential this year, you’ll never get that back. Carpe diem! This also explains why such awesome things as the percentage of alcohol in beer and amount of cheese that can be legally applied to a burrito are limited.

Guys: Girls LOVE Roth IRA’s! – Guys, I can’t stress this enough. Girls love money. Roth IRAs are incredible tools at getting lots and lots of money. If you want to get your swerve on in the retirement home, you’d better be maxing out a Roth IRA in your 20′s. Otherwise, you’ll only need a one-seat motor scooter because you won’t be driving any honeys around on your discount 6 volt; not when the guy down the hall with the fat Roth IRA balance is sporting a pimped-out, gold-plated 12 volt. Remember those Bing.com commercials from a few years ago? You’ll be the guy screaming “looooos liiiiiiiiiinks!” (i.e. the one without the girl).

Girls: Guys LOVE Roth IRA’s! – Seriously ladies, no guy likes a gold digger. Having a big, fat portfolio makes you hot, hot, hot.

Roth IRA is into yoga – One of the best things about a Roth IRA is that it is so FLEXIBLE! We’re talking a real yoga master, here. Decide you don’t need the money in your IRA after all? Want to pass it on to your heirs? Roth IRA got your back! No required minimum distributions! Now what about if you have some sort of emergency? Need to pay some medical bills? Roth IRA got your back! You can withdraw your contributions completely tax-free forever and for always! Go ahead and give Uncle Sam the finger. He can’t touch you!

Roth IRA can beat up Traditional IRA – Seriously, it’s not even close. Tax-free income! No required minimum distributions! Traditional IRA is old and busted. Roth IRA is the new hotness. It’s like watching a baby take on the Incredible Hulk. Traditional IRA doesn’t stand a chance.

So go ahead, open a Roth IRA today. All the cool kids are doing it.

We’ve all heard the various rules of thumb for splitting your portfolio up between stocks and bonds, the two most fundamental asset classes. Age in bonds. 120 – your age in stocks. Double your maximum tolerable loss in stocks. The list goes on. These are all reasonable rules to be sure, but they all feel just a bit too arbitrary for many investors. Why 120 minus your age in stocks? What’s the logic behind that particular magic number?

Let me be frank: it really doesn’t make much of a difference in the long term if you hold 35% of your portfolio in bonds instead of 32% or 37% or even 40%. Since nobody can predict the future, nobody can know in advance which exact stock/bond mix will prove optimal. Sure, we can draw a few broad generalizations about the fact that holding 60% in bonds will be significantly less risky than holding 20% in bonds, but once you get down to the 34% versus 38% range the differences aren’t nearly so noticeable. It truly doesn’t matter what you choose at that level of granularity, at least not statistically.

Confidence Drives Behavior

So if  optimizing your stock/bond allocation down the the nearest tenth of a percent doesn’t matter, what does? That’s easy: confidence. Confidence in your plan; confidence that you’ve made the right decision; confidence in the fact that you have considered your specific situation and haven’t just invested in a cookie cutter portfolio using generic advice. Mind you, it doesn’t really matter whether the generic advice is actually appropriate or not. The very fact that it is generic will cause many investors to inherently distrust it. And that’s okay. We all like to think our situation is special in some way.

So How Does One Decide On Their Stock/Bond Split?

It’s really not complicated. We’ll start with the old conservative age in bonds rule-of-thumb and then increase or decrease our stock allocation depending on how you answer a few questions about your specific situation. Will the results of this exercise be superior to blindly following one of the aforementioned rules of thumb? Not necessarily. But the fact that you’ve thought about it in a methodical way will at least give you a better understanding of the issues involved and the confidence to implement your plan.

Start with age in bonds. For example, if you are 35 years old you will start with a 35% bond allocation and adjust your allocation according to how you answer the following questions.

Will you have a significant inflation-adjusted pension other than social security in retirement?
If so, your need to take risk has diminished. Decrease your equity allocation by 5%.

Is your portfolio already large compared to what you think you’ll need in retirement?
Again, your need to take risk has diminished. Decrease equity allocation by 5%.

Do you plan to leave a large inheritance to heirs or charity?
If so, you should invest a bit more aggressively. Increase your equity allocation by 5%

Would you describe yourself as a “risk tolerant” investor?
Increase your equity allocation by 5%.

If you owned equities in 2008, how did you react by the market crash?
If you felt comfortable owning equities even while their value depreciated significantly, add 5% to your equity allocation. If you either sold in a panic, thought strongly about selling, or otherwise experienced extreme discomfort it’s a good bet you were investing beyond your risk tolerance. Decrease your equity allocation by 10%.

Do you save more than 25% of your gross pre-tax income?
If so, you stand a very good chance of meeting your goals without taking on quite as much risk. Decrease your equity allocation by 5%.

Do you work in a stable career with little chance of being laid off or otherwise losing your income?
Increase your equity allocation by 5%.

Does longevity run in your family?
If so, there’s a chance your money will have to last a bit longer in retirement. Increase your equity allocation by 5%.

Tally Your Results

Tally your results. What do they reveal about your risk tolerance and need to take risk? Using the above process, your portfolio could range anywhere between age in bonds – 25 or age in bonds + 25. For example, an aggressive 35 year old investor might have as little as 10% of their portfolio in bonds. Likewise, an extremely conservative 35 year old investor might have as much as 60% of their portfolio in bonds. The average investor will likely fall somewhere in the 30-35% range. I would like to add one caveat: regardless of your results on this test, I recommend you never dip below 10% of your portfolio in bonds nor below 10% of your portfolio in stocks. I don’t believe any portfolio should be 100% in anything.

Where do you stand?

Portfolio diversification is really simple. Step one, find at least three different mutually non-correlated  asset classes. Step two, buy those asset classes, preferably in equal amounts. Step three, re-balance. It doesn’t really matter if you re-balance annually, quarterly, in accordance with some pre-determined allocation shifts, or anything like that so long as you re-balance. Done!

Unfortunately, those three or four magical mutually uncorrelated  asset classes simply don’t exist. You see, asset class correlations shift over time. Sometimes (usually), short-term bonds are an excellent diversifier of domestic equities. Other times, they’re not. Ditto for TIPS. Ditto for commodities. Ditto for real estate. Ditto even for gold. Unfortunately, we are in an age of increasing correlations. According to Morningstar, 9 out of 11 broad asset class indexes they track have become increasingly correlated with the S&P 500 over the past decade, including foreign stocks, gold, REITs, and commodities. The two indexes that actually became less correlated with the S&P 500 are those tracking the aggregate US bond market and the 7-10 year treasury bond market.

REITs Have Become Almost 100% Correlated With The S&P 500

According to Morningstar, the Trailing 12 Month (TTM) average daily correlation of the Dow Jones US Real Estate Total Return USD index stood at 0.59 at the beginning of 2002. A 0.59 correlation coefficient represents a moderate but not spectacular diversification opportunity. Still, even a moderate diversification benefit is well worth chasing after. Unfortunately, at the beginning of 2012 the TTM average daily correlation of that same index stood at 0.91, yielding pretty much no diversification benefit over the prior year.

Should we be concerned that REITs no longer seem to be adequate diversifiers? In a word, no. At least not yet. Remember that “correlations drift over time” statement I made above? It’s not just a theory. It really happens. A lot. I fully intend to remain invested in Real Estate Investment Trusts going forward and recommend you do as well. There are a few obvious reasons why the broader stock market and REITs have become so correlated over the past few years and a few compelling reasons to believe they won’t stay that way, for the most part.

Why Have Correlations Increased?

The S&P 500 now includes several large REITs - The S&P decided to finally allow REITs into the index back in 2001. According to REIT.com, there was only a single REIT in the S&P 500 at the beginning of 2002, Equity Residential (EQR), and that had only been a part of the index since November of 2001. As of now, there are 15 REITs in the S&P 500 with almost 2% of the index being made up of real estate related companies. To be sure, 2% isn’t a large number, but it does make sense that the S&P 500 would become slightly more correlated with REITs over the past decade as they have increased from 0% to 2% of the index. It may be that REITs will go on to comprise even more of the S&P 500 in the future as more private real estate holdings (the vast majority of domestic real estate is still privately owned) are “REITized.” Before 2001, flows off assets into REITs and REIT funds were determined more by fundamentals than anything else. Since their inclusion in the S&P 500, however, flows become much more tied to the broader market. Unfortunately, this isn’t going to change.

“Correlation moves to 1 in a crisis” - There is a lot of truth to this statement. When the fit hits the shan, risky asset classes tend to all drop together as investors flock to the safety of short-term treasuries and gold. Then, as the economy begins to recover, that money tends to pour back into risky assets and they all more or less rise together in a “rising tide lifts all ships” kinda way. Therefore, I don’t think it should really come as a surprise to anybody that correlations are up across the board over the last 3 years. The economy has been through a lot!

REITS have become more accepted by conventional wisdom - Ten or fifteen years ago, not many experts would have recommended a large REIT allocation for most investors. These days, they are recommended by almost everybody. I don’t have any numbers to back this up, but just based on the “prevailing wisdom” I would be very surprised if the percentage of the average portfolio dedicated to REITs hasn’t increased significantly over the last decade. More and more people are buying REITs as a matter of course; they are no longer exotic investments of just a few sophisticated investors. I think this trend is likely to continue.

Why Will Correlations Probably Decrease Again?

But all is not lost! While in-depth analysis seems to suggest it is likely (but not guaranteed) that REITs will be at least slightly more correlated to the broader market in the future than in the past, there are reasons to believe the recent run of very high levels of correlation is temporary.

Separation tends to occur following a crisis - As mentioned above, correlation moves to one in a crisis. The upshot of this is that correlation has usually, in the past, moved away from one after the recovery. Indeed, since the middle of January daily correlations of REITs and the broader market have dropped to below 0.60. Of course, you can’t really conclude anything based on just 30 days of data, but hopefully this is a step in the right direction.

Owning real estate is a distinct business - Owning and operating commercial real estate is just a different business than companies in most other industries are engaged in. Rents tend to be relatively stable, at least compared to the earnings of companies in most other industries. It’s true that lower corporate profits could lead to decreased demand for commercial real estate, but the long-term nature of most lease contracts gives REITs at least somewhat of a buffer. Additionally, real estate can often be re-purposed to fit with shifting demand. Old industrial properties are being turned into residential lofts in urban areas across the country, for example. None of this is to say that the commercial real estate market is immune from economic troubles; obviously it’s not, it’s just that those troubles tend to come in slightly different cycles than the broader economy. I don’t foresee this changing anytime soon.

REITs are extremely exposed to hiccups in the financial market – This is an understatement. Since REITs are required by law to pay out at least 90% of their net income as dividends to shareholders, they depend heavily on the capital markets for expansion. The financial panic really threw most real estate companies for a loop as infusions of outside capital became nearly impossible to come by. Fortunately, the financial crisis was a once-in-a-lifetime occurrence. Will it happen again? Absolutely! But it won’t happen regularly. It could be decades before a comparable crisis hits again. Or at least, I hope so.

We’ve been here before - This is not the first time we’ve seen correlations over 0.90. It’s happened several times in the past, in fact. Correlations moved downward then and there’s no reason to think this time is any different.

Last year, Citigroup ran a promotion offering frequent flier miles as a reward for opening a bank account. No big deal, right? Banks offer promotions and incentives all the time. This time, however, it’s a bit more complicated. You see, Citigroup sent out 1099 forms reporting the miles as income and the IRS wants a cut of that income.

What? You mean those bonuses you receive are considered taxable income? According to the IRS guidelines, the answer is a qualified “yes.” The IRS has an article on its website titled What is Taxable and Nontaxable Income? that lists the most common forms of taxable income. While frequent flier miles received from a bank promotion aren’t explicitly listed, the IRS does state that “…generally, an amount included in your income is taxable unless it is specifically exempted by law…” Since I’m not aware of any specific tax laws explicitly excluding bank promotions from taxation, it’s probably safe to assume they are, in fact, taxable.

Why Did Citigroup Send A 1099 In This Particular Instance?

But people take advantage of bank promotions all the time. Why did Citigroup send out a 1099 to recipients in this particular case but not in others? First off, it must be noted that just because you don’t receive a 1099 in the mail doesn’t mean you don’t owe income tax on legally recognized taxable income. You do. The reason Citigroup issued a 1099 in this case seems to be because Citigroup determined the value of the promotion to be $625 (25,000 frequent flier miles at 2.5 cents per mile).  Since IRS rules require the reporting of prizes and awards valued over $600, they had no choice but to report it. Hence, a 1099 was issued both to the recipients of the award and the IRS. Had Citigroup valued the promotion at some amount lower than $600, they probably would not have issued a 1099. However, recipients would still be legally required to self-report and pay taxes on the award, regardless of the amount.

This rule makes sense when you think about it. If you went to Vegas and happened to win a new car from a slot machine, you would expect to pay income tax on the value of the vehicle, wouldn’t you? What Citigroup is doing here is really no different. They are simply paying you to be their customer, which is clearly a form of income.

It should be noted, though, that the IRS itself has considered this issue in the past and ruled that, while this income is technically taxable,  the IRS hasn’t been enforcing  the rules due the complex nature of these types of awards and promotions, at least not yet. That could change going forward, however, as these types of programs are becoming more and more commonplace.

Does This Mean Things Like Credit Card Rewards Are Taxable?

In a word, no. Well, maybe. It really depends on the nature of the reward. The determinant of whether or not a reward is considered taxable is whether the reward in question is connected to a specific purchase or transaction. Cash-back rewards tied to credit card purchases are not taxable because they are considered to be merely discounts in the purchase price of whatever you bought. Think of it this way: if you were shopping a going-out-of-business sale and managed to score a flat screen television for 80% of its original listed price, would you owe income tax on the difference between the original price and what you actually ended up paying for it? Of course not. That’s because the discount isn’t a form of income, it’s just a discount. Both parties, the buyer and the seller, agreed to part with that particular item at a lower-than-usual price for whatever reason.

Rewards not tied to a specific purchase or transaction are usually considered taxable, however. In the Citigroup case above, those 25,000 bonus points weren’t connected to any specific purchase so you can’t apply the “discounted price” argument above. It was compensation for completing a specific action. In this case, it was signing up for a bank account.

In conclusion, you are safe not paying taxes on all credit card rewards tied to actual purchases. Sign-up bonuses, on the other hand, are technically taxable most of the time. Since the IRS is by its own admission not enforcing those rules right now, you’re probably safe not reporting them for small amounts. But for a bonus worth over $600? It’s probably safer to just pay up. Better safe than sorry.

Earn a $50 bonus when you open an Electric Orange℠ checking account from ING DIRECT. Free ATMs and no overdraft fees.*

* But don’t forget to pay taxes on that $50!

Inflation has been pretty tame the last few years (unless you believe the conspiracy theorists, at least), but few believe that will last for long. The recession and subsequent slow recovery have put downward pressure on consumer prices but the sheer amount of money that has been, and still is being, pumped into the economy is sure to catch up with us eventually. And when it does, consumer prices could shoot through the roof.

Sudden Inflation Wreaks Havoc On A Traditional Portfolio

A sharp increase in inflation is bad for almost every asset class in the short term with two notable exceptions, TIPS and commodities. We’ll get to those in a second. First, we’ll examine the two traditional portfolio asset classes to see why they hold up poorly during inflationary periods.

Stocks - While it’s true that stocks are a pretty decent long-term inflation hedge due to the fact that companies will eventually be able to pass along production cost increase to consumers, they actually make relatively poor short- and intermediate-term inflation hedges. This is somewhat contrary to popular wisdom, but here’s why. When the cost of raw materials shoot up, companies have two options: they can either raise their own prices or take a hit to their own profit margins. Companies with strong economic moats such as Coca-Cola and Apple can afford to raise their prices – you don’t think kids are going to go without sugary beverages and hipsters without their Apple products, do you? – but the majority of companies can’t get away with passing along their increased costs right away. So their earnings suffer, at least in the short term. And when earnings suffer, stock prices drop.

Bonds - That bonds are vulnerable to inflation is fairly obvious. Simply put, nominal bonds pay a fixed rate of interest until maturity regardless of what happens with inflation. The longer until maturity, the more exposure a bond has to inflation risk. A 5% interest rate looks decent when inflation is 2% but it isn’t nearly as nice when inflation doubles to 4%. Short-term bonds aren’t as vulnerable because you don’t have to wait as long to reinvest the principal at a higher interest rate.

Investments That Hold Up Well To Inflation

Here are three alternative asset classes that hold up relatively well to sudden spikes in inflation.

Commodities – Raw material, crops, oil. The price of the stuff that fuels our economy is intimately linked with the consumer price level. It’s no surprise that commodities are positively correlated to inflation, even unexpected inflation. Unfortunately, there really aren’t any good low cost commodity mutual funds out there. Among open-ended funds, Pimco Commodity Real Return (PCRDX) is probably your best bet.

TIPS – Treasury Inflation Protected Securities are probably my favorite alternative asset class. TIPS are extremely well-correlated with inflation, which is kinda the point. Like regular bonds, TIPS pay a particular interest rate until maturity. Unlike regular bonds, the principal is adjusted twice annually in response to changes in the consumer price index. If inflation goes up, so does the principal. In the event of deflation, however, the principal goes down. Thus, the interest rate paid on an inflation protected security is in effect its guaranteed real rate of return. That’s a deal you really can’t get anywhere else. Of course, TIPS are only as good as the credit of the U.S. Treasury but I don’t think there’s any danger of a default anytime soon, despite the recent hysteria.

Gold – Yes, gold is an excellent inflation hedge and yes, it may have a small part to play in a diversified portfolio. Not that I’m a gold bug, or anything. I still think gold has too many negative characteristics to make a good long-term investment on its own. But as ballast to a broadly diversified portfolio, I think it can have its uses, particularly when unexpected inflation strikes.

Investments That Are Moderate Inflation Hedges

Here are two more investments that, while not perfect hedges against inflation, can do a decent job of hedging against moderate price spikes.

Real Estate – This could refer to both direct investment in real estate or REITS, although I prefer REITS. The reason I list real estate as only a partial inflation hedge is that prices are determined as much by rent levels as by land and material prices, and rents are determined as much by local supply and demand as anything else. It’s quite possible for rents, and thus prices, to fall even when inflation heats up. Of course, this can’t continue forever. Eventually rents will return to equilibrium with the overall price level.

Cash – Since cash investments are essentially very, very short-term bonds, they have very little inflation risk. Since cash securities mature so quickly, they can always be reinvested at higher rates. Still, this only goes so far. There reaches a point when financial institutions are no longer willing to pay ever higher interest rates on short-term cash deposits, regardless of what inflation is doing.

If you ask an insurance agent if you need life insurance even though you happen to be single, most will say “of course you do!” and then offer a litany of logical-sounding reasons why. Big surprise! It’s important to realize, though, that most (but not all) sales pitches are built around a kernel of truth. Otherwise, they probably wouldn’t be very effective.

So yes, I believe there are a few valid reasons for the average single person to buy term life insurance (and only term life insurance). Since term life coverage can be so inexpensive, it’s at least worth considering in some situations. There may be some additional reasons applying specifically to wealthy individuals, but I’m going to focus solely on the middle and lower class for the purposes of this article.

Reasons NOT To Buy Life Insurance When You’re Single

Don’t buy life insurance as a savings vehicle – Insurance salesmen love to pitch whole life insurance as a tax-deferred way to invest for retirement due to the the accumulation of cash value. This is much the same way variable annuities and equity-indexed annuities are often pitched, in fact, and you know how I feel about those products. Unfortunately, these claims about whole life insurance don’t really stand up to analysis in most situations. Except for a few estate planning advantages only the rich need worry about, the cost drag of most whole life policies is going to more than outweigh any tax-deferral advantages involved. Max out your 401k instead and, once you’ve done that, a plain-old taxable account is probably going to turn out to be a better choice. By all means, run the numbers, but life insurance is a wholly unsuitable vehicle for retirement investing.  Besides, if you haven’t already fully maxed out your 401k and/or IRA you don’t need another tax-advantaged product anyway.

Don’t buy life insurance just because you were told it was the “responsible” thing to do – Buy a house. Save for retirement. Buy life insurance. These are just a few of the things modern adults are simply told they should do. But blindly following these societal rules-of-thumb isn’t always the best course of action. There are plenty of scenarios where it doesn’t make sense to buy a house, for example, just as there are plenty of situations where it doesn’t make sense to stash money in a retirement account in lieu of paying down high-interest credit card debt. Similarly, don’t just go out and buy life insurance if you don’t really need it simply because that’s what you were led to believe responsible adults do. Perhaps that money could be better spent elsewhere.

Reasons To Buy Life Insurance When You’re Single

Now that we’ve gotten that out of the way, here are a few reasons why you should consider buying term life insurance even though you’re single.

Will your family be able to afford your funeral? - Let’s be honest: if you die young, do you really think your parents and loved ones are going to cut corners on your funeral? Of course not. They are going to spend a ton of money to give you a nice burial whether they can afford it or not. The average funeral these days with burial comes in at around $7,000. Even if you opt for cremation, you’re still looking at a $5,000 bill, and that’s just average. Trust me, there is practically no limit on how expensive a funeral can be if you opt for all the frills.

If your parents or rich, there’s no problem. $5,000-10,000 is a drop in the bucket for them. But what if they’re not? That $10,000 bill could end up being a major hardship and since we know they are going to end up doing it even if we tell them not to, it could make sense to take out a small term life insurance policy to protect those you leave behind from an unexpected financial hardship. Fortunately, these days many corporate employers provide some nominal amount of life insurance for free as a benefit to employees. At my current job, every employee is covered at an amount equal to their annual salary (not including bonus) for free. If that’s the case, this argument doesn’t apply to you.

You want to protect your future insurability – Most term life policies have a clause stating that once you’re covered, you are guaranteed to be allowed to renew the policy as many times as you want. For example, say you purchase a 20-year term life insurance policy at age 25. Nothing happens, thankfully, and you live to 45. Unfortunately, you have developed a heart condition, cancer, or some other complication that effectively makes you “uninsurable.” Now that you are married with 2 children, going uninsured simply isn’t an option for you. Thankfully, you bought that policy back when you were single and the insurance company is required to let you renew it for another 20 years even though it now knows you are a poor insurance risk. Had you not bought life insurance in your single days, you may not have been so fortunate. At best, finding an insurance company willing to insure you would have been a major pain.

Do you want to leave a legacy? - If you’re young, you probably haven’t had the chance to save millions of dollars for retirement yet. That’s fine. But what if you really, really want to leave a contribution to some charitable cause after you die? A life insurance policy can be one way of doing that while spreading the “donation” out over a number of years. You may not be able to donate $50,000 to your favorite charity today, but can you afford $20 per month over 20 years? That’s probably much more manageable. And if you happen not to die during that time period, well then, that’s great! By then you just might have saved up enough money to make a donation outright. It’s certainly not for everybody, but I believe this is a valid reason to purchase life insurance for some charitable souls.

Where And How To Buy Life Insurance?

Okay, this is really a topic for another post (or a whole series of posts), but the advent of the internet has made things like buying practically anything, including life insurance, exponentially easier. There are a number of sites out there like InsureMe.com that take your information and hook you up with a variety of top-rated insurance companies offering your their best quotes. Then, you can just choose from amongst the best offers and go from there. I’ve gotten quotes from InsureMe before and based on my experience, I’d recommend them as a good place to start. You can shop and compare multiple Life Insurance quotes for free on their website. You can use the prices you get there as a starting point for further price comparisons (which is what I did) or, if you’re happy with the quotes you received, just go ahead and buy. One caveat: I believe a $50,000 policy is the lowest amount they will give you a quote for, but that shouldn’t be a problem.

Question To Readers: Did I Miss Anything?

Are there any other compelling reasons a single person should consider purchasing life insurance? Leave your opinion in the comments section and I’ll add the best reasons to the body of this post.

Apparently, Mitt Romney pays “about 15% in taxes” and Newt Gingrich pays around 32%. Quelle Horreur! Apparently, this is big, important news on the campaign trail. Said Newt Gingrich (to paraphrase), “I am a superior candidate to you, Mitt Romney, because you utilized more completely legal and above-board tax planning strategies than I did last year.” Color me impressed!

Why Do People Care?

Newt is right, after all. Not intentionally paying more taxes than you legally owe is both immoral and stupid. All moral people, both rich and poor, always pay more taxes than they legally owe. Have you ever heard of anybody ever going to any amount of effort to claim all the credits and deductions to which they were entitled? Me neither. It’s unheard of because everybody knows the only ethical course of action is to overpay your taxes.

I mean, it’s much worse than that ethics violation Newt was reprimanded for, becoming the first Speaker of the House to ever be disciplined for ethics violations. Besides, Newt paid $300,000 in fines for that little issue. All’s well that ends well, right? The fact that Mitt Romney didn’t cheat on his taxes in the past gives we the people a lot of insight into how horrible of a president he will be. What a slimeball! Newt’s ethics violations, however, are completely irrelevant. Once an abuser of power, always an abuser of power? Please. That’s racist talk! Romney legally paid all the taxes he was required to pay and not a penny more! That bastard!

People Don’t Really Care, Which Brings Me To My Point…

In case you couldn’t tell, I was being sarcastic above (and yes, I have to explicitly state that because I’ll get angry email otherwise). I don’t care what either candidate has paid in taxes, so long as they did so legally. And despite all the vitriol, neither does anybody else. Newt’s supporters (and Obama’s by extension: just wait and see) don’t care that Romney only paid 15% in federal taxes. What they care about is that it gives them an opportunity to take a jab at him in order to support their own side. Some of them have probably even managed to convince themselves that Romney’s tax rate is a big deal. It’s not. How many truly independent voters have complained about Romney’s tax rate? None. It’s all partisan squabbling (and yes, it can be partisan squabbling even though it is within the Republican party.

Do You Care About Romney’s Tax Rate?

I’d like to issue a challenge to anybody who actually believes Romney’s tax rate is an important issue. Why do you think this? Is it because you believe it makes him greedy? If so, you’d better be able to produce your own tax return showing the extra amount of tax you paid to the IRS beyond what you legitimately owed.

Do you think it makes him a tax dodger? Again, present your own tax return showing excess tax paid before you make this argument.

Do you think it means he’s not paying your fair share?

What is it? Why does it matter to you? Give me specifics, not meaningless BS generalities like “oh, well it shows his lack of character and that he’s out of touch and that he hates puppies.”

Can anybody give me a legitimate reason why I or anybody else should care?

Oh well. I’m voting for Obama anyway.