SENIOR CITIZEN BANKRUPTCY.

An Alarming Situation. Our elders (Omigod that includes me) are filing bankruptcy at an alarming rate. I recently announced this via a facebook post but I have continued to think about it since. Large credit card bills, prescription drug costs, uninsured medical expenses, increasing energy costs, and trying to support children who have not yet learned to care for themselves are among the most common reasons. The magnitude of this problem is illustrated by the fact that bankruptcy filings for those under the age of 55 has steadily dropped over the years but it has steadily risen for those over 55. Bankruptcy for those in the 75-84 bracket has risen over 400% since 1991. One bankruptcy attorney I talked to told me that he seldom had a client over 65 when he started his practice 30 years ago, now they represent the majority of his practice with his oldest client being over 90.

Failure To Plan? The old cliche says that most people don't plan to fail. Instead they fail to plan. My experience is that many seniors are in serious financial condition despite the fact that they have been very conservative in their planning. In fact, those who have insisted on low risk investments are often in the most serious condition of all. In 1989, it was possible to invest $200,000 6-month certificates of deposits and receive 10.4% interest or $20,800 a year. While this isn't a lot, when combined with $12,000 or so a year in social security, frugal retirees could live rather well on this amount. In 2000, it was still possible to get 6.9% or $13,800 per year. Combining this with cost of living adjusted social security left the frugal retiree in reasonable shape with a minimal amount of belt tightening. Even as late as 2006, it was possible to get 5.5%. This has continued to drop until the present time, it is difficult to get 1% without extending maturity out to unreasonable levels. The only remaining alternative that most conservative investors have is invasion of principal.

Credit Card Debt. The fact that that most seniors filing bankruptcy list credit card debt in excess of $20,000 is often cited as evidence of irresponsible consumption. This may be true in some cases; however, it is often the result of using credit cards to cover living expenses during difficult times. Prescription drug costs are becoming an ever increasing expense for many seniors. Social security drug benefits provide some relief but many enter the so-called doughnut hole, in which no benefit is available, early in the year. It is not unusual for two seniors covered by medicare part D to spend more than $8,500 in a given year for uncovered expenses. Rather than go without much needed drugs, many are forced to use credit cards to cover that expense. As credit card debt piles up, the next step is to delay payment on necessary expenses such as utilities and telephone. These pile up until there is an imminent danger of shut off.

Management of Post-Retirement Finances. One of the first things financial advisers learn in the education process is reduction of investment risk through diversification. Unfortunately, most diversification techniques involve diversification of assets. This is important but not as important as diversification of income. The key issue for those nearing retirement is how to replace income from full time employment with income from other sources. If we have several sources of income we are less vulnerable to abrupt reduction in income from a single source. Those considering retirement, either voluntary or involuntary, within the next 5 years should begin income planning sooner rather than later.

How Do You Diversify Your Income Sources? In my next post, I'll give you an example of a $200,000 portfolio structured for the production of income from several different sources. Some of these may surprise you.

DO YOU KNOW WHAT A RARE EARTH IS?

First A Definition. Rare earths are a group of 17 elements with names you probably have never heard of. They have not found wide use in the economy despite he fact that they aren't really that rare except when compared to iron, copper, and aluminum which are found in relative abundance. During the past few years their applications have increased mainly because they can be made into very strong, permanent magnets that are highly useful in the manufacture of several somewhat high-tech applications such as batteries, for wind turbines, hybrid cars, and guided missiles.

Why Are They In The News? Because China controls 90% of the World's supply. We have been buying virtually all our rare earths from China at a price cheaper than we could make them ourselves. This still wouldn't be a problem except that China has decided that they may need to conserve their supply and cut their exports of these elements by 72%, leaving the rest of the world to cope with the resulting shortage on their own. Investment bankers have been promising investors huge returns for investing in companies that have been formed to exploit Non-Chinese sources of these materials. One such company is Molycorp, a NYSE company with headquarters in Colorado. Molycorp is no neophyte in rare earths. They have been mining a concentrate which can used to extract these elements for a number of years. In a recent public offering they raised $379 million to expand their operation from mining concentrate to one in which they take the concentrate to the individual elements and then to finished magnets. They claim they have improved these processes to allow the production of the finished product at less than currently available in China.

There are several companies that have announced their intent to expand their rare earth business. I have not researched them all but, if you are looking to get in on the ground floor, it might make sense to diversify into this area. Despite the hype from the investment banking community, I believe that these are high risk investments and there are a number of variables that may not be evident as yet. Still, this might prove to be an interesting investment for those willing to devote a small amount of their portfolio to a high-risk investment. I plan to continue to research companies in this field.

Considerable Conventional Energy Exploration in Colorado. Despite pressure from the environmental lobby, a number of companies are looking to exploit oil and natural gas from a formation in Colorado known as Niobrara Shale. This formation encompasses land in Colorado, Wyoming, Kansas, and Nebraska and is in it's infancy. Still, it is being compared to to the Bakken Shale in North Dakota and Montana. This formation has made a tremendous contribution to the economy of North Dakota. A host of small and large companies are working in this area and producing both oil and natural gas. Hopefully, this will get by environmentalists to produce energy that will be desperately needed until we can come up with more economical renewal sources.

What About The Conoco Corporate Center. It's been at least a year and possibly two since I learned of Conoco's acquisition of 400+ acres of land near Louisville to be used for construction of a world class corporate training and research center. The eventual employment target is 7,000 employees which should mean a billion dollar impact for the area. Despite all the hype, I noticed that the total project is anticipated to take 20-25 yeas to complete. Thanks a lot. I would be almost 100 by then. The good news is that construction is scheduled to begin in time for completion of phase 1 by 2012. Hopefully, I'll live long enough to see at least some of that project completed.

I Will Be In Colorado Late This Week. Call my cell phone at 303-902-3940 to arrange a meeting.

ADJUSTING TO NEW REALITIES.

My Outdoor Home.

It's Been a Tough Year For A Lot of Us. With the year drawing to a close, it's time to begin planning for next year. Taking a look at our assets, we often overlook the most important one: The ability to generate income. Over the past five years, I have often written of the plight of those who have undergone a big shift in their income due to job loss. Most of my clients have been high earners over the years and most of those who have lost jobs have found the adjustment quite difficult. The biggest problem is that re-entry into their previously high-paid career is virtually impossible. I have always recommended that high earning clients recognize that their biggest risk is the possibility of loss of high employment income. In previous years, many of those have told me that they were somewhat "bullet proof" in this regard. This attitude no longer prevails and the need for security is replacing the desire for luxury as paramount in the mind of pre-retirement clients. Talk show host, David Ramsey has developed a large following among those who agree with his slogan that "A free and clear house has replaced a BMW in the driveway as the most desired status symbol". I'm not sure that this statement fits everyone but does appear that it fits a lot of those who find that they can no longer keep up with the expense of making large monthly payments on luxury items they wish they no longer owned. A very wise client of mine once said "You can always trade money for stuff but it is much more difficult to trade stuff for money."

Now Is A Good Time To Evaluate Your Strategy. At this point, I am talking to highly compensated individuals who are still employed. Those who have lost jobs are not without hope but will require a different strategy. If you still have a job, even if you think you are secure, ask yourself what you would do if that income were to suddenly end. There is no "one size fits all" strategy, I can give you a few ideas but they may not fit your situation. The best thing you can do is spend some time with a spiral notebook and brainstorm the possibilities. Here are some common problems.

1. Benefits. How will you replace your health insurance? Will your family be vulnerable without your company paid life insurance. Are you insurable? You may not have disability insurance if you are no longer employed and it will be difficult to purchase if you are not.

2. Liquidity. If you don't have adequate investment income to pay your monthly expenses, you will need to have some assets that you can liquidate to cover these expenses. This could present a problem for many of those who liquidated their investment portfolio to purchase one of the annuity products that promises a guaranteed minimum return with some upside if the stock market does well. Without commenting on the merits of this investment, I can almost guarantee that withdrawal before the maturity date will involve a substantial withdrawal penalty. While you can always withdraw from a qualified plan such as a 401-k or profit sharing plan, you will have to pay a penalty if you need a substantial sum. It may be preferable to live on credit cards at the end of the year in order to push the income into next year when your overall income will probably be less. The bottom line is that adequate liquidity is your most important insurance against financial disaster. Guard your liquidity reserves with your life.

3. Debt Service. It is probably inadvisable to liquidate your qualified plan assets and pay a penalty to pay off debt but you need to look at ways to manage this debt. If you were one of those who took out a 15-year loan to get a lower interest rate, perhaps you might prefer lower payments. Even if you get a slightly higher interest rate, you definitely lower your risk by taking out a 30-year loan as opposed to a 15. I have seen more people in trouble because their payments were too high than due to a longer payoff period.

4. Develop New Skills. Consider ways to develop new skills. Look at ways to develop other marketable skills. Not only can it help you stay employed at your current employer it could provide ways to generate earned income if you do become unemployed.

Parting Shots. These are just a few points to consider. More than anyone else, you are in a position to look at the risks you face and develop a plan to deal with them. Can't say I'm making much progress towards my health goals. Will talk more about them next week.

WHAT IS A CAREGIVER?

Fall colors amid the greenery

An Accidental Discovery. One afternoon as I was moving around on the internet, I wandered into a chat room. My pre-conceived notion was that people who spend time in chat rooms fall into the "Get a life category." There were 10 or so people in this chat room titled "Caregivers" or something like that. I was welcomed right away and invited to stay. They asked me if I was a caregiver and I told them I handled some of the personal and financial affairs of my aunt and uncle who lived in an assisted living center in Denver. Apparently, that qualified me. One thing that impressed me was the quality fellowship that existed in this group. It kind of reminded me of when I would stop in the afternoons at Dairy Queen on my trips through Texas. There would often be a large table full of folks drinking coffee and talking about country life. I used to love eavesdropping. I remember one farmer talking about the cost of feeding his cattle and asking if his neighbors thought he could get food stamps for them. Another time, I remember a bunch of farmers in straw hats and overhauls talking about the hard drives and random access memory on their computers. I think chat rooms like the caregiver group are sort of an offshoot of the afternoon coffee clubs but without the coffee.

What is a Caregiver? In the beginning, my definition of a caregiver would have been someone who takes care of one or more disabled persons who can no longer care for themselves. There were several like that in this chat room. Some were professional caregivers, the most common being nurses; however, the majority were individuals who had cared for spouses or family members during an extended terminal illness. One of the older men in the group had spent several years, taking care of a spouse for several years after having a stroke. Another, man had spent several years taking care of an aging parent. He often spoke of the toll those years had taken on his life. One retired RN spent years taking care of her mother and was now engaged as a volunteer rehabilitating injured animals. Most of the participants were no longer involved in this activity since the care recipient had since died.

What impressed me most about this group was the bond between these individuals. Most had never met face-to-face and those who had did so only briefly. The word love was used frequently and this puzzled me since I had difficulty with the concept that people who knew each other only in cyberspace could really love each other. It was several years ago that I started visiting this "room." There is a designated time that the participants have set aside to meet and I usually try to attend most of the time. I do consider these individuals as friends, one of which I have visited several times via instant messages and discussed numerous problems that each of us may occasionally have.

The main reason I have included this story is that my definition of a caregiver has changed over the time I have participated in this group. The reason for this is that I have discovered a common thread among the participants. My theory is that they are caregivers, not because they spent time caring for another person, but because they continue to do things for others. There are countless examples among this group of people. Common characteristics are unselfishness, empathy for others, strong sense of community, and a strong set of principles. If we think about it, we all know people who fall into this category. The bottom line is that you aren't a caregiver because of what you do. It's because of what you are.

Not Much Progress. When I weighed in on Sunday, I weighed the same 167 pounds that I have observed for three weeks. In addition, my glucose levels remain higher than normal. These results illustrate how we can let our health deteriorate to the point that it becomes very difficult to manage. I have allowed this to happen over an extended period and now I realize how hard it will be to change it. There are two principles that apply to my future prospects. 1. Tenacity. When we find a goal to be very difficult to accomplish, we often decide that it is no longer worth pursuing. 2. Stupidity. Continuing to do the same thing while looking for a different result is stupid. I am not going to give up and next week I am going to try some different tactics. I will let you know how this works next week.

REFLECTIONS ON A SUNDAY AFTERNOON

This Picture Look Upside Down? It isn't. Actually its a picture of the water. If you look in the upper right hand corner, you can see the white swan that is on land. With the exception of the tree branch in the center, the remainder is in the water, as a reflection of the blue sky, clouds and trees. I love the way the lake changes the landscape. On some days, the texture of the surface is ruffled by the wind and on days like this one, the surface is so smooth it's hard to tell what is real and what is a reflection. Another thing different about the appearance of this post is the type size which I increased as an accommodation to one of my readers who told me it was difficult to read. Hopefully this will help.



Did You Get Out Of The Market Last Year? If you did, you did it against my advice. It's very difficult to stay in a falling market hoping it will get better. A lot of my clients could no longer bear the pain of seeing their assets drop to levels that we had previously thought impossible. If you will read my posts I did warn that the market was vulnerable prior to this drop. While we changed our strategy prior to the drop to reflect our decreased optimism, (We raised more cash and moved away from high P/E stocks) we were still vulnerable and took a hit along with everyone else, although perhaps not as much. What hurt us the most was that some companies in our portfolio with a long track record of increasing dividends cut or eliminated the dividend. Some did this within weeks of announcing that they were totally committed to continuing their dividend policy. There are ways to determine which dividends are most likely to be cut and we will monitor those more closely in the future.



The Market Averages Have Increased By 80% Since March of 2009. If you got out close to that date, you were likely to have cemented in a huge loss. We had several clients who did that. As I have preached for years, there are market forces that prompt you to sell when markets are low and buy when they are high. I will admit that I don't know how to predict the markets well enough to be either 100% in or 100% out at any given time but when everyone says "run for the hills", its probably time to begin buying again. I do not know how much the current market trend will last but I predict that we have another 3-4 months of strong markets. This prediction is based strictly on statistical principals which show that from September to the first of the year, the markets show the strongest increase of any other period.



Having Trouble With Weight Management. I weighed in at 167 again this morning. Despite constant efforts to eat less, I still weigh the same as I did last week. Glucose levels are also about the same. I had to give up and do some occasional injections during the day to keep it down. I am still not giving in totally and will work even harder next week to drop some weight and reduce insulin levels.

IT ALL STARTS AT SUNRISE

I've been Watching This Tree. This picture was taken last fall and I am waiting for a repeat performance this year. It's been 15 years and I never cease to be amazed at the beauty that surrounds me here. This is but one example. This picture was taken at sunrise before sunlight floods the back yard. I can't claim to have done many good works in my 72 years on this planet, so I guess all this is truly a gift, for which I have done nothing to deserve. Just don't tell me it is a random occurrence.


Understanding Real Estate. One thing we may not often consider about real estate. Property values are inextricably linked to interest rates. Some of you might think you know the reason for this but maybe there are other reasons that aren't so obvious. When it comes to personal residences almost everyone gets a mortgage to buy the house. Lower interest rates usually mean more people can afford to buy. This increases demand and causes prices to rise. That's simple. But what about the buyer who pays cash and intends to rent the property out for a monthly income? The value of the income stream received is higher in a low interest rate environment. This is part of what's going on right now. Suppose you have $200,000 to invest and you are in need of income to help cover your monthly expenses. If you can rent the property for $12,000 a year after expenses for the next 10 years, you will receive total income accumulation of $120,000. If you buy a 10-year government bond at the current rate of 2.61% you will receive less than half that or a total accumulation of only $52,200. Give the huge difference in return, you might even be willing to pay an extra $20,000 for the real estate.

What if the property produces no rental Income? Do lower interest rates increase the value of real estate that produces no rental income such as raw land. Consider a case of a $100,000 lot that you might want to buy and hold for resale in two years. In the current environment, you can choose to buy a risk free 2 year treasury bond instead but your yield will be only 0.4%. This means that you will lose out on $800 in interest waiting for the market to improve. Perhaps you might be willing to pay an extra %5,000 for that land.

Wait A Minute! Here we have the lowest interest rates of the past 50 years and we all know property values have been going down not up. So how can low interest rates favor higher real estate values. Nothing is simple. I never said that interest rates were the only factors that affect property values. There are other factors at play right now. Probably the biggest factor is the relatively low rates and low qualification standards of the past 10 years. This pushed property values to unrealistic levels as people rushed out to buy properties at values they couldn't afford. Builders rushed to produce more inventory. When it became obvious that home owners couldn't make the payments they promised on contracts they signed, an additional source of inventory became available: foreclosed properties. This made it unprofitable for builders to build new homes and large numbers of construction workers, mortgage originators, and title company employees lost their jobs. Employees in related industries such as lumber, furniture, and concrete also lost jobs. This offset the benefits offered by low interest rates.

Is There An Opportunity Here. I believe there is. If you have a diversified investment portfolio and you can buy a property at a reduced price with a substantial down payment and a low interest mortgage, the rental market is strong and you can receive a decent cash flow while you wait for prices to recover. Now is probably a good time to divert some of your other investments into real estate. This isn't a strategy for a low income employee with twenty grand in the bank and little else but it is a good use of funds for stable investors with an adequate liquidity reserve.

Not a Good Week Health Wise. This morning I tipped the scales at 167, same as last week. I can also see that my blood sugar levels, although acceptable in the morning get much higher during the day and I will not be able to continue at these levels without taking more insulin, a situation I have wanted to avoid. The bottom line is that I made little or no progress. I can not let this discourage me from reaching toward my goal. I will work harder next week. There is a plaque on the wall in Betty's office that says, "Let us run with endurance the race that God has set before us." Hebrew 12:1. I'll remember that as I go through next week.

IT'S SUNDAY AFTERNOON. WHERE ARE YOUR CHILDREN

Beautiful Sunday Afternoon. I love it when the blue sky and clouds reflect into the water. Helps me relax and makes me think about the important things in life. I was going to communicate about the effect the rising stock market is going to have on the economy over the next year but I recently received a message from a friend about a lead she received on the possible whereabouts of her missing daughter. Her daughter didn't disappear in the last few days.....Or even in the last few months. It has been fifteen years since she last saw her. This is just one of the many leads she has followed up during this time. I won't mention her full name yet but she is from Madisonville, Ky and is well known in those parts. While I am willing to help her in just about anyway I can, including writing a story for the world to hear, i am not sure I am the best person for the job. In any event, my heart aches for her as she tells me that she is about to run down this recent lead about a girl in a mental hospital who claims to be the missing daughter. Although it is likely that this lead will be a blind alley like so many others she has followed over the years, her words to me were a simple, "I have to know." More than anything she has said, these simple words let me know a fraction of of the anguish she has felt for so long. Those of you who have children of your own, no matter how old, put your self in her place for a few minutes....If you can stand it. Another simple set of words that ring true are, "No child should ever be just missing." No matter what their condition, they should be found so that the family can welcome them back or give them an honorable goodbye.

Stories About Missing Children and Young Adults Abound. I guess I haven't paid a lot of attention to them up until now. Let's all take a moment to recollect where our children are. Let's also say a prayer for Sara that she can find an end to her soulful journey of the last fifteen years. I wish I knew what I could do to help her. I will try to keep you informed of any progress in future posts.

I Promised To Keep You Up To Date About My Other Journey. Since my last week's post, I only lost another pound. This is probably more realistic than my previous weekly result of five pounds. Still, 167 lbs is certainly much better than close to 180 a year or so ago. The bad news is that my H A/1c is still 7.7. Much too high and certainly a level that damages my body. They won't test that again until January. It is important that I receive a better result at that time.

THE VALUE OF AN EDUCATION

Memoir From 1960. I'm sitting in a first-class seat on a United DC-7, wearing slacks, my only white shirt, one of my Dad's ties, and a sport coat I got for Christmas when I was in the 8th grade. I am traveling to Wilmington, Delaware to interview for a job at DuPont, the company that promises "Better Things For Better Living....Through Chemistry." I can't believe I'm about to graduate from college with a degree in chemistry and DuPont wants to hire me so bad that they are willing to fly me first class to Delaware for an interview. I'll never forget the flight attendant (they called them stewardesses in those days) who comes up to our seat and asks us what we want to drink. I don't have a clue so I follow the lead of the grey haired man in the next seat and order a scotch and soda. The first taste almost leaves me in need of the "barf bag" in the seat pocket in front of me. Despite the initial shock, I manage to down two drinks and feel like it doesn't matter how long it takes to fly from Denver to Wilmington.



The details of the next day are not important. What is important is at the end of that day when I sit in front of the massive desk of the research director and he offers me a job at a salary that is more than my dad had ever earned. While I am trying to swallow, he tells me that I can expect to double that within five years. Here I am, 22 years old, and that day represents the high point of my career as a research chemist. It was all down hill from there. I did double my salary in five years but I expected that. I found out that what I thought was a huge salary didn't buy nearly what I thought it would and the necessity of going to work on a regular schedule was highly restrictive to my freedom. Even though those were "the good old days," they still didn't meet the expectations of a young man coming out of poverty who had expectations that a college degree was the key to the American dream.



Fast-Forward Fifty Years. I recently heard some statistics that 80% of college seniors expect to move back in with their parents after they graduate. This is up from 67% four years ago. I am not sure I believe that these are exact numbers but my experience tells me that far more young people are entering college these days and graduating into far less opportunity with each passing year. Way too many of my friends and clients still have the responsibility of providing food and shelter for adult offspring. Often, these are not young adults. Some are in their late 40's. You might ask, what is the reason for this? Although I have some ideas, I can't claim to know what the answer is....but I know what it isn't. It isn't depending on the government to solve the problem. Each of us has a unique set of problems that require unique solutions. It is up to us to help our children determine their educational and career path. I have been far more lucky than smart in this area but I know that failure to make the right decisions in this area can make life far more difficult for both parents and kids. The government can't solve all our problems and we need to take responsibility for ourselves. Could part of our recent economic problems lie with those who have come to look towards the government to care for us rather than go out and work to solve our own problems. History has shown us that American ingenuity resulted in products and strategies that have put us ahead of the rest of the world. Many of these solutions didn't come from brilliant ideas but from hard work and grinding out results. The efforts of entrepreneurs like Bill Gates and Steve Jobs have resulted in an improved quality of life and higher productivity for all of us. They had the initiative and drive to accomplish great things and neither had government grants or affirmative action to help them get an education.

Speaking Of Solutions. I promised to keep you informed of my progress towards controlling diabetes. My theory is that dietary control and weight management will provide the solutions I seek. In that regard, my weight has dropped from 173+ to 168 in the course of a week. Periodic blood sugar checks indicate that I am doing about as well without three insulin injections a day as I did when I was taking these shots. At this point I am still taking 50 units of time release injections at night. So far, the biggest problem with blood sugar control has been hypoglycemic (low blood sugar) episodes at night. The journey has only begun. I'll let you know of my progress, if any, next week.

I AM NOT A DIABETIC.

Don't Call Me A Diabetic. I have diabetes but I never did like calling people names just because they have a disease or disorder. When you call me a diabetic, you are adding a label that makes it my identity. In 1995, I was told I was about to develop diabetes. I weighed about the same then as I do now and I ate whatever I pleased. They told me that I either had to change my lifestyle or I would be subject to all the complications that develop with diabetes. These include, blindness, loss of limbs, heart disease, stroke, and overall reduced life span. As a result I went on a drastic diet, reducing the amounts simple sugars, animal fats, and overall caloric intake I consumed.



Great Results....For Awhile. I lost almost 20 lbs, brought my blood sugar to normal levels, and eliminated the blood pressure medication that I had taken for 10 years. I considered this quite an accomplishment but I bragged too soon. My weight gradually increased and I had to resume the blood pressure medication. They put me on oral diabetes medication. Although I would have preferred not to have taken this medication, I guess I considered this a small price to pay to live the way my friends and family lived.



Things Got Worse. Within five years, the oral medication was no longer sufficient to maintain my blood sugar at normal levels. Although I resisted, they warned me that I was facing the danger of some severe complications if I didn't do what was required to bring my blood glucose levels down. To make matters worse, they warned that once I begun to experience these problems it would be too late to reverse them. This reminded me of what happened to my grandfather who spent his last 5 years with no legs. He also suffered a stroke and no longer recognized any family members. They gave me a free supply of time release insulin and some needles and told me to try nightly injections for a month. The results were excellent and, although I had really wanted to avoid the needles, I decided the shots didn't hurt too much and a single injection at bed time was not too high a price to pay to avoid ending up like my grandfather.



Fast Forward Five Years. The nightly injection of time-release insulin is no longer sufficient to keep glucose levels within the desired range. They decided that the best way to remedy the situation was for me to test my blood sugar at each meal and inject myself with a fast-acting insulin before eating. I gave up and decided to try it. Again, it was not painful but it severely cramped my style. I did what they said........sorta. On my last visit, after being on this regimen for 6 months they asked me to wear this device that would give them a continuous reading of my blood glucose levels. Then they could tell me more precisely when to make these injections and in what quantity. It was at that point that I decided to try something on my own.

Here Are Some Steps I Plan To Take. 1. Strict low carbohydrate diet with an emphasis on protein. 2. More diligent exercise levels. 3. Eliminate fast-acting insulin injections. 4. Lose at least 15 lbs. Why am I telling you this? Because I plan to write about my progress once a week and going on record with my plans should provide some extra motivation to stick with it. Another, more important, reason is that I think improved awareness of diabetes risk factors might benefit my readers. Diabetes is approaching record levels in this country. Granted, better detection and monitoring is responsible for part of this; however, obesity and inactivity are other major factors. Type two diabetes levels are endangering our children as they are developing this at far earlier ages than in the past.

Weight Loss Is a Major Issue For Now. My friends tell me I don't need to lose weight. When I went on a major weight loss program 20 years ago, my friends told me I looked like "a refugee from the Bataan death march." That being said, I know losing some weight would be beneficial. As of today, I weigh 173.5 lbs. I will write again next Sunday and report my progress. Another major factor is called hemoglobin A1c, which is a measure of average blood glucose levels over a 3 month period. As of my last visit to the clinic this level was 7.7. Over 8 is considered dangerous and the real goal is 6.5 or less. A new result will be available after October 21 and I will report that then. In the meantime, I will work on my weight and report on the results. This should take less space than this post and I will resume writing about our financial choices in this most difficult of economic environments.

MY NEW RULE FOR REAL ESTATE INVESTING

An Interruption It's a cool Sunday evening. I am on my patio at our Colorado townhouse getting ready to grill a couple of steaks. Virtually out of nowhere a man appears and asks, "Are you Phillip Storms?" When I say yes, he hands me a document which I immediately recognize as a summons. I tell him thank you and he leaves. While this is somewhat of a surprise, it isn't totally unexpected. The homeowners association of a condominium I own has filed suit to collect $2,000 that they say I owe. Since I am a member of this association, in effect, I am suing myself. Without going into detail, there is little doubt in my mind that this suit is totally without merit. Since 2006, when I acquired this unit as as a foreclosure from a friend (or should I say a former friend) to whom I loaned money, I have been paying over $400 a month in HOA dues. This is an astronomical price for a 2-bedroom, 2-bath, 1025 sq foot unit and you might think that this is a luxury unit with many amenities. Not so. The units are run down, the clubhouse/pool is one that you wouldn't want your family to use and landscaping is barely maintained. The only saving grace is the location, a few blocks from light rail and in a relatively popular area of town.

How Did This Situation Occur? The short answer is mis-management by the homeowner association and, again, it is not necessary to go into detail. A major advantage of real estate investing is that you have a fair amount of control over the outcome of your investment. You can decide what improvements you might make to increase the rental income available from the property; you can decide the proper rent levels to maximize occupancy and increase cash flow; and you can decide; what steps you can take to increase the value. If you buy AT&T stock you can only hope and pray that CEO, Randall Stephenson earns his $7.3 million salary and makes the right decisions to maximize cash flow and share value. Not the case with real estate, you are not only an investor, you are CEO of your own company. If you own within a homeowner association, you give up most of this control to a group with many members who have no clue as to how to manage and maintain properties for maximum liveability and sustained property value. Your ability to control the destiny of your property stops when you walk out the front door.

How Could This Situation Have Been Prevented. I broke one of my existing rules when I made the loan on this property. That rule was to make loans only on properties I would buy at a price equal to the amount of the loan. When I made this loan, I really didn't want to own the property. Instead, I depended on the ability of the borrower to make the right decisions to maintain the value of the property and protect my investment. This has never been a good policy for me. The second rule is a new one. Do not make loans or acquire properties with homeowner associations who make most of the decisions affecting the value of your property.

Perhaps This Sounds A Bit Extreme. You may have notice that the title of this post is My Rules For Real Estate Investing. This doesn't mean that they should be your rules. In almost 5 years of publishing this blog, this is probably the first time I have described one of my investments that turned out to be a disaster. I am embarrassed to describe this folly to you but I think the ability to think about what could go wrong with an investment is often more important than the ability to think about what can go right. I recall one quote that I included in a previous post that said, "The ability to manage the unintended consequence of an unsuccessful investment is one of the most important abilities an investor can have." If you are thinking about making a real estate investment that has a homeowners association be sure to thoroughly investigate that association and decide what additional risks the HOA might impose. If you are like me, you will probably decline the investment.

MANAGING YOUR ASSETS IN A MARKET FULL OF RISK

"Forget the return ON my investment. What concerns me is the return OF my investment". Will Rogers (I think).

Return of vs Return on. This is probably one of the most misunderstood terms in investing and one of the biggest sources of argument between me and one of my very astute clients. It is best illustrated by an example. Suppose you make a loan of $100,000 to a friend with interest at 10% per year and the entire amount due in 10 years. If this is compounded annually he will owe you $259,374. If he comes to you at the end of 10 years and says I have managed to scrape up $100,000, its all I have and all I will ever get. I would say you got your money back. My client would say you have a big loss. I am not saying you made a good investment nor is your purchasing power preserved but you got your money back. Your return on investment was zero and your return of was 100%.

Let's recast this loan into one involving annual interest only payments at 10,000 per year. If we assume the friend comes to you at the end and says I have no money to pay your principal but at least you got your money back via the annual payments. Again, your return on investment was zero and your return of investment was 100%. These are relatively simplistic examples but they illustrate an important point. Remember I said your return on investment was zero and this was a poor investment but you put out 100,000 and you got back $100,000.

Let's Compare The Risk Levels. Which would you prefer? To go through 10 years and get your entire principal back or to receive $10,000 a year for 10 years and get no return at the end. From a total return standpoint, they are equal but if you think about it, the $10,000 a year scenario is far superior from a risk standpoint. This brings me to the key point of what I have been writing about for the past 5 years. The sooner you begin to get cash flow from your investment the lower your risk. Sitting on an investment for 10 years not knowing whether you will get what you have anticipated doesn't work. Especially for an investor in the later stages of life. Of course, I am aware that taking taxes into account, the conclusions are reversed but I still maintain that the lower risk of the cash flow scenario is worth a lower after-tax return.

Here is Another Scenario. Suppose in the last scenario, you have received $10,000 per year for 10 years and all you can collect at the end is $40,000. You have received a total of $140,000 and your return on investment calculates to be 5.30% compounded. So despite the fact that you only received 40% of your investment at the end, the interim cash flow more than makes up for this and your return is positive. Suppose this was a 20 year year loan and you received $10,000 per year for 20 years and $40,000 at the end. Your return is 8.80%. These bring me to two more conclusions. 1. When you receive interim cash flows from an investment, you really don't know whether they represent a return ON your investment or a return OF your investment until the investment is terminated. 2. The longer the investment continues and the more interim cash flows you receive, the less important the final payment becomes.

Do You Find This Boring? I wouldn't blame you if you did. That's part of the reason I seldom write about topics like this because, in my book, the biggest sin is boring. It's not boring to me. It's fascinating. The utility of these few points says a lot about planning your investment strategies. It's not just about getting the highest return possible on your investment, its about getting the type of return that meets your needs. If you are entering retirement, in a relatively low tax bracket, with an aversion to risk, it is far better to get the majority of your return in the form of interim cash flow (there are exceptions). If you are a high-tax bracket younger investor, you might want to have the majority of your investments in vehicles that allow you to build wealth with no interim tax consequences.

This Probably Leaves You With Questions. I would be happy to answer these via comments to this post or via e-mail or in person. Feel free to contact me at 303-902-3940. I will be in and out of town but should be back in Texas by mid October. I look forward to your comments.

SHOULD YOU INVEST IN REAL ESTATE?

Some Things You Should Know. There are a lot of things you should know before you invest in real estate. Probably the first of these is that virtually every one should invest in this area and part of the puzzle is to pick the investment vehicle that is right for you. While I have discussed most of these at one time or another I will confine this discussion to direct ownership as opposed to more passive investment vehicles such as real estate investment trusts (REITs) or tenants in common (TICs). There are also several property types from single-family homes to office buildings. Take my word for it, unless you are an experienced, high net worth investor, now is not a good time to venture into commercial properties. While you might buy one of these at a bargain price, it may be difficult to find and retain tenants to provide rent to cover operating expenses and debt service. Unless you have adequate reserves it might be difficult to hold on to the property until a strong market cycle allows you to sell at a favorable price. In the final analysis, the single-family market seems to offer the best combination of return and safety. We will confine the rest of our discussion to single-family home investment.

Is This A Good Time? The financial press is filled with articles that tell you that housing prices still have a considerable distance to fall before the market stabilizes. Is this true? In reality no one, including me, knows. To make things even more difficult, there is a tremendous difference between various regions of the country. In addition, there is a difference between different regions of the state, and even between different regions of a given metropolitan area. If you read national publications, the most common theme is that housing suffers from two major difficulties. 1. Excessive inventory of houses for sale and 2. Negative equity. This places a burden on sellers. There is heavy competition from other sellers and it is impossible for even desperate sellers to offer their property at a bargain price if that price is significantly lower than the amount owed on the property. If you offer a seller $150,000 for a property in which he owes $200,000, chances are he doesn't have $50,000 to pay out of pocket in order to sell the property.

Where Are The Opportunities? Despite all the negative publicity about housing, there are some opportunities for those willing to seek them out. The main opportunity in the Metro-Denver area is strong tenant demand. Investors sometimes forget that it is tenants that drive the investment market. Five years ago, real estate prices were increasing rapidly, and my phone constantly rang with investors looking to diversify out of financial markets into real estate. I informed most of them that high vacancy rates made it too risky to invest in real estate at that time. Now the situation is reversed. In Denver, the vacancy rate for single-family housing is less than 4% and for apartments the vacancy is in the 6% range. Our experience tells us that such low vacancy rates provide pressure on rental rates making future rent increases more likely.

Interest Rates Are Low. Although credit requirements are strong and fewer buyers can qualify for loans, those who can qualify will find rates favorable. Lenders are motivated to make loans to buyers with good credit, stable income, and higher down payments. Although there are always seminars about buying real estate with none of your own money, it is only the more entrepreneurial buyers who should venture into these areas. One thing to remember is that low down-payment financing adds a lot to your risk. You have to make those mortgage payments even if your property is vacant and the value of your property is below your acquisition price.

Housing Starts are Low. In most areas of the country, builders are producing little in the way of new inventory. This makes it more likely that any excess inventory of properties for sale will eventually be absorbed. Further, since it takes awhile for builders to re-enter the market, it is unlikely that this situation can rapidly reverse itself. In the early 1990's when the supply-demand balance began to reverse it took over a year for building to pick up. In the meantime those who owned houses were able to take advantage of very high appreciation rates. Unless you are in an area that is chronically depressed, this situation is likely to recur.

Some Initial Steps. 1. Know your finances. If you have a portfolio of financial assets and ample liquidity to provide for emergencies, this market might be favorable for you. 2. Know your market. Evaluate the market you are considering. If there is a very large inventory of properties for sale and few recent sales, don't buy unless you know the rental market is strong. The quickest way to evaluate the market is to find out how many properties have sold within the past year. Divide that number by 12 to determine the average sales per month. Then divide the total number of properties for sale by that number. This will tell you how long the current inventory will last. If there are 12 sales during the past 12 months, that means during the average month, 1 property sold. If there are 36 properties for sale, the inventory would last for 3 years or if there are only 2 properties for sale that means a 2 month supply. Our experience shows that when the inventory is more than a year supply, the market is depressed and less likely to appreciate. When there are less than 6 months supply, market values should be increasing. 3. Study the rental market. How many properties are for rent? What is the asking price. Don't be afraid to call on some of the properties being offered to find out the asking price.
4. Take a look at what's available. Look at a few properties, estimate the rental income and expense, figure out what your debt service will be and determine your potential cash flow. If it doesn't show at least 4-6%, look at alternative ways to finance or pass on the deal. If there appear to be some opportunities, check with a lender to make sure you are qualified for financing and proceed with caution.

This Is Scratching The Surface. I will go into more detail in a later post. In this very difficult investing environment, you can't afford to ignore opportunities to improve your situation. I think real estate may offer those opportunities.

RESTORING HONOR.

These Are Scary Times. I know I promised to write about finance on my next post but after watching Glen Beck's Restore Honor Rally I am compelled to put my thoughts in writing. I know there are many who disagree with Mr. Beck's behavior and I am certainly not prepared to defend all of it. I am also not prepared to judge his motives in staging this rally; however, I saw little in the way of hate speech and negative politics this morning. I'm pretty sure that anyone who watched it carefully came away with an opinion. I had a flood of memories afterword and I wanted to put some of them out for your consideration.

I Will Always Remember The Morning Of September 11, 2001. The sight of the world trade center buildings coming down is burned into my memory. The anxiety I felt when I learned that the center of our military operations was attacked and there was another plane headed towards Washington is still with me when I think about it. Strangely enough, the most vivid memory comes from later that day when I walked out on the balcony outside my 9th floor office. I looked down towards the freeway and saw a lone figure standing on the overpass waving a huge American flag towards the cars passing underneath. Thinking about it still brings tears to my eyes. Here was one lone citizen who absolutely had to do something to express his feelings about his country. Those terrorists didn't attack George Bush or Bill Clinton, they attacked you and me, and, from that day forward, we have never been the same. Think about it. Think of your last trip to the airport when you had to take off your shoes, throw away your toothpaste, and walk through a metal detector just to get on an airplane. Think about the young men and women who had to leave their families and swelter in the heat to look for those terrorists. Think about the small children who will never know one of their parents because they died in places who's names we can't even pronounce.

Fast Forward 3 years. Three years later, I was driving down that same freeway and there were several young folks standing on that same overpass. They were holding a sign that said "Bush lied, thousands died." I am ashamed to admit I rolled down my window and gave them the finger as I drove by. Today, I think about the contrast between that young man who stood waving the flag as a sign of love for his country and the young man holding the sign accusing his president of being a liar. Whether you believe the President lied or not, there is no mistaking the hate in that sign. While I reserve the right to comment for or against the policies of our politicians, I have resolved not to participate in that kind of hate, tempting as though it may be from time to time.

Did The Terrorists Win? There is no doubt that they inflicted a horrendous blow to our country. Think of the human and financial cost incurred in the aftermath of that event. It is still being felt today. If you have become frustrated in the hassle of our airports, you are feeling the effects. If you lay awake worrying about the size of our huge federal deficit, you are feeling the effects. If you are anguished by the thought of our younger generation torn away from their families and in constant danger, you are feeling the effect. We don't have to let the terrorists win but it is not impossible that they might. It's time to stop all the hate and work together to keep our country strong.

I Have Been Called A Super-Patriot. Most of those who called me that definitely didn't mean it as a compliment. In my view, there is no such thing as a super-patriot. You either love your country and are willing to sacrifice for it or you don't.

I Saw My Nephew At The Rally. I watched it on TV. My nephew has gone from a shy four-year old who used to hide under the bed when we came to visit to a dedicated family physician. Was it a co-incidence that I saw him among the 300,000 or so who attended that rally. I think not. Would he be proud if we labeled him as a super-patriot. I think so.

ART WITH A PURPOSE.

Our Colorado Trip Is Almost Over. One of the main reasons we came up here was to tie up some loose ends on our real estate investments, catch up on some miscellaneous business and spend some time with family. A few things kept us from doing this as well as we would like, one of which was an illness that kept my wife in the hospital for a few days. Other obstacles like a burst hot water heater cost us some time in cleaning up the mess. Still, it has been a very enjoyable trip. As expected, I got to spend some quality time with family and take several spiritual journeys down clear creek, the land of my ancestors. What was unexpected was the enjoyment I got from associating with several individuals in the music business.

Down On The Farm Guitars. This is the name of a new guitar venue opened on the grounds of White Fence Farm. It is run by two of the most genuine people I know, Reed and Alice Bennett. I met Reed Bennett when I responded to an ad for a guitar he had for sale. We developed a kinship right away, I suspect because of our love for guitars for more than just the music they produced. I guess we're both part of a group labeled by musicians as "gear geeks." There is something inspirational about the aesthetics of the instrument. It took me awhile to figure out what it was but the answer is simple. More than just a musical instrument, a guitar is a work of art and those who produce them, called luthiers, are artists just as much as painters or sculptors. Reed and Alice have a wide variety of instruments in their store but less than half of them are for sale. Reed has developed such an attachment to some of them that you could never talk him into selling them. They do have a variety of instruments for sale, some of which are in the collectible category and should represent good investments for the future. Another excellent feature of their store is that they invite local musicians and groups to play under the grape arbor adjacent to their building. The time I have spent at Down on The Farm Guitars has been one of the high points of my trip. You can find out more about this unique store at http://downonthefarmguitars.com

I Have Always Wanted To Build A Guitar. Several years ago I decided to build my own guitar. After some preliminary due diligence, I decided that I was not cut out for this kind of endeavor. Still, I am fascinated by the process in which these instruments are created and always look for opportunities to meet the artists who create these instruments. Yesterday, I drove across town to pay a visit to Herb Taylor. Unlike most luthiers I have met, Herb really does consider himself an artist and he has a degree in art and a background as an art teacher to prove it. Rather than try to sustain himself as a "starving artist" he obtained a masters in computer science and worked as a software engineer until he retired in 1994. For the past 10 years, he has been making one-of-a kind stringed instruments, everything from mandolins and bouzoukis to guitars. I was particularly impressed with an archtop guitar made of redwood. It is an example of elegant simplicity with most of the beauty coming from the clean lines and beautiful wood. I also liked several of the "flat top" guitars he made. All of his guitars are unique creations and derive most of their aesthetic qualities from the unusual wood he collects. One aspect of the creation which is not totally under his control is the sound qualities of the finished product. He freely admits that he is unable to design an instrument that can match the sound of any other instrument. I played several of his guitars and didn't find any with other than excellent sound quality. Just about anyone with a decent bankroll can acquire an excellent Martin or Gibson guitar but if you want a unique instrument that is yours alone, you might want to talk to Herb. Check his web site at http://www.herbtaylor.com.

A Few Words About The Markets. One of the reasons I have not spent a lot of time talking about the financial markets lately is that there is little change from week to week even though there are some really bad days and a few good days. This kind of market is perfect for the strategy I employ. While there is little in the way of appreciation to brag about, option premiums and dividends have provided me with above-average returns. If you want to discuss how to apply some of these techniques to your own portfolio, don't hesitate to give me a call.

TWO PATHS TO WEALTH.

Before I Begin This Post. I should emphasize that this is strictly my opinion, based on my observations over the years. It is not based on scholarly research and there is plenty of room for disagreement. The first task is to describe my definition of financial independence and some of you may find plenty to disagree with already. My definition is that financial independence is the ability to lead a lifestyle that provides for the needs of my family with freedom from "woeful want" (I got that term from my mother who often told me that "Willful waste makes woeful want)." From that definition you can determine that financial independence can be different for two people with differing needs and wants. I can live with that. Given that definition, lets start with the most common path pursued today.

Work and Strive For Abundance. This is the path I decided on as a pre-teenager. Here are some of the things you can do if you choose this path.

Get A Good Education. While many may achieve an abundant lifestyle with little education, most parents advise their children to take this step. Statistics have shown that those among us with more education earn, on average, more income over their lifespan than those with less. These statistical methods may be somewhat flawed, still the prevailing opinion is that education is directly correlated with income.

Choose a High Paying Career Field. Some career fields pay more than others. Engineers earn more than teachers and computer scientists earn more than sociologists. Entrepreneurship pays well for those who are successful; however, starting your own business is usually a second step in a career path.

Make Aggressive Investments Using Leverage. All debt is not bad. If you can earn more on your investments than the cost of borrowed funds, you can magnify your rate of return and build wealth rapidly. Of course there is more risk. If your investment doesn't pan out, you have to pay the money back anyway.

Buy Nice Things, Lots of Them. Nice houses, cars, and other toys will give you the appearance of success and make others want to do business with you. If you don't have the cash, borrow it. There is an old saying that states, "Fake it until you make it." If you can convince yourself that these possessions mean you are competent, you will appear more confident and more people will think you are competent even if you aren't.

Thousands have become successful using this technique. Others have found themselves facing bankruptcy, prison terms, and there are some suicides among this group. It is obvious that this path can be stressful but there is no doubt that many have become very wealthy choosing it. The upside potential of this path is much higher than the other I will describe, particularly when measured in terms of total wealth accumulation. It also has a higher downside when measured in terms of overall life satisfaction.

Practice Frugality And Simplicity. There is an old saying that if you will live for 20 years like no one else will, you will be able to live the rest of your life like no one else can. I know several individuals who have achieved financial independence this way. There is no shortage of happiness among this group. Much of the benefit of financial independence arises from freedom from worry and not necessarily the expensive possessions you can buy. I have a client who achieved a windfall from a successful investment and was able to buy an expensive car and a large, luxurious house. Several months later he learned that the expensive house and car didn't bring him near as much happiness as the fact that he no longer had to worry about about how he would pay his living expenses each month.

Get the Best Job You Can Find and Keep it. You can build equity in a job by staying in one place, working hard, and being loyal to your employer. There are exceptions to this in the event that you find your loyalty isn't reciprocated. The best thing to do in this case is to move somewhere in which it is. While this isn't as easy to do as it used to be, it still pays off for a lot of employees.

Start Saving Early and Leave it Saved. Someone once asked Albert Einstein what was the most amazing thing he had learned about the universe. His reply was "compound interest." As an example, let's assume a 25 year old starts saving $200 a month at 5% interest. At 65 he will have accumulated $305,204. If he decides to draw out his $2400 at the end of year one, his nest egg at 65 will be $288,013. That $2400 withdrawal shrinks his nest egg by a little over $17,000. The $2,400 spent now costs 7.2 times that at age 65.

Remember the Buffet Rules. One of the most successful investors of all time, Warren Buffet says that there are two rules to successful investment. Rule 1. Don't lose money. Rule 2. Don't forget rule number 1. If you choose this wealth building path you will have to keep your risk low in order to avoid losses.

Shop Carefully and Buy Only Bargains. Look for sales. Don't be embarrassed to buy used, particularly cars. The new car buyer bears the lion's share of depreciation for the privilege of being the first owner. Buying used vehicles can add a considerable amount to your net worth over your life span.

Take Care of What You Have. If you walk into a lot where my father's car is parked, it will catch your eye as the nicest in the lot. It is a sixteen year old pearl white Buick with a blue cloth top that looks like it just rolled off the showroom floor. You can still have pride of ownership without laying out huge sums of money for car payments every month. The same holds true for your house. A little extra effort keeps your home value at the top for your neighborhood.

This Includes Your Health. My father has spent virtually no time in the hospital over his 91 years. He has eaten healthfully and exercised faithfully for six days each week. There is no doubt that this requires considerable time and effort. The choice is yours. Either spend your time staying healthy or waste your time being sick.

Don't Borrow. It is difficult to invest in totally safe investments and earn a higher return on investments than your borrowing costs. Even deductible mortgage interest is more expensive than most investments of equivalent safety. If you follow this strategy it is a good idea to strive for a free and clear house. This means buying less house than you can qualify for and developing a plan for early repayment.

I Know What Most of You Are Saying. You don't read this column to be told how to scrimp and save your way to success. It's not my style either but these economic times may call for different strategies. Having to cut back on your lifestyle can be painful but its not the end of the world. I have known several folks who have done well this way and, as a group, they are more satisfied with their life than the first group. Of course, the two strategies I describe are the extremes. There options between the two and you can choose the ones you want to follow. I'll go back to my normal style on my next post.

CARE AND FEEDING OF THE BRAIN.

The Power of Positive Thinking. What do Napoleon Hill, Og Mandino, Mike Dooley, and Tony Robbins have in common? They all believe we can shape our future by controlling our thoughts. This is but a small sample of individuals who have written or spoken on this topic over the past 50 years. Many entrepreneurs, sales people, and religious leaders subscribe to these theories; however, others who might like to believe remain skeptics. You can count me among the latter group.

Enter The Neuroscientists. In recent years, a large body of research has been conducted that shows that the positive thinking gurus may be on to something. Most of this research comes out of academia and was conducted by doctoral level researchers, many of whom were MD’s. A notable example comes from the University of Pennsylvania where Dr. Martin Seligman heads the Positive Psychology Center and Dr. Andrew Newburg directs the Center for Spirituality and the Mind. Both have published books and research papers as a result of their research into this area. Their approach is strictly scientific. Although I have read the work of several others, these two attracted my attention the most.

What is Brain Plasticity? For many years, scientists have known that the brain will physically change in response to a number of factors. This ability is known as plasticity. It is a remarkable ability and is much more prevalent in man than in the so-called lower animals. Dr. Newburg has used modern research tools such as PET scans and MRI to track these changes. His research shows that spiritual practices such as prayer and meditation cause physiological changes in the brain. These changes can be permanent and generally beneficial. One of the interesting aspects of the research into prayer is that changes occur regardless of the religious characteristics of the person praying. Buddhists, Christians, Jews, and Muslims all achieve similar results. While I don’t claim to understand the details of the anatomical changes that occur (even the researchers lack complete understanding), the result of these changes is a reduction of activity in areas where primitive emotions such as fear and anger reside. These emotions interrupt your ability to be rational. In addition, you lose the awareness that you are acting in an irrational way. Spiritual practices result in an increase in areas crucial for empathy and compassion. Extensive research shows that individuals who regularly engage in spiritual practices are generally less prone to depression, have stronger immune systems, and overall have longer and more fulfilling lives.

Where Am I Going With This? Dr. Newburg has given us a list of ways to exercise your brain to increase it’s effectiveness. I will list the three most important for your consideration. In order of ascending importance, they are as follows:

3. Aerobic Exercise. Physical exercise strengthens all areas of the body and the brain is no exception. Studies have shown that it enhances relaxation and spiritual well being. It lowers the risk of circulatory diseases as well as mental disorders such as depression. Dr. Newburg cites one study in which an exercise program has the equivalent benefits of twelve sessions of psychotherapy. You may be skeptical of some of the research stated by Dr. Newburg (as am I) but the overall body of research provides overwhelming evidence that exercise is very beneficial to our physical and mental well being.

2. Dialogue With Others. Most neuroscientists agree with Dr. Newburg on the importance of dialogue with others. Dr. Newburg states that “Any form of social isolation will damage important mechanisms in the brain and lead to aggression, depression, and various neuropsychiatric disorders". I have noticed this among some of my aging friends who gradually withdraw as they age. Undoubtedly, the brain has evolved as a social organ and needs the nourishment of social contact for continued health.

3. Faith. This point surprised me the most of all the others but it is what correlates the beliefs of several neuroscientists with the positive thinking advocates. We all have choices to make which will affect our physical, emotional, and spiritual health. In reality, these choices are nothing more than educated guesses. There will always remain some degree of uncertainty but the degree with which we can have faith in our beliefs is of primary importance to our mental health. Research has shown that, even irrational belief in is better than no belief at all. Remember the placebo effect in which a sugar pill can cure up to 30% of most physical and emotional disorders.

Whether You Think You Can Or You Think You Can’t, You’re Correct. I don’t know who came up with this saying, but much research shows that it is true. I have taken a course on physiology of the brain and read several books by neuroscientists on the how the brain works. What I have learned shows me how very little I know. While these books have been written for non-professionals, I sometimes feel that they are still beyond my ability to comprehend. I will continue to read new publications in this area and re-read what I have already read. The ability to do this is one of the benefits that come with the freedom of getting older. I am grateful for these benefits.

WATCHING THE VIX.

I Hate To Be Boring. One of the biggest sins a writer can commit is to be boring. I would almost rather be dead wrong than boring. As I contemplate this post, I can picture the eyes of many readers glazing over because they don't care about the VIX. Unfortunately, I think it is of sufficient importance that I can't afford not to give you the opportunity to know what it is and how it can affect your investments.

Definition: The VIX comes from a calculation by the Chicago Board of Options Exchange (CBOE). It is a measure of the implied volatility in the market place. A high number means the market is more volatile than normal while a low number means less. High numbers usually occur in falling markets while low numbers usually occur when the market is rising. As a rule, most investors consider the VIX as a measure of fear in the investment community. At high fear levels, option demand picks up as more folks try to hedge their bets. You can buy put options which give you a right to sell at a given price. If the price of the stock drops, your loss is limited to the strike price of the put minus the premium you paid when you purchased it. You can also sell a call against a stock you own in order to earn a premium to offset part of the loss should the price drop.

Implications. Some investors use the VIX as a means of predicting highs and lows in the market. An old rule says when the VIX exceeds 40, the market is nearing an oversold situation and a rebound can be expected. Conversely, when the VIX is below 20, the market is approaching an overbought situation and a correction is anticipated. Although I use this rule, I consider it just another data point and would encourage investors not to place too much credence in these numbers. For example, in the debacle of 2008, the VIX went right past 40 into the 80's. This level is unprecedented in all the years in which this number has been published. If you had been depending on a bottom in the 40's, you would have found that you had a considerable period of falling prices before a turnaround occurred.

Another implication is that option prices will be higher when the VIX is high and lower when the VIX is low. Although each security has its own volatility levels, a general rule is that you should be buying options when the volatility is low and selling when volatility is high. If you own a stock and are considering writing calls against it, you are better off doing this at periods of high volatility. At that point, call buyers are willing to pay higher premiums and you will make money if volatility drops and you will have more downside protection if the stock price drops. At times when the VIX is lower, you might consider buying options instead of the stock.

Understanding The VIX Can Give You An Edge. While this information can give you a bit of an edge over investors who ignore it, it will probably not make you wealthy. Other fundamental and technical data is necessary for sound investment decisions.

This is My 150th Post or Close To It. I have enjoyed writing this blog and interacting with my readers. While I still have topics in mind for future posts, I would invite my readers to suggest others. You can send me an e-mail or comment in the comment sections. I will post most comments as long as they are in good taste and not too hostile.

REAL WEALTH.

I Am Interested in Creating Wealth.
But lately I have been thinking more and more about real wealth. The picture on the right illustrates the kind of wealth we can all enjoy whether we have money or not. Our world is filled with so many wonders, everything from trees and flowers to little miracles like the one in the picture. Like so many others, I have spent so much time trying to create financial wealth that I have not taken enough time to enjoy the non-material kind. I plan to remedy that situation in the time I have left.

Re-Distributing The Wealth. To quote the president, " When you spread wealth around, everyone benefits." Many of us disliked that statement but it is true. Even the most conservative among us wouldn't want to live in a country where most of the residents live in poverty while a small percentage live in luxury. The question is, how far should we pursue the objective of spreading the wealth? Viewed from another angle, it appears obvious that if we tax high earners and give their earnings to the low earners, we may reach the point where it becomes less beneficial to work hard and produce more, and more beneficial to enjoy the fruits of the labor of others. Where do we stand in this process? You decide.

Our Tax Code Has Always Spread The Wealth. Since the beginning of the income tax, high earners have paid more than low earners. Not just on an absolute basis but on a percentage basis as well. We labeled the Bush tax cuts as "tax cuts for the rich" but is this really true? I was blown away by recent data that showed 47% of Americans will pay no income tax in 2009. It was also astounding that a family of 4 can earn $50,000 and pay no taxes. In fact, they will receive tax credits that exceed the tax they pay. Many of my readers will not believe this, so here are the cold hard facts. 1. The standard deduction is equal to to $11,400. 2. Personal deductions are 4x$3650 or $14,600. 3. This leaves $26,000 in taxable income and a preliminary tax obligation of $2,640. 4. Tax credits are $1,000 per child or $2,000. 5. The stimulus package allows $800 in credits, leaving the "taxpayer" receiving a check for $160. Granted, a family of four earning $50,000 per year isn't getting rich, they aren't reduced to eating dog food either. They receive the benefits of an educational system, public safety, infra structure, and national defense. All paid for by someone else. Looking at the top 10% of wage earners, they earn an average of $$366,400 per year and pay 73% of all income tax. If this isn't spreading the wealth, I don't know what is. I believe that one factor that allowed our country to surpass others in economic growth is the fact that it is possible for us to work hard and keep enough what we earn to enjoy a high living standard. If we keep an excessive burden on the high earner group, they may decide that they aren't being adequately compensated for their efforts and join the pay no tax group. When we reach that tipping point we can say goodbye to job formation and economic growth. We can also expect a lower living standard for everyone.

YOUR MORTGAGE AND YOUR RETIREMENT

Magnolia Blossom Symbol of The South.

I walked out of my front door on a sunny morning and came face to face with a beautiful, fragrant, magnolia blossom. I love magnolia trees and have 15 on my main lot. This makes me different than most of my neighbors who often think of these trees as a nuisance because they shed leaves all year and its harder to keep your lawn neat. I would rather have the glossy green leaves and large white flowers than a neat lawn anytime.

Your Mortgage and Your Retirement. Over the years, my main specialty has been advising clients on how to select the right mortgage product for their particular financial situation. One of the main points to consider about your mortgage and your retirement is whether or not you want to pay off your house before you retire. In my initial financial training, I was taught that funds necessary for retirement should include the amount necessary to pay off your mortgage. Initially, I bought into this issue; however, over the years I have been open to more possibilities. The bottom line is that the answer will depend on a number of factors. Some of these are as follows:

1, Where will you Get The Funds For Repayment? If you have to cash in funds from a 100% taxable retirement plan, be sure you consider the tax implications first. If you are in the 25% tax bracket, you will have to withdraw more than $265,000 to pay off the mortgage. Not a good idea for most folks. Tax implications of retirement plans aren't the only ones you have to worry about. If you are holding stocks in which you have a large capital gain, be sure to determine how much you will net on an after-tax basis before making the move. If you have enough cash sitting around in bank deposits to pay off the mortgage, you will certainly get a higher return from paying off the mortgage than you will get on those deposits. Another possibility for older borrowers is a reverse mortgage. While you don't exactly get rid of the mortgage, the reverse mortgage will allow you to get rid of the payments. I don't know about you, but its the payments that bother me, not the mortgage.

2. What Are Your Liquidity Needs? If most of your retirement income is from relatively stable sources like annuity payments, company or military pensions, and social security ( maybe not as stable in the future as you think), you have less need for liquidity than those who must rely on investment income. Some retirees have excellent income but few assets. I have certainly seen more borrowers in trouble from lack of liquidity than I have from a mortgage that is too high. One way to pay off a small first mortgage is to utilize a home equity line of credit as a liquidity source. You pay off the loan with the funds you already have and replace your liquidity reserve with the home equity loan. If you use this strategy, make sure you only draw on the line for genuine emergencies. All too often, I have seen borrowers who use this strategy only to wind up with a large home equity line because they used the funds to purchase consumer items or pay for home improvements.

3. What Is Your Risk Tolerance. A well known financial talk show host says that, "the paid-for house has replaced the BMW in the driveway as a status symbol." While this is true for many borrowers with low risk tolerance, it is possible that you may be able to get a higher return on your investments than the mortgage rate. If you insist on a high degree of safety, you will not be able to do this; however, if you are willing to take moderate risks, history shows that a diversified investment portfolio will outperform the rate you are paying on your mortgage. There are many who would argue with this statement and give examples of recent performance of the markets to support their argument. I agree, but from a strictly statistical point of view my statement is true.

4. The Main Issue is Cash Flow. I'm sure you expected to hear this from a writer of a blog entitled Cash Flow Garden, but cash flow is still a big issue in this decision. You may reach retirement age with a small loan, a great interest rate and a short time remaining. The problem is that the short term requires high principal payments for a substantial period after you retire. For example, $90,000 at 4% with 10 years remaining requires a payment of $911 per month. In order to make these payments with income from a 5% after-tax investment, you would have to have $218,640 in investment capital. Keeping this mortgage represents a serious drain on your cash flow in the earliest years of your retirement, a time when you have the energy to make good use of your new freedom. If you keep the loan and repay it at the current rate, you will be 75 before it is paid off. Trust me, your ability to enjoy leisure time diminishes as you pass 70. You need the cash flow now and, if you can't find the money to pay it off, you should consider a new loan for a longer repayment period even if the interest rate is higher. For example, if 30-year rates are at 4.75%, a new 90,000 first mortgage would cost you 469 per month giving you an extra $442 a month to increase your retirement enjoyment. Increased tax benefits will increase this cash flow.

There Are Many Other Issues. None of these arguments may make sense to you and I would caution that there are no "one size fits all" recommendations. Hopefully, my comments will encourage you to take some time to study your situation thoroughly before utilizing some rule-of-thumb to make a decision that deserves a thorough analysis. To quote a long-time colleague of mine, Ray Benton, "Rules of thumb apply only to thumbs.

SUNSET AT THE LAKE.

The Picture Speaks for Itself. This is one of the most beautiful sunsets I have seen. It appears to be the result of a combination of water vapor, clouds, and light, having occurred right after a moderate rain storm. Of course, you might want to say that God created it and sent it to us.

Hedging Your Bet With Options. I know I have talked a lot about options; however,I doubt that many of my readers have tried to apply them to their investment philosophy. Some don't want to bother, while others stay with the notion that options are too risky. The best way to demonstrate the conservative nature of an option strategy known as covered calls is to give you an example of my own experience. I little less than two years ago I bought 1000 Shares of AT&T. A year later, I bought another thousand shares. Unfortunately, my timing wasn't the greatest and the shares are now worth only 25.05 for a paper loss (since I haven't sold) of $6,100. To lose $6,100 from my investment portfolio would be a disaster for me; however, there is more to the story. Over this ownership period, I sold numerous calls (which give the purchaser the right to buy my stock at a pre-specified price). For this, I received call premiums of just over $7900. Subtracting that from my loss gives a profit of $1,800. Looked at another way, I started with 2000 shares and I still have 2000 shares but I received $7,900 cash flow in the interim. I also received $3,700 in dividends for a total cash flow of $11,600 that I could re-invest or pay my utility bills if I choose. This illustration demonstrates 2 things: 1. The conservative nature of some option strategies and 2. The importance buying investments that produce cash flow rather than depending on buying at a low price and selling higher.

Who Is A Racist. In a way, we all are are racist to a certain degree but many of us have made considerable progress in overcoming bigotry and judging people as individuals rather than as members of a racial or religious group. Still, we receive virtually no credit for the progress we have made since I was a 10-year old at Fruitdale School. That's why I feel insulted when backers of the current president accuse me of being a racist when I disagree with his policies. Likewise, I resent those who would call me a racist because I want to control who is allowed to come into our country. Jessie Jackson views LeBron James as a runaway slave. I view him as a young man of many talents who used his freedom to move to a position more suited to accomplishing his goals. Which one of us is a racist?

I Will No Longer Avoid Controversy. There is considerable controversy in our society. Both right and left leaning voters have strong negative opinions about the other. Both are entitled to their opinions and I plan to use this forum to state mine. Readers can feel free to comment. I reserve the right to eliminate those who exhibit excessive hostility in response.