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Everyone's Money Book

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EVERYONE』S 


MONEY BOOK 


THIRD EDITION 


JORDAN E. GOODMAN 




This publication is designed to provide accurate and authoritative information in regard 
to the subject matter covered. It is sold with the understanding that the publisher is not 
engaged in rendering legal, accounting, or other professional service. If legal advice or 
other expert assistance is required, the services of a competent professional person 
should be sought. 

Vice President and Publisher: Cynthia A. Zigmund 
Senior Managing Editor: Jack Kiburz 
Interior Design: The Publishing Services Group 
Cover Design: Design Alliance, Inc. 
Cover Photo: . Doug Finley 2000 

.1995, 1998, 2001 by Amherst Enterprises, Ltd. 

Published by Dearborn Trade, a Kaplan Professional Company 

All rights reserved. The text of this publication, or any part thereof, may not be reproduced 
in any manner whatsoever without written permission from the publisher. 

Printed in the United States of America 

01 02 03 10987654321 

Library of Congress Cataloging-in-Publication Data 

Goodman, Jordan Elliot. 
Everyone』s money book / Jordan E. Goodman. — 3rd ed. 

p. cm. 
Includes bibliographical references and index. 
ISBN 0-7931-4224-5 
1. Finance, Personal. 2. Investments. I. Title. 
[HG179.G675 2001] 
332.024—dc21 2001017088 
Dearborn Trade books are available at special quantity discounts to use as premiums and 
sales promotions, or for use in corporate training programs. For more information, please 
call the Special Sales Manager at 800-621-9621, ext. 4514, or write to Dearborn Trade, 
155 North Wacker Drive, Chicago, IL 60606-1719. 


Dedication 


To my wife, Suzanne, whose unwavering support throughout months of unrelenting 
work made this book possible, and my son, Jason, who also helped his 
daddy complete 「The Money Book」 even though it was hard for him to understand 
why Daddy was unavailable to play with him for so long. 

Acknowledgments 


Everyone』s Money Book would not have been possible without the generous 
contributions and extremely hard work of many talented people. 

Foremost among these contributors are the staff of Dearborn Trade, who exhibited 
incredible team spirit and professionalism in making this book a reality. 
Vice President and Publisher Cynthia Zigmund recognized the need to revise and 
update what has become a classic work in the field of personal finance, adding not 
only the latest resources but also the many sections on how to maximize the use of 
your computer to improve your personal financial management. 

Senior Managing Editor Jack Kiburz skillfully guided this edition through the 
process from original manuscript to final published work. 

Many other people at Dearborn were enormously important in making the concept 
of Everyone』s Money Book a reality. Robert Kyle, former chairman of the board, 
and Anita Constant, former senior vice president, provided unwavering support for 
all phases of the first edition. Former president Dennis Blitz was equally supportive 
of the revised and updated version. Paul Mallon, sales director, enthusiastically gave 
the book his full backing. Todd Sanders of the Publishing Services Group produced 
many well-designed renderings, which will help you understand complex concepts 
more clearly. Judy Quinnert in manufacturing coordinated the timely printing and 
binding of the book. Art Director Lucy Jenkins contributed her invaluable assistance 
with the color and design of the dust jacket. The staff of the dotted i worked without 
complaint to typeset this book under extremely tight deadlines and displayed enormous 
flexibility in meeting our schedules. I also appreciate the efforts of Senior Editorial 
Assistant Sandra Thomas and indexer Sharon Johnson. 

This third edition would not have been possible without the enormous dedication, 
intelligence, and hard work of Austin Lynas, who worked for months updating 
all of the resources of the book. In particular, he researched thousands of Web 
sites to help identify the sites that would be most useful and reliable for you to use. 


ACKNOWLEDGMENTS 

I thank Money magazine Managing Editor Frank Lalli, Assistant Managing 
Editor Frank B. Merrick, and Associate Publisher Betsy Martin for their support 
and encouragement of this project, including their willingness to allow me to take 
a leave of absence to work on the book. 

I also offer my heartfelt gratitude to the many people who reviewed every word 
of Everyone』s Money Book for accuracy and style. Elliot R. Goodman, professor 
emeritus of political science at Brown University, and Norma B. Goodman, an astute 
investor, meticulously reviewed the entire book and suggested hundreds of 
helpful improvements. As my parents, their contribution extended far beyond the 
call of parental duty. 

Each of the individual chapters was also reviewed by a highly esteemed expert 
in the relevant field, often an author of a Dearborn book on the subject: 

. 
Loretta Nolan, a certified financial planner and president of Nolan Associates 
in Greenwich, Connecticut, who skillfully offered suggestions on 
Chapter 1, 「Giving Yourself a Financial Checkup.」 
. 
Mark Skousen, editor of the investment newsletter, Forecasts & Strategies, 
author of Scrooge Investing, and coauthor of High Finance on a Low Budget, 
thoroughly reviewed Chapter 2 on cash instruments. 
. 
Gene Walden, author of The 100 Best Stocks to Own in America, scrutinized 
Chapter 3 on stocks. 
. 
Stephen Littauer, author of How to Buy Mutual Funds the Smart Way, 
checked Chapter 4 on mutual funds for accuracy. 
. 
Gerald Krefetz, author of the Making the Most of Your Money Series, offered 
several helpful comments on Chapter 5 about bonds. 
. 
William F. Eng, the author and international lecturer of technical analysis 
and market psychology books, including Options: Trading Strategies That 
Work, Trading Rules, and many other books, reviewed Chapter 6 on futures 
and options. 
. 
Bart Sotnick and Steven R. Malin, staff directors of press and community relations 
for the New York Federal Reserve Bank, who graciously shared their 
expertise on Treasury securities and other cash instruments. 
. 
David E. Carlson, manager of the Department of Financial and Sales Practice 
Compliance at the Chicago Board Options Exchange, who reviewed Chapter 
6 on Futures and Options. 
. 
John H. Lutley, president of the Gold Institute in Washington, D.C., checked 
the accuracy of the gold section in Chapter 7, and Steve Bobbitt, media relations 
director of the American Numismatic Association, checked the accuracy 
of the section on numismatic coins. Aran Murphy of the Platinum Guild 
International checked the section on Platinum and provided the graph show

ACKNOWLEDGMENTS 

ing the movement of platinum and gold prices over the long term. David J. 
Maloney, a professional appraiser and author of Maloney』s Antiques & Collectibles 
Resource Directory, provided invaluable guidance on the collectibles 
section in Chapter 7. 

. 
Peter G. Miller, author of The Common-Sense Mortgage and several other 
titles and creator and host of the 「Real Estate Forum」 with America Online, 
and Betty Rubin, a long-time real estate agent in Oceanside, California, 
both of whom ably reviewed Chapter 8 on real estate. 
. 
John Ventura, an attorney at his Texas law firm of Ventura & Thrasher and 
author of The Credit Repair Kit and The Bankruptcy Kit, offered several 
valuable suggestions on Chapter 9 about credit. 
. 
W. Allan Wilbur, executive director of public affairs at the National Automobile 
Dealers Association in McLean, Virginia, was helpful in reviewing 
Chapter 10 on buying a car. 
. 
Ted Burton of the Dearborn Financial Institute provided expertise on the 
property and casualty section of Chapter 11 on insurance. Jeanne Salvatore, 
vice president of consumer affairs for the Insurance Information Institute, 
also reviewed the property-casualty section of the chapter. Anne 
Shropshire, CLU, Insurance Division, Dearborn Financial Publishing in 
Chicago, commented on the disability, health, and life insurance sections 
of Chapter 11. Jack Dolan and Herbert Perone of the media relations 
department of the American Council of Life Insurers also provided valuable 
suggestions on the disability, health, and life insurance sections of 
Chapter 11. 
. 
Anna Leider, president of Octameron Associates in Alexandria, Virginia, 
and coauthor of Don』t Miss Out: The Ambitious Student』s Guide to Financial 
Aid and several other books about funding college, was very helpful in 
her review of Chapter 12 on financing college education. 
. 
James A. Marino, P.C., a prominent tax attorney in Chicago, was most 
helpful in reviewing Chapter 13 on tax planning. 
. 
Chester H. Greenspan, a prominent estate planning lawyer and certified 
financial planner in Queens, New York, reviewed Chapter 15 on estate 
planning. 
. 
The staff of the employee benefits consulting firm of Kwasha Lipton, in 
Fort Lee, New Jersey, assembled by Communications Director Ted Barna, 
ensured the accuracy of Chapter 16 on employee benefits. 
. 
Several specialists in the seven fields of personal finance were consulted on 
Chapter 17 on finding financial advisors. One of the most helpful was Edith 
Lank, syndicated columnist and author of many professional real estate 
books, who provided valuable insights on the real estate section. 

ACKNOWLEDGMENTS 

. 
Several experts in their respective fields, whose guidance proved beneficial, 
reviewed Chapter 14 on retirement and Chapter 18 on strategies for 
every age and situation. 
In addition, I would like to thank the many organizations and publishers who 
gave me the permission to reprint tables, graphs, and charts that are used throughout 
the book. These organizations are identified with a credit line under all the material 
they provided. 

Photographer Doug Finley of Denville, New Jersey, deserves credit for taking 
the wonderful photographs of Jordan Goodman that appear on the cover and flap 
jacket. 

I am also indebted to Daniel Christmas of Design Alliance, Inc., who worked 
long and hard to create a wonderful cover design. 

Many other people, some of whom wish to remain anonymous, also generously 
gave their time and expertise on a wide range of topics to support my efforts 
to create the most accurate Everyone』s Money Book possible. I thank them all. 

Although I have attempted to make the 「Resources」 sections as complete and 
accurate as possible, please forgive any errors that may have crept in or addresses 
and telephone numbers that may have changed since this book went to press. 

In particular, the fast-changing world of the Internet means that every day there 
are new Web sites being created and old ones that disappear or become inactive. 
The financial world is one of constant dynamic change, and this book should provide 
you with the resources you need to maximize your financial potential. 

Jordan E. Goodman 
March 1, 2001 


Contents 


List of Figures xv 
Preface xix 


PART ONE: Maximizing Your Investment Options 1 

Chapter 1 Giving Yourself a Financial Checkup 3 

Determining Your Net Worth 3 
Creating Your Recordkeeping System 12 
Defining Your Financial Goals 13 
Analyzing Your Cash Flow 26 
Creating a Budget That Works 35 
Assembling a Long-Term Financial Plan 46 
Assessing Your Tolerance for Risk 50 
Using Your Computer to Keep Your Finances in Shape 58 
Shopping Online 62 
Resources 72 

Chapter 2 Maximizing Returns on Cash Instruments 78 

The Importance of Cash Instruments 78 
The Benefits of Bank Insurance 79 
Earning Interest on Cash 80 
Types of Cash Instruments 82 
Using Your Computer for Home Banking 94 
Resources 101 


CONTENTS 

Chapter 3 Picking Winning Stocks 107 

Investing in Stocks 107 
The Basics of Being a Shareholder 109 
Buying Stocks on Margin 112 
Selling Short 113 
How to Pick Winning Stocks 114 
Understanding Key Financial Ratios 118 
Categories of Stock 121 
New Issues 133 
Spiders and Diamonds 138 
Socially Conscious Investing 138 
Stock Indexes and Averages 140 
Dividend Reinvestment Plans (DRIPs) 141 
Shareholder Freebies 151 
Using Technical Analysis to Choose Stocks 152 
Choosing Stocks with an Investment Club 153 
Foreign Stocks 154 
Making Sense of Stock Tables 156 
Using Your Computer to Invest in Stocks 162 
Resources 163 

Chapter 4 Selecting Mutual Funds 193 

Load versus No-Load Funds 193 

The Advantages of Mutual Funds 195 

More on Fund Fees 197 

Buying and Monitoring Shares in a Stock Mutual 
Fund 200 

Types of Stock Funds: Choosing the Best for You 213 

Closed-End Mutual Funds 218 

Using Your Computer to Pick Mutual Funds 221 

Resources 222 

Chapter 5 All about Bonds 269 

Investing in Bonds 269 
The Basics of Holding Bonds 270 
Types of Bonds: Choosing the Best for You 285 
Bond Mutual Funds 311 
Types of Bond Funds: Choosing the Best for You 312 
Closed-End Bond Funds 315 
Unit Investment Trusts 317 
Resources 318 


CONTENTS 

Chapter 6 Speculating with Futures and Options 328 

The Basics of Futures Trading 328 

Futures Pools and Discretionary Accounts 333 

The Basics of Options Trading 334 

Using Your Computer to Trade Futures and 
Options 339 

Resources 340 

Chapter 7 Investing in Gold and Collectibles 350 

Gold and Other Precious Metals 350 
Coins and Bars 352 
Certificates 356 
Precious-Metals Stocks 356 
Precious-Metals Mutual Funds 357 
Precious-Metals Futures and Options 358 
Antiques and Collectibles 360 
Resources 368 

Chapter 8 Inside Real Estate 383 

Buying Versus Renting 384 
If You Decide to Rent 386 
If You Decide to Buy 387 
Finding the Right Home 392 
Choosing the Best Mortgage 399 
Protecting the Value of Your Home 408 
Selling Your Home 410 
Investment Real Estate 411 
Using Your Computer to Buy and Sell Real Estate 419 
Resources 421 

PART TWO: Financing Your Present and Future Needs 441 

Chapter 9 You and Your Credit—Managing It Wisely 443 

Open-End versus Closed-End Credit 444 
Secured versus Unsecured Credit 447 
Truth-in-Lending Rules 448 
Types of Loans 448 
Qualifying for Credit 455 
Problems with Billing 471 


xii 
CONTENTS 

Managing Your Credit Wisely 472 
Using Your Computer to Improve Your Credit 
Management 480 
Resources 481 

Chapter 10 
Getting the Most for Your Money 
When Buying a Car 489 

Determining What Kind of Car You Need 489 
The Shopping Process 493 
Closing the Deal 495 
Buying a Used Car 498 
Financing versus Leasing 499 
Using Your Computer to Buy Your Car 505 
If You Have Problems with Your Car 510 
Resources 513 

Chapter 11 
All about Insurance 520 

The Basics of Insurance 521 
Assessing Your Insurance Needs 527 
Auto Insurance 528 
Disability Insurance 537 
Health Insurance 541 
Homeowners Insurance 550 
Life Insurance 560 
Types of Life Insurance 563 
Choosing a Life Insurance Company 575 
Using Your Computer to Buy Insurance 576 
Resources 577 

Chapter 12 
How to Finance a College Education 593 

Estimating College Costs 594 
Investing to Pay College Bills 595 
Winning the Financial Aid Game 603 
Applying for Financial Aid 611 
Borrowing Against Your Assets 614 
Using Your Computer to Finance College 
Education 616 
Resources 617 


CONTENTS 
xiii 

Chapter 13 
The Basics of Tax Planning 638 

The Basics of Filing a Tax Return 638 
Strategies to Cut Your Taxes 657 
Dealing with the IRS 662 
Key Provisions of the Taxpayer Relief Act of 1997 664 
Using Your Computer to Prepare Your Taxes 672 
Resources 673 

Chapter 14 
Retirement—How to Get There from Here 685 

Projecting Expenses and Income in Retirement 686 
Social Security 689 
Pensions 697 
Pension Plans for the Self-Employed 703 
Individual Retirement Accounts (IRAs) 706 
Other Savings and Investments 712 
Evaluating an Early Retirement Offer 714 
Choosing a Retirement Lifestyle 716 
Taking Care of the Next Generation 723 
Resources 723 

Chapter 15 
Estate Planning—Keeping Your Assets in the 
Family 745 

What Estate Planning Entails 746 
The Basics of Writing and Executing a Will 747 
The Living Will and Health Care Power of 
Attorney 750 
The Probate Process 750 
How to Avoid Probate 751 
Planning Your Funeral and Burial 759 
Resources 762 

PART THREE: Controlling Your Financial Destiny 
769 

Chapter 16 
Making the Most of Your Employee Benefits 771 

Pension and Retirement Savings Programs 772 
Traditional Defined Benefit Pension Plans 773 
Defined Contribution Pension Plans 779 


xiv 
CONTENTS 

Retirement Plans for Employees of Small 
Companies and the Self-Employed 793 
Individual Retirement Accounts (IRAs) 795 
Health Care Benefits 796 
Flexible Spending Accounts (FSAs) 802 
Dependent Care Benefits 805 
Employee Assistance Programs (EAPs) 806 
Education Benefits 807 
Legal Services Benefits 807 
Company-Sponsored Insurance Programs 808 
Resources 811 

Chapter 17 
Finding Financial Advisors Who Are Right 
for You 815 

Tax Preparers 819 
Bankers 825 
Financial Planners 827 
Insurance Agents 835 
Lawyers 839 
Money Managers 846 
Real Estate Brokers 853 
Stockbrokers 858 
Resources 865 

Chapter 18 
Smart Money Strategies for Every Age and 
Situation 894 

Your 20s and 30s—Establishing Your Financial 
Foundation 895 
Your 40s and 50s—The Peak Earning Years of 
Middle Age 900 
Your 60s and Up—The Retirement Years 905 
When You』re Single 912 
When You』re Married 918 
When You』re Divorced or Widowed 928 
Conclusion 944 
Resources 944 

Index 
953 


List of Figures 


Figure Title 
Page 

1.1 Assets Worksheet 
6 

1.2 Liabilities Worksheet 
10 

1.3 Recordkeeping Worksheet 
14 

1.4 Short-Term Goals Worksheet 
23 

1.5 Medium-Term Goals Worksheet 
24 

1.6 Long-Term Goals Worksheet 
25 

1.7 Goal-Tracking Worksheet 
26 

1.8 Determining the Monthly Savings Needed to Reach a Goal 27 

1.9 Cash Flow Worksheet 
36 

1.10 Annual Budgeting Worksheet 
44 

1.11 Monthly Budgeting Worksheet 
45 

1.12 Investment Risk Levels 
54 

1.13 Risk Tolerance Quiz 
56 

2.1 Tender for 13-Week Treasury Bill 
90 

3.1 1925–2000 Chart of Stocks, Bonds, Bills, and Inflation 108 

3.2 Investing $10,000 All at the Same Time 
115 

3.3 Investing $10,000 by Dollar-Cost-Averaging Strategy 116 

3.4 Cyclical Stock Worksheet 
122 

3.5 Growth Stock Worksheet 
126 

3.6 Income Stock Worksheet 
128 

3.7 Out-of-Favor Stock Worksheet 
130 

3.8 
Value Stock Worksheet 134 

4.1 
The Effect of Compounding on a Berger Growth Fund 
Investment 198 

4.2 
Sample Charges That Funds Levy 199 


LIST OF FIGURES 

Figure Title 
Page 

4.3 Oppenheimer』s New Account Application Form 
202 

4.4 Trading Risk for Return: A Mutual Fund Dial 
215 

5.1 Relationship between Bond Funds and Interest Rates 273 

5.2 Percentage Points Rate Increase in a Year 
273 

5.3 Percentage Points Rate Decrease in a Year 
274 

5.4 Bond Rating Services』 Rating System 
275 

5.5 Sample Treasury Yield Curve 
279 

5.6 Sample Positive Yield Curve 
280 

5.7 Sample Flat Yield Curve 
280 

5.8 
Sample Inverted Yield Curve 282 

5.9 
Savings Bond 288 

5.10 
Sample CMO (Collateralized Mortgage Obligation) 
Brochures 294 

5.11 
The Growth of a 20-Year Municipal Zero-Coupon Bond 
Yielding 7 Percent 305 

5.12 
Zeros versus Full-Coupon Bonds 306 

5.13 
5-, 10-, 20-, and 30-Year Zeros Responding to Rate 
Changes 306 

7.1 
Platinum Typically Trades at a Premium to Gold 352 

8.1 
The Monthly Mortgage Worksheet 389 

8.2 
Monthly Payment Factors 390 

8.3 
Purchase Cost Worksheet 391 

8.4 
Refinancing Worksheet 405 

8.5 
Net Proceeds Worksheet 412 

9.1 
Sample Equifax Credit Report 459 

9.2 
Sample Experian Credit Report 460 

9.3 
Sample Trans Union Credit Report 464 

9.4 
Debt Limit Worksheet 473 

10.1 Annual Cost of Fuel (Based on 15,000 Miles per Year) 494 

10.2 Leasing Costs Worksheet 
504 

10.3 Car Loan Worksheet 
505 

10.4 Vehicle Owner』s Complaint Form 
511 

11.1 Auto Insurance Pricing Worksheet 
533 

11.2 Auto Insurance Discount Worksheet 
534 

11.3 Disability Income Worksheet 
540 

11.4 Benefits Offered by Medicare Supplemental Policies 547 

11.5 Household Inventory Worksheet 
555 

11.6 Death Expense Worksheet 
563 

11.7 Survivor』s Worksheet 
564 

12.1 College Costs and Savings Needs Worksheet 
596 


LIST OF FIGURES 

Figure Title 
Page 

12.2 
Money Accumulated by Investing $100 Per Month 597 

12.3 
Estimating Parental Contributions 612 

12.4 
Financial Aid Package Worksheet 615 

13.1 
2001 Tax Rates and Brackets 641 

14.1 
Retirement Expenses Worksheet 687 

14.2 
Capital Accumulation Worksheet 689 

14.3 
Annual Savings Worksheet 690 

14.4 
Personal Earnings and Benefits Estimate Request Form 692 

14.5 
Approximate Monthly Benefits If You Retire at Full 
Retirement Age and Had Steady Lifetime Earnings 695 

14.6 
Approximate Monthly Benefits If You Become Disabled 
in 2001 and Had Steady Lifetime Earnings 696 

14.7 
Approximate Monthly Survivors Benefits for Your Family 
If You Had Steady Earnings and Die in 2001 697 

16.1 
Tax Savings from a Salary Reduction Plan 783 

16.2 
Salary Reduction Plan Growth under Four Different 
Scenarios 785 

16.3 
Amount of Money Available for Retirement 787 

16.4 
Impact of Additional 1 Percent Portfolio Return 788 

16.5 
Asset Allocation for the 20s and 30s Age Group 790 

16.6 
Asset Allocation for the 40s Age Group 790 

16.7 
Asset Allocation for the 50s Age Group 791 

16.8 
Asset Allocation for the Retirement Years 791 

16.9 
FSA Funding Worksheet 803 

16.10 
Dependent Care Expenses Worksheet 804 

16.11 
Amount Saved by Funding an FSA 804 

17.1 
Financial Planner Disclosure Form 832 


Preface 


No one will ever care about your personal financial situation as much as you 
do. Sure, you can hire financial advisors to help you through the thicket of complex 
investment decisions, tax planning, insurance programs, and employee benefits. 
But at the end of the day, you will have to make the final decisions about financial 
matters that will affect your present and future lifestyles—as well as the financial 
well-being of your family. 

To make those decisions intelligently, you must be armed with knowledge. If 
you don』t understand the basics of money and personal finance, you may fall prey 
to some advisor who is more concerned with his or her own financial welfare than 
with yours. No get-rich-quick schemes really work; if they did, the schemers 
would not be trying to convince you to give them your money—they would be 
aboard their yachts in the Caribbean. 

Because you are reading this book, you are clearly interested in taking charge 
of your finances. That is a very important first step. For some strange reason, most 
people work extremely hard for their money all their lives but never make the effort 
to maximize that money. People tend to neglect money decisions out of either 
fear or inertia and pay little attention to where their money is coming from or 
where it is going. They often live paycheck to paycheck. If you spend 991.2 percent 
of your time earning money and less than a half of 1 percent of your time managing 
it, the time has come to change. By bumping up that half of 1 percent to even 5 
percent or so, you can make your money work for you much more effectively and, 
in the process, start to realize some of your lifetime goals, which previously might 
have seemed unattainable. Your money can work either for you or against you; the 
difference depends on whether you control your money or it controls you. 

This book is designed to help you gain control of your finances as easily as possible. 
I have spent years answering questions from people just like you on call-in 
radio and television shows, so I am well aware of what you need to know to get your 


xx PREFACE 

financial act together. One of the most common questions I get is: 「If I want to buy 
just one book that will explain this whole subject in a very understandable way, 
which would it be?」 I surveyed the market, and despite all the personal finance 
books out there, none has really covered the field as comprehensively and accessibly 
as it could have. That』s why I wrote Everyone』s Money Book and set it up the 
way I did—loaded with easy-to-use worksheets, step-by-step instructions, charts, 
graphs, application forms, and quizzes. 

If you own a personal computer, you may be interested in using the software designed 
to complement this text. Called Everyone』s Money Software, it allows you to 
enter your own numbers on all the worksheets exactly as they appear in the book. The 
software permits you to test various assumptions to see how the numbers work out. 
For example, you can calculate your monthly mortgage payment at different interest 
rates and with various down payments. Or you can determine how much money you 
will accumulate for retirement at varying levels of savings and rates of return. For 
more information on how to obtain this software, please call 800-606-0347. 

Following each chapter is an annotated list of resources, including books, 
magazines, newsletters, newspapers, pamphlets, and software. Many of the federal 
and state government agencies, trade associations, and other private organizations 
cited offer free or low-cost publications. Taken together, the end-of-chapter resources 
comprise the most extensive directory of resources ever assembled in one 
personal finance book. 

This third edition of Everyone』s Money Book has far more resources than the 
first two editions (the first one was published in 1994). In particular, it features extensive 
listings of ways to use your personal computer to improve your finances. 
Most chapters have lists of computer programs, online services, Web sites, and 
other computerized resources that can make your financial life more efficient, and 
save and make you a huge amount of money. For example, if you do your banking 
online, trade stocks and mutual funds through online discount brokers, and find the 
lowest-cost insurance policies and lowest-interest credit cards on the Web, you can 
make your investment in computer hardware, software, and online services pay off 
many times over. 

Solving the Mystery of Personal Finance 

I know that many people and organizations in the money business have a 
vested interest in keeping financial knowledge as mysterious as possible, creating 
as much anxiety as possible, so that you pay them to explain it all and calm you 
down. I disagree wholeheartedly with this practice. I think that you can understand 
these matters well enough to feel as conversant with them as you do with your full-
time work. Once you feel comfortable with the subject, you will no longer be intimidated 
by experts; instead, you will gain confidence to make your own 
decisions in your own best interest. 


PREFACE xxi 

This book is designed to be used in many different ways at many different 
points in your life. Whatever your age or family situation, you will find material 
here to help you. You can put some information to use right away for immediate results, 
while other subjects might not apply to you right now. Remember, you can 
always return later to sections that you don』t need at your present stage of life. As 
you become more knowledgeable about an area of personal finance, reread the corresponding 
chapters to learn even more, or follow up on the 「Resources」 sections 
to gain an in-depth understanding of the subject. Don』t be discouraged if at first 
some subjects intimidate you. The world of personal finance is complicated, and 
you always have more to learn. I』ve tried to make the complex as simple and easy 
to understand as possible. 

Maximizing Your Investment Options 

The first part of the book helps you maximize your investment options. Chapter 
1, 「Giving Yourself a Financial Checkup,」 helps you determine where you stand 
now financially and where you want to be in the future. I help you calculate your 
net worth, define your financial goals, analyze your cash flow, and assess your tolerance 
for risk, all in preparation for outlining a comprehensive personal financial 
plan. Then I help you set up a budget that you can stick to so you can turn your 
hopes into reality. 

Once you』ve assessed your current situation and formulated a plan for a future, 
I explain the many tools you need to accomplish your goals. I discuss key investment 
alternatives, including cash instruments like CDs and money funds; stocks, 
mutual funds, and bonds; futures and options; gold, other precious metals, and collectibles; 
and real estate and limited partnerships. 

Financing Your Present and Future Needs 

In the second part of the book, I help you in financing your present and future 
needs. I begin by explaining the ins and outs of credit—when it makes sense to 
borrow and when it doesn』t, both for everyday needs and for long-term uses like 
buying a home or car. I then guide you to the best ways to shop for and finance 
a new or used car. Next, I explain how to calculate how much auto, disability, 
health, homeowners, and life insurance you need and how to obtain the greatest 
coverage at the lowest cost. The following chapter discusses the complex subject 
of financing your children』s college education—how to establish a savings plan 
and how to help your children apply for and win educational scholarships, grants, 
and loans. 

I continue with an overview of tax planning, offering advice on how to maximize 
deductions, exemptions, and credits and minimize your tax liability. This chapter and 
the entire book are completely up-to-date as of the Taxpayer Relief Act of 1997, 


xxii PREFACE 

passed by Congress and signed into law by President Clinton in August 1997. This 
tax-planning chapter also summarizes the key provisions of the 1997 act. 

The next chapter guides you through the process of planning for your 
retirement—a stage of life that creeps up on you much faster than you can ever 
imagine. I help you calculate how much you need to save and how much income 
you can expect from Social Security, pensions, and your own investments. I then 
offer advice on choosing among various retirement lifestyles. 

The final chapter of this second part explains what estate-planning steps you 
can take to pass your assets on to your heirs and minimize estate taxes. 

Controlling Your Financial Destiny 

The last part of the book also helps you take control of your financial future. It 
begins with a chapter explaining how to make the most of your employee benefits. 
Your company may offer many benefits you do not understand and therefore do not 
take advantage of. This chapter should help you get as much from your employer 
as possible. 

I then guide you in choosing financial advisors who put their clients』 interests 
ahead of their own. It can be quite difficult to locate accountants, bankers, financial 
planners, lawyers, money managers, and other financial experts who put their 
clients ahead of their own interests. This chapter will supply the questions you 
need to ask potential advisors and the skills that will help you separate the worthy 
professionals from the incompetents. 

The final chapter offers a perspective on each of the topics discussed in previous 
chapters, keyed to your age and family situation. I explain the special factors 
you should consider in all aspects of personal finance when you are in your 20s and 
30s, 40s and 50s, and 60s and up. In addition, I offer customized counsel on all 
areas of personal finance to singles, married couples, both with and without children, 
and widows, widowers, and divorcees. 

So let』s get started! All you have to lose is your fear of financial matters; all 
you have to gain is control of your financial destiny. 


PART ONE 
Maximizing 
Your Investment 
Options 



CHAPTER 1 
Giving Yourself a 
Financial Checkup 


Before you can figure out how to improve your financial condition, you must 
take stock of where you are right now; that is, you must compute your net worth. 
Calculating your net worth is like weighing in before the championship fight. To 
find out what you weigh (financially, that is), you add up the total value of what 
you already own, known as your assets, and subtract the amount of debt you owe, 
known as your liabilities. This bottom line is known as your net worth. It is a 
snapshot in time, good only for the moment you calculate it. Consider this photo 
the first in a lifelong album of financial achievements. Your first statement gives 
you a benchmark to compare yourself against as your net worth grows over the 
years. 

Determining Your Net Worth 

By doing this exercise, you will be able to see clearly how your assets and liabilities 
match (or mismatch). As you find ways to control your spending, pay off 
your debts, and increase your savings and investment assets, you can make your 
net worth grow, which, in turn, will permit you to reach your financial goals. If you 
are doing all the wrong things, like increasing your debt and depleting your savings, 
this will show up quickly in your net worth as well. 

Calculating your net worth is also important because it lets you see at a 
glance whether you are accumulating enough assets to support yourself comfortably 
in retirement and how much money you will have to pass on to your heirs. 
Having a current net worth statement will also come in handy when you apply 
for loans, such as a mortgage, or for financial aid for your children』s college 
education, because lenders will require you to show your assets and liabilities on 
the application. 


PART ONE: Maximizing Your Investment Options 

While you will want to compute your net worth once a year to track how 
you』re doing, it is particularly important to do the exercise when there has been 
a major change in your financial situation. That might mean when you become 
eligible to receive an employee benefit like a pension, when you buy a home or car, 
when you contribute to a Keogh or an individual retirement account (IRA), or 
when your Aunt Sally dies and leaves you a big inheritance. 

ASSETS 

There are five classes of assets. What distinguishes one kind from another is 
how quickly you can turn it into cash or, put another way, how liquid it is. The 
more liquid an asset, the easier it is to put a value on it. For instance, you know exactly 
what the $102.55 in your checking account is worth, but you would probably 
have to ask a local real estate agent or appraiser to give you the current worth of 
your house or apartment. 

Because of the different levels of liquidity of different assets, we suggest that 
you separate your assets into these five classes: 

Current assets. Current assets are easily convertible into cash. This includes 
bank accounts, money-market mutual funds, and Treasury securities. For each of 
the bank accounts, list the name of the bank where the asset is held and the current 
yield. Also list the yield on Treasury bills, which mature in a year or less, and U.S. 
savings bonds, which you can cash in any time as long as you have held them for 
at least six months. If you have overpaid your taxes and are due a refund from the 
Internal Revenue Service (IRS) or your state tax department, you should also count 
that as a current asset. If you are owed a bonus or commission within the next few 
months, that counts as current, too. 

Securities. These include publicly traded stocks, bonds, mutual funds, futures 
contracts, warrants, and options. The current market values of all such securities 
are available in most major newspapers, particularly The Wall Street Journal, as 
well as from your broker or from stock quotation services, such as Dow Jones 
News Retrieval, that you connect to by computer. For each security, list your purchase 
price, the number of units held (such as shares of stock), the percentage yield 
it pays (a dividend for a stock, interest for a bond), and when it matures (for a bond, 
a futures contract, or an option). 

Real estate. Real estate includes first and second homes, condominiums, 
cooperatives, rental properties, and real estate limited partnerships. The current 
worth of all real estate should be based on appraisals from knowledgeable 
local experts like appraisers or real estate agents. Remember to subtract all 
selling costs, such as the standard 6 percent real estate broker』s commission. 
For partnerships, list the general managing partner who is running the operation, 
the yield being paid to you, if any, and the year you expect the partnership 
to be liquidated and the proceeds to be paid out to you. Also include any mort



CHAPTER 1: Giving Yourself a Financial Checkup 

gage loans that may be due you, such as on a house you sold on which you 
granted a loan. 

Long-term assets. These include the cash value of life insurance policies; the 
worth of annuities, pensions, and profit-sharing plans; IRAs and Keogh plans; any 
long-term loans due you; any long-term royalties due you from writing a book or 
having patented an invention that is still selling; and any interests you have in an ongoing 
business. Long-term assets are often difficult to value because you have access 
to their true worth only several years, or even decades, from now. Still, your life 
insurance company will give you the current value of policies and annuities, and 
your employer will tell you what your pension and profit-sharing plans would be 
worth if you left the company now. Valuing your interest in a closely held business 
is particularly tricky, but it can be done. Ask your partners what they would be willing 
to pay if you wanted to cash in your share. (To some extent, that depends on how 
actively involved in the business you are and how key it is for the business to have 
your services available.) You can also get some idea from a business broker who 
specializes in selling and buying the kind of business in which you are involved. 

Personal property. Personal property such as cars, jewelry, collectibles, and 
home furnishings would be valued at whatever you think they could be sold for 
now in their present condition. In valuing personal property, try to be as realistic as 
possible. Don』t just put down what you think they are worth; this number is often 
inflated. You should try to get some sense of the market when you value things. For 
instance, check with a used-car dealer, the used-car ads in your newspaper, or the 
National Automobile Dealers Association Blue Book to see what your car』s model 
and year is now worth. Bring any rare coins or stamps into a reputable dealer for 
an appraisal. For antiques or other collectibles, contact a local member of the 
American Society of Appraisers, found in the Yellow Pages. 

In the Assets Worksheet in Figure 1.1, you should make a detailed list of not 
only which assets you have but also who holds the titles to them. If you are married, 
you can own property jointly or separately. (See Chapter 15, 「Estate Planning— 
Keeping Your Assets in the Family,」 for guidance on the best way to hold assets.) 
Some assets, like a securities portfolio for a child, may be held in a trust for which 
the parents are responsible until the child turns 18 years old. If you need more space 
for any category as you fill out the worksheets, copy that page and attach it to your 
worksheet. 

LIABILITIES 

Liabilities, or what you owe others, are not as much fun to add up as assets, but 
you』ve got to tote them anyway. Remember, the people and institutions to whom 
you owe money count your liabilities as their assets. 

Liabilities should be divided into short- and long-term categories, just as assets 
are. That』s because some debts you need to pay back very soon, like current bills 


PART ONE: Maximizing Your Investment Options 

Figure 1.1 Assets Worksheet 
Date 
Assets Purchased 
1. Current Assets 
Bonuses or Commissions 
(due you) 
Certificates of Deposit 
Checking Accounts 
Credit Union Accounts 
Money-Market Accounts 
Savings Accounts 
Savings Bonds 
Tax Refunds (due you) 
Treasury Bills 
TOTAL CURRENT ASSETS 
2. Securities 
Bonds (type of bond) 
Bond Mutual Funds 
Individual Stocks 
Original 
$ Value 
$ 
$ 
$ 
Current 
Date 
Current 
$ Value 
$ 
$ 
$ 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.1 (continued) 
Date 
Assets Purchased 
Stock Mutual Funds 
Futures 
Warrants and Options 
TOTAL SECURITIES 
3. Real Estate 
Mortgage Receivable 
(due you) 
Primary Residence 
Rental Property 
Real Estate Limited 
Partnerships 
Second Home 
TOTAL REAL ESTATE 
4. Long-Term Assets 
Annuities 
IRAs 
Keogh Accounts 
Life Insurance Cash 
Values 
Loans Receivable 
(due you) 
Pensions 
Private Business Interests 
Profit-Sharing Plans 
Royalties 
Salary Reduction Plans 
(401(k), 403(b), 457 
plans) 
TOTAL LONG-TERM ASSETS 
Original 
$ Value 
$ 
$ 
$ 
$ 
$ 
$ 
Current 
Date 
Current 
$ Value 
$ 
$ 
$ 
$ 
$ 
$ 


PART ONE: Maximizing Your Investment Options 

Figure 1.1 Assets Worksheet (continued) 
Date Original 
Assets Purchased $ Value 
5. Personal Property 
Antiques $ 
Appliances (washing 
machines, dishwashers, 
vacuum cleaners, etc.) 
Automobiles 
Boats, etc. 
Campers, Trailers, etc. 
Clothing 
Coin Collections 
Computers, etc. 
Furniture 
Furs 
Home Entertainment 
Equipment (CD 
players, stereos, 
televisions, VCRs, 
etc.) 
Home Furnishings 
(drapes, blankets, etc.) 
Jewelry 
Lighting Fixtures 
Motorcycles, etc. 
Paintings and Sculptures 
Pools, etc. 
Stamp Collections 
Tableware (glasses, 
plates, silverware, etc.) 
Tools, etc. 
Other 
TOTAL PERSONAL PROPERTY $ 
TOTAL ASSETS $ 
Current 
Date 
Current 
$ Value 
$ 
$ 
$ 


CHAPTER 1: Giving Yourself a Financial Checkup 

or credit cards, while other debts, like mortgages or college loans, will take years 
to repay. In the Liabilities Worksheet (see Figure 1.2), you should list to whom you 
owe money, the interest rate you are paying, if any, when the loan comes due if 
there is such a maturity date, and how much money you owe. 

You should use the following four main categories for listing your liabilities: 

Current liabilities. These are debts you must pay within the next six months. 
In this category would be bills from the utilities (the telephone company, the electric 
company, the gas company, the oil company), physicians and dentists, home 
repair contractors, retail stores, and other short-term creditors. You should also include 
regular alimony or child support payments if these apply to you. If you owe 
money to a relative or friend who helped you out in a pinch, make sure to include 
that debt as well in this category. 

Unpaid taxes. These taxes might be due either on April 15 or as part of your 
quarterly estimated tax payments to both the IRS and your state tax department. 
They include not only income taxes but also the capital gains taxes you owe on an 
asset you have sold for a profit. You should also include local property taxes, which 
you may have to pay directly, or which may be paid by the bank that holds your 
mortgage. If you owe any sales taxes on purchases you have made recently, put that 
down as well. Finally, if you are self-employed, you must make sure to account for 
Social Security self-employment taxes. 

Real estate debt. This category of debt includes both first and second mortgages 
on your primary residence and on any second (or even third, if you should be 
so lucky) home you may have. It also includes any mortgages you owe on rental 
properties that are producing income. On a separate line, list any home equity 
loans outstanding on your first or second home. 

Installment debt. Installment debt covers all loans you have committed to pay 
off over a period of time. This category includes automobile loans from either a car 
dealer or a bank; bank loans taken out to consolidate bills or for any other purpose 
including overdraft loans attached to your checking account; education loans from 
your college or university; loans to pay for equipment or appliances, including 
computers; furniture loans; home improvement loans; life insurance loans taken 
against the cash value in your policies; and margin loans from a brokerage house 
taken against the value of your securities. If you have lost a lawsuit and there is a 
liability judgment against you, that should be considered part of the installment 
debt you owe. 

Finally, if you have borrowed against your pension plan at work, which is usually 
some form of salary reduction plan, you normally are obligated to pay it back 
by payroll deduction over five years. This obligation should also be counted as installment 
debt. Credit card charges from MasterCard, Visa, American Express, 
Diners Club, Discover, as well as retail stores, on which you owe at least the minimum 
payment, should also be noted in this category because you control when to 
pay off the outstanding balance. 


PART ONE: Maximizing Your Investment Options 

Figure 1.2 Liabilities Worksheet 
To Interest 
Liabilities Whom Rate % 
1. Current Liabilities 
Alimony % 
Bills 
Electric & Gas 
Home Contractor 
Oil Company 
Physician & Dentist 
Retail Stores 
Telephone 
Other 
Child Support 
Loans to Individuals 
TOTAL CURRENT LIABILITIES 
2. Unpaid Taxes 
Income Taxes 
Federal % 
State 
Capital Gains Taxes 
Federal 
State 
Property Taxes 
Sales Taxes 
Locality 
Social Security Taxes 
(self-employed) 
TOTAL UNPAID TAXES 
3. Real Estate Liabilities 
Home # 1 
First Mortgage % 
Second Mortgage 
Home Equity Loan 
Due 
Date 
Amount 
Due $ 
$ 
$ 
$ 
$ 
$ 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.2 (continued) 
To Interest 
Liabilities Whom Rate % 
Home # 2 
First Mortgage % 
Second Mortgage 
Home Equity Loan 
Rental Property 
First Mortgage 
Second Mortgage 
TOTAL REAL ESTATE LIABILITIES 
4. Installment Liabilities 
Automobile Loans % 
Bank Loans for Bill 
Consolidation 
Credit Cards 
Education Loans 
Equipment and Appliance 
Loans 
Furniture Loans 
Home Improvement 
Loans 
Liability Judgments 
Life Insurance Loans 
Margin Loans Against 
Securities 
Overdraft Bank Loans 
Pension Plan Loans 
TOTAL INSTALLMENT LIABILITIES 
TOTAL LIABILITIES 
Due 
Date 
Amount 
Due $ 
$ 
$ 
$ 
$ 
$ 


PART ONE: Maximizing Your Investment Options 

Now, for the moment of truth: Take your total assets from the Assets Worksheet 
and subtract your total liabilities from the Liabilities Worksheet. This deter


mines your net worth. 
Total Assets 
(Minus) Total Liabilities 
Equals Positive (or Negative) Net Worth 
$ 
( 
$ 
) 

First, notice whether your net worth is positive or negative. If it』s positive, 
you』ve been doing a good job at building assets and keeping liabilities under control. 
Now that you know where you stand, you are in a good position to see your 
net worth grow even more in coming years. 

If your net worth is negative, do not despair. You have just discovered something 
very important about your finances. Knowing that you are under water (financially 
speaking) is the first step in getting out of trouble. Clearly, you have too 
much debt for the amount of assets you have accumulated. Remember, this is only 
a snapshot of your current situation. Let』s hope the next time you calculate your net 
worth, it will be a more 「positive」 experience. 

After you calculate your net worth each year, you should compare it to your 
calculations for the past five years to see how you have been progressing. Use this 
simple form to keep records: 

Year Net Worth Percentage Increase/Decrease 

This year 
Last year 
Two years ago 
Three years ago 
Four years ago 
Five years ago 


Creating Your Recordkeeping System 

Filling out all the worksheets in this book will be much easier if you don』t have 
to dig through boxes full of unopened bank and brokerage statements, life insurance 
records, and old tax returns. Though it will take some effort at first to get organized, 
the time commitment will be minimal compared to the return you will 
earn from getting a handle on your finances. It is also invaluable to have your papers 
easily accessible when you are filling out your tax return or—God forbid!— 
you are audited and have to prove how much you paid for a stock ten years ago. 


CHAPTER 1: Giving Yourself a Financial Checkup 

The best way to get started is to set up a filing system separate from the rest of 
your household files. In addition to setting up a separate file for each of the categories 
described in the Recordkeeping Worksheet (see Figure 1.3), it is crucial to 
note on the worksheet where all your important documents are located and other 
details such as account numbers and the names of brokers, insurance agents, and 
other people who know about your accounts. Many a widow tells the story of how 
she was thrown into total financial chaos when her husband died suddenly and all 
the records were scattered throughout the house. Even worse, if both you and your 
spouse die together, it will be extremely difficult for your children or other beneficiaries 
to reassemble your financial records. 

Figure 1.3, then, is a worksheet that consolidates all your important data in one 
place. You should organize your file system using the exact same categories, which 
are arranged alphabetically. 

Defining Your Financial Goals 

Now that you know where you stand financially, you must figure out where you 
want to go. Setting specific financial objectives and putting them in writing—listing 
dollar amounts and noting exactly when you will need the money—will motivate 
you to achieve your goals. So many people never take the time to figure out what 
they want because they have convinced themselves that they will never reach their 
targets. However, if you don』t define your goals, you won』t accomplish them. 

This section will give you several easy-to-fill-out worksheets so you will be 
able to determine your highest financial priorities and how you can achieve them. 
You can』t reach all of your goals overnight, but knowing what they are, and which 
ones take precedence, will help you fulfill your goals faster than if you never took 
the time to do this exercise. Because setting goals is really another way of defining 
priorities, the process helps you make sure that your limited resources and income 
are used most effectively to attain your highest priorities. By crystalizing your aspirations, 
you take charge of your life so that you control your money for the purposes 
you find most important. 

Don』t think that goal setting is too hard; you』ve been doing it for most of your 
life. When you last started a diet, you set a specific goal for how many pounds you 
would trim. When you were on the track team in high school, you set a goal to 
achieve a particular time for your event—a four-minute mile, for instance. As you 
went through college, you set a goal of a certain grade-point average or maybe a 
goal of doing well enough to enter a certain graduate school. All you are doing now 
is applying the same discipline to your personal finances. 

Some people』s financial goals differ so greatly from others』 because people 
have been brought up with different values. For some, providing the finest education 
for their children is the top priority because it will allow the children to attain 
greater achievements than the parents could ever imagine. For others, buying 


PART ONE: Maximizing Your Investment Options 

Figure 1.3 Recordkeeping Worksheet 
1. Personal Information 
Your Name 
Address 
Home Telephone 
Work Telephone/FAX 
Date, Place of Birth 
Birth Certificate Location 
Social Security Number 
Marital Status 
Spouse』s Name 
Address 
Home Telephone 
Work Telephone/FAX 
Date, Place of Birth 
Birth Certificate Location 
Social Security Number 
Marital Status 
Child』s Name 
Spouse』s Name 
Address 
Home Telephone 
Work Telephone/FAX 
Date, Place of Birth 
Birth Certificate Location 
Social Security Number 
Marital Status 
Parent』s Name 
Address 
Home Telephone 
Work Telephone/FAX 
Date, Place of Birth 
Birth Certificate Location 
Social Security Number 
Marital Status 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.3 (continued) 
Parent』s Name (Spouse) 
Address 
Home Telephone 
Work Telephone/FAX 
Date, Place of Birth 
Birth Certificate Location 
Social Security Number 
Marital Status 
Grandchild』s Name 
Spouse』s Name 
Address 
Home Telephone 
Work Telephone/FAX 
Date, Place of Birth 
Birth Certificate Location 
Social Security Number 
Marital Status 
Grandparent』s Name 
Spouse』s Name 
Address 
Home Telephone 
Work Telephone/FAX 
Date, Place of Birth 
Birth Certificate Location 
Social Security Number 
Marital Status 
Sibling』s Name 
Spouse』s Name 
Address 
Home Telephone 
Work Telephone/FAX 
Date, Place of Birth 
Birth Certificate Location 
Social Security Number 
Marital Status 


PART ONE: Maximizing Your Investment Options 

Figure 1.3 Recordkeeping Worksheet (continued) 
2. Professional Contacts 
Accountant 
Address 
Telephone/FAX 
Assistant』s Name 
Attorney 
Address 
Telephone/FAX 
Assistant』s Name 
Banker 
Address 
Telephone/FAX 
Assistant』s Name 
Dentist 
Address 
Telephone/FAX 
Assistant』s Name 
Employee Benefits Counselor 
Address 
Telephone/FAX 
Assistant』s Name 
Executor of Estate 
Address 
Telephone/FAX 
Assistant』s Name 
Financial Planner 
Address 
Telephone/FAX 
Assistant』s Name 
Insurance Agent (auto) 
Address 
Telephone/FAX 
Assistant』s Name 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.3 (continued) 
Insurance Agent (health) 
Address 
Telephone/FAX 
Assistant』s Name 
Insurance Agent (home) 
Address 
Telephone/FAX 
Assistant』s Name 
Insurance Agent (life) 
Address 
Telephone/FAX 
Assistant』s Name 
Investment Manager 
Address 
Telephone/FAX 
Assistant』s Name 
Physician 
Address 
Telephone/FAX 
Assistant』s Name 
Priest/Rabbi/Minister 
Address 
Telephone/FAX 
Assistant』s Name 
Stockbroker 
Address 
Telephone/FAX 
Assistant』s Name 
Trust Officer 
Address 
Telephone/FAX 
Assistant』s Name 


PART ONE: Maximizing Your Investment Options 

Figure 1.3 Recordkeeping Worksheet (continued) 
Other 
Address 
Telephone/FAX 
Assistant』s Name 
Other 
Address 
Telephone/FAX 
Assistant』s Name 
3. Financial Accounts 
Banking Records (CDs, checking, credit union, savings) 
Name of Type of Account Location of 
Institution Account Number Documents 
Bonds (corporate, municipal, Treasury bonds) 
# of Date Due Location of 
Issuer Bonds Bought $ Cost Date Documents 
Business Ownership 
Name of Type of % Other 
Business Business Owned Partners 
Childrens』 Accounts 
Child』s Name/ Type of Account Location 
Trustee or Trust $ Value of Funds 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.3 (continued) 
Debts (auto, credit card, education, mortgage) 
Type Name of Account Amount Monthly 
of Loan Institution Number Due Payment 
Employee Benefit and Retirement Plans (401(k), IRA, Keogh plans, 
pension plans, profit-sharing plans, stock purchase plans) 
Type Who Is $ Value 
of Plan Covered Trustee of Plan Beneficiary 
Insurance Policies (auto, health, home, life insurance) 
Insures $ 
Type of Who or Name of Account Amount Location of 
Policy What Company Number Insured Documents 
Mutual Funds 
Type of Name of Account # of Location of 
Account Company Number Shares Documents 
Real Estate 
Type of Location of Date Purchase Location of 
Property Property Purchased Price $ Documents 


PART ONE: Maximizing Your Investment Options 

Figure 1.3 Recordkeeping Worksheet (continued) 
Safe-Deposit Boxes 
Primary and Person 
Secondary with Location of 
Depository Owner Power of Contents List 
Bank and Address of Assets Attorney and Key 
Stocks 
Type of Name of Account # of Date Purchase Location of 
Account Company Number Shares Bought Price $ Documents 
Tax Records 
Estimated 
Persons Quarterly Location of Location of 
Filing Payments Latest Tax Return Previous Returns 
Wills and Trust Documents 
Family Member Location of 
Covered Attorney Executor Documents 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.3 (continued) 
4. Other Important Papers 
Appliance Instructions, 
Guarantees, and Warranties 
Automobile Titles or Lease 
Documents 
Burial Plot Documentation 
Citizenship Papers/Passports 
Club Membership Records 
Contracts 
Credit Reports 
Divorce Decrees 
Educational Records and 
Diplomas 
Employment Records 
Financial Records 
Frequent Flier Account 
Records 
Health Care Proxy 
Health Records 
Home Improvement Records 
Inventories of Household 
Goods 
Jury Duty Records 
Living Wills 
Marriage Certificate 
Medical Insurance Forms 
Medicare Cards 
Military Discharge Papers 
Power of Attorney Documents 
Receipts for Major Purchases 
Rental Leases 
Resumes 
Social Security Cards and 
Earnings Records 
Utility Bills 
Other (specify) 
Location 


PART ONE: Maximizing Your Investment Options 

life』s luxuries for immediate use is a higher goal. If you』re in this group, it might 
be because you were brought up with a certain standard of living, and your goal is 
to replicate it for yourself once you are living on your own. For people who have 
never lived more than a bare-bones existence, a worthwhile goal may be to elevate 
their lifestyle by buying all the modern gadgets that make living more pleasurable. 

Remember, setting goals is not only about allocating your money—it』s also 
about allocating your time. If one of your goals is to have more free time to play 
with your children or do community work, that takes away from the time you can 
devote to advancing in your career. Nothing is wrong with that choice as long as it 
is one you make consciously. 

If you share finances with a spouse or partner, goal setting must be done mutually. 
To avoid friction, you must agree, for the most part, with your spouse or significant 
other on which goals get the highest priority. You can avoid many financial 
fights by coming to terms on goals in the first place. 

The goal-setting exercises in Figure 1.4–1.8, like the net worth exercise in the 
previous section, are not once-in-a-lifetime events. As you accomplish certain 
goals during your life, you must constantly be setting new ones. For example, once 
your children』s college educations have been paid for, you may want to shift priorities 
in order to set aside money for a second home or for your retirement. 

There are three kinds of goals: short term, medium term, and long term. Within 
each of these three categories, you have not only goals but also priorities for those 
goals. Because you will probably never have enough money to achieve all your 
goals over the next year, you have to allocate some resources on an ongoing basis 
to each of the three categories so you have some chance of accomplishing the goals 
over time. Usually, people neglect the medium- and long-term goals in favor of the 
seemingly more pressing short-term goals, but that only puts off the day of reckoning. 
The longer you delay starting to accumulate the money for longer-term 
goals like buying a home or funding retirement, the more difficult the realization 
of those goals becomes. 

This section provides a worksheet for each of the three kinds of goals. After 
you locate one of your goals on the worksheet, note the amount of money you will 
need to pay for it, how high a priority it has compared to other goals, and when you 
would like to achieve it. 

SHORT-TERM GOALS 

Short-term goals are those you would like to achieve within the next year (see 
Figure 1.4). These might include paying off your credit cards, buying certain large 
items like a television, a car, or furniture, or taking a long-needed vacation. 

MEDIUM-TERM GOALS 

Medium-term goals are items for which it takes between two and ten years to 
accumulate the money (see Figure 1.5). These may include building a down payment 
for a first or second home, creating a college fund for children older than 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.4 Short-Term Goals Worksheet 
Date to 
Goal Priority Accomplish 
Build Up Emergency 
Reserve (worth three 
months』 salary) 
Buy Adequate Insurance 
Auto 
Health 
Home 
Life 
Contribute to Charity 
Name __________________ 
Fund IRA or 
Keogh Account 
Increase Contribution to 
Company Benefit Plan 
Join a Health/Sports Club 
Make Major Home 
Improvements 
Make Major Purchases 
Pay Off Bills 
Pay Off Credit Cards 
Save for Christmas 
Gifts, Birthdays, etc. 
Take Vacation 
Other (specify) 
_______________________ 
TOTAL $ AMOUNT NEEDED 
$ Amount 
Needed 
$ 
$ 

eight years, or saving up to take the overseas trip of your dreams. If you have one 
child and plan on having another in a few years, you might want to start putting 
aside money for the little one now. After all, economists project that it will cost at 
least $300,000 to bring up a child from birth through his or her senior year in high 
school (assuming you are able to exert some control over the child』s demands for 
toys in the early years and high-fashion clothes in the teen years). 

LONG-TERM GOALS 

Long-term goals take more than ten years to fulfill (see Figure 1.6). The most 
common long-term goal is a financially secure retirement, which takes a lifetime 


PART ONE: Maximizing Your Investment Options 

Figure 1.5 Medium-Term Goals Worksheet 
Date to 
Goal Priority Accomplish 
Create College Fund 
for Children 
Child 1 ______________ 
Child 2 ______________ 
Save Down Payment for 
First Home 
Save Down Payment for 
Second Home 
Finance Special Occasions 
(weddings, bar mitzvahs, 
etc.) 
Help Child Finance Home 
Pay Off Education Debt 
Save for Next Child 
Take Overseas Trip 
Take Time Off to 
Pursue an Interest 
Other (specify) 
_______________________ 
TOTAL $ NEEDED 
$ Amount 
Needed 
$ 
$ 

of financial discipline. Other long-term goals include paying for extensive travel, 
starting your own business, going back to school to receive a higher degree of education, 
and buying a vacation home. Another long-term goal is to make sure you 
can afford medical attention in your later years. 

TRACKING GOALS 

For each goal on which you have placed a high priority, Figure 1.7 is a quick 
worksheet that will let you track the progress you are making toward achieving that 
goal. 

MONTHLY SAVINGS NEEDED TO REACH GOAL 

To figure out the monthly amount you need to invest to reach the goal you analyzed 
in the Goal-Tracking Worksheet, use the table in Figure 1.8. The left 
column shows the number of years you have until you need the money for your 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.6 Long-Term Goals Worksheet 
Date to 
Goal Priority Accomplish 
Buy Retirement Home 
Buy Vacation Home 
Continue Education 
Do Community or 
Charity Work 
Establish Long-Term 
Health Care for Self 
and/or Spouse 
Establish Retirement Fund 
Help Older Parents 
Make a Charitable Bequest 
Pay Off Mortgage Early 
Start a Business 
Start a Second Career 
Travel Extensively 
Other (specify) 
_______________________ 
TOTAL $ NEEDED 
$ Amount 
Needed 
$ 
$ 

goal. The next four columns show the divisors for four different rates of return that 
you can safely assume it is possible to earn, on average, over a long period of 
time. These rates of return assume you have adjusted for the effects of inflation 
and taxes, so they are known as real after-tax yields. The higher the rate of return, 
the more risk you have to take in your investment choices to achieve it. (See 
Chapter 3 for more on rates of return.) 

To use the table, take the amount of money you will need to pay for your goal 
and pick an assumed rate of return. Then find the divisor for the number of years 
you have allocated to reach the goal. Simply divide your dollar goal by the divisor, 
and you have figured out the monthly amount of savings you need to reach your 
goal. The divisor automatically calculates the effect of compounding of interest, 
which becomes quite a powerful force over time. 

For example, say you want to accumulate a $100,000 nest egg for your 
retirement in 20 years. You assume a real after-tax yield of 8 percent. When you 


PART ONE: Maximizing Your Investment Options 

Figure 1.7 Goal-Tracking Worksheet 
Goal (identify) 
Date in the Future You Will 
Need the Money 
How Many Years until You 
Need the Money 
Amount of Money Needed 
to Accomplish This Goal 
Money Already Accumulated 
for This Goal 
Rate of Return (%) Assumed 
for Accumulated Money 
Money Remaining to Be 
Accumulated for This Goal 
Money Needed to Be Saved Each 
Year at Assumed Rate of Return 
Monthly Amount to Be Saved 
(previous line divided by 12) 

look down the 8 percent column to the 20-year line, you see the divisor of 592. 
Divide $100,000 by 592. You have to save $168.92 a month to meet your goal. 

Here』s another example for a shorter-term goal: Say you need $2,000 in two 
years to buy furniture for your living room. Assuming a 6 percent rate of return, 
you divide $2,000 by the divisor of 25.4 to come up with a monthly savings target 
of $78.74. 

With your net worth statement in hand and short-term, medium-term, and 
long-term goals clearly defined, you should be feeling better already. But the fun 
is just beginning. It』s now time to analyze your cash flow to see where your money 
is coming from and where it is going on a monthly and an annual basis. 

Analyzing Your Cash Flow 

Now that you know how much you are worth and what your financial goals 
are, it』s time to do a detailed analysis of where your money is coming from and 
where it is being spent. This is known in the financial planning world as a cash flow 
analysis because it allows you to trace your sources and uses of money. 

Even though it is a simple exercise, most people never get around to it. They 
are left wondering, 「Where did all my money go?」 at the end of each month, and 
they anxiously wait for their next paycheck so they can pay their bills. By doing 


CHAPTER 1: Giving Yourself a Financial Checkup 27 
Figure 1.8 Determining the Monthly Savings 
Needed to Reach a Goal 
Divisors (By Rate of Return) 
Years to Goal 2% 4% 6% 8% 
1 12.1 12.2 12.3 12.4 
2 24.5 24.9 25.4 25.9 
3 37.1 38.2 39.3 40.6 
4 49.9 51.9 54.1 56.4 
5 63.1 66.2 69.8 73.6 
6 76.5 81.1 86.4 92.1 
7 90.2 96.6 104.1 112.3 
8 104.2 112.7 122.8 134.1 
9 118.4 129.5 142.7 157.7 
10 133.0 146.9 163.9 183.4 
11 147.8 165.1 186.3 211.1 
12 163.0 184.0 210.1 241.2 
13 178.5 203.6 235.4 273.7 
14 194.2 224.0 262.3 309.0 
15 210.4 245.3 290.8 347.3 
16 226.8 267.4 321.1 388.7 
17 243.6 290.4 353.2 433.6 
18 260.7 314.3 387.3 482.2 
19 278.2 339.2 423.6 534.9 
20 296.1 365.1 462.0 592.0 
21 314.2 392.1 502.9 653.8 
22 332.8 420.1 546.2 720.8 
23 351.8 449.3 592.2 793.4 
24 371.2 479.6 641.1 872.0 
25 390.9 511.2 693.0 957.2 

the cash flow analysis in this section, you will never again have to be one of those 
people, because even if you are anxious for each paycheck, you will know exactly 
how much income you can expect to receive as well as nearly all the expenses you 
plan to cover with that income. (Don』t plan on any sudden windfalls, but you 
should expect a few surprise expenses.) 

The Cash Flow Worksheet presented in this section is designed to be used on 
an annual basis. Some income, such as bonuses or capital gains distributions made 
by mutual funds, is received only at certain times of the year—for example, in 
December. Similarly, many expenses, such as tuition payments, fuel oil bills, or 


PART ONE: Maximizing Your Investment Options 

quarterly tax bills, occur only during certain months of the year. By totaling all 
your annual income and expenses, you will get a sense of how your overall cash 
flow looks for the year. 

It is also important to do a more short-term cash flow analysis because sometimes 
your expenses are due before the income arrives, causing a cash squeeze. 
The same Cash Flow Worksheet in Figure 1.9 can be filled out on both a monthly 
and a quarterly basis. 

We have designed this worksheet to be as comprehensive as possible, providing 
you with lines for the most common sources of income and the most frequent 
expenses, broken down into familiar categories. If you currently do not 
have one of the sources of income listed, leave the lines blank. Even so, it will be 
instructive for you to see the many different potential sources of income. 

The same holds true on the expense side. If you are not spending money for 
day care or a health club membership, leave it blank. Still, this list of expenses will 
give you some idea of the range of ways people spend their money. 

The best way to complete this worksheet is to take your bank, brokerage, insurance, 
and other statements, last year』s tax return, along with your last year-end 
paycheck and other records you have accumulated for the past six months, and fill 
in the real numbers. This is not an exercise in wishful thinking; this is a document 
that will show you, for better or worse, how you actually are earning and spending 
your money now. It』s no use inflating the income and lowballing the expenses because 
you』re the only one who will be hurt by not knowing the truth. You don』t 
have to show the results to anyone—not even your mother. 

SOURCES OF INCOME 

The income side of the Cash Flow Worksheet is broken into six categories: 
earned, self-employment, family, government, retirement, and investment income. 
The following is a brief guide to what kinds of income fall into each category. (For 
each of the six categories, we have provided a line on the worksheet to subtotal the 
income, which will make it easier to add up your total income at the end of the 
worksheet.) 

Earned income. The most common and largest source of income for most 
people, of course, is their salary from a job. You should note on the worksheet your 
net take-home pay, after deductions. 

Other sources of earned income include commissions paid to salespeople, 
bonuses for extraordinary performance, overtime, and tips. You may also be entitled 
to stock options, which give you the right to buy your company』s stock at a 
preset price, usually below the current market value, and the right to sell the shares 
for a profit. There are also many forms of deferred compensation that can be paid 
out to you, based on your performance or in accordance with the provisions of a 
contract. If you expect to exercise stock options or receive deferred compensation 
in the next year, you should note this on the worksheet. 


CHAPTER 1: Giving Yourself a Financial Checkup 

Self-employment income. If you work for yourself or a closely held partnership, 
most of your income will come from this income category. Because taxes or 
other deductions are not normally withheld from freelance income, you will have 
to pay income and self-employment taxes on this money on a quarterly basis 
through estimated tax filings. Finally, if you are a writer, a musician, a painter, or 
an inventor, you may be getting regular royalty income from sales of your books, 
music, paintings, or inventions. 

Family income. If you are lucky enough to come from a family that has put 
money in a trust for you, this can be a significant source of regular income. You 
should list on the worksheet the income produced from the assets you inherited or the 
assets in a trust for you. If you receive regular (or even irregular) gifts from family 
members, the total amount should also be listed here. Finally, if you are divorced and 
receive alimony or child support, that income should be entered on the worksheet. 

Government income. You might qualify to receive regular checks from the 
federal or state government. If your other income is low enough, you can get welfare 
or Aid to Families with Dependent Children (AFDC) funds. If you have had a 
disabling accident, you may qualify for disability insurance or workers』 compensation 
insurance. If you had a job, but were laid off, you are entitled to unemployment 
insurance for several months. Note these amounts on the worksheet. 

Retirement income. There are several sources of income once you have 
retired, assuming you have been building up retirement assets for most of your 
working life. You can receive a monthly payment from an annuity, issued by an insurance 
company, based on your lifelong contributions to the annuity. Alternatively, 
you can take the lump sum you receive from your employer once you retire 
(from any pension plan you may have had) and buy an annuity from an insurance 
company to ensure a fixed monthly income for the rest of your life. Similarly, 
starting at age 591.2, you can take money out of your IRA or Keogh account without 
penalty. (You must pay a 10 percent penalty if you withdraw from these accounts 
sooner.) If you worked at a company that offered a profit-sharing plan, a 
salary reduction plan, or a pension plan, you can have the earnings paid to you in 
monthly installments. Finally, as long as Social Security was keeping track of how 
many years you worked and what you were earning, you will get monthly Social 
Security checks as well. 

Investment income. This category offers the most possibilities because there 
are so many kinds of bank instruments, bonds, stocks, mutual funds, and limited 
partnerships designed to throw off income. Among bank products, you can earn 
regular interest income from certificates of deposit (CDs), money-market deposit 
accounts, NOW accounts, on which you can write checks, and other savings 
accounts such as passbook accounts. Two additional kinds of short-term interest-
bearing accounts are money-market mutual funds, which come in both taxable and 
tax-exempt varieties, and Treasury bills, which come in three-month, six-month, 
and one-year maturities. 


PART ONE: Maximizing Your Investment Options 

Among income-producing bonds, your options include corporate bonds (issued 
by corporations); convertible bonds (also issued by companies, but with the 
added option of converting the bonds into company stock in the future); Treasury 
notes maturing in up to 10 years and Treasury bonds coming due in up to 30 years; 
municipal bonds (issued by states and localities and paying interest free from federal 
and usually state taxes); and foreign bonds (issued by non-U.S. corporations 
or foreign governments). In addition, you may be counting on income produced 
from selling any of these kinds of bonds for a profit, listed on the worksheet as capital 
gains from bond sales. Similarly, you can produce regular income by investing 
in bond mutual funds that buy any of these taxable or tax-exempt bonds. 

Stocks also give you several options for producing regular income. Many individual 
stocks pay quarterly dividends, with some, like public utilities, yielding 5 
percent or more. Many mutual funds investing in stocks also are designed to pay a 
significant monthly dividend to income-oriented investors. Plus, most mutual 
funds make a yearly payout of all the capital gains they have accumulated during 
the year, known as a capital gains distribution. If you plan to sell some of your 
stocks or stock funds to realize a profit, that should be entered on the worksheet as 
income from capital gains. 

Limited partnerships, though their name has been tarnished by the many partnership 
debacles of the 1980s, still provide a viable vehicle for producing regular 
income. Partnerships can invest in rental real estate, oil and gas wells, or leasing of 
equipment such as airplanes or computers, all of which provide a monthly stream 
of income. If you have any interests in such partnerships, enter the annual income 
you expect from them on the worksheet. 

Next, total the income you expect to receive in all six categories, and add any 
other income sources as well, to create your grand total: annual income. 

EXPENSES 

Now you』re going to figure out where all of that income disappears every year. 
Your expenses can be divided roughly into two categories: what is fixed, meaning 
it must be paid on an annual or a monthly basis, and what is flexible, meaning you 
have more control over whether and when you spend it. By filling out the expense 
portion of the worksheet in these two categories, you will be able to see what percentage 
of your income is taken up by fixed expenses. This will give you a clearer 
idea of how much money you have left over for discretionary spending. 

There are seven categories that should be considered fixed expenses: 
automobile-related expenses, family expenses, home-related expenses, insurance, 
savings and investments, taxes, and utilities. 

Automobile-related expenses. Most people either lease their car from the 
dealer or buy it with an auto loan. In either case, you will have to make a monthly 
payment until the lease is up or the loan is paid off. To keep the car running, of 
course, you will need gasoline in the tank and oil under the hood. 


CHAPTER 1: Giving Yourself a Financial Checkup 

Family expenses. It』s hard to raise children without feeding them (they will 
start to complain), so add food and beverages to your regular fixed expenses. If 
your children go to a school that charges tuition, this also goes into the fixed expenses 
column. If you are divorced and still supporting your spouse and your children, 
count alimony and child support as fixed expenses. 

Home-related expenses. You』ve got to live somewhere, and if you own or rent, 
certain expenses are impossible to avoid. Owners must make their monthly mortgage 
payments, just as renters must keep the landlord happy on the first of the month. And 
if you want cable television, make an allowance in your budget for its charge. 

Insurance. Somehow, paying the insurance company never feels like a good 
use of money—until you have a claim. Then you are glad that you kept up with 
your premiums. The most common forms of insurance you will have to pay are 
auto, disability, dental, excess liability, health, homeowners and life insurance. 
(These are all discussed in more detail in Chapter 11, 「All about Insurance.」) 

Savings and investments. At last, here is an expense category that lets you 
feel you are not spending money you will never see again. It may seem hard to 
think of saving and investing as fixed expenses, but it』s the only way to accumulate 
funds. The easiest way to invest is through some kind of automatic savings plan, 
such as your salary reduction plan (called a 401(k) in companies, a 403(b) in nonprofit 
institutions, and a 457 in government agencies). You can also save at your 
bank by building up your emergency fund, which should be kept at three months』 
salary, if possible. Such a fund is crucial if you suddenly become unemployed, 
must pay for a major auto or house repair, or have a major medical emergency. And 
even though you may not think of repaying debt as savings, it』s one of the best savings 
moves you can make. Not many investments out there can guarantee you, for 
example, the instant 18 percent return you earn for paying off credit card debt. (For 
much more on savings and investments, read Chapters 2–8.) 

Taxes. The federal, state, and local governments seem to have this nasty habit 
of expecting you to pay taxes quite frequently. If you do not have enough withheld 
from your paycheck or you have a great deal of freelance income, you must make 
quarterly estimated payments to both the IRS and your state. Also, the freelancer 
should make regular Social Security self-employment tax payments as well. If you 
own your home, your city government expects you to pay property taxes, though 
often those taxes are actually paid by the bank that holds your mortgage and has set 
up your tax escrow account. 

Utilities. If you want to keep the lights on, your electric utility gets its share 
of your budget. The same holds true for the gas company or oil dealer—if you want 
to stay warm. If you want to talk on the telephone, you must ante up each month to 
the utility. In some cities, you are also charged for water or sewage service. 

These seven categories include most of what you absolutely have to pay every 
year. The typical American spends about 70 percent of his or her income on fixed 


PART ONE: Maximizing Your Investment Options 

expenses. With some good planning, you will have about 30 percent of your income 
left for more discretionary purchases, known by financial professionals as 
flexible spending. There are many more ways to spend money when you have 
some choice in the matter, so we』ve broken flexible expenses into 13 categories: 
children, clothing, contributions and dues, education, equipment and vehicles, financial 
and professional services, food, home maintenance, medical care, miscellaneous, 
recreation and entertainment, savings and investments, and travel and 
vacations. 

Children. If you have children or are planning to have them, you know that the 
joys of parenthood don』t come cheap. As children grow up, what they require and desire 
changes, and it usually gets more expensive. While your infant may be perfectly 
content with a pacifier for $.69, your teenager will not be satisfied with anything but 
the latest stereo equipment, starting at roughly $500. Many older children, even those 
who have graduated from college, often continue to need financial help (and often 
housing back in what was supposed to be the empty nest!) until they get a job and become 
established. So depending on their age, you might as well plan on spending 
something on allowances, babysitting, day care, books, and toys. During the summer, 
the children will probably want to go to camp. And it will surely cost you something 
to rent a hall or restaurant for their birthday parties. Remember, they』ll grow up 
faster than you can ever imagine, and soon they』ll be out on their own—at least that』s 
what everyone likes to tell you. 

Clothing. You probably will need to augment your clothing budget if you are in 
a professional setting, where appearance is important. Set aside money not only for 
new clothes and shoes but also for the upkeep of your clothes, such as for dry cleaning, 
tailoring, and pressing. All those trips to the dry cleaner may seem insignificant, 
but those bills can really add up over a year. 

Contributions and dues. The amount you give to charities, religious institutions, 
and political candidates is up to you. You may be able to deduct some or all of 
your contributions, which will give you a bit of a tax break. For the most part, 
though, give because you believe in the cause, not to get the write-off. If you are a 
member of a union, dues are normally not so voluntary. And gift giving can always 
take a big bite out of your budget because you can get carried away with your feelings 
of generosity toward the recipients. 

Education. If you or your children plan on going to a school that charges tuition, 
it』s never too early to start budgeting. Remember, you will have to pay not only 
for tuition but also room and board, books, software, and supplies. And don』t forget 
to budget for lessons on everything from ballet to violin. 

Equipment and vehicles. Every time you buy a new vehicle or piece of equipment 
to make your life easier, you are adding potential expenses. Cars, boats, motorcycles, 
and motor homes all need maintenance, registrations, licenses, and a 
place to part. Televisions, videotape recorders, stereos, CD players, and other consumer 
electronics need videotapes, audiotapes, and CDs, along with occasional 


CHAPTER 1: Giving Yourself a Financial Checkup 

repairs. The same holds true for all of life』s other conveniences, from Cuisinarts to 
washing machines. 

Financial and professional services. Some areas of finance are too complicated 
for the average person, and it is worthwhile to pay an expert for advice. That 
can be particularly true with tax, legal, and investment matters. Also, most of the 
time, you are charged fees to make financial transactions, from the pesky fees that 
banks charge to use automatic teller machines to brokerage fees you pay to buy or 
sell stocks or mutual funds. Some of these fees can be avoided; for example, you 
can buy a no-load mutual fund directly from a fund company that does not charge 
an up-front commission. Still, even no-load funds charge an annual management 
fee, which is taken out of your fund』s return. If the advice you get from financial 
professionals is solid, the charges can be well worth it. But if the advice is biased 
in favor of the advisor, or you don』t act on it because you don』t understand the advice 
or you think the counsel is inappropriate for you, the fees can be a major 
money-waster. 

Food. In addition to food you buy to serve at home, you should allow for food 
outside the home, including both restaurant meals and on-the-fly snacks. Count 
any purchases of alcohol and tobacco in this food category. 

Home maintenance. The bigger your house or apartment, the more expensive 
it is to maintain. You should expect a certain amount of repairs every year, along 
with ongoing cleaning and household expenses, from soap to dishes to light bulbs. 
Remember the fees for outside maintenance as well, which include removing the 
garbage and snow and tending the lawn and garden. If you have a home office, you 
will have to keep it stocked with file folders, pens, and probably computer supplies 
and fax paper. If you have suffered a break-in or damage to your house that is not 
covered by your insurance policy, you should count that, too. 

Medical care. Even those workers with health insurance through their employers 
bear more and more medical costs these days. Often, employees have to 
pay part of the insurance premium, deductibles, and copayments, as well as for 
drugs, eyeglasses, and medical devices like wheelchairs and canes. In some cases, 
insurance companies limit the amount of a physician』s, dentist』s, or hospital』s bill 
that they will reimburse, leaving the insured holding the bag. In addition, you must 
budget to cover over-the-counter medicines, personal care items, and toiletries, as 
well as haircuts, manicures, and pedicures if they are part of your routine. You may 
also have to pick up medical expenses for your older parents if they do not have 
enough money, whether they live on their own or in a nursing home, because most 
insurance will not cover all of their expenses. 

Miscellaneous. There are always going to be some expenses that just don』t fit 
into any of the other categories. Unreimbursed business expenses and postage are 
two that come to mind. Quite frequently, the recurring nonrecurring expense hits. 
Generally each of these expenses happens only once, but a new one seems to occur 
every month or so. One month, the boiler breaks down. The next month, your parked 


PART ONE: Maximizing Your Investment Options 

car is hit, but the damage is just under your insurance deductible. By assuming such 
recurring nonrecurring expenses will pop up, you can budget for them. 

And then there is always that big hole in your budget we like to call 「mystery 
cash.」 You had cash in your wallet, and you have absolutely no idea what you spent 
it on by the end of the week. Try writing down what you spend every penny on during 
one week, and you might be able to unlock the secrets of mystery cash. 

Recreation and entertainment. Most people can』t exist without some kind 
of hobby, sport, or recreation. You may like pets, books, movies, music, photography, 
plays, sporting events, or videos, all of which can become expensive hobbies. 
You may be committed to your health, having joined a fitness club or playing 
a sport like golf, where greens fees are required. Nothing is wrong with any of 
these—except that they don』t come free. 

Savings and investments. While you should put aside a certain amount of 
money as part of your fixed expenses to keep your emergency fund solvent, you 
should also try to invest in bank instruments, stocks, bonds, and mutual funds that 
will provide you with the wherewithal to reach the financial goals you set in a previous 
section of this book. If you don』t start investing for these goals, the money 
will never be there when you need it, whether it be for your child』s college education 
or your retirement. While some of the investments should be in a regular 
taxable bank, brokerage, or mutual fund account, some of the money should be 
compounding tax deferred in an IRA or a Keogh account. 

Travel and vacations. There are two kinds of travel—for business and for 
pleasure. You should set aside money for both. For business, you will spend money 
to commute to work, whether that means driving (paying tolls and parking your 
car) or taking a bus, subway, or train. In addition, there are often expenses you 
incur while on the road for your business that your company might not reimburse, 
like watching a pay-per-view movie in your hotel room. Vacations are all on you, 
and you should be realistic about the cost of airfares, hotels, car rentals, food, tips, 
and souvenirs. Vacations can be wonderfully relaxing, but somehow they always 
end up costing more than you expect. 

So, there you have it—the 13 major categories for which you spend your 
money. As you fill out the Cash Flow Worksheet in Figure 1.9 only certain sections 
may apply to you right now. Some day, you probably will use those sections 
you cannot use now. For the moment, feel free to skip those categories that do 
not apply. 

After you』ve filled out both the income and expense sides of this worksheet, 
it will be time to get down to the bottom line. Subtract your expenses from your 
income, and you have your annual cash flow. If you are taking in more than you 
are spending, congratulations. You are in positive cash flow. Your next job is to 
figure out the best places for your extra cash—probably savings vehicles and 
investments. 


CHAPTER 1: Giving Yourself a Financial Checkup 

If, on the other hand, your expenses total more than your income—not an unlikely 
situation—you are in negative cash flow, and it』s time to start scrutinizing 
your expenses. Just because you have negative cash flow does not mean you are in 
trouble. For example, you may still be putting away money in your company savings 
plan, so you are investing more than you remember. But if the reason you are 
spending more than you are taking in is excessive debt, it』s time to take notice. This 
exercise is your loud wake-up call, and the time to mend your ways is now. That』s 
where we go in the next chapter—creating a financial plan and budget that will 
help you meet your goals. 

Creating a Budget That Works 

By now, you have assembled a pretty accurate picture of where you stand financially. 
You know what your assets and liabilities are, you have clearly prioritized 
your financial goals, and you have analyzed how your income matches up 
with your expenses. Using this information as a base, you now must project into 
the future to create a budget that works for you. 

Often, the word budget sounds constricting, foreboding, and even a bit frightening. 
The word has a certain ring to it, vaguely resembling the word homework 
when you were in school. 

Instead, you should see a budget as your friend. It is the document that gives 
you control over your finances—in a way that lets you decide what is most and 
least important to you. A budget is an intensely personal plan; there is probably 
no one you know who has exactly the same priorities you have. If you find it important 
to include in your budget a lavish ski vacation to the Alps every winter, so 
be it—as long as the numbers tell you that you can afford it. 

Once you become accustomed to budgeting, you will wonder how you got 
through all those years without one. A budget is a living, breathing document that 
expands or contracts as your circumstances change. Think of it as a road map, allowing 
you to know the direction you want to go, but giving you several options on 
how to get there. For example, you might be planning to buy a house in three years, 
and you are carefully putting aside money for a down payment. Then you are involved 
in a car accident that puts you out of work for six months. Your budget must 
change, causing your down payment plans to be put off for a while. But this does 
not mean you will never buy the house, just that your budget priorities have had to 
adapt to altered circumstances. 

When you』ve executed a budget, you will be able to answer those questions 
that you have asked yourself in the past but were never able to resolve conclusively. 
Here are a few examples: 

. Do I have enough income to cover the payments on more debt? 
. Do I have enough money available to cover quarterly tax payments? 

PART ONE: Maximizing Your Investment Options 

Figure 1.9 Cash Flow Worksheet 
Annual Income $ Amount 
1. Earned Income 
Salary after Deductions $ 
Bonuses 
Commissions 
Deferred Compensation 
Overtime 
Stock Options 
Tips 
Other 
TOTAL EARNED INCOME 
2. Self-Employment Income 
Freelance Income $ 
Income from Partnerships 
Income from Running a Small 
Business 
Rental Income from Real Estate 
Royalties 
Other 
TOTAL SELF-EMPLOYMENT INCOME 
3. Family Income 
Alimony Income $ 
Child Support Income 
Family Trust Income 
Gifts from Family Members 
Inheritance Income 
Other 
TOTAL FAMILY INCOME 
4. Government Income 
Aid to Families with Dependent 
Children Income $ 
Disability Insurance Income 
Unemployment Insurance Income 
Veterans Benefits 
Welfare Income 
Workers』 Compensation Income 
Other 
TOTAL GOVERNMENT INCOME 
$ 
$ 
$ 
$ 
$ Total 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.9 (continued) 
5. Retirement Income 
Annuity Payments 
Social Security Income 
Pension Income 
Income from IRAs 
Income from Keogh Accounts 
Income from Profit-Sharing Accounts 
Income from Salary Reduction Plans 
(401(k), 403(b), 457 plans) 
Other 
TOTAL RETIREMENT INCOME 
6. Investment Income 
Bank Account Interest 
CDs 
Money-Market Accounts 
NOW Accounts 
Saving Accounts 
Bonds and Bond Funds 
Capital Gains 
Dividends 
Interest 
Other 
Limited Partnerships (real estate, 
oil, gas) 
Money Funds and T-Bills 
Taxable Funds 
Tax-Exempt Funds 
T-Bills 
Stock and Stock Funds 
Capital Gains 
Dividends 
Interest 
Other 
Other 
TOTAL INVESTMENT INCOME 
7. Other Income (specify) 
______________________________ 
TOTAL OTHER INCOME 
TOTAL ANNUAL INCOME 
$ Amount 
$ 
$ 
$ 
$ 
$ 
$ 
$ 
$ Total 


PART ONE: Maximizing Your Investment Options 

Figure 1.9 Cash Flow Worksheet (continued) 

Annual Expenses $ Amount $ Total 

1. Fixed Expenses 
Automobile-Related 
Car Payment (loan or lease) $ 
Gasoline or Oil 
Other 


Total $ 

Family 
Alimony 
Child Support Payments 
Food and Beverage 
School Tuition 
Other 


Total 

Home-Related 
Cable Television Fees 
Mortgage Payments Home #1 
Mortgage Payments Home #2 
Rent 


Total 

Insurance 
Auto 
Disability 
Dental 
Health 
Homeowners 
Life 
Other 


Total 

Savings and Investments 
Bank Loan Repayment 
Emergency Fund Contributions 
Salary Reduction Plans 
Contributions (401(k), 403(b), 


457 plans) 
Other 
Total 


Taxes 
Federal 
Local 
Property 
Social Security (self-employed) 



CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.9 (continued) 
$ Amount $ Total 
State $ 
Other 
Total $ 
Utilities 
Electricity 
Gas 
Telephone 
Water and Sewage 
Other 
Total 
Other (specify) 
Total 
TOTAL FIXED EXPENSES $ 
2. Flexible Expenses 
Children 
Allowances $ 
Babysitting 
Books 
Camp Fees 
Day Care 
Events (parties, class trips, etc.) 
Toys 
Other 
Total $ 
Clothing 
New Purchases 
Shoes 
Upkeep (cleaning, tailoring, dry 
cleaning, etc.) 
Total 
Contributions and Dues 
Charitable Donations 
Gifts (Christmas, birthdays, etc.) 
Political Contributions 
Religious Contributions 
Union Dues 
Other 
Total 
Education 
Room and Board 

PART ONE: Maximizing Your Investment Options 

Figure 1.9 Cash Flow Worksheet (continued) 
$ Amount 
Books and Supplies (parents 
and/or children) $ 
Tuition (parents and/or children) 
Other 
Total 
Equipment and Vehicles 
Appliance Purchases and 
Maintenance 
Car, Boat, and Other Vehicle 
Purchases and Maintenance 
Computer Purchases, etc. 
Consumer Electronics Purchases 
Licenses and Registration of 
Cars, Boats, etc. 
Parking 
Other 
Total 
Financial and Professional Services 
Banking Fees 
Brokerage Commissions and Fees 
Financial Advice 
Legal Advice 
Tax Preparation Fees 
Other 
Total 
Food 
Alcohol 
Foods and Snacks away from Home 
Restaurant Meals 
Tobacco 
Other 
Total 
Home Maintenance 
Garbage Removal 
Garden Supplies and Maintenance 
Home Office Supplies 
Home Furnishings 
Home or Apartment Repairs and 
Renovations 
Home Cleaning Services 
Home Supplies 
Lawn Care and Snow Removal 
Linens 
$ 
$ Total 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.9 (continued) 
Uninsured Casualty or Theft Loss 
Other 
Total 
Medical Care 
Dentist Bills 
Drugs (over the counter) 
Drugs (prescriptions) 
Eyecare and Eyeglasses 
Hospital (uninsured portion) 
Medical Devices (wheelchairs, 
canes, etc.) 
Medical Expenses (parents, etc.) 
Nursing Home Fees (parents, etc.) 
Personal Beauty Care (hair stylist, 
manicurist, etc.) 
Personal Care (cosmetics, 
toiletries, etc.) 
Physician Bills 
Unreimbursed Medical Expenses 
Other 
Total 
Miscellaneous 
Mystery Cash 
Postage and Stamps 
Recurring Nonrecurring Expenses 
Unreimbursed Business Expenses 
Other 
Total 
Recreation and Entertainment 
Animal Care 
Books 
Club Dues 
Cultural Events 
Health Club Memberships 
Hobbies 
Lottery Tickets 
Magazine and Newspaper 
Subscriptions 
Movie Admissions 
Music Admissions 
Photography (cameras, developing, 
film, etc.) 
Play Admissions 
$ Amount 
$ 
$ 
$ Total 


PART ONE: Maximizing Your Investment Options 

Figure 1.9 Cash Flow Worksheet (continued) 
$ Amount 
Recreational Equipment (games, 
sports, etc.) $ 
Sporting Events Admission 
Videotape Rentals 
Other 
Total 
Savings and Investments 
Bank Savings Contributions 
Stock, Bond, and Mutual Fund 
Contributions 
IRA Contributions 
Keogh Account Contributions 
Other 
Total 
Travel and Vacations 
Bus Fares 
Subway Costs 
Tolls 
Train Fares 
Travel Expenses (other than 
vacations) 
Unreimbursed Business Travel 
Expenses 
Vacations (airfare) 
Vacations (car rental) 
Vacations (food) 
Vacations (hotel) 
Vacations (other) 
Other 
Total 
Other (specify) 
Total 
TOTAL FLEXIBLE EXPENSES 
TOTAL ANNUAL EXPENSES 
TOTAL ANNUAL INCOME 
(MINUS) 
TOTAL ANNUAL EXPENSES 
EQUALS 
TOTAL NET ANNUAL 
POSITIVE (OR NEGATIVE) CASH FLOW 
$ 
$ 
$ 
$ 
( 
$ 
$ Total 
) 


CHAPTER 1: Giving Yourself a Financial Checkup 

. 
Have I put aside enough to cover the Christmas presents I want to give? 
. 
Will my Social Security and pension income be enough to live on and 
maintain my current lifestyle if I retire this year? 
. 
What size mortgage payments can I afford? 
Many such questions will continue to arise as you move through different 
stages of life, and you will finally be in a position to make rational, informed decisions 
based on the information in your budget worksheet. 

Creating a written budget therefore accomplishes several tasks for you. It communicates 
your priorities in black and white when they may have been communicated 
only verbally in the past. The process of creating a budget will, in itself, 
motivate you to take charge of your financial life. As the year goes on, you will feel 
in control of your money because you will know whether you are spending more 
or less than you expected. And at the end of the year, you will be able to evaluate 
how you did based on accurate information, making next year』s budget even better. 

ANNUAL BUDGET 

As you make out your budget (see Figure 1.10), keep in mind a few commonsense 
tips: 

. 
A budget takes thought, so you probably can』t do a good job of forecasting 
all your income and expenses in an afternoon. Plan to do it in several sessions 
over about a week』s time. 
. 
Do your first few rounds of budgeting in pencil so you can erase until all the 
numbers add up. 
. 
Work out a budget with everyone who will be affected by it. A budget should 
not be handed down to the family like the Ten Commandments from Moses. 
Instead, it should be discussed with your spouse and children so they feel involved 
in the plan. This way, you have a much better chance of meeting your 
targets than if they had no input. 
. 
Be realistic and specific to your situation. You should not count on levels of 
spending or income that you only wish you had, or that your neighbor has. 
That will only frustrate the exercise. Also, remember that a budget, in itself, 
will not increase your income or cut your spending; it only allows you to see 
what is going on so you can improve it. 
. 
When setting priorities, refer back to the 「Defining Your Financial Goals」 
section, in which you went through the exercise of determining what is most 
and least important to you. 
. 
Use round numbers in your budget. You』re not trying to drive yourself crazy 
by getting your spending down to the last penny. 
. 
When making projections for the next year, don』t automatically assume 
you will earn or spend the same amount in each category as you did the 

PART ONE: Maximizing Your Investment Options 

Figure 1.10 Annual Budgeting Worksheet 
YEAR _________ +/(.) 
Budget vs. 
Actual Budget Actual Actual 
Annual Income Last Year This Year This Year This Year 
Earned Income $ $ $ $ 
Self-Employment Income 
Family Income 
Government Income 
Retirement Income 
Investment Income 
Other Income 
TOTAL ANNUAL INCOME $ $ $ $ 
Expenses 
Fixed Expenses 
Automobile-Related $ $ $ $ 
Family 
Home-Related 
Insurance 
Savings and Investments 
Taxes 
Utilities 
Other 
Total Fixed Expenses $ $ $ $ 
Flexible Expenses 
Children $ $ $ $ 
Clothing 
Contributions and Dues 
Education 
Equipment and Vehicles 
Financial and Professional 
Services 
Food 
Home Maintenance 
Medical Care 
Miscellaneous 
Recreation and 
Entertainment 
Savings and Investments 
Travel and Vacations 
Other 
Total Flexible Expenses $ $ $ $ 
TOTAL EXPENSES $ $ $ $ 
TOTAL INCOME LESS 
TOTAL EXPENSES $ $ $ $ 

CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.11 Monthly Budgeting Worksheet 
MONTH ___________ 
Income Budget Actual 
Earned Income $ $ 
Self-Employment Income 
Family Income 
Government Income 
Retirement Income 
Investment Income 
Other Income 
TOTAL INCOME $ $ 
Expenses 
Fixed Expenses 
Automobile-Related $ $ 
Family 
Home-Related 
Insurance 
Savings and Investments 
Taxes 
Utilities 
Other 
Total Fixed Expenses $ $ 
Flexible Expenses 
Children $ $ 
Clothing 
Contributions and Dues 
Education 
Equipment and Vehicles 
Financial and Professional 
Services 
Food 
Home Maintenance 
Medical Care 
Miscellaneous 
Recreation and 
Entertainment 
Savings and Investments 
Travel and Vacations 
Other 
Total Flexible Expenses $ $ 
TOTAL EXPENSES $ $ 
TOTAL INCOME LESS 
TOTAL EXPENSES $ $ 
$ 
$ 
$ 
$ 
$ 
$ 
$ 
$ 
YEAR _________ 
YTD YTD 
Budget Actual 
$ 
$ 
$ 
$ 
$ 
$ 
$ 
$ 


PART ONE: Maximizing Your Investment Options 

previous year. Last year』s figures should be a guide, not a straitjacket. Part 
of your budget is taking control of your finances, so move numbers on the 
expense side up or down, depending—to some extent—on what you would 
like to see happen in the next year. 

In setting up your budget (see Figure 1.10), use the totals from the Cash Flow 
Worksheet from the previous section (see Figure 1.9) and add four columns to it. 
Label the first column, 「Actual Last Year.」 In it, record what you actually earned 
and spent in each of the categories in the last year. This should be easy because all 
you have to do is transfer the figures from the Cash Flow Worksheet. 

Next, you want to project what you think you will earn and what you want to 
spend in each of the categories over the next year. Label this second column, 「Budget 
This Year.」 

As you proceed through the year, you will be keeping track of what you are 
actually earning and spending in each category. This should be entered in the third 
column, 「Actual This Year.」 In the fourth column, you will calculate whether you 
are above or below what you projected in each category. Label this last column, 
「+/. Budget vs. Actual This Year」 or 「Difference.」 

With this design, you can instantly see whether your income and expenses are 
coming in over or under projections. When you total them, you can observe 
whether you are shooting above or below your total budget. If you are over budget, 
the culprit category usually sticks out like a sore thumb. If you are under budget, 
you might make a mid-course correction to see where else you can put some 
money, such as in savings or investments. 

MONTHLY BUDGET 

In addition to doing an annual budget, you should keep a running tab of how 
you are doing on a monthly basis in at least the major categories. The Monthly 
Budgeting Worksheet in Figure 1.11 will let you compare your budgeted amount 
with your actual income and spending. At the end of the worksheet, calculate 
whether you are over or under budget overall. Using this worksheet, you will be 
able to see month by month what kind of progress you are making toward meeting 
your budget and what items are at the greatest variance with your projections. 

Assembling a Long-Term Financial Plan 

While budgeting is crucial to balancing your income and spending over the 
coming months and years, you also have to take steps to project how your needs 
will evolve during the rest of your life. That is where long-term financial planning 
fits in. This process not only helps you avoid or at least be prepared for financial 
surprises and disasters; it helps those in good financial shape become even better 
prepared for the future. As you get older, certain financial events inevitably are 
bound to occur, and the more prepared you are for them, the easier they will be 


CHAPTER 1: Giving Yourself a Financial Checkup 

to handle. The relatively small amount of time you spend on long-term planning 
will pay off enormously for the rest of your life, both in terms of dollars and cents 
and in the security it gives you to know you will be able to deal with almost any 
twist or turn of your financial fate. 

As you found out in the 「Defining Your Financial Goals」 section, there are 
short-, medium-, and long-term dimensions to your financial life. While budgeting 
is aimed at satisfying your short-term goals, you might never get to the medium-
and long-term objectives without a comprehensive financial plan. 

Many of the aspects of long-term planning will be discussed in more detail 
later in this book. What follows is a brief introduction to all of the elements you 
will need to consider in setting up your strategy for long-term success. 

Investment strategy. Your financial plan will outline how much capital you 
will need to accumulate to meet certain long-term goals, such as paying for your 
children』s college education, buying or upgrading a home, or providing for a secure 
retirement. Part of the investment strategy is assembling a portfolio of 
stocks, bonds, mutual funds, and bank instruments that will get you where you 
want to go. One of the main risks you must overcome in a long-term plan is the 
slow but steady erosion of the worth of a dollar because of inflation. A good investment 
strategy will keep your dollars growing faster than inflation so that by 
the time you need to spend them, you will have enough. Another element of investing 
is finding a level of risk with which you feel comfortable. For more on 
investing, see Chapters 2–8. 

Housing planning. Whether it is figuring out how to build a down payment 
on a first home, making an addition to your existing home, or planning a move to 
a retirement community, your long-term housing needs must be planned far in advance 
because such decisions are expensive. Part of the planning entails deciding 
what kind of housing you would like at each stage of your life. You should then 
consider the different financial strategies you might use to pay for it. In some circumstances, 
it might make more sense to rent than to buy. In other cases, a 15-year 
mortgage might be better than a 30-year loan. A more detailed discussion of these 
matters appears in Chapter 8, 「Inside Real Estate.」 

Debt planning. There are times in your life when it makes sense to borrow 
and other times when it is better to pay off debt. A young couple buying and furnishing 
their first home should expect to borrow to cover these enormous costs, 
while someone nearing retirement should already have his or her mortgage paid 
off (in an ideal world) and have as little debt as possible. If you do not plan carefully, 
debt can overwhelm your other financial plans because interest costs have a 
way of swallowing up much of your discretionary income. (For an extreme case, 
look at the federal government, which has to pay more and more for interest each 
year because of the soaring budget deficit, leaving less and less for programs.) 
When you do borrow, you must decide among various repayment alternatives in 
order to pay the lowest interest and still provide yourself with repayment flex



PART ONE: Maximizing Your Investment Options 

ibility. You will find more on debt planning in Chapter 9, 「You and Your Credit— 
Managing It Wisely.」 

Automobile planning. Aside from your house and your children』s education, 
your car will probably be the most expensive purchase you will make in your lifetime. 
Depending on what you will use your car for, how much you will drive it, and 
how long you expect to keep it, there are different financial strategies to consider 
in obtaining a car. You might compare leasing versus taking out an auto loan to buy 
the car. You also should weigh the merits of buying a new versus a used car. You 
will find more on these questions in Chapter 10, 「Getting the Most for Your Money 
When Buying a Car.」 

Insurance strategy. A key part of your long-term financial plan is to make 
sure you, your family, and your major possessions are protected in case something 
unfortunate happens. That means finding the right kind of auto insurance, disability 
coverage, liability protection, health plans, homeowners policies, and life 
insurance. For a fuller explanation of these options, see Chapter 11, 「All about 
Insurance.」 

Financing college. To accumulate the $50,000 to $100,000 or more that it 
will take to put your children through four years of a good college over the next 
few years, you would have had to start planning—and saving—as soon as they 
were born. This takes a discipline that will pay off as they approach their freshman 
year. The later you start saving, the more you will need to invest each year to 
end up with the same college kitty. In addition, it takes advance planning to understand 
and qualify for various kinds of student loan programs, both those offered 
by the government and those offered by individual schools. More details on 
college financing strategies can be found in Chapter 12, 「How to Finance a College 
Education.」 

Tax planning. Without a systematic plan to minimize your federal, state, and 
local tax liability, you will end up paying far more to the government than you need 
to. A key part of financial planning is determining in advance the tax implications 
of all your other moves. This might involve bunching deductions in one year rather 
than the next. Or tax considerations might dictate that you sell your business in installments 
over several years instead of taking all the cash in one lump sum, which 
would create a huge tax bill. To create more deductions, you might want to borrow 
against the equity in your home rather than on your unsecured line of credit, for 
which interest costs are nondeductible. For more on how you can plan to beat the 
tax man legally, read Chapter 13, 「The Basics of Tax Planning.」 

Retirement planning. Even though it may be decades away, it is not too soon 
to plan for your retirement. Millions of people reach their supposedly 「golden 
years」 impoverished because they failed to plan. Millions of dollars passed 
through their hands during their lifetime, but very little of it was saved for their 
later years. The more capital you build up during your working years, the more 


CHAPTER 1: Giving Yourself a Financial Checkup 

options you will have when you retire. Considerations about retirement include 
whether you will stay in your home or move to another state; whether you will continue 
your career in modified form or even try a new career; or whether you will 
travel extensively. More on this topic appears in Chapter 14, 「Retirement—How to 
Get There from Here.」 

Estate planning. You should think far in advance about how you want to dispose 
of your assets to your heirs. The scenes from old movies where the ancient patriarch 
signs over all of his assets to his children on his deathbed just don』t apply 
to the real world anymore. In that situation today, the IRS would lump all of those 
assets back into his estate, which may have to pay estate tax at a rate of 37 percent 
or more. Estate planning, of course, involves writing a will, but it also might entail 
setting up different kinds of trusts and giving gifts to several people over several 
years. For more detail on this topic, read Chapter 15, 「Estate Planning—Keeping 
Your Assets in the Family.」 

Employee benefit planning. Your biggest source of long-term capital, if you 
manage it well, could be the benefits your employer offers you. Quite often, the 
benefits are not explained very well by your benefits office, and you fail to take 
full advantage of what you are offered. By enrolling in salary reduction, savings 
bond payroll deduction, profit-sharing, and flexible spending plans, among others, 
you can greatly enhance your long-term financial health with relatively little 
effort. For further details on these plans, see Chapter 16, 「Making the Most of 
Your Employee Benefits.」 

Selecting financial advisors to prepare the plan. Each of the areas just 
mentioned is itself a specialty that requires expertise. This book will give you most 
of the basic knowledge you will need so that you can understand and make judgments 
about what advisors recommend. Still, it would probably be productive for 
you to sit down with them and go over your specific situation. If you bring in your 
complete net worth, goals, cash flow, and budget worksheets from this book, you 
will already be miles ahead of most people who arrive at the door of financial plan-
ners—and you will save yourself a great deal of money because the planner will 
not have to take time to assemble that information for you. For you to create a 
workable plan that meets all legal requirements, you should assemble a team that 
includes a financial planner, a tax advisor, an estate lawyer, an insurance specialist, 
and an investment professional. For more on how to choose members of this 
team, see Chapter 17, 「Finding Financial Advisors Who Are Right for You.」 

Finally, the answers in all these areas of financial planning depend on your age 
and your situation (whether you are single, married, remarried, divorced, widowed, 
with or without children, etc.). The final chapter gives you brief outlines of some 
special planning rules that apply to different ages—whether you are in your 20s, 
30s, 40s, 50s, or retirement years. 


PART ONE: Maximizing Your Investment Options 

Assessing Your Tolerance for Risk 

Unfortunately, for many people, the word risk, just like the word budgeting, 
has a negative connotation. 「Why would I want to risk my hard-earned money?」 
you say. 「I』m very conservative.」 

The answer: If you take no risks with your assets, you will be unlikely to earn 
a return high enough to achieve your financial goals. To alter the universal saying 
seen in gymnasiums everywhere—「No pain, no gain」—when you get into the 
money world, the saying is 「No risk, no return.」 

Now, we』re not advocating that you take enormous risks with all of your 
money. Not every risky investment will earn a high return; if it did, it wouldn』t be 
risky. By diversifying your assets carefully among high-risk, medium-risk, and 
low-risk investments, you are assured of ending up with a larger pool of assets over 
time than if you keep all of your money in low-risk, low-return choices. 

In general, the further in the future a return is expected, the greater the risk. Because 
it is tricky enough to predict what is going to happen over the next few 
months, it is even more difficult to know what the long-term future holds. Therefore, 
under normal circumstances, the longer you commit yourself to an investment, 
the more risk you are taking. But because you are taking more risk, you 
should be compensated in the long run by a higher return. 

As you determine your tolerance for risk, you should understand several types 
of risk. There are ways to control and minimize each of these risks. But before we 
get to that later in the book, here are the most important risks you will face. 

Currency risk. While most of your assets will probably be in dollar-denominated 
investments, you should be aware of the risk of currency movements if you own 
stocks or bonds denominated in other currencies. When you buy an individual stock 
or bond in another country, or a mutual fund that invests in foreign securities, the 
value of your investment fluctuates based on how many dollars it takes to buy a unit 
of the foreign currency. In effect, when you own a British stock, for example, your 
money has been converted into pounds. If the value of the pound falls against the 

U.S. dollar, your British shares will be worth less if you were to sell the stock and 
translate the pounds back into dollars. Conversely, if the pound gains value against 
the greenback, your British stock will be worth more if you were to sell it. Currency 
movements, which swing day to day based on each country』s economic and political 
conditions, can therefore hand you substantial gains or losses. 
Deflation risk. If prices are falling sharply because of a severe economic contraction, 
you face the risk that the value of your assets will drop just as sharply. 
This is what happened during the Great Depression of the 1930s, when stock 
prices, real estate prices, and prices of just about everything else plummeted. To 
some extent, deflation was a problem in the early 1990s as well, particularly in 
commercial real estate, which had been vastly overbuilt during the boom times of 
the 1980s. The key to sidestepping deflation risk is to make sure you do not have 


CHAPTER 1: Giving Yourself a Financial Checkup 

too much of your wealth in assets that could get hit by a deflationary wave. Treasury 
bonds provide a good haven from deflation, for example, because it is safe to 
assume the government will always honor its obligations to bondholders. 

Lack of diversification risk. This is commonly known as the risk of keeping 
all your eggs in one basket. If all your assets are in one kind of investment, like 
stocks or CDs, you are not protected if that asset falls sharply in value. Even more 
dangerous is to keep most of your money in just one stock, bond, or CD because 
if something happens to it, you have no alternate assets to fall back on. Many people』s 
biggest financial mistake is to have too much of their net worth tied up in 
their own company』s stock. Even if it is a wonderful company that has a bright future, 
these people lack diversification. The way to lower risk in this realm is to 
spread your holdings among different kinds of assets as well as among several individual 
investments within each kind of asset. One easy way to diversify is to buy 
a mutual fund, which itself holds dozens of stocks or bonds. For more on this, see 
Chapter 4, 「Selecting Mutual Funds.」 

Inflation risk. Even if prices are rising at about 5 percent a year, the value of 
your dollars is steadily eroding over time. If inflation is galloping at more than 10 
percent, your purchasing power disappears much faster. Sometimes you don』t notice 
inflation risk until you must buy something you have not bought for several 
years and you are hit with sticker shock when you see how much prices have risen. 
That can be true when you buy a new car or when you make your child』s first tuition 
payment. You might mutter to yourself: 「Why, when I went to college, it cost 
me $5,000 for all four years, and now that covers only the first semester of freshman 
year!」 Welcome to inflation risk. 

Interest rate risk. Over the past two decades, interest rates on bonds, money-
market accounts, mortgages, and all other types of interest-sensitive financial instruments 
have been extremely volatile. In the early 1980s, the prime rate reached 
as high as 211.2 percent, and rates on bonds, CDs, and mortgages also soared into 
double digits. By the 1990s and 2000s, rates had plunged to the low single digits, 
and savers who had become accustomed to 14 percent CDs were crying, 「Bring 
back the good old days of double-digit yields!」 Interest-rate risk can therefore cut 
both ways. If you lock into a fixed-rate instrument like a bond or CD when rates 
are low, and then rates rise sharply, the value of your investment will plunge if you 
have to resell it. On the other hand, if you set your lifestyle according to the high 
yields you can earn in an environment of soaring interest rates, you will endure a 
painful shock when rates fall and your lifestyle suffers. 

Lack of liquidity risk. There are times when you need to sell something, but 
the market for it has dried up temporarily. That leaves you with two options: You 
can hang on to what you had wanted to sell, or you can sell it anyway even if you 
must accept an artificially low price. In general, the more aggressive an investment 
is, the more subject it is to the risk of holding an illiquid asset. Stocks of small 


PART ONE: Maximizing Your Investment Options 

companies and junk bonds, for example, are relatively easy to buy and sell under 
normal circumstances. But when bad news hits these markets or investors become 
nervous, the ability to sell at a fair price temporarily disappears. 

Playing it too safe risk. As mentioned at the beginning of this section, if you 
keep all your money in supersafe CDs, money-market funds, and Treasuries, you 
run the risk of outliving your assets because your return has not kept you current 
with inflation. This risk is not frequently recognized, but it is probably the biggest 
risk people take. By the time you have figured out that you have been too conservative 
with your investments, it is often too late to recover. 

Political risk. If you invest in countries where the political structure is not as 
stable as in the United States, you run the risk of a change in government, which 
will dramatically devalue the worth of your holdings. In the most extreme case, a 
new government that has run on the platform of 「throwing out all the foreigners」 
might go so far as to nationalize all assets, which means you will get whatever the 
government decides to give you for your stocks and bonds. Fortunately, most countries 
have been going the opposite direction lately, as they realize it is better to encourage 
foreign investment than to scare it away. 

A milder form of political risk that you should keep in mind for American investments 
is the change in government policy that favors one industry over another. 
This can be done by legislation, tax policy, tariffs, subsidies, or many other means 
at the government』s disposal. For example, in the 1970s, President Carter wanted 
to encourage the use of coal because it was available domestically and could reduce 
our dependence on foreign oil. By the 1990s, coal was considered an environmentally 
dangerous fuel, and natural gas was in vogue. Another striking 
example is the multi-billion-dollar buildup of the defense industry in the 1980s, 
unraveled in the 1990s, with devastating impact on the holders of defense-related 
stocks. 

Repayment risk. There are two kinds of repayment risk. The most common, 
also known as credit risk, is the chance that you will not get repaid what you are 
owed when it is due. The second risk is the opposite: you are repaid before you 
want or expect to get your money back. You are taking credit risk whenever you 
buy a bond because your ability to collect on that obligation is only as good as the 
issuer』s ability to repay it. Some issuers, like the U.S. government, which sells 
Treasury bonds, are above reproach, and, therefore, credit risk on such paper is 
considered to be virtually nonexistent. Bonds issued by corporations, municipalities, 
and foreign governments also rarely default, but these issuers offer several 
gradations of credit risk. Credit risk ratings by agencies like Standard & Poor』s and 
Moody』s Investors Service, which range from AAA to D, will indicate how much 
repayment risk you are taking with a particular issue. 

The other kind of repayment risk entails getting your money back faster than 
you expect. While you might not think this is a big problem, it is in two circumstances. 
First, suppose you lock in a 10 percent yield on a bond, and gradually the 


CHAPTER 1: Giving Yourself a Financial Checkup 

rate falls to 6 percent. Because interest rates have dropped, you will not be able to 
replace that bond with a new one at the same yield. Most bond issuers have the 
right to redeem (or call, as it is known) a bond a certain number of years after it 
has been issued. (One of the advantages of Treasury bonds is that they are usually 
noncallable.) 

The other kind of investment that hits you with repayment risk is the mortgage-
backed security. Known in the trade by the names Ginnie Mae, Fannie Mae, or 
CMO (which stands for collateralized mortgage obligation), mortgage-backed securities 
are actually pools of thousands of individual mortgages that have been 
packaged for sale. The repayment problem occurs when mortgage rates fall 
sharply and homeowners rush to refinance their loans. While it is great for the 
homeowners, the holders of mortgage-backed securities lose because the securities 
repay most of their principal quickly. Because interest rates have fallen, holders of 
mortgage-backed securities have the same problem as owners of called bonds: 
They can』t replicate the high rates they thought they had locked in for years. (For 
more on bonds, refer to Chapter 5, 「All about Bonds.」 

Volatility risk. This risk occurs when an investment swings wildly in value, 
from a very low price to a high one in a short period of time. Of course, volatility 
gives you a greater chance to profit if you buy when the price is low and sell 
when it is high. But that』s easier said than done. Often, your emotions will drive 
you to buy into a volatile investment when its price has been rising because you 
assume the price will continue to soar. The opposite usually holds true: You are 
most tempted to sell when the price has plummeted because you fear it will 
plunge even further. Just because an investment is volatile in the short run doesn』t 
mean you should avoid it altogether. But you should realize what you』ve bought 
and feel psychologically able to ride out sudden air pockets when they strike, 
keeping in mind that you entered into the investment in the hope of long-term 
gain. 

THE INVESTMENT PYRAMID 

In assembling a portfolio that both achieves your financial goals and still allows 
you to sleep comfortably at night, think of your entire mix of assets in the 
form of an investment pyramid (see Figure 1.12). 

At the top of your pyramid are the riskiest assets, which offer the greatest potential 
for high returns as well as big losses. The high-risk apex includes collectibles, 
foreign investments, futures contracts, junk corporate and municipal 
bonds, new stock issues, oil and gas limited partnerships, options, raw land, small 
growth stocks, tax shelters, unfinished real estate construction, venture capital, and 
warrants. 

The next tier of the pyramid, the moderate-risk sector, includes stock and bond 
mutual funds, income-oriented limited partnerships, mortgage-backed securities, 
individual growth stocks, corporate bonds, and rental real estate. 


PART ONE: Maximizing Your Investment Options 

Figure 1.12 Investment Risk Levels 

Greatest potential 
for high returns 

High risk 

Moderate risk 

Low risk 

Safest 
investments 


Money-market mutual funds 
Checking accounts GICs Savings accounts 
Cash Bank CDs T-bills 
Utility stocks Zero-coupon bonds 
Short-term 
bond funds 
Life insurance 
contracts 
Blue chip stocks 
T-bonds 
Annuities 
Futures 
contracts 
Collectibles 
Options 
Foreign 
investments 
Corporate bonds 
Rental real estate 
Junk 
bonds 
Raw 
land 
Mortgage-
backed 
securities 
Stock and 
bond mutual 
funds 
Lowest 
yields 



CHAPTER 1: Giving Yourself a Financial Checkup 

The third tier of the pyramid, called the low-risk sector, consists of annuities, 
blue ship stocks, Treasury bonds, life insurance contracts, municipal bonds with 
high credit ratings, short-term bond funds, utility stocks, and zero-coupon bonds. 

The base of the pyramid is composed of investments where there is almost no 
chance of losing your principal. This includes bank CDs, cash, checking accounts, 
money-market mutual funds, and guaranteed investment contracts (GICs) found in 
salary reduction plans, savings accounts, and Treasury bills. 

There is, however, the risk of investments that are too safe. While your principal 
is not at risk, the investments earn low yields and therefore do not allow you to 
keep up with inflation. 

No matter what your age or situation, you should probably have some of your 
assets in each of the four sectors of the pyramid at all times. What should change 
over time is how much you invest in each sector. You might be young and able to 
take more risk, so more of your money should be in the high-risk apex. Or you may 
be retired and need to live off your investments. More of your money should then 
be in low-risk and base investments. But the young person should still have a cash 
reserve in base investments, and the retiree should have a small amount of money 
in apex investments, so they both can stay ahead of inflation. The allocation of assets 
among the four pyramid sectors is discussed in more detail in Chapter 18, 
「Smart Money Strategies for Every Age and Situation.」 

A QUIZ TO DETERMINE YOUR RISK TOLERANCE 

Even though by now you should realize that you will have to take some calculated 
risks in order to attain your financial goals, this doesn』t mean you are comfortable 
doing it. The quiz in Figure 1.13 will give you some insight into how much 
risk you feel able to take. Answer each of the questions, giving yourself one point 
for answer one, two points for answer two, up to four points for answer four. Then 
add up the points to see what kind of risk-taker you are. 

Keep your risk score in mind as you read through the rest of the book. If you 
are a diehard conservative, you should resist the temptation to put much money in 
riskier investments even though they may sound promising. Keep the investment 
pyramid in mind, though; you still don』t want to have all your assets in only the 
safest bets. 

If you are a moderate-risk investor, put more of your money in the middle and 
top sectors of the investment pyramid as long as you carefully gauge the level of 
risk you are taking. 

For high-risk investors, allocate more of your money to the apex of the investment 
pyramid, but don』t neglect the pyramid base. You should be careful not to become 
so enthusiastic about an investing idea that you put too much of your capital 
at risk in something that goes bust. 

Wherever you stand on the risk spectrum, keep in mind that dealing with 
your personal finances, in general, and investing, in particular, is not only about 


PART ONE: Maximizing Your Investment Options 

Figure 1.13 Risk Tolerance Quiz 
A. If someone made me an offer to invest 15 percent of my net worth in a deal 
he said had an 80 percent chance of being profitable, the level of profit 
would have to be 
1. No level of profit would be worth that kind of risk. 
2. seven times the amount I invested. 
3. three times the amount I invested. 
4. at least as much as I have invested in the first place. 
Points: ___________________ 
B. How comfortable would I be assuming a $10,000 debt in the hope of 
achieving a $20,000 gain over the next few months? 
1. Totally uncomfortable—I would never do it. 
2. Somewhat uncomfortable—I would probably never do it. 
3. Somewhat comfortable—I might do it. 
4. Very comfortable—I would jump at the chance to do it. 
Points: ___________________ 
C. I am holding a lottery ticket that has gotten me to the finals, where I have a 
one in four chance of winning a $100,000 prize. The least I would be will to 
sell my ticket for before the drawing is 
1. $15,000. 
2. $20,000. 
3. $35,000. 
4. $60,000. 
Points: ___________________ 
D. I have spent more than $150 on one or more of these activities: 
professional sports gambling, recreational betting on poker or basketball 
games I participate in, casino gambling. 
1. I have never participated in any of these activities. 
2. I have participated in these activities only a few times in my life. 
3. I have participated in one of these activities in the past year. 
4. I have participated in two or more of these activities in the past year. 
Points: ___________________ 
E. Whenever I have to decide where to invest a large amount of money, I 
1. delay the decision. 
2. get somebody else (like my broker) to decide for me. 
3. share the decision with advisors. 
4. decide on my own. 
Points: ___________________ 


CHAPTER 1: Giving Yourself a Financial Checkup 

Figure 1.13 (continued) 
F. If a stock I bought doubled in the year after I bought it, I would 
1. sell all my shares. 
2. sell half of my shares. 
3. not sell any shares. 
4. buy more shares. 
Points: ___________________ 
G. Which of the following describes how I make my investment decisions? 
1. Never on my own 
2. Sometimes on my own 
3. Often on my own 
4. Always on my own 
Points: ___________________ 
H. My luck in investing is 
1. terrible. 
2. average. 
3. better than average. 
4. fantastic. 
Points: ___________________ 
I. My investments are successful mainly because 
1. God is always on my side. 
2. I was in the right place at the right time. 
3. when opportunities arose, I took advantage of them. 
4. I carefully planned them to work out that way. 
Points: ___________________ 
J. I have a high-yielding certificate of deposit that is about to mature, and 
interest rates have dropped so much that I feel compelled to invest in 
something with a higher yield. The most likely place I will invest the 
money is 
1. U.S. savings bonds. 
2. a short-term bond fund. 
3. a long-term bond fund. 
4. a stock fund. 
Points: ___________________ 
TOTAL SCORE: ___________________ 


PART ONE: Maximizing Your Investment Options 

How to score yourself: 

0–9 points: You are a conservative investor who feels uncomfortable taking any 
risk. 

20–29 points: You are a moderate investor who feels comfortable taking moderate 
risks. 

30–39 points: You are an aggressive investor who is willing to take high risks in 
search of high returns. 

maximizing the amount of dollars in your pocket. Finding your financial comfort 
zone is also important, so that you feel psychologically secure about the decisions 
you are making. It』s no use becoming rich if you die from the stress of attaining 
your wealth (even though your heirs might disagree!). 

Using Your Computer to Keep Your Finances in Shape 

Now that you have done the exercises in this chapter, it would be best if you 
could keep this data up-to-date on a regular basis so that you always know where 
you stand when you need to make financial decisions. The easiest way to accomplish 
this job is by using your personal computer. There are two ways to put your 
computer to work for you in this arena: (1) entering data in a personal finance software 
program and (2) using the Internet and its many Web sites to educate yourself 
about finance and track your progress toward your financial goals. 

PERSONAL FINANCE SOFTWARE PROGRAMS 

In the early days of the personal computer, there was a profusion of programs 
to help you manage your personal finances. Now many of the competitors have 
fallen by the wayside, leaving two major programs for you to choose from. They 
are available at most bookstores and computer software stores, as well as through 
the Web sites listed here: 

Microsoft Money Deluxe (800-426-9400; www.microsoft.com). This financial offering 
from the dominant software company in the world covers all the bases in a logical, 
easy-to-navigate style. The program allows you to track your portfolio, research 
potential investments, calculate your net worth, prepare and follow a budget, and prepare 
your taxes. The program is used by many banks for online banking systems, making 
electronic bill payments and recordkeeping easy. You can also prepare charts and 
graphs of different aspects of your personal finances that may help you understand 
your situation better than just looking at columns of numbers. Microsoft Money was 


CHAPTER 1: Giving Yourself a Financial Checkup 

designed to work with Windows software, and it does so very elegantly. The program 
will scan your past spending in different categories, such as rent and gasoline. It then 
crafts a budget that you can customize. After you』ve done that, it keeps track of your 
spending performance and will shift amounts among categories to allow you to stay 
within your overall budget. Money』s portfolio downloads fundamental stock data, including 
price-earnings ratios and earnings per share. Money』s 「Portfolio Review」 
grades your investing results against major market indexes. In a report written in understandable 
language along with charts explaining the software』s conclusions, you 
can see how you stack up. It』ll tell you which stocks have performed best or worst. It 
will also show you how your mutual funds, including any 401(k) accounts, have done 
compared with your individual stocks. Money』s 「Monthly Review」 feature analyzes 
your month』s spending, income, and investments and creates a report showing you 
how you did compared with the previous month. To guard against loss of data due to a 
computer failure, you can store all of your personal finance data on Microsoft』s Money 
Central Web site at . 

Quicken Deluxe (650-944-6000; www.qfn.com). The bestselling Quicken is the 
most comprehensive, in-depth program in personal finance. If you are willing to spend 
a great deal of time and effort inputting data and doing analysis of your financial situation, 
you will get a lot out of Quicken. But if you are a novice, you may find the program 
a bit overwhelming. Quicken lets you set up detailed budgeting categories, a 
check register, a financial calendar, a credit card and mortgage loan tracking system, 
an asset-liability worksheet, and an investment portfolio system. You can create numerous 
charts and graphs, showing, for instance, how much your income or expenses 
are varying from your projections. Quicken also provides a detailed tax-planning section, 
designed to work with Intuit』s TurboTax program. The program is loaded with financial 
planning calculators to help you figure out the cost of refinancing a loan or how 
much you need to be saving toward retirement or your children』s college education. 
Quicken is designed to work with CheckFree to let you pay bills online, and the special 
Intellicharge credit card downloads your credit card statement and automatically 
categorizes your transactions for you into Quicken. There is also the Mutual Fund 
Finder, which allows you to screen for mutual funds meeting your investment parameters 
using Morningstar data. You can type in the name of your employer and Quicken』s 
401(k) Advisor knows which mutual funds are available to you. It then can match your 
taste for risk and investment goals with the funds your employer makes available. To 
protect your data from loss due to computer failure, you can upload your data to 
Quicken』s Web site. 

TAPPING THE ONLINE WORLD 

There is a vast amount of information on the Internet and commercial online 
services to help you manage your finances. You can get news; search for price 
quotes on stocks, bonds, mutual funds, and insurance policies; find the cheapest 
credit cards; and learn about any area of personal finance that tickles your fancy. 
You can join in any of thousands of discussion groups and bulletin boards covering 


PART ONE: Maximizing Your Investment Options 

the broadest or the narrowest of financial interests. You must be careful when doing 
so, however, because you never really know who is giving advice or what their hidden 
motives might be, particularly when people are recommending investments. 

Perhaps the easiest place to get started in the online world is by subscribing to 
America Online (800-827-3338). AOL has prepackaged an enormous amount of 
personal finance resources under its Personal Finance Channel button, so that you 
don』t have to find Web site addresses on your own. AOL』s Channel is divided into 
many subchannels, such as the Insurance Center, the Banking and Loans Center, 
the Mutual Funds Center, and the Brokerage and Real Estate Center. Each center 
has an educational component that explains the basics and more sophisticated 
strategies to screen for stocks and mutual funds, or purchase home or car insurance, 
for example. Each also displays the icons of several major institutions, such 
as banks, brokers, and insurance companies, beckoning you to visit their Web sites: 

. 
In the Mutual Funds Center, you can screen among thousands of funds in 
the Morningstar database, consult the Sage for advice on funds, look at 
Fund Family Profiles, and track a portfolio of funds. 
. 
In the Insurance Center, you can learn about the ins and outs of auto, life, 
and home insurance, and buy coverage online. 
. 
In the Banking and Loans Center, you can perform online banking; look at 
rates on credit cards, mortgages, and other loans in the Bank Rate Monitor 
section; find the highest-yielding certificates of deposit ranked by maturity; 
and find links to major bank Web sites. 
. 
In the Investment Center, there is a plethora of information on stocks and 
bonds. You can look at current market news and quotes, maintain a stock 
portfolio, find links to several major online discount brokers, and screen for 
stocks that meet specific criteria. 
. 
Other features of the Personal Finance section include the following subsections: 
The Markets, Business News, Investment Research, Message 
Boards, Stock Games, Active Trader, Money Basics, Advice & Planning, 
Taxes, and Personal Finance Live. Personal Finance Live features 「AOL 
Market Talk,」 「Market News Chat,」 and 「CBS Marketwatch Radio.」 The 
site features investing tips, information, and articles from Money.com, 
Smart Money, Family Money, Fool.com, and Financial Engineers. You can 
set up and track your investment portfolio on this site. 
For those who want more, there is a seemingly endless number of Web sites 
devoted to personal financial topics. One way to find sites is to type in words like 
Personal Finance or Money into a web browser to come up with Web site addresses. 
Even better, narrow your search by typing in a word specifically related to 
what you are investigating at the moment. Here are just a few suggestions of some 
Web sites that will help you find out what you need to know: 


CHAPTER 1: Giving Yourself a Financial Checkup 

. 
Financenter. A wealth of information on how to finance major assets like 
homes and cars. The site allows you to compare various borrowing alternatives 
so you can pick what is best for your situation. It also has an extensive 
section on how to get the best credit cards. Several companies allow you to 
apply for loans online, and some even offer special rates to Financenter 
users.  
. 
Financial Electric Library. The ultimate source of information to answer 
whatever question you have about personal finance. The Library draws on 
hundreds of magazines, books, wire services, newspapers, and broadcast 
transcripts to get you what you need based on how you define the search 
criteria.  
. 
Homestore.com/Finance. Full of personal finance categories with multiple 
links to Web sites related to each of the categories, this site is a mine of personal 
finance information.  
. 
Kiplinger.com. This site is full of useful personal finance tips and ideas. It 
is organized into three main sections: Investing, Managing, and Spending. 
Investing has current and historical market information and articles on investing. 
Managing has articles and columns on managing money, current 
mortgage rates, auto loan rates, and credit card rates, and has CD and other 
interest rates. Spending has links to many shopping sites with reviews and 
comparisons of products. The site covers college financial issues, retirement, 
banking, checking, ATMs, all types of insurance, and tax software. 
 
. 
The Money Page. This site offers a source of links to personal finance information, 
including consumer credit, electronic money, investor』s guide, 
money talk, money forums, banking, ATMs, insurance, real estate, retirement, 
social security, and travel.  
. 
OnMoney.com. This personal financial site has a wealth of information. 
The site』s 「OnMoneyGuides」 includes primers on how the stock market 
works, advice on trading stocks online, and tips for planning for next year』s 
tax bill. OnMoney.com highlights the work of its 「experts,」 including financial 
book authors Gene Walden, Janet Lowe, and Jordan Goodman, formerly 
of Money magazine. Users can get stock quotes and company news. 
The site also offers services that let you pay bills online, file taxes online, 
or shop for loans and insurance.  
. 
Personal Finance Magazine Web Sites. All of the major financial magazines 
sponsor their own Web sites, which offer much more than articles 
from the publications. They host chat sessions with magazine staffers and 
experts featured in articles and provide investment news and portfolio 
tracking services, financial calculators, polls, links to other Web sites, and 

PART ONE: Maximizing Your Investment Options 

much more. The magazine Web site addresses for Bloomberg Personal, 
Family Money, Kiplinger』s Personal Finance, Money, Smart Money, and 
Worth are listed under 「Magazines」 in the 「Resources」 section. 

Shopping Online 

Shopping is not quite what it used to be. In addition to shopping centers and 
malls, you now have the ability to conveniently shop online. One of the advantages, 
aside from the convenience of not leaving your home, is that you can price-
shop between various online stores. 

Other issues to bear in mind include the danger that your credit card number 
could be stolen, although this is a diminishing problem with modern computer operating 
systems improving credit card encryption systems, rip-off companies that 
take your money and run, and shipping charges that are added to the price. 

There are a large number of online shopping sites to choose from. The most 
popular items for sale appear to be electronic devices, home audio, videos, computers, 
digital and other cameras, and books. Among many other items and services 
available on the Web, you can buy your electrical energy, your groceries, 
your home gas, and even in some cases, your auto gasoline. 

You can buy an automobile online; however, your local dealers will be involved. 
In most states it is illegal for the automobile manufacturer to sell and deliver 
an automobile directly to the customer, without involving the dealer. 

On many of the sites the auto dealers will bid for your purchase, which eliminates 
the face-to-face negotiation on the dealer parking lot. On other sites, only the 
dealer in your area working with the site will set the price, which may or may not 
meet with your approval. Here are a few of the major online shopping sites. 

ONLINE SHOPPING SITES 

Americangreetings.com. Send e-mail animated, musical cards to your friends and 
relatives.  

Amazon.com. This is one of the most comprehensive retail sites on the Internet. Its 
major product is books; however, you now also can buy music, electronics, software, 
toys, video games, kitchen, tools and hardware, lawn and patio, and health and beauty 
products.  

Bargaindog.com. Directs users to sales and discounts at leading online merchants. 
A personalized e-mail newsletter, BargainDog, notifies its members of product sales in 
categories ranging from software to apparel.  

BargainSmarts. This site directs you or links you to many other Web sites specializing 
in airline, hotel, restaurant, cruise, retail gift certificates, reward programs, and 


CHAPTER 1: Giving Yourself a Financial Checkup 

sales. Also allows you to bid on airline tickets, hotel rooms, groceries, rental cars, and 
long distance phone service.  

Barnesandnoble.com. This is the online store from the major book retailer. The 
primary product for this retail site is books. Also, it sells e-books, music, software, 
prints and posters, and magazine subscriptions.  

Beyond.com. Computer hardware, software, and games.  

Bluemountain.com. Send e-mail animated, musical e-cards, screen savers, and 
gifts to your friends.  

Bookcloseouts.com. Sells remainders from publishers, out of print books surplus. 
 

Borders.com. Online store from the major book retailer. This is principally a retail 
book-selling site. Also sells music and videos.  

Bottomdollar.com. Online retail store selling computer hardware, software, electronic 
items, toys, sporting goods, office products, wireless products, entertainment 
items, videos, home and garden, pets, kitchen, and office products.  

Brainplay.com. Educational items for kids of all ages, toys, video games, software, 
DVDs, and gifts.  

Buy.com. Discount store for computers and hardware, software, electronic items, 
books, videos, games, music, and golf items.  

Buyerzone.com. This site is targeted to small business owners. Sells computers, 
credit cards, furniture, health insurance, office equipment, supplies, accounting and 
legal services, software, long distance telephone service, phones, and travel—all online. 
 

Catalogcity.com. This site has over 27,000 catalogs for clothing, gifts and collectibles, 
home, health and fitness, travel, food and drink, computers and electronics, 
hobbies and crafts, books, music and video, gardening, home office, cars, trucks and 
other vehicles, jewelry and accessories, kid』s stuff, pets, lifestyles, and sports. Catalogs 
are either online or can be ordered free through this site. Items in these categories are 
also for sale on this site.  

Catalogsite.com. This site has over 200 online catalogs for books; video and 
music; children』s apparel; computers and electronics; fashion accessories; food and 
gourmet; garden and outdoors; gifts and flowers; health, beauty, and fitness; hobbies; 
toys and pets; home accessories and furnishings; mens apparel; office furnishings and 
supplies; sports and automotive; and women』s apparel.  


PART ONE: Maximizing Your Investment Options 

cdnow.com. This site specializes in music CDs and movie DVDs. Also has a gift 
registry for CD/DVD gifts and has CDnow radio in which you can listen to your selection 
of different types of music and, of course, purchase your selection.  

Computers4sure.com. Sells computers and all things related online: software, 
printers, peripherals, scanners, supplies, storage, modems, memory, and cameras. 
 

cdw.com. This site sells computer hardware, software, computer books, and audio 
and video computer equipment.  

Cooking.com. This site offers items related to cooking, utensils, tools, cutlery, 
dishes, china, cooking pots, recipes, housewares, small appliances, and specialty 
foods.  

Coolsavings.com. Site offers printable coupons, free catalogs, and trial subscriptions, 
newsletters, rebates, and gift certificates.  

Coolshopping.com. This site sells a wide variety of items, art and collectibles, 
books and education, business and financial products, clothing, computers and electronics, 
discount shopping, entertainment, food and drink, children』s toys, gifts, health 
products, hobbies and travel, home products, and sports and fitness products. Includes 
links to many other shopping sites.  

Costco.com. Online shopping site for Costco discount warehouse stores. You can 
purchase appliances, books, CDs, DVDs, clothing, computers and peripherals, electronics 
and cameras, flowers, gourmet foods, hardware and outdoor living products, 
health and beauty products, home essentials, jewelry and accessories, office machines 
and supplies, pharmacy prescriptions, and sporting goods and toys.  

Couponemporium. This is a major coupon site with printable discount coupons for 
practically anything from cars to groceries. Also offers free stuff and links to other 
free-stuff sites.  

Dailyshopper.com. This site does not offer online shopping but does allow the consumer 
to find what they are looking for by category, brand name, and local store to 
simplify their shopping trip.  

Dealcatcher.com. Provides links to discounts with various Internet retailers from 
clothes to auto parts.  

Digitalheadquarters.com. This site specializes in retail sales of digital cameras, 
cellular phones, and accessories.  

Dotdeals.com. Offers coupons, freebies, rebates, contests, and sales with links to 
Internet retailers.  


CHAPTER 1: Giving Yourself a Financial Checkup 

drugstore.com. Online pharmacy and drugstore. Mail your prescriptions to the address 
given on the site with your prescription or have your doctor call it in, and they 
will mail your prescription to your home. Other normal drugstore items, shampoos, 
over-the-counter drugs, household products, etc., available at this site.  

ecoupons.com. Offers printable coupons for national or local use and rebates for a 
host of items.  

egghead.com. This is a comprehensive, well-known site that specializes in computer 
products, software, camcorders, digital cameras, digital satellites, DVD players, 
TVs and VCRs, home office equipment, and home electronics.  

800.com. This site sells video/TVs, home audio, digital cameras, personal audio 
equipment, car audio, and phones.  

Energyguide.com. Insert your Zip code and this site will list all the options available 
to you for electrical energy from various power companies and for household gas 
with prices. Included is an energy analyzer to help you analyze your own home』s energy 
usage.  

Essential.com. An energy and communications marketplace that sells residential 
electricity, gas, heating oil, and phone service (Qwest long distance). Insert your Zip 
code and the site will offer its products for sale in your area.  

etoys.com. This site sells children』s toys, software, books, video games, and hobbies 
online.  

Fashionmall.com. A comprehensive online fashion store, offering most of the well-
known brand names. Shop by brand name, category, or floor.  

Food.com. Order food online for takeout or delivery from a local restaurant.  

Ftd.com. Purchase online and send flowers and gifts anywhere in the world. 
 

garden.com. On this site, you can learn about gardening and purchase gardening 
products and tools.  

Go-Green.com. Purchase 「green」 electrical power in deregulated states. This power 
has been generated from solar, wind, and biomass sources.  

Greenmountain.com. Purchase electrical power generated by wind, solar, and biomass 
sources.  

Jango.com. This is the Excite shopping site on which you can buy autos, baby 
gear, books, clothes and accessories, computers, electronics, flowers and cards, garden 
products, groceries, health products, house and home, music, office, software, sports 
and fitness, toys and games, and videos.  


PART ONE: Maximizing Your Investment Options 

Jewelry.com. This site is an online jewelry store.  

Living.com. This site offers furniture and accessories for any room in your house. 
It also offers an online room designer to select your furniture and place it in your room 
dimensions, move things around, and change furniture until you are satisfied with your 
choices. Includes appliances, kitchen and bath items, lighting, office needs, and rugs. 
Site is complete with catalog photographs and drawings.  

Marthastewart.com. A comprehensive home-based site covering articles on cooking, 
gardening, crafts, weddings, home remodeling, baby needs, television, and holidays. 
There are items for sale in each of these categories.  

Mercata.com. This site sells electronics, appliances, and sports and fitness, lawn 
and garden, home and kitchen, home office, and baby products.  

MicroWarehouse.com. Sells all computer products, desktops, notebooks, software, 
servers, digital cameras, drives, memory, networking devices, printers, scanners, cables, 
and other supplies.  

Mobshop.com. Unique discount online computer and electronics products shop. 
Operates using a 「buy-cycle」 process to gather a group of buyers interested in purchasing 
a particular product and use the buying power of the group to negotiate a discount 
with the distributor or manufacturer.  

MPsuperstore.com. Online discount store for computers, cameras, digital cameras, 
and home video and audio equipment.  

MyCoupons.com. Online source for discount coupons of all types, grocery 
coupons that can be redeemed at your local grocery store, other local store coupons, 
special items on sale, links to many discount merchants from booksellers to other 
coupon sites to online discount shopping clubs, telephone services, lawyers, and flowers. 
 

Netgrocer.com. Buy groceries; pet, entertainment, houseware, home office, and 
school products; drugstore items; and nonprescription medicines online. This site delivers 
in the 48 contiguous states.  

Netmarket.com. Online store with outdoor furniture, kitchen appliances, phones, 
computers, MP3 players, games, outdoor products, books, baby products, and toys. 
 

Nojunkfree.com. This site is all about free stuff. It tells you how to find the best 
free samples of everyday things. You can also find how to get Internet access and e-
mail for free. Tells you how to create free Web sites and has links to other freebie sites. 
 

OfficeDepot.com. This the online store for this major office supplier. Sells office 
supplies, computers, digital cameras, fax machines, phones, printers, scanners, and 
software.  


CHAPTER 1: Giving Yourself a Financial Checkup 

1Bargainworld. This is a discount and coupon clipping site. Look for your grocery 
and other coupons here and print them out. Find discounted items from clothing to car 
parts to flowers.  

1bookstreet.com. This is a discount online store that sells books only. Specializes 
in remainders, out-of-print, and overstocked books.  

OnlineChoice.com. This site uses group buying power to offer an alternative gas and 
electric power supply for states whose electricity supply has been deregulated, alternative 
long distance telephone suppliers, and gasoline purchases.  

OurHouse.com. A comprehensive online shopping Web site that covers bath and 
health; hardware; home decor; kitchen and appliances; lawn, garden, and patio; lighting; 
and tools and equipment.  

Outletmall.com. This is an online fashion store for children. Has limited online 
catalogs.  

Outpost.com. Online store selling electronics, computers, cameras, software, 
games, office products, Brookstone items.  

PCConnection.com. Online store for cameras, computers, computer hardware, 
and software. Includes a very broad selection of brand names.  

PCMall.com. Online store for computers, peripherals, notebooks, cables, networking 
devices, printers, projectors, scanners, and software.  

PlanetRx.com. This an online pharmacy and drugstore that will fill prescriptions 
from your doctor』s office, phoned, faxed, or mailed directly from the doctor』s office, or 
mailed by the patient. The site also has all the usual drugstore items for sale. 
 

Priceline.com. This is an unusual site that allows consumers to bid the rates they 
want to pay for hotel rooms, rental cars, automobiles, and airline tickets. Home mortgages, 
equity loans, and home refinancing are also available.  

PriceSCAN.com. This site scans other retail sites for the lowest price for the product 
you need—computers, electronics, appliances, sporting goods, or books—and 
links you to the site with the lowest price.  

Recipes.com. This site has thousands of free recipes for all types of cooking and 
includes a recipe exchange program where consumers can request or offer recipes. A 
free newsletter is offered and kitchenware is available to purchase online.  

Redtag.com. Online discount store offering brand name closeouts and out-ofbusiness 
stores』 surplus items, including electronics, cameras, telephones, TVs, VCRs, 


PART ONE: Maximizing Your Investment Options 

home and home improvement items, and personal care and leisure products.  

Savishopper.com. High-end men』s fashion store with many exclusive brand 
names. Sells clothing and accessories.  

Send.com. Online site that sends high-end gifts of wine, scotch, cigars, flowers, 
crystal, books, jewelry, and exotic cars to the person of your choice.  

Servicelane.com. This site will connect you to a local provider for any service you 
may need, from electrician to lawyer.  

SmarterKids.com. Online store for kids infant through grade 9. This store offers 
advice from a team of child specialist advisors and offers educational books, software, 
toys, games, music, and videos from an inventory especially selected by this team. 
Specializes in products that will encourage proper development of children.  

sharperimage.com. This site offers specialty products often seen in airline shopping 
catalogs, such as personal grooming items, innovative radios, alarms, and CD 
players.  

Shopper.com. This is the Cnet shopping site. Presents a range of retailer prices for 
computers, computer peripherals, cameras, software, games, and computer training 
courses. The site does not sell these items directly; the buyer chooses the retailer from 
the list in the Cnet site and goes online with that retailer or calls them using the phone 
number supplied on the Cnet site. The retailers are listed by price for the item the buyer 
chooses, and Cnet notes whether that retailer has a Cnet approval stamp. This site is 
great for price comparisons for a particular item.  

Shopfind.com. This is the Yahoo! shopping site. Presents a wide range of products 
and brands for sale online. Products include apparel, accessories, shoes, art and collectibles, 
baby care, books, computers, electronics, flowers, gifts, food and beverages, 
health, home and garden, jewelry and watches, movies and videos, music, office supplies, 
sports, toys, and games and hobbies.  

Skymall.com. Unique and innovative products, including automotive electronic 
items, cameras and camcorders, home theater, portable audio, telephones, TVs, and visual 
devices.  

Snap.com. This is an NBC site with shopping, auctions, classifieds, information 
about many categories of products, autos, business, careers, computing, gardening, 
pets, education, entertainment, finance, games, health, kids, multimedia, retailers, society, 
sports, teens, travel, and links to literally hundreds of sites with reviews, comparisons, 
and information.  

Specialoffers.com. Printable coupons, rebates, special offers, and links to discounts 
and sales at online retailers.  


CHAPTER 1: Giving Yourself a Financial Checkup 

Staples.com. This is the online store for the major office products retailer. Sells office 
products, computers, digital cameras, fax machines, phones, calculators, and software. 
 

State Street Direct. This is an online discount store for housewares, electronics, 
computers, and appliances.  

StreetPrices.com. This is a low-price search site for computers, electronics, cameras, 
books, music, and sports, with links to thousands of classified ads, auctions, and 
comparisons.  

TenderLand Power Co. For deregulated states and communities, this site offers a 
flat retail rate for electricity generated from renewable sources that is in many cases 
lower than the peak rate from grid supply in a community. The flat rate offered, however, 
may result in higher annual electricity costs than your basic local supplier. 
 

The Nets Best. Printable coupons and discounts.  

Utility.com. Offers to provide electricity to consumers in deregulated states for 
less than grid power. You can order the change of provider online. Also offers long distance 
telephone service and service plans for appliances. Plans to offer alternative natural 
gas supply in the future.  

ValuPage.com. This site offers a discount shopping service through your own local 
supermarkets. You choose from the list of special items, then select the local supermarket 
to find and purchase the item at the guaranteed discounted price.  

WatchZone.com. This is an online discount store for watches, with a wide selection 
of watch manufacturers and clear photos of watches offered.  

Wattage Monitor. Insert your Zip code and this site will display all of the energy 
provider choices you have, with current prices/kwhr.  

ONLINE RATING AND PRICE COMPARISON SITES 

BizRate.com. This site rates hundreds of online stores and products. Covers computers, 
peripherals, cameras, printers, and accessories.  

Cnet.com. This site offers reviews and price comparisons of computer hardware, 
software, electronic components, cameras, games, and Web builders. Also offers news 
and commentary on technical trends, updated stock quotes, information on IPOs, free 
games, and other downloads. This Web site also has a job center and reviews of Web 
services.  

Consumers Digest Online. Reviews of many products, household goods, financial 
products and companies, health and fitness issues, sports and recreation, home elec



PART ONE: Maximizing Your Investment Options 

tronics, and automotive. Investigations and reviews of a large number of consumer 
products and services.  

Consumer Reports Online. Online site for well-known nonprofit, independent testing 
and rating agency for all consumer products and services.  

Consumer World. Product reviews, price comparisons, discount shops, discount 
travel, consumer agency lists, directories, booklets, investment links, broker links, and 
literally hundreds of useful links to other Web sites.  

Epinions.com. Conducts detailed reviews and offers opinions on autos, motorcycles, 
computers, cameras, colleges, prep courses, gourmet items, health and wellness 
products, home and garden products, kids and family products, personal finance, brokers, 
banking, credit, big city restaurants, travel airlines, cruises, and destinations. 
 

epubliceye.com. Rates and compares online shopping sites by category of product. 
 

Gomez.com. This site reviews other online sites in a number of categories: banks, 
brokers, credit cards, homebuying, insurance, mortgages, airlines, rental cars, cruises, 
hotels, travel agents, apparel, books, general merchandise, flowers and gifts, golf, 
music, toys, videos, car buying sites, car manufacturers sites, auctions, buying services, 
health, prescriptions, computers, electronics, furniture, groceries, home furnishings, 
home improvements, and pet supplies.  

mySimon. Comparison shopping site. Compares prices for a particular item as sold 
by many online shopping sites, offers reviews through link to epinions.com. Covers 
apparel and accessories, books, music, movies, computers, software, consumer electronics, 
family, health, flowers, gifts, gourmet and groceries, hobby and leisure, home 
and garden, office supplies, personal finance, sports and recreation, and toys and collectibles. 
 

National Fraud Information Center. Alerts consumers to various types of commerce 
fraud.  

Shopnow.com. Compares prices for a chosen item as sold by many online shopping 
sites, offers reviews of sites, and sells some special items. Categories covered for 
price comparisons are: arts items, books and magazines, career, training, consultants, 
cell phones, computers, fashion, food and beverage, health services, home and garden, 
kid stuff, personal finance office supplies, travel, teens, auctions, cars and motorcycles, 
electronics items, flowers, hobbies, music, movies, personal care, pets, sports, and 
telecommunications.  


CHAPTER 1: Giving Yourself a Financial Checkup 

AUCTIONS ONLINE 

Anything you might find in a garage sale or in Sotheby』s art auctions is available 
to you in online auctions. There are a large number of sites to choose from and 
a number of sites that rate and rank the auction sites. Most sites present the items 
with the current bid, the reserve price, and how long there is to go before the auction 
of your item is gaveled in days, hours, and minutes. Obviously, readers should 
get to know something about the site and the seller before committing their credit 
card information for an item being auctioned. Auction sites sometimes rate the 
seller from past consumer experiences with that seller. Following is a sample of the 
major auction sites available on line: 

Amazon.com. Arts and antiques, books, cars and transportation, clothing and accessories, 
coins and stamps, collectibles, comics, cards and sci-fi, computers and software, 
electronics and photography, family and living, food and beverage, home and 
garden, jewelry, gems and watches, movies and videos, music, sports, toys and games, 
travel, and real estate.  

AuctionAddict.com. Some 26,000 items on sale. Buyers bid for items. Wide range 
of items available.  

AuctionGuide.com. Directory for online and other auctions worldwide. Offers 
auction software to set up an auction site. Wide variety of items for which auction sites 
are identified.  

AuctionInsider.com. Reviews of and links to many auction sites covering a wide 
range of items.  

Auctions-portal.com. Reviews of and links to many auction sites covering a wide 
range of products. Just type in your request and if that item is offered for auction on 
any of the auction sites covered, it is shown to you with the bid history to date. 
 

Auction-Sales.com. Auction site for computers, electronics, software, housewares, 
jewelry and watches, cell phones, health care products, automobiles, travel, and sports 
items.  

Auctions.com. Brings buyers and sellers together with over 1,000 categories of 
items.  

biddersedge.com. Offers item searches across multiple auction sites for a large 
number of products.  

Cnet.com. Runs auctions on computer hardware.  

Dazzo. Search engine for online auctions and online shopping stores.  


PART ONE: Maximizing Your Investment Options 

DealDeal.com. Online auction with a wide range of products.  

eBay. Large auction site with a wide range of items.  

Fed Win Net. Listing of federal, state, and local auctions for cars, boats, airplanes, 
and homes. Paid membership required.  

firstauction. Offers items across a number of auction sites.  

Live Bid.amazon.com. Allows you to bid at a live scheduled auction, using interactive 
pictures and text. Features consumer goods and industrial offerings.  

Sothebys.amazon.com. Asian art, books and manuscripts, ceramics and glass, 
coins and medals, collectibles, entertainment memorabilia, furniture and decorative 
arts, jewelry, paintings, drawings and sculpture, prints and photographs, rugs and carpets, 
silver and objets de vertue, sports memorabilia, stamps, toys and dolls, and 
watches and clocks.  

ubid.com. Online auction site for computers and peripherals, consumer electronics, 
apparel, home and leisure products, art, home improvement, travel, major appliances, 
jewelry and gifts, and sports and recreation products.  

Bid Find. This site lists some 400,000 items from around 400 auction sites with 
links to those sites.  

WANTads.com. Online auction site with a wide variety of items.  

Resources 

For further information on the topics presented in the first chapter of this book, 
I recommend that you consult the following resources. 

BOOKS 

The Black Woman』s Guide to Financial Independence: Smart Ways to Take Charge 
of Your Money, Build Wealth, and Achieve Financial Security, by Cheryl D. Broussard 
(Penguin Putnam, 405 Murray Hill Parkway, E. Rutherford, NJ 07073; 800-788-6262; 
www.penguinputnam.com). Deals with all facets of financial management, from 
checkbook balancing to stocks and bonds financing. Advice to African-American 
women on how to set up budgets, set financial goals, keep good records, plan for retirement, 
make investments, set up education funds. 

The Budget Kit: The Common Cent$ Money Management Workbook, by Judy 
Lawrence (Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 


CHAPTER 1: Giving Yourself a Financial Checkup 

800-245-2665; www.dearborntrade.com) An easy-to-use hands-on workbook that 
helps you keep track of your budget each month. 

Charles Schwab』s Guide to Financial Independence: Simple Solutions for Busy 
People, Charles R. Schwab (Three Rivers Press, Random House, Order Dept., 400 
Hahn Rd., Westminster, MD 21157; 800-733-3000; www.randomhouse.com). Basic 
book for people who recognize the importance of investing but know little or nothing 
about how to do it. Explains the ins and outs of planning an investment, choosing the 
instruments, and looking out for taxes. 

Consumer Reports Money Book, by Janet Bamford, Jeff Blyskal, Emily Card, and 
Aileen Jacobson (Consumer Reports Books, P.O. Box 10637, Des Moines, IA 50336; 
800-500-9760; www.consumerreports.com). A comprehensive guide on how to acquire, 
save, and spend money wisely. 

Ernst & Young』s Personal Financial Planning Guide, Robert J. Garner, Charles L. 
Ratner, Barbara J. Raasch, Martin Nissenbaum (John Wiley & Sons, 1 Wiley Dr., Somerset, 
NJ 08875-1272; 212-850-6000; 800-225-5945; www.wiley.com). Covers fundamentals 
of financial planning and in the second half focuses on major life events 
(marriage, homebuying, starting a business, raising a family, retirement), showing how 
each event or stage in life affects one』s current financial picture. Included are 70 charts, 
tables, and worksheets. 

Get a Financial Life, by Beth Kobliner (Fireside Books, 1230 Avenue of the Americas, 
New York, NY 10020; 212-698-7000; 800-223-2348). Written specifically for 
people in their 20s and 30s, this book shows anyone how to manage money and make 
it grow. It teaches how to refinance high-rate credit cards and student loans. 

Ninety Days to Financial Fitness, by Joan German Grapes (IDG Books, 919 E. 
Hillsdale Blvd., Suite 400, Foster City, CA 94404; 650-653-7000; 800-434-3422; 
www.idg.com, www.dummies.com). Offers a plan for financial stability and provides 
model plans for people in different situations, including married couples, couples living 
together, and singles. 

Personal Finance for Dummies, by Eric Tyson (IDG Books, 919 E. Hillsdale Blvd., 
Suite 400, Foster City, CA 94404; 650-653-7000; 800-434-3422; www.idg.com, 
www.dummies.com). Includes financial planning advice for dealing with life changes 
and finances, budgets, savings accounts, tax implications, insurance, and more. 

Personal Finance on the Web: The Interactive Guide, by Jonathan Michaels (John 
Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875-1272; 212-850-6000; 800-225-5945; 
www.wiley.com). Shows you how to find, access, and utilize the newest personal 
finance resources on the Web. Works seamlessly with the Web; uses graphics, maps, 
and online lessons to help you do your banking, get the best mortgage, research and select 
investments, and deal wisely with credit cards. Included in the book is access to its 
Web counterpart, which parallels the printed volume exactly and links you to all the 
sites it recommends. 


PART ONE: Maximizing Your Investment Options 

The Rookies Guide to Money Management: How to Keep Score of Your Fitness, by 
Carolina Edwards and Ray Martin (The Princeton Review, 2315 Broadway, New York, 
NY 10024; 800-273-8439; http://beta2.review.com). Practical information about managing 
personal finances and planning for the future. Suitable for college students who 
are about to enter the workforce. 

Smart Money: How to Be Your Own Financial Manager, by Ken and Doria Dolan 
(Berkley Books, 405 Murray Hill Pkwy., East Rutherford, NJ 07073; 800-631-8571; 
www.berkley.com). A breezy guide to personal finance presented mostly in questionand-
answer format. 

The Smart Woman』s Guide to Spending, Saving, and Managing Money, by Ellie 
Williams Clinton and Diane Pearl (Harper Mass Market Paperbacks, P.O. Box 588, 
Dunmore, PA 18512; 212-207-7000; 800-331-3761; www.harpercollins.com). How to 
make a budget, put money away, get the best mortgage, invest, consolidate debts, and 
cut credit card addiction. 

Talking Dollars and Making Sense: A Wealth-Building Guide for African-Americans, 
by Brooke M. Stephens (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800634-
3961; www.mcgraw-hill.com). Written within the social, cultural, and historical 
framework of the African-American experience, this book honestly examines the attitudes, 
beliefs, and behaviors of African-Americans with regard to money. Covers the 
basics of goal setting, managing credit, homebuying, investing, insurance tax strategies, 
and educating children about money. 

The Truth About Money, by Ric Edelman (Harper Resource, P.O. Box 588, Dunmore, 
PA 18512; 212-207-7000; 800-331-3761; www.harpercollins.com). Discusses 
the money problems that most people face today, points to the origins of the problems, 
and suggests ways to resolve them. Lists the pros and cons of renting versus owning a 
residence and walks the reader through the financial processes the decision involves. 

The Unofficial Guide to Financial Freedom, by Lisa Iannucci (IDG Books, 919 E. 
Hillsdale Blvd., Suite 400, Foster City, CA 94404; 650-653-7000; 800-434-3422; 
www.idg.com, www.dummies.com). Offers readers a clear assessment of their individual 
money personalities and what to do if they differ from their partner』s, advice on 
how to teach children about money, means for setting realistic goals, and ways to set 
and stay within a budget. 

Wealth Happens One Day at a Time: 365 Days to a Brighter Financial Future, by 
Brooke M. Stephens (Harperbusiness, P.O. Box 588, Dunmore, PA 18512; 212-2077000; 
800-331-3761; www.harpercollins.com). Shows the basics of investing, building 
wealth, protecting what you』ve built, and retiring on that wealth. Includes real-life scenarios 
showing how your income can get whittled away with foolish purchases and the 
resultant credit card interest. 

Your Money or Your Life: Transforming Your Relationship with Money and Achieving 
Financial Independence, by Joe Dominguez and Vicki Robin (Penguin Putnam, 


CHAPTER 1: Giving Yourself a Financial Checkup 

405 Murray Hill Pkwy., East Rutherford, NJ 07073; 800-788-6262; www.penguin. 
com). Offers a new financial road map to improve your financial well-being. 

Your Wealth Building Years: Financial Planning for 18 to 38 Year Olds, by Adriane 
G. Berg (Newmarket Press, 18 E. 48th St., New York, NY 10017; 212-832-3575; 
800-233-4830; www.newmarketpress.com). A basic financial primer for 18- to 38year-
olds with information on taxes, dividend reinvestment programs, the real estate 
market, and using the computer as an investment tool for trading on the Net and using 
interactive Web sites for financial planning. 

MAGAZINES 

Bloomberg Personal (P.O. Box 888, Princeton, NJ 08542-0888; 609-279-3000; 
888-432-5820; www.bloomberg.com). Sophisticated magazine, largely devoted to investing 
strategies, published by the Bloomberg Business News organization, which 
supplies news and data to the financial services industry. 

Family Money (1716 Locust St., Des Moines, IA 50309-3023; 515-284-3000; 
800-642-9607; www.familymoney.com). Basic personal finance magazine published 
by Meredith Corporation, which also publishes Better Homes and Gardens. 

Financial Planning (SDC Publishing, 40 W. 57th St., Suite 114, New York, NY 
10019; 212-765-5311; 800-455-5844; www.fponline.com). A magazine that covers 
the financial planning industry and the latest trends in financial planning. 

Kiplinger』s Personal Finance Magazine (The Kiplinger Washington Editors, Inc., 
1729 H St., N.W., Washington, DC 20006-3938; 202-887-6400; 800-544-0155; www. 
kiplinger.com). Personal finance magazine aimed at readers less financially sophisticated 
than those who read Money. 

Money (Time Inc., a division of Time Warner, Time and Life, Rockefeller Center, 
New York, NY 10020; 212-522-1212; 800-633-9970; www.money.com). The largest 
circulation and most prestigious magazine bringing financial planning ideas to average 
Americans. Features advice and news on investing, taxes, real estate, insurance, retirement, 
and all other topics in personal finance, written in an easy-to-understand 
style. 

Smart Money Magazine (1755 Broadway, 2nd Floor, New York, NY 10019; 800444-
4204; www.smartmoney.com). Sophisticated magazine concentrating on investing 
strategies, stocks, and mutual funds but also dealing with lifestyle and spending 
decisions. 

Worth Magazine (Capital Publishing, 575 Lexington Ave., New York, NY 10017; 
212-751-4550; 800-777-1851; www.worth.com). Magazine covering both investing 
and lifestyle choices to help you improve your personal financial decision making. 


PART ONE: Maximizing Your Investment Options 

Your Money Magazine (Consumer Digest Inc., 8001 N. Lincoln Ave., Skokie, IL 
60077; 847-763-9200; www.yourmoney.com). Magazine covering the basics of personal 
finance, investing, and banking in an easy-to-read manner. 

NEWSLETTERS 

The Frugal Gazette (P.O. Box 3395, Newtown, CT 06470-3395) This newsletter is 
full of money-saving ideas. 

The Kiplinger Letter (The Kiplinger Washington Editors, Inc. 1729 H St., N.W., 
Washington, DC 20006-3938; 202-887-6462; 800-544-0155; www.kiplinger.com). 
News on business and personal finance trends from Washington. The letter covers 
changes in government policies, interest rates, investment markets, and tax rulings that 
affect your finances. 

The MoneyLetter (Hume Publishing, 2200 Yonge St., Suite 604, Toronto, Ontario, 
Canada M4S 2C6; 416-440-8260; 800-733-4863; www.humegroup.com). A newsletter 
with solid tips on all aspects of financial planning. 

NEFE Digest (National Endowment for Financial Education, 5299 DTC Blvd., 
Suite 1300, Englewood, CO 80111-3334; 303-220-1200; www.nefe.org). Letter aimed 
at updating financial planners on industry trends. 

Personal Finance Letter (KCI Communications, 1750 Old Meadow Rd., McLean, 
VA 22103; 703-905-8000; 800-832-2330; www.pfnewsletter.com). Touches on all 
areas of personal finance but specializes in investment advice. 

SOFTWARE 

Microsoft Money (Microsoft Corp., One Microsoft Way, Redmond, WA 980526399; 
425-882-8080; 800-426-9400; www.microsoft.com). A simple program designed 
to track your income, expenses, and net worth; keep your checkbook; and pay 
your bills electronically. 

Quicken (Intuit, 2535 Garcia Ave., Mountain View, CA 94043; 650-944-6000; 
www.qfn.com). When you must make a financial decision on investments, taxes, or 
other matters, allows you to track every aspect of your personal finances and analyze 
alternatives using color graphs. Offers six software packages: Quicken Basic to start 
organizing your finances, balance your checkbook, and bank online; Quicken Deluxe, 
same as Basic plus you can enter transactions via the Web, you can download stock 
quotes and news, planners for retirement, college, home purchase, and savings, and 
track basic tax data; Quicken Suite with TurboTax and Family Lawyer, which allows 
you to do banking, investing, planning, taxes, and legal applications in one integrated 
program; Quicken Financial Planner helps plan for retirement; and finally Quicken 
Deluxe for Macintosh. 


CHAPTER 1: Giving Yourself a Financial Checkup 

TRADE ASSOCIATIONS 

American Financial Services Association (919 18th St., N.W., Suite 300, Washington, 
DC 20006; 202-296-5544; www.americanfinsvcs.com). The trade group for consumer 
finance companies; will send you the Consumer』s Almanac for a very low price. 

Consumer Information Center (Pueblo, CO 81009; 719-948-3334). The U.S. government』s 
main distribution center for consumer information. Catalog lists consumer-
oriented publications. 

Council of Better Business Bureaus (4200 Wilson Blvd., Arlington, VA 22203; 
703-276-0100; www.bbb.org). The national organization for local Better Business Bureaus; 
offers a number of publications on how to avoid fraud. 

Financial Planning Association (3801 East Florida Ave., Suite 708, Denver, CO 
80210; 303-759-4900; 800-282-7526; www.fpanet.org). Represents planners who 
have passed their Certified Financial Planning examinations; will provide you with a 
list of CFPs in the town where you live. 

National Association of Insurance and Financial Advisors (2901 Telestar Ct., Falls 
Church, VA 22042-1205; 703-770-8100; www.naifa.org). Group of life insurance 
agents and investment advisors. 

National Association of Personal Financial Advisors (355 W. Dundee Rd., Suite 
200, Buffalo Grove, IL 60089; 847-537-7740; 888-333-6659; www.napfa.org). Represents 
financial planners who work on a fee-only basis and therefore earn no commissions 
by selling products they recommend. 

National Center for Financial Education (P.O. Box 34070, San Diego, CA 92163; 
619-232-8811; www.ncfe.org). Nonprofit organization dedicated to helping people do 
a better job of spending, savings, investing, insuring, and planning for their financial 
future to avoid depending entirely on Social Security or Medicare. Operates a Money 
Bookstore that offers discounts on books for members, publishes books, including Do 
It Yourself Credit Repair Guide and Marta』s Closet Book: Bargain Dressing for Fun, 
Flair, and Extra Money. 

National Endowment for Financial Education (529 DTC Blvd., Suite 1300, Englewood, 
CO 80111-3334; 303-202-1200; 800-553-5343; www.nefe.org). Administers 
the mail-order test for financial planners seeking to become Certified Financial 
Planners. 


CHAPTER 2 
Maximizing Returns 
on Cash Instruments 


If you are a beginner at investing, chances are that you have most of your money 
in cash instruments. By cash, we mean investments that are totally safe from loss 
of principal, including checking, savings, and certificate of deposit (CD) accounts 
at banks and savings and loans, money-market mutual funds, and Treasury bills 
(T-bills). When you got your first allowance as a child, you probably were taught 
to save at least part of it in the bank, where you were proud to earn 51.2 percent. 
Many people have never broken this praiseworthy habit but put some of their 
money into investments, such as stocks and bonds, that can offer higher rates of 
return. 

The Importance of Cash Instruments 

Cash instruments play an important stabilizing role in your investment portfolio. 
No matter how much or how little your cash earns for you in interest, it 
cannot fall in principal value, which certainly cannot be said for stocks and bonds. 
Cash can therefore act as a haven when stock and bond prices are falling. 

Clearly, it is important to have cash available to meet everyday living expenses. 
Many cash instruments, including money-market accounts, NOW accounts, and 
passbook savings accounts, are instantly accessible either through a check privilege 
or by withdrawing cash at an automatic teller machine (ATM). Other cash vehicles, 
including CDs and T-bills, which have short maturities, allow you to get at 
your money when the instruments mature in a few months. The liquidity of cash is 
one of its main benefits. 


CHAPTER 2: Maximizing Returns on Cash Instruments 

The Benefits of Bank Insurance 

Safety is another important benefit of cash. Despite bank and savings and loan 
failures, no depositor with insured cash instruments of $100,000 or less has lost a 
penny of principal or interest due. Ever since the Federal Deposit Insurance Corporation 
(FDIC) was set up in 1933, bank depositors have been able to sleep safely 
knowing that whatever happens to their banks, their money is safe as long as they 
keep the amount on deposit under the legal maximum. This could not be said before 
the FDIC was established. In fact, many bank depositors were wiped out 
when their banks failed after the stock market crash of October 1929. As expensive 
as it has been over the years for the federal government to keep its promise to 
protect bank depositors—and it has cost hundreds of billions of dollars—that assurance 
has provided stability for the banking system, which has allowed the 
economy to prosper. In countries where there is no deposit insurance, people keep 
their money under the mattress, or they open a foreign bank account—usually in 
America or Switzerland. 

It is important to understand exactly what federal deposit insurance covers and 
what it doesn』t. Under current law, each account you have registered at a bank or 
savings and loan is insured up to $100,000. For example, a married man may have 
an account in his name, a separate account in his wife』s name, and a joint account 
in both their names. Each of the accounts would be separately insured to $100,000, 
for a total, in this case of $300,000. You can extend your coverage by opening 
accounts at other banks. While the FDIC is the overall insurer of deposits, banks 
are covered by the Bank Insurance Fund (BIF), and savings and loans are covered 
by the Savings Association Insurance Fund (SAIF). Credit union accounts are 
insured up to the same limit by the National Credit Union Share Insurance Fund, 
administered by the National Credit Union Administration (NCUA). This structure 
was created as part of the savings and loan bailout legislation in 1989. 

While federal deposit insurance guarantees that you will get back your principal 
and all interest due, it does not guarantee that you will be able to withdraw 
your money at will if a bank is seized. In that case, you may have to give the bank 
up to 30 days』 advance notice if you want to take money out of your account. This 
provision, designed to help banks withstand a flood of depositors demanding their 
money at once, is rarely enforced. Usually, when a bank is taken over (the Feds 
typically do it after closing on Friday), you have access to your money within a few 
days (often on Monday). The idea is to assure depositors that they have no need to 
worry, thus averting panic. 

Even though you might think you will never have to worry about it, make sure 
not to keep more than $100,000 in one account at a time. The federal insurance 
agencies say explicitly that they do not insure more than $100,000 per account, and 
they may or may not cover any amount over that if a bank is seized or liquidated. 


PART ONE: Maximizing Your Investment Options 

There have been horror stories of people receiving lump-sum distributions of well 
over $100,000 in pension benefits at retirement or in severance pay after they were 
laid off, which they deposited temporarily in a bank account, only to be struck by 
a surprise closing of the bank by federal regulators. In some cases, they lost all 
the money in their account over $100,000. Don』t even tempt the fates: If you have 
more than $100,000 in cash at any time, spread it among various accounts at 
several banks. 

Despite the protection of federal deposit insurance, you might still want to 
watch the condition of the bank where your life savings are invested. You do not 
want the upset and inconvenience of seeing your local bank closed, having swarms 
of federal agents comb through bank records, then seeing the bank reopen with a 
new name. There is now an easy way to check on the financial condition of any 
bank in the country. A firm called Veribanc (P.O. Box 461, Wakefield, MA 01880; 
781-245-8370; 800-837-4226 [800-VERIBANC]) has established a three-star rating 
system to grade the financial strength of banks. The highest rating is three stars, 
followed by two stars and then one star. Some banks get no stars. You can call 
Veribanc to find out the financial health of any bank and, for a fee, get a detailed 
written report on the bank. The Veribanc ratings are also published widely, including 
monthly in the 「Monitor」 section of Money magazine. 

Earning Interest on Cash 

BANKS AND SAVINGS AND LOANS 

For decades, the interest that banks and savings and loans could pay on 
checking and savings accounts was regulated by the federal government. Savings 
and loans could pay 51.2 percent on passbook accounts, while banks could pay a 
maximum of 51.4 percent. The soaring inflation and interest rates of the late 1970s 
rendered those fixed rates obsolete, ushering in the era of bank deregulation. Ever 
since the banking industry was fully deregulated in the early 1980s, banks and 
savings and loans have been free to pay as much as they choose on checking and 
savings accounts. A bank that wants to generate a large amount of deposits to make 
loans will offer higher interest rates than a bank that does not anticipate much loan 
demand. 

Though there are variations from bank to bank, the yields you earn on your 
cash are affected more by the general movement in interest rates than by individual 
banks themselves. If inflation is high and rising and the Federal Reserve pushes 
up interest rates to try to cool off the economy, cash instruments will pay rates from 
8 percent to as much as 20 percent, as they did in the early 1980s. Under these circumstances, 
which persisted in the 1990s and 2000s, yields on cash can fall dramatically 
to as low as 2 percent. 


CHAPTER 2: Maximizing Returns on Cash Instruments 

When you sign up for a bank account, take note of what kind of compounding 
the bank uses in calculating interest. The more frequent the compounding, the more 
you will earn. The fastest compounding is called continuous compounding. Other 
banks compound on a daily or monthly basis. While signing up with a bank that 
compounds interest more frequently is desirable, you will not earn so much more 
interest that it makes it worth sacrificing convenience or other useful bank services. 

Remember that all interest you earn from a bank or savings and loan account 
is totally taxable at the federal, state, and local levels. Deduct what you will be paying 
in taxes when you calculate what your return will be from a bank account of 
any type. 

In choosing a bank, look closely at the minimum deposit levels required to 
avoid monthly service charges and other fees. Banks today say they are not in the 
banking business, but the 「financial relationship」 business. The more of your 
money you bring to a bank, the more you will be rewarded with higher yields and 
lower fees on your accounts, as well as lower interest rates on loans. If you keep 
small balances of less than $1,000, you may want to opt for a no-frills checking 
account, on which you pay a flat fee no matter how low your balance falls. 

CREDIT UNIONS AND ASSET MANAGEMENT ACCOUNTS 

There are two viable alternatives to banks and savings and loans for earning interest 
on your cash: credit unions and the asset management accounts offered by 
brokerage firms. Credit unions, which are run for the benefit of their members and 
not for the profit of stockholders, typically require lower minimum balances, 
charge lower service fees, and pay higher interest rates than banks. To join a credit 
union, you must be able to show some common affiliation with other credit union 
members. That might mean you are an employee of a company, nonprofit institution, 
government agency, church or synagogue, or a member of a labor union or 
trade association. To find out whether there is a credit union near you that you 
would be eligible to join, contact the Credit Union National Association (CUNA, 

P.O. Box 431, Madison, WI 53701; 608-231-4000; 800-356-9655; www.cuna. 
org). Make sure that any account you open is insured by the NCUA because there 
are still a few privately insured credit unions that are subject to bank runs if 
something goes wrong. The most notable case of this problem came in the early 
1990s when a failure at one bank in Rhode Island caused a failure of the fund that 
insured several banks and credit unions, which forced the governor to freeze credit 
union accounts insured by the private fund for more than a year, wreaking havoc 
with the lives of thousands of credit union members. 
If you have stocks, bonds, and mutual funds, a brokerage firm』s asset management 
account may offer the highest return on your cash and the greatest 
convenience. Such an account automatically sweeps all interest and dividend 
income distributed by your securities into a money-market fund until you decide 
what to do with the money. You can also write checks on the account although 


PART ONE: Maximizing Your Investment Options 

there usually is a minimum check size of $100 to $500. The account also comes 
with credit and debit cards as well as margin loan capacity allowing you to borrow 
against the value of your securities. Most brokerage firms will open an account for 
about $5,000 to $10,000 in cash and securities, and they typically charge an annual 
management fee from $25 to $100. Assets in such accounts are insured against the 
bankruptcy of your brokerage firm for up to $500,000 in securities, including 
$100,000 in cash, by the federal Securities Investor Protection Corporation (SIPC, 
805 15th St., N.W., Suite 800, Washington, DC 20005; 202-371-8300). However, 
it makes sense to maintain an asset management account only if you have enough 
money to make it worthwhile. 

Types of Cash Instruments 

In deciding how much money to allocate to the different kinds of cash accounts, 
you should consider both convenience and yield. Because all of these 
alternatives are absolutely safe, they belong on the bottom, or low-risk level, of 
your investment pyramid (described in the last chapter). What follows is a rundown 
of the advantages and disadvantages of the different kinds of cash instruments, 
starting with the lowest yielding and running through the highest yielding. 

NOW AND SUPER-NOW CHECKING ACCOUNTS 

Before the mid-1970s, checking accounts paid no interest. The introduction of 
the money-market mutual fund forced banks to respond by offering what was 
called a negotiable order of withdrawal (NOW) account. At first, these accounts 
could pay a maximum of 51.4 percent interest, but by the mid-1980s, banks were 
free to pay whatever they chose. Rates rose a bit higher but then fell to the 2 percent 
to 3 percent range in the 1990s and 2000s. 

NOW and super-NOW accounts allow unlimited writing of checks of any size. 
In return, banks often require minimum balances of at least $1,000, and they 
charge service fees if you do not keep enough money in the account. Some banks 
will also charge for every check you write if you do not maintain the minimum 
balance. Before you sign up for a NOW account, see whether you typically keep 
enough in your checking account to earn more in interest than you will pay in fees. 

PASSBOOK SAVINGS ACCOUNTS 

Long the staple of bank depositors, the passbook savings account is not as 
popular as it used to be. In the 1970s, it was about the only account a bank offered 
that paid interest—usually 51.4 percent—and that provided instant access to your 
money. The bank provided a passbook in which it would post your interest and 
balances. 

These days, passbook accounts often don』t even come with passbooks. Because 
you can put money into them or take money out whenever you want, they 


CHAPTER 2: Maximizing Returns on Cash Instruments 

are called day-to-day savings accounts. Instead of receiving a passbook, you get a 
monthly statement from the bank updating your balance and the amount of interest 
earned. 

Even when interest rates soared in the early 1980s, few banks paid more than 
about 5 percent on their passbook accounts because they noticed that depositors 
seemed to be struck with a case of inertia. The banks figured that if they could pay 
low rates and still not lose deposits, there was no reason to raise rates to competitive 
levels. When interest rates plunged in the early 1990s, however, the banks 
moved swiftly to lower rates on passbook accounts to the 1 percent to 3 percent 
range, where they remained into the early 2000s. 

Unless you do not have enough money to meet minimum balance requirements 
on other higher yielding accounts, passbook savings plans are not very attractive 
investments. The fees a bank charges to maintain a passbook account may eat up a 
significant portion of your interest earnings unless you maintain a large enough 
balance. 

MONEY-MARKET DEPOSIT ACCOUNTS 

Money-market deposit accounts (MMDAs) are the banking industry』s answer 
to the money-market mutual fund. They were first offered as banking was deregulated 
in the early 1980s to allow banks to compete against the money funds that 
were attracting billions of dollars in deposits. 

Banks can pay whatever they wish on MMDAs. Their rates will always be 
higher than those on NOW or passbook savings accounts, though not always much 
higher. In the early days of deregulation, banks paid hefty double-digit rates, but by 
the 1990s and 2000s, MMDA yields had plunged to about 3 percent to 4 percent. 
Bankers will usually adjust their MMDA rates on a weekly basis, based on what 
competing banks and money-market mutual funds are offered and what is happening 
to the general direction of interest rates, particularly short-term rates such as 
Treasury bills. Because MMDAs track the general direction of interest rates, you 
will benefit if yields rise sharply. However, this is a short-term rate, and you cannot 
lock in a high yield unless you convert to some form of fixed-income security, 
such as a bond or a long-term CD. 

Unlike your access to a NOW account, your access to an MMDA is somewhat 
restricted. According to federal banking law, you can write three checks of any 
amount and make three electronic transfers a month on your MMDA. Those 
electronic transfers might be made by telephone, at an automatic teller machine, or 
as an automatic payment to a third party, like a utility. Your best strategy is to make 
three large transfers a month into your checking account, for which you can write 
checks. This way, most of your money will be earning high interest for a longer 
period of time. 

Like they do for other accounts, banks usually require a minimum balance of 
at least $1,000 to open an MMDA. Most banks also charge fees for keeping a low 


PART ONE: Maximizing Your Investment Options 

balance, though often they will pay higher interest if you keep more money in your 
account. 

If you want to consolidate most of your cash at a bank in one liquid account, 
the MMDA is the best place to do it. It will pay the highest yields of any readily 
accessible product the bank offers. 

MONEY-MARKET MUTUAL FUNDS 

Though many people think money-market mutual funds are the same as 
MMDAs, there are several important differences between them: 

Money-market mutual funds are run by fund management companies, and they 
buy short-term securities that offer the best yields available in the marketplace at 
that time. The money funds buy high-quality, short-term obligations called commercial 
paper, banker』s acceptances, CDs, repurchase agreements, and Treasury 
bills, and they pass on all of their income, minus management fees, to shareholders 
in the funds. In contrast, bank MMDA funds are not invested in the money markets 
directly. They are lent by the bank to corporations and consumers, and the bank 
keeps whatever difference there is between the loan proceeds and the money-
market yield. 

Money-market mutual funds are not insured by the FDIC or any other government 
agency, unlike bank MMDAs. Though there has never been a default or 
even a near-default in a money-market mutual fund, there is usually no insurance 
company guaranteeing that it will cover losses in the unlikely case of such a 
default. (A few money funds do carry such insurance.) Ultimately, the fund management 
company stands behind the guarantee that you will be able to withdraw 
your money from a money fund. In a few cases where there were temporary problems 
with a money fund, the fund company immediately bailed out shareholders. 
One advantage of having assets in a money fund that is part of a larger mutual fund 
family is that you can transfer money into or out of the money fund with a simple 
toll-free phone call. 

Money-market mutual funds have a net asset value that is kept stable at $1 a 
share, while there is no price per share set for bank MMDAs. Money funds set up the 
$1-a-share system when they were introduced in the mid-1970s, and allowing people 
to know that the number of shares they own is exactly equal to the dollar value of 
their accounts has worked well. In the money fund business, it would be considered 
a violation of the worst kind to 「break the buck,」 or $1 share price, for any reason. 

Money-market mutual funds assess annual management fees of less than 1 
percent annually, which is deducted automatically from a fund』s yield. The industry 
average is 3.4 percent, and any fee over 1 percent is excessive. So if the fund 
earned an 8 percent yield last year and it levies a 1 percent management fee, you 
will earn 7 percent. Sometimes, if money funds get into a war for business, they 
will waive some or all of their management fees for a few months, which will 


CHAPTER 2: Maximizing Returns on Cash Instruments 

instantly raise the funds』 yields. In contrast, banks do not charge management fees. 
Instead, they impose minimum balance requirements and service fees. 

Money-market mutual funds usually impose a minimum amount on checks that 
ranges from $100 to $500, while bank MMDAs usually allow checks of any amount. 
All brokerage asset management accounts come with money-market funds on 
which you can write checks. 

Money-market mutual funds come in both taxable and tax-free varieties, while 
interest from bank MMDAs is always taxable. Money-market funds offer three taxable 
varieties: Treasury-only, government-only, and general-purpose. Treasury-only 
funds buy exclusively Treasury bills and other direct obligations of the U.S. government. 
These are the safest but lowest yielding money funds. The government-
only funds invest solely in paper that is backed either directly or indirectly by the 
government. These funds are extremely safe, yet they pay slightly higher yields than 
Treasury funds. General-purpose money funds buy obligations of both domestic and 
foreign governments and corporations. While these are also very safe, there is a bit 
more risk that a corporate issuer will default. As a result, these money-market funds 
pay the highest yields, which may be as much as a percentage point higher than 
government funds. Whether you opt for a government or a general-purpose fund 
depends on your tolerance for risk, though a general-purpose money-market fund 
should hardly be considered a trip to the roulette wheel. 

Money-market mutual funds also are available in tax-free form. These funds 
buy the short-term debt of states and municipalities and pass all their income, 
minus management fees, to shareholders. There are hundreds of national tax-
exempt funds to choose from, either directly from fund companies or indirectly 
through brokerage firm asset management accounts. The percentage yield on these 
funds will always be lower than that of taxable money-market funds, but if your 
tax bracket is high enough, you will have more money in your pocket after taxes 
with a tax-exempt money fund. In some high-tax cities like New York, there are 
even triple-tax-exempt money funds, which buy only debt of the city. Shareholders 
in these funds thereby avoid federal, state, and city income taxes. For you to 
determine whether it makes more sense to keep cash in a taxable or a tax-free 
money fund, perform the following calculation, called finding the taxable equivalent 
yield of your money fund. It is the same method you would use when considering 
buying a municipal bond. 

Deduct your federal tax bracket percentage from 100. In this example, we will 
use a 31 percent tax bracket. The result is known as the reciprocal of your tax bracket. 

100 . 31 Tax bracket = 69 Reciprocal of tax bracket 

Divide the tax-free yield on the money fund you are considering by the reciprocal 
of your tax bracket. In this case, we will assume that your tax-free money 
fund pays a 5 percent tax-free yield. 


PART ONE: Maximizing Your Investment Options 

5% Tax-free money-fund yield 

= 7.25% Taxable equivalent yield 

69 Reciprocal of tax bracket 

This means that you would have to find a taxable money fund paying 71.4 percent 
to end up with the same dollars in your pocket after taxes that the 5 percent 
tax-free will pay you. 

To determine whether a double-tax-free or triple-tax-free money fund makes 
sense, go through the same exercise, adding in your state and local tax brackets. 
If your combined federal, state, and local tax brackets add up to 40 percent, for 
example, the taxable equivalent yield of a 5 percent triple-tax-free money fund 
would be an astounding 8.33 percent! 

5% Tax-free money-fund yield 

= 8.33% Taxable equivalent yield 

60 Reciprocal of tax bracket 

Now you can see why tax-free money funds are so popular. Like taxable 
money funds, tax-free money funds permit you to write checks, usually with a 
minimum size of at least $100. (For names and addresses of the mutual fund 
companies offering money-market mutual funds, see the 「Resources」 at the end 
of Chapter 4, 「Selecting Mutual Funds.」) 

Money-market mutual fund yields are usually higher than those paid by bank 
MMDAs. Fund managers have a certain amount of flexibility in managing their funds 
that allows them to maximize yields. Money-market mutual funds, by law, cannot 
buy securities with maturities of longer than one year, and the average maturity of 
their entire portfolio cannot exceed 90 days. The longer the maturity of the paper 
they hold, the higher the funds』 yields, and the longer those yields will last. 

Fund managers who anticipate falling interest rates will lengthen the maturity 
of their holdings to be able to hang on to high yields for as long as possible. On 
the other hand, if managers think rates will rise, they will shorten the maturity of 
their holdings so they mature quickly, allowing them to buy more debt securities 
as soon as the yields are higher. The average maturity of all mutual funds is 
published every week in The Wall Street Journal and other financial newspapers, 
so you can tell whether maturities in the industry in general, and in any particular 
fund, are lengthening or shortening. Because of the different maturities of money 
funds, their yields tend to lag behind the movement in overall short-term rates. 
That is an advantage when rates are falling because you will be earning a high 
yield for a longer time. But when rates shoot up sharply, money fund yields take a 
while to catch up. 

Money-market mutual funds are widely diversified. Securities and Exchange 
Commission (SEC) regulations prohibit money funds from investing more than 5 
percent of their assets in the paper of a single company, or any more than 25 
percent in one industry. In addition, SEC rules force money funds to buy commercial 
paper that is in either of the top two quality ratings—A1 or A2 by Standard 


CHAPTER 2: Maximizing Returns on Cash Instruments 

& Poor』s, or P1 or P2 by Moody』s Investors Service. In contrast, all of your money 
is with one bank if it is in a bank MMDA, though if the funds are insured, there 
is nothing to worry about. 

Money-market funds are credited with interest daily, and the interest is reinvested 
automatically in more fund shares. Banks can pay interest on MMDAs daily, 
weekly, or monthly. When it is credited to your account, interest also compounds 
automatically. 

Money-market fund yields are widely quoted in four ways: the annualized 
average 7-day simple yield, the annualized average 7-day compounded yield, the 
annualized average 30-day simple yield, and the annualized average 30-day 
compounded yield. The simple yield measures what the fund is paying without 
compounding. The 7-day maturity yield will give you a sense of what the fund has 
been buying lately, while the 30-day yield will tell you what has happened over 
the last month. If the 7-day yield is lower than the 30-day yield, the fund』s yield 
is falling. If the 7-day yield is higher, the fund』s yield should be rising soon. 
iMoneyNet.com (One Research Drive, Suite 400A, Westborough, MA 01581; 
508-616-6600; www.imoneynet.com) compiles these numbers and also sells subscriptions 
to its weekly newsletter. 

Here is what you will normally see in weekly newspaper listings of fund 
yields: 

Money-Market Mutual Funds 

Assets in Average 7-Day 
Fund Name1 Millions2 Maturity3 Yield 4 
Taxable 
Fidelity Cash Reserves Fund $9,749 55 3.20% 
Select Government Fund 10 25 2.30 
Tax exempt 
Dreyfus Investors Municipal Fund 370 76 2.35 
Putnam California Fund 56 55 1.41 

Explanation of Newspaper Listings 

1. 
The name of the money-market mutual fund. The name will normally reveal 
whether it is a general-purpose fund or a government-only fund. Fidelity 
Cash Reserves is a general-purpose fund, while Select Government is a 
government-only fund. The tax-exempt funds are listed separately. The 
national tax-free funds, which buy securities from all over the country, are 
mixed in with single-state funds, which buy securities only from one state. 

PART ONE: Maximizing Your Investment Options 

In this case, the Dreyfus Investors Municipal Fund is national, while the 
Putnam California Fund buys securities only from California-based issuers. 

2. 
Asset size in millions of dollars. The larger the fund, the less its expenses 
tend to be. Any fund with more than $100 million in assets would be 
considered a large fund. In this case, the Fidelity Cash Reserves Fund has 
a massive $9.749 billion, while the Select Government Fund has only $10 
million. The Dreyfus Investors Municipal Fund has $370 million, while 
the Putnam California Fund has $56 million. 
3. 
Average maturity of the fund』s portfolio. This figure tells you the average 
number of days it will take for the fund』s securities to mature. The longer 
the maturity, the more the fund manager believes interest rates will fall. 
In this case, the Fidelity Cash Reserves Fund has an average maturity of 
55 days, which is quite long, while the Select Government Fund』s maturity 
is 25 days, which is quite short. The fund managers of these two funds 
clearly disagree on which way interest rates are headed. The manager of 
the Dreyfus Investors Municipal Fund, with a 76-day maturity, is even 
more convinced that interest rates will fall. 
4. 
The 7-day yield. This is the average compounded yield for each fund. In this 
case, the Fidelity Cash Reserves Fund』s yield of 3.2 percent is higher than 
the Selected Government Fund』s 2.3 percent because Fidelity』s maturity is 
longer and because government securities like Treasury bills yield less than 
the corporate securities in Fidelity』s portfolio. Among the tax-exempt funds, 
the Dreyfus 2.35 percent is higher than the Putnam California』s 1.41 percent 
because the Dreyfus Fund』s maturity is longer and because the California-
only securities in the Putnam Fund offer a lower yield than a national fund. 
Yet for high-tax-bracket residents of high-tax California, the Putnam Fund 
might offer a better after-tax return than the Dreyfus Fund. 
Therefore, depending on the amount of money you have and your need for 
convenience and liquidity, a money-market mutual fund might be just right for you. 

TREASURY BILLS 

T-bills, as they are called, provide the ultimate in safety and liquidity and are 
therefore among investors』 favorite havens for cash. Treasury bills are backed by 
the full faith and credit of the U.S. government, so for all practical purposes, they 
carry no risk of default. 

Any Treasury security that is issued with a maturity of one year or less is called 
a Treasury bill. They are normally auctioned to the public every Monday in 
three-month and six-month maturities. (The Treasury calls them 13-week and 
26-week bills.) Normally, the longer you commit your money, the higher your 
yield will be. Yields on Treasury bills tend to be lower than yields on money-
market mutual funds because of the extra security that T-bills offer. 


CHAPTER 2: Maximizing Returns on Cash Instruments 

You can buy a Treasury bill directly from any Federal Reserve Bank or branch (a 
list of them appears in the 「Resources」 section in Chapter 5, 「All about Bonds」) by 
mail, with no fee. You can buy bills through the Treasury Direct program. If you keep 
$100,000 or less in the program, there is no charge. If you keep $100,000 or more, the 
Treasury charges you an annual fee of $25. You must fill out a form called a tender 
(see Figure 2.1), which means that you are making what is known as a noncompetitive 
bid, and submit a check for at least $10,000, the minimum accepted for a Treasury bill 
purchase. By submitting this bid, you are agreeing to accept whatever yield emerges 
from the Treasury auction at which you are bidding. Professional government securities 
traders submit competitive bids for millions of dollars of bills. The supply of and 
demand for bills ultimately determine the average yield on each T-bill auction. 

Alternatively, you can buy a Treasury bill through any broker or bank for a 
minimal charge of about $25. That fee, of course, reduces your effective yield. 
Once you have bought a T-bill, your name will be kept in the Treasury』s electronic 
records. Don』t expect a fancy certificate to be sent to you. 

The investment yield method. Once the yield on the T-bill has been set by the 
auction, which will be determined before 2 PM of that day and reported on the Internet 
right away and in newspapers the next day, the Treasury will immediately 
send you a refund check for what is known as the discount. The discount is the difference 
between $10,000 and the market price of the T-bill at that point. For example, 
if the auction produces a yield of 5.26 percent, you will receive a check 
for a discount of $500, which represents your return on investment. Your $9,500 
remains with the Treasury until the bill matures. To calculate your yield for a one-
year T-bill, divide the discount by the effective purchase price, which is $10,000 
minus $500 in this case: 

$500 Discount ÷ $9,500 Effective purchase price = 5.26% Investment yield 

For a three- or six-month T-bill, you have to annualize the yield. For a three-
month T-bill, you multiply the yield (5.26%) by 365, then divide by 91. For a six-
month T-bill, you multiply the yield by 365, then divide by 182 as follows: 

$500 Discount 365

× = 10.5% Investment yield 

$9,500 Effective purchase price 182 

This yield is also know as the coupon-equivalent yield because it is measuring 
your return on the principal you have tied up in the T-bill until maturity. When the 
T-bill matures in three or six months, you receive a check for $10,000. 

Like the interest on all Treasury securities, your T-bill』s interest is taxable for 
federal income tax purposes, but it is not taxable at the state or local level. This 
gives a boost to the after-tax return you earn from the T-bill, particularly if you live 
in a high-tax state like New York or California. Taxes are due in the year the T-bill 
matures or is sold; therefore, if you want to delay taxes into the next year, you can 
buy a T-bill that matures after the next January 1. 


PART ONE: Maximizing Your Investment Options 

Figure 2.1 Tender for 13-Week Treasury Bill 



CHAPTER 2: Maximizing Returns on Cash Instruments 

If you need to cash in your T-bill before maturity, you can sell it but may not 
receive the best price. If interest rates have risen between the time you bought it 
and when you want to sell it, the T-bill』s price will have dropped. 

To look up the price of your Treasury bill, consult the listing in The Wall Street 
Journal, Barron』s, or another financial newspaper. They will look like this: 

Treasury Bills 
Date1 Bid2 Ask3 Change4 Yield5 
Mar 25 2.96 2.94 +0.03 2.99 
Jul 29 3.16 3.13 +0.03 3.22 

Explanation of Treasury Bill Listings 

1. 
This is the date the Treasury bill will mature. Most listings will carry 33 
dates, which is the number of T-bill maturity dates outstanding. In these 
two cases, the bills mature on March 25 and July 29. 
2. 
The bid price is the highest price dealers are willing to pay for a particular 
Treasury bill. The number is actually the discount from face value, expressed 
as an annual percentage. In the first case here, dealers will buy the 
bill at 2.96 percent. The higher the discount, the lower the price of the T-bill. 
3. 
The ask price is the lowest price that dealers are willing to sell a particular 
Treasury bill. It is also the discount, expressed as an annual percentage. 
In the first case here, it is 2.94 percent. Therefore, dealers are willing 
to sell at a smaller discount, which means the ask price of the T-bill is 
higher than the bid price. 
4. 
The change signals how much the discount rose or fell in yesterday』s 
trading. Paradoxically, a plus (+) refers to a rise in interest rates and means 
that T-bill prices dropped. In these cases, the interest rate rose yesterday by 
.03, meaning the prices fell by that amount. Think of it in terms of a store 
putting goods on discount. The bigger the discount, the lower the price of 
the goods to customers. A minus (.) means that T-bill prices have risen 
and interest rates fell because the discount has been reduced. 
5. 
The yield is the coupon-equivalent yield. That is, it is based on your return 
on the capital you have tied up in the T-bill until maturity. In the first case 
here, the yield is 2.99 percent. It would be calculated as follows: 
$291 Discount ÷ $9,709 Remaining principal = 2.99% 

This means that you would have $9,709 tied up until the T-bill matures, 
when you would receive a check from the Treasury for $10,000. Your interest 
would be $291. 


PART ONE: Maximizing Your Investment Options 

Treasury bills might be right for you if you want total security from default, 
liquidity, and have a minimum of $10,000 to invest. 

CERTIFICATES OF DEPOSIT (CDS) 

CDs are bank, savings and loan, or credit union instruments that allow you to 
lock in an interest rate for a specific period of time. If you withdraw your money 
from the CD before the CD matures, you face an early-withdrawal penalty set by 
each bank—often three months』 interest. The most popular CDs mature in three 
months, six months, and one year, although banks offer CDs with maturities as 
long as five years. Some banks even offer so-called designer CDs, for which you 
decide the maturity and the bank quotes you a yield. Generally, the longer you 
commit your money, the higher your CD』s yield will be. Banks usually set some 
minimum amount for CDs, which can be as low as $100 or as much as $1,000, but 
they never charge a fee to buy a certificate. 

There are several methods that banks use to pay interest on CDs. In many 
cases, the interest is not paid until the CD matures. For longer term CDs, banks 
mail out checks every three or six months, or they deposit the money directly into 
your bank account. Most banks will also allow you to reinvest your interest in the 
CD if you wish. All interest from CDs is taxable at the federal, state, and local 
levels in the year it is received, even if the interest is reinvested. Remember to 
calculate the effect of those taxes when you compare your potential CD returns 
against other alternatives, like tax-free money funds or municipal bonds. 

Since the banking industry was deregulated in the 1980s, banks have been able 
to offer whatever rates they want on CDs. The yield that any particular bank is willing 
to pay depends on its executives』 expectations of loan demand. If they expect a 
pickup in loan demand, they might raise the rates they pay on CDs to attract more 
funds to lend. If they do not see much demand for loans, they will not offer higher 
than market rates. 

You do not have to restrict your search for high yields to your neighborhood 
or even your state. Many banks accept out-of-state deposits by wire or mail, and 
the highest yields around the country are publicized constantly in major financial 
newspapers such as The Wall Street Journal and USA Today, as well as the 「Monitor」 
section of Money magazine. You also can look up the highest yields on Web 
sites such as  or . Or, you can subscribe 
to the newsletter 100 Highest Yields (P.O. Box 088888, North Palm Beach, 
FL 33408; 800-327-7717), which surveys banks every week to uncover those 
with the top yields for 6-month, 1-year, 21.2-year, and 5-year certificates. In the 
1980s, yields on CDs stayed in double digits for several years, then fell sharply, 
along with all interest rates. By the 2000s, CD yields had settled in the 3 percent 
to 6 percent range. 


CHAPTER 2: Maximizing Returns on Cash Instruments 

As with other bank products, different banks use different methods of compounding 
interest on their CDs. Some compound using simple interest, while 
others compound daily, weekly, monthly, quarterly, semiannually, or annually. 
This affects what banks advertise as the 「effective yield」 on a CD, which, in fact, 
is mythical because it is unlikely that you will be able to capture exactly the same 
rate when the CD comes due in three or six months. 

Make sure that you check with your bank to see what happens when your CD 
matures. Banks are not required to notify you when a CD is about to mature. Some 
will automatically reinvest the money in a new CD at the prevailing rate, which 
may or may not be what you want. Some banks will automatically mail you a 
check for the full amount of your CD, while others will put the money in a low-
yielding passbook account until you give them further instructions. 

To protect yourself against the ups and downs of interest rates, you might try 
a strategy called laddering. Instead of putting all your money in one CD with one 
maturity, spread it among several CDs maturing every few months. With this 
technique, CDs will constantly be maturing, which gives you the chance to reinvest 
at higher rates if rates have risen. If rates have fallen, you still have several CDs 
locked in at higher rates. 

In addition to buying CDs directly from banks, you can buy CDs indirectly, from 
brokerage firms. Most brokerage firms sell CDs from banks across the country. For 
example, a bank contacts a brokerage firm because it wants to raise several million 
dollars quickly. Instead of relying on its branches to bring in cash, the bank pays a fee 
to the broker to solicit clients. Therefore, clients do not have to pay a fee to buy a CD 
through a broker because the bank has already paid the fee. From your point of view, 
you are able to buy a CD that is probably yielding more than your local bank』s, and 
you are still protected by federal deposit insurance, as long as you invest less than 
$100,000 (which you should!). In addition, if you need to sell the CD before it matures, 
the brokerage firm maintains a ready market for it. If interest rates rose after 
you bought it, you will suffer a loss, while if rates fell, you will earn a profit. 

Some banks have added wrinkles to the simple CD in recent years. One popular 
version is the rising-rate CD, which guarantees that if interest rates rise, your CD』s 
yield will be increased as well every six months. Other versions allow you to switch 
to a higher rate for your CD once during its lifetime if interest rates have risen. Some 
banks offer expandable CDs. These permit you to add more money to an existing CD 
at the same rate, which would be advantageous if rates have fallen since you first 
bought the CD. Even dicier CDs are tied to stock market indexes. First Union Securities 
(www.firstunionsec.com), LaSalle Bank (www.lasallebank.com), and others 
now sell a market index CD. There, you are guaranteed a certain level of return on 
your CD, as usual, but, in addition, you will receive a certain percentage of the market 
appreciation or depreciation in the Standard & Poor』s 500 over the life of the CD. 


PART ONE: Maximizing Your Investment Options 

Whether you invest in a traditional CD or a fancier version, it might have just 
the combination of high yields, convenience, and safety that is right for you. 

Using Your Computer for Home Banking 

Today it』s easy to use your home computer to improve the efficiency of all 
your banking transactions. Most major banks offer software allowing you to tap 
into their mainframes to do everything from checking your balances to buying securities 
and paying bills. Some banks offer proprietary software that only works 
with their system, while others allow you to use commonly available programs like 
Quicken or Microsoft Money to initiate transactions. The advantage to banking 
using these programs is that all of your records are already captured in the software, 
making it easier to keep your budget up-to-date or to do your taxes. More and 
more banks are offering their services over the Internet, either directly at their Web 
sites or through commercial services such as America Online. Some banks only 
have an online existence, allowing them to offer banking services at lower cost because 
they have minimal physical overhead from branches and tellers 

Whichever system you use, home banking allows you to stay on top of what is 
going on in your bank account in a far more convenient manner than was ever possible 
before. Some banks charge monthly or annual fees for access to home banking, 
while many others give the service away free because it saves the banks the 
cost of providing live tellers for routine transactions. Even if you have to pay a 
small fee, electronic banking is usually worth the cost if you use it wisely. You do 
not need to worry about the security of your bank account records because all of 
the information is protected by passwords. Just make sure that your password does 
not get into the hands of those who shouldn』t have access to your account. Here are 
the main functions you can perform with home banking. 

MONITORING ACCOUNT BALANCES 

There』s no longer any reason to wonder how much money you have in your 
checking, savings, and borrowing balances. All of your accounts are updated daily, 
so you can find out when checks have cleared, when your paycheck has been 
deposited, when certificates of deposit have paid their interest, when loan payments 
are due, and much more. By tracking all of these balances carefully, you 
should be able to maximize the interest you earn on deposits and minimize the 
interest you pay on loans. For example, you can keep most of your money in a 
money market account earning interest until it is needed to cover checks in a 
checking account, which usually does not earn any interest. By keeping track of 
your balances, you can also be sure not to bounce checks because of insufficient 
funds, thereby avoiding the substantial fees that banks levy for bad checks. Home 
banking systems also will summarize your entire bank account, showing you how 
much money you have on deposit and in investments and how much you owe in 
various kinds of loans. 


CHAPTER 2: Maximizing Returns on Cash Instruments 

TRANSFERRING MONEY BETWEEN ACCOUNTS 

Home banking also makes it easy to move money from one account to another 
electronically. With a few keystrokes, you can transfer funds from savings to 
checking or vice versa, pay off overdraft lines of credit or credit card balances, or 
buy a certificate of deposit. You not only can transfer funds on the day you are 
logged on, but you also can set up transfers several days ahead. For example, you 
can have funds transferred to cover a check even when you are out of town. 

CUSTOMER SERVICE 

You can take care of tedious housekeeping on your bank account by communicating 
with the bank』s customer service people online. For example, you can 
open and close accounts, ask for a credit line increase, stop payment on a check, 
wire money, or resolve errors by sending electronic messages. Never a need to 
stand in line to speak to a bank officer about these matters again! 

PAYING BILLS ELECTRONICALLY 

Perhaps the most useful feature of home banking is the ability to pay bills 
online. Once you get into the habit of doing it, you』ll wonder how you ever paid 
bills the old-fashioned way. The first step is to set up a list of your payee』s names 
and addresses with your account numbers. Many banks today provide a ready-
made list of payees, such as the electric and gas utilities, other banks, credit card 
companies, schools, health care facilities, and other local institutions that are 
equipped to receive payments electronically. It is far better to pay a bill electronically 
than to have a paper check cut and mailed to the payee, because the electronic 
payment is certain and immediate, while the paper check may get lost or delayed 
in the mail and may take several days to be posted to your account. 

Check your bank』s list of predetermined electronic payees before you enter 
your own. All you have to do is enter your account number and you』re ready to 
use that payee. For payees that don』t appear on the bank』s list, such as individuals, 
contractors, or others that you pay regularly, you must fill in the person』s name, 
address, and your account number, if any, on the bank』s bill payment system. The 
bank will always have to cut a paper check and mail it to these personal payees. 

Once you have your list of payees entered into the computer, your bill-paying 
chores become much easier. Assemble your bills before you go online, noting the 
amount to be paid to each payee and the date the payment should be made. For 
electronic payments, you can initiate the payment only a day or two before it is 
due, while payments made by check through the mail should be sent at least a week 
ahead of time. Once you are connected to the bank』s computer, you just have to 
enter the amount due each payee and the date of the payment and you』re done! No 
checks to write, no envelopes to stuff, no stamps to lick, no trips to the post office! 
Even when you are out of town or thinking about other more important things, your 
bills are being paid reliably. 


PART ONE: Maximizing Your Investment Options 

Another advantage of home banking is that it gives you excellent records of the 
bills you have and are planning to pay. You can look into the history of payments 
to a particular payee to show when your payment was sent and when it cleared. You 
can also look at what payments you have coming up, so you can be sure to have 
enough funds in your account to cover these bills. You can also print out all your 
payments that may generate tax deductions, such as medical expenses or donations 
to charitable organizations. 

If done correctly, electronic bill paying should also allow you to hold onto your 
money for a longer time, where it can earn interest, instead of having to send 
checks off in advance to make sure they arrive in a timely fashion. That』s why it』s 
best to make electronic payments whenever possible, because you can zip the necessary 
funds to the payee right before the bill is due. 

If your bank does not offer electronic bill paying, you may still be able to pay 
bills online by establishing an account with Checkfree, which can be found on the 
Internet at . Checkfree allows you to pay any amount to anyone 
from any bank from anywhere at any time, because it accesses the Federal Reserve 
payment system directly. Checkfree includes a sophisticated security 
system so financial information about you or your payments to others is not stolen. 
The service is also compatible with major software packages like Microsoft Money 
and Quicken (discussed in greater detail at the end of Chapter 1). 

INVESTING 

Most home banking systems make it easy to buy stocks, bonds, mutual funds, 
CDs, options, and other investments. One advantage in investing through your 
bank is that all of your holdings are consolidated in one place. That not only makes 
recordkeeping easier, but many banks will charge lower fees, or even waive them 
altogether, if you keep all of your assets at the bank. The more money you keep at the 
bank, the higher the interest the bank pays on deposits and the lower interest 
it charges on loans. Another advantage is that you are able to comparison-shop 
online for yields on CDs and other bank products. Banks will list all of the different 
maturities of their certificates with the current yields, so you can pick the CD 
with the highest yield and maturity appropriate for your needs. 

Banks will also automatically update the value of your securities portfolio, 
usually every night after the stock market has closed. In addition, the bank will 
keep track of reinvesting stock dividends and mutual fund capital gains distributions 
and will adjust for stock splits and bond redemptions. The bank also should 
keep track of your cost basis so that you can calculate your capital gains liability 
when you sell an investment. All of these recordkeeping chores would be a tremendous 
burden for you to track on your own. 

The only disadvantage of investing electronically through a bank is that the 
bank may charge you fees and commissions that you might be able to avoid or 
reduce if you bought the investments directly from the source. For example, many 
banks will charge a commission to buy a no-load mutual fund that you could buy 


CHAPTER 2: Maximizing Returns on Cash Instruments 

directly from the fund company on your own without a sales charge. Also, you 
should compare the commissions charged by your bank for buying stocks and 
bonds with the fees from discount brokers, which can in many cases be substantially 
less. You may find that the convenience of having all your assets in one institution 
outweighs the higher fees you may have to pay. But you should at least 
know how much extra you are paying for the privilege of convenience. 

RESEARCHING THE BEST BANKING DEALS ONLINE 

You can also use your computer to find the best opportunities for high yields 
from savings instruments and lower interest rates on loans. Today, there is a 
national market for banking services, so you should not feel limited by what your 
local bank is offering. Here are two online resources to help you shop for the best 
nationwide rates: 

Bank Rate Monitor. BRM collects data from thousands of banks and displays the 
best deals on its Web site. It lists the highest-yielding certificates of deposit, separated 
by the CD』s maturity, from one month to five years. All of the banks are federally 
insured. A toll-free phone number is provided so you can contact the bank directly and 
open an account. BRM also provides a huge amount of data allowing you to find the 
lowest-interest loans anywhere in the country. Their Web site has separate sections for 
credit cards, home equity loans, mortgages, auto loans, and personal loans. You can 
sort their database for the kind of loan that fits your needs. For example, in the credit 
card arena you may want to isolate the card charging the lowest interest rate or one 
without an annual fee or a card that provides the biggest cash-back bonus. When looking 
for a mortgage, you have to screen for lenders who originate mortgages where you 
live.  

BanxQuote. Their Web site provides yields on savings deposits, money market 
accounts, and CDs throughout the country. It also shows loan rates on a variety of consumer 
loans. BanxQuote features state-by-state and regional benchmarks for savings 
and loan rates, so you can judge whether the investment or loan you are considering is 
above or below the local or regional average.  

FINDING AN ONLINE BANK 

Since you are not limited by geography when searching for an online bank, 
you should feel free to compare the fees and services of many banks before you 
decide to open an account. One resource you may find helpful is NETBanker 
(www.netbanker.com), which includes directories of online banks with Web addresses. 
NETBanker is a service of the newsletter Online Banking Report. Another 
resource is , which evaluates the services and performance of 
online banks. 

Though there are many online banks to choose from, and new ones creating 
Web sites all the time, you may want to stick with an institution that has been doing 
electronic banking for a while. The first Internet-only bank was Security First Net



PART ONE: Maximizing Your Investment Options 

work Bank (www.sfnb.com), which offers no-fee checking, several free electronic 
payments per month, no minimum balance requirements, and online banking statements. 
Security First also offers credit cards, CDs, money market accounts, stocks 
and mutual funds, and several kinds of loans. Instead of receiving cancelled paper 
checks, you can call up an electronic image of the cancelled check if you need to 
prove you paid a bill. 

The following banks are dedicated online banks that can be used as your own 
bank with checking, bill paying, credit card, and ATM services. In many cases no 
bricks and mortar, these banks are accessible only on the Internet or by phone. 

American Express. Full-service online banking, free bill paying, free check writing 
with account balance of $1,000 or more, savings, free ATM transactions at any of 
8,700 American Express ATMs nationwide, up to four fee reimbursements for 
non–American Express ATM transactions. Mortgage loans, brokerage services, and financial 
planning and advice also available.  

Bank By Net. This is the site for the Ohio Savings Bank Internet banking system. 
This is a full-service Internet bank with checking, ATMs, bill paying, and fund transfer 
services.  

Bank Direct. Full-service bank with free bill paying, checking, savings, and ATM 
card (up to four transaction fees refunded per month).  

Bank of America. Offers online banking, online investing, online mortgage and 
loan applications including equity and student loans, insurance, and other services. 
Also has consumer personal finance, helpful online guides for personal budgeting, investment 
assessment, home purchase, retirement planning, education planning, insurance 
planning, estate planning, and other services.  

Citifi Financial Interactive Network. Full-service online bank with free bill paying, 
free checking with balance over $1,000, free ATM service at Citibank ATMs, up 
to four ATM transaction fees reimbursed when using non-Citibank ATMs, loans, and 
home mortgages.  

CompuBank. Full-service online bank with free bill paying, checking, free ATM 
transaction fees at participating ATM networks in your state, and up to four ATM fee 
reimbursements per month for use of other ATMs.  

Directbanking.com. Full-service online bank with free checking, electronic 24-hour 
bill paying using Quicken, ATM card, and debit card. Also offers brokerage services, insurance 
services, and personal, auto, and mortgage loans.  

E*Trade Bank. Full-service E*Trade online bank with checking account, free online 
bill paying, free ATM/debit card, plus all the financial services available through 
E*Trade.  


CHAPTER 2: Maximizing Returns on Cash Instruments 

everbank.com. Full-service online bank offering free bill paying, checking, Visa 
checkcard, airline miles credit card, and ATM service with fee refunds up to $4 per 
month.  

First Internet Bank of Indiana. Full-service online bank with free bill paying, 
checking, ATM reimbursement up to $6 per month, credit cards, and home loans. 
 

Huntington.com. Full-service online bank with a choice of checking accounts, 
checks are free with a qualifying balance, ATM, and credit cards. Personal, auto, and 
mortgage loans are available. Also offers insurance products.  

nBank Online Banking. Online bank with free bill paying, free checking with accounts 
holding $2,500 or more, ATM fee reimbursement up to $6 per month, and check 
card.  

NetBank. Full-service online bank with free bill paying, checking, free ATM transactions 
at HONOR/STAR /AVAIL ATMs, and Visa checkcard.  

Security First Network Bank. This is an online bank with online bill paying, checking, 
credit cards, and ATM card. All services require a fee, depending on the type of accounts 
you have and how much money you keep in these accounts. Up to four ATM 
fees may be refunded per month.  or  

Ubank Online Express. Full-service online bank offering bill paying, checking, 
credit card with full tracking, and ATM card/debit card.  

USABancShares.com. This is an online bank that offers checking, a savings account, 
credit card, and CDs.  

USAccess Bank. Full-service online bank with online bill paying, checking account, 
credit cards, ATM card with links to lists of free ATMs around the country. 
 

WellsFargo.com. Full-service online bank with bill paying, investment, insurance, 
loan, mortgage, credit card, online shopping, retirement planning, and student loan services. 
 

WingSpanBank.com. A division of First USA Bank, free online bill paying, checking 
account, credit cards, free ATM transactions at Bank One and FCNBD ATMs. 
 

Online bill-paying services. Send a cancelled check and a list of payees with 
pay dates to one of the following online bill-paying services and they will pay your 
bills for you: 

eMoneyMail.com. Use your checking account or Visa card to send money. All you 
need to know is the recipient』s e-mail address. Receive money via e-mail and deposit the 
money into your checking account or credit your Visa card.  


PART ONE: Maximizing Your Investment Options 

paymybills.com. This site offers to pay up to 25 bills for $8.95/month.  

PayPal. This site offers a number of money-transfer services. To pay your bills by 
e-mail, notify them how much to transfer to the payee, then send an e-mail to the recipient 
informing them to go to PayPal』s site to get their money. You can transfer cash 
or receive cash using this method. The site is especially useful for transferring cash at 
auctions. This site works with many auction sites, including eBay.  or 
 

PayPlace.com. This is a money-transfer site that facilitates money transfer via e-
mail. You can send money to someone with an e-mail address, or you can receive 
money from them.  

Paytrust. This site offers to pay up to 25 bills for $8.95/month.  

Statusfactory. This site offers to pay up to 30 of your bills for $8.95/month.  

United States Postal Service. This U.S. postal site offers to pay up to 20 of your 
bills for $6/month.  

Most traditional brick-and-mortar banks also have Web sites that allow you to 
complete banking transactions and learn about ways to manage your money better. 
Following is a list of the more advanced Web sites: 

Bank of America  

Bank of New York  

Bank One  

Chase Manhattan  

Citibank  

Firstar  

First Union  

FleetBoston Financial  

KeyBank  

Mellon Bank  

National City Bank  

PNC Bank  

Republic Bank & Trust Company  

SunTrust Banks  

U.S. Bank  
Wachovia Bank  
Wells Fargo  

CHAPTER 2: Maximizing Returns on Cash Instruments 

Other Web sites. 

bankrate.com. This site displays current interest rates from a large variety of institutions 
for all kinds of loans, mortgages, auto, credit card, credit unions, Internet 
banks, money markets, personal loans, savings/CDs, home equity, and online finance. 
 

Gomez.com. This site rates banks for ease of use, customer confidence, on-site resources, 
relationship services, and overall cost.  

ELECTRONIC CASH 

One service that an online bank cannot provide is cash from an Automated 
Teller Machine right in your home. But they can offer something almost as good— 
electronic cash. By transferring funds electronically to an account, you can use this 
money to buy goods and services online. Some cities are also experimenting with 
electronic cash debit cards that you can reload and that can be used in stores in the 
same way as credit cards. Here are some of the Web sites that can give you more 
information on electronic cash alternatives: 

CyberCash. Using CyberCash Wallet software, you can purchase goods and services 
online for as little as 25 cents. The Wallet software can be downloaded for free 
from this site. CyberCash makes sure that all transactions are secure by using its 
encryption systems.  

Digicash. Payments can be made electronically using Ecash developed by Digicash. 
Their Web site provides links to providers of Ecash as well as the many online merchants 
who accept Ecash.  

Banking from your home computer is only going to become easier, cheaper, 
and more convenient as banks continue to innovate and compete online. The 
sooner you start banking online, the better! 

Resources 

BOOKS 

Banking Online for Dummies, by Paul A. Murphy (IDG Books, 919 E. Hillsdale 
Blvd., Suite 400, Foster City, CA 94404; 650-653-7000; 800-434-3422; www.idg.com 
or www.dummies.com). Covers all online banking options from checking account balances 
to paying bills to importing data into your financial software package. Helps locate 
your bank on the Web, transfer funds, pay bills, review your accounts, and manage 
your money with the popular financial software packages. 

The Bank Rating Service by Veribanc (Veribanc, P.O. Box 461, Wakefield, MA 
01880; 781-245-8370; 800-VERIBANC; 800-837-4226; www.veribanc.com). A series 


PART ONE: Maximizing Your Investment Options 

of publications published by Veribanc, a rating service that rates the financial 
strength of most banks in the country. They will send you reports on any bank, savings 
and loan, credit union, or bank holding company for a fee. You can get instant ratings, 
a short form report, an in-depth research report, or what is known as a VERIFAX, a 
faxed, in-depth report. You also can get lists of financial institutions that are particularly 
safe, broken down by state, region, or financial condition. Veribanc also offers 
DEPOSITSURE, a private insurance program offering insurance against bank default 
up to $5 million, instead of the $100,000 offered by federal agencies. For more information 
on this program, call 800-723-3893. 

The Complete Guide to Offshore Money Havens: How to Make Millions, Protect 
Your Privacy, and Legally Avoid Taxes, by Jerome Schneider and Susan Silva (Wilshire 
Publishing Company, 1219 Morningside Dr., Manhattan Beach, CA 90266; 800-8773777; 
www.offshorewealth.com). Definitive guide to offshore money havens, covers 
foreign trusts, annuities and endowments, and banks. 

The Money Market, by Marcia Stigum (McGraw-Hill Publishing, P.O. Box 543, 
Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). The most comprehensive 
and authoritative guide to the money markets. 

Savings Bonds: When to Hold, When to Fold and Everything In-Between, by 
Daniel J. Pederson (The Savings Bond Informer, Inc., P.O. Box 9249, Detroit, MI 
48209; 800-927-1901; www.bondinformer.com). Offers tips on the best times to redeem 
your bonds, details on swapping EE bonds for HH bonds, tax aspects, and all the 
issues one needs to think about when purchasing, holding, and redeeming bonds. 

NEWSLETTERS 

iMoneyNet.com (One Research Drive, Westborough, MA 01581; 508-616-6600; 
www.imoneynet.com). Provides savings and borrowing information from money-
market mutual funds, banks, thrifts, credit unions, mortgage companies, credit card issuers, 
and other lenders. The company provides Money Fund Report Averages and 
lists of the top-yielding money funds that are printed in newspapers and magazines and 
on databases across America. It also provides lists of the best credit card deals, highest-
yielding certificates of deposit, lowest-cost loans for new and used cars, home equity 
lines and loans, and the best deals on fixed-rate and adjustable mortgages. 

Income Fund Outlook (Institute for Econometric Research, 2200 Southwest 10th 
St., Deerfield Beach, FL 33442; 954-421-1000; 800-327-6720; www.mfmag.com). 
Lists the top-yielding bank MMDAs and 30-day, 60-day, 3-month, 6-month, 1-year, 
21.2-year, and 5-year CDs in the United States. Provides information on taxable and 
tax-free money-market mutual funds, including safety ratings, yields, telephone 
numbers, assets, portfolio maturity, expenses, minimum initial investments and check 
amounts, and loads. Also lists top-yielding bond mutual funds. 

The International Bank Credit Analyst (BCA Publications, 1002 Sherbrooke St. 
West, Suite 1600, Montreal Quebec H3A 3L6; 514-499-9550; www.bcaresearch.com). 


CHAPTER 2: Maximizing Returns on Cash Instruments 

A monthly journal that provides an outlook for the direction of interest rates and trends 
in banking safety. 

Jumbo Rate News (Bauer Financial Newsletters Inc., P.O. Drawer 145510, Coral 
Gables, FL 33114-5510; 305-445-9500; 800-388-6686; www.jumboratenews.com). 
Jumbo Rate News is a weekly eight-page newsletter that analyzes and surveys over 1,000 
select creditworthy institutions. The Bank Rater, a toll-free rating service, provides financial 
strength ratings on all U.S. banks, savings and loans, and credit unions on a 5-star 
system. Institutions with 31.2 to 5 stars are considered well capitalized, while those with 0 
to 2 stars are undercapitalized and may be in danger of being seized by federal regulators. 

Martin Weiss』 Safe Money Report (Weiss Research, 4176 Burns Rd., Palm Beach 
Gardens, FL 33410; 561-627-3300; 800-289-9222; www.weissratings.com). Covers 
the risks of all types of investing and discusses troubled banks, savings and loans, insurance 
companies, and brokerage firms. Predicts potential danger spots in the stock 
and bond markets. The Weiss organization also compiles safety ratings—from A (excellent) 
to F (failed or in the process of failing)—on thousands of banks and savings 
and loans, insurance companies, and brokerages, and rates HMOs. 

The MONEYLETTER (PRI Financial Publishing, Inc., 360 Woodland St., P.O. Box 
6020, Holliston, MA 01746-6020; 800-890-9670; www.moneyletter.com). A twice-
monthly newsletter featuring top-performing mutual funds. Funds are separated into 
domestic stock, international stock, sector, bond, and money market categories. Diversified 
model portfolios are constructed using these funds for conservative, moderate, 
and venturesome investors. 

100 Highest Yields and Bank Rate Monitor (Financial Rates, Inc., 11811 U.S. Highway 
1, Suite 101, North Palm Beach, FL 33408; 561-627-7330; 800-327-7717; 
www.bankrate.com). List the 20 highest-yielding bank MMDAs and 6-month, 1-year, 
21.2-years, and 5-year CDs. Also show each bank』s safety rating from Veribanc. Included 
are the highest yields for mini-jumbo CDs (those with $25,000 or $50,000 minimums) in 
the 3- and 6-month maturities and the highest yields for jumbo ($100,000 minimum) 
CDs in 1-, 3-, and 6-month maturities. Discuss other banking topics of interest to consumers, 
such as credit card, home equity loan, and car loan rates. 

FEDERAL GOVERNMENT REGULATORS 

Comptroller of the Currency (250 E St., S.W., Washington, DC 20219; 202-8745000). 
The chief regulator of all national banks. Compliance Management handles 
consumer complaints against national banks. (The current telephone number for Compliance 
Management and the Consumer Affairs Office is 202-874-5280.) 

Federal Deposit Insurance Corporation (FDIC, 550 17th St., N.W., Washington, 
DC 20429; 202-393-8400; 800-276-6003; www.fdic.gov). The FDIC insures all banking 
deposits up to $100,000 per account. Examines banks regularly and handles consumer 
complaints about banks. 

Federal Reserve System (20th St. and C St., N.W., Washington, DC 20551; 
202-452-3946). Regulates some U.S. banks, bank holding companies, and financial 


PART ONE: Maximizing Your Investment Options 

holding companies plus Edge Act and agreement corporations, and the money supply. 
You can buy Treasury securities through any Federal Reserve Bank or branch. 
(They are all listed in the 「Resources」 section in Chapter 5.) Will send you a copy of 
the following booklets: The ABC』s of Figuring Interest; Points of Interest; SHOP—The 
Card You Pick Can Save You Money; Endorsing Your Check: What the New Endorsement 
Standard Means; The Structure of the Federal Reserve System; Consumer Handbook 
to Credit Protection Laws; Home Mortgages: Understanding the Process and 
Your Right to Fair Lending; Looking for the Best Mortgage: Shop, Compare, Negotiate; 
Consumer Handbook on Adjustable-Rate Mortgages; Frauds and Scams: Protect 
Yourself and Your Money; Paying a Loan Off Early: Things You Should Know; Plastic 
Fraud: Getting a Handle on Debit and Credit Cards; How to Establish, Use & Protect 
Credit; How to File a Consumer Complaint About a Bank.  

National Credit Union Administration (1775 Duke St., Alexandria, VA 223143428; 
703-518-6300; www.ncua.org). Regulates federally chartered U.S. credit unions 
and handles consumer complaints against credit unions. Insures deposits through the 
National Credit Union Share Insurance Fund (the current telephone number for the National 
Credit Union Share Insurance Fund is 703-518-6570). 

Office of Thrift Supervision (1700 G St., N.W., Washington, DC 20552; 202-9066000; 
www.ots.treas.gov). Supervises and charters federal savings and loan associations 
and handles complaints from the public about savings and loans. The Consumer 
Affairs Office, designed to handle consumer complaints, can be reached at 202-9066237 
or 800-842-6929. 

STATE BANKING REGULATORS 

The following state banking departments will pursue consumer complaints 
against banks in their states. 

Alabama: 401 Adams Ave., Suite 680, Montgomery 36130; 334-242-3452 

Alaska: P.O. Box 110807, Juneau 99811-0807; 907-465-2521 

Arizona: 2910 N. 44th St., Suite 310, Phoenix 85018; 602-255-4421 

Arkansas: Tower Building, 323 Center St., Suite 500, Little Rock 72201-2613; 
501-324-9019 

California: 111 Pine St., Suite 1100, San Francisco 94111-5613; 415-263-8500 

Colorado: 1560 Broadway, Suite 1175, Denver 80202; 303-894-7575 

Connecticut: 260 Constitution Plaza, Hartford 06103; 860-240-8200 

Delaware: 555 E. Lockerman St., Suite 210, Dover 19901; 302-739-3609 

District of Columbia: Comptroller of the Currency, 250 E St., S.W., Washington 
20219; 202-874-5000 

Florida: 101 E. Gaines St., Tallahassee 32399-0350; 850-410-9370 

Georgia: 2990 Brandywine Rd., Suite 200, Atlanta 30341-5565; 770-986-1633 

Hawaii: Division of Financial Institutions, P.O. Box 2054, Honolulu 96805; 808586-
2820 

Idaho: P.O. Box 83720, 700 W. State St., Boise 83720-0031; 208-332-8000 


CHAPTER 2: Maximizing Returns on Cash Instruments 

Illinois: Office of Banks and Real Estate, 500 E. Monroe St., Springfield 62701; 
217-782-3000 
Indiana: 402 W. Washington St., Room W066, Indianapolis 46204-2759; 317232-
3955 
Iowa: Iowa Division of Banking, 200 E. Grand Ave., Suite 300, Des Moines 

50309; 515-281-4014 
Kansas: 700 Jackson St., S.W., Suite 300, Topeka 66603; 785-296-2266 
Kentucky: Department of Financial Institutions, 1025 Capitol Center Dr., Suite 

200, Frankfort 40601; 502-573-3390 
Louisiana: Office of Financial Institutions, P.O. Box 94095, Baton Rouge 708049095; 
225-925-4661 
Maine: State of Maine Bureau of Banking, 36 State House Station, Augusta 
04333-0036; 207-624-8570 
Maryland: Commissioner of Financial Regulations, 500 N. Calvert St., Baltimore 

21202; 410-333-6808 
Massachusetts: One South Station, Boston 02110; 617-956-1500 
Michigan: Financial Institutions Bureau, P.O. Box 30224, Lansing 48933; 517


373-3460 
Minnesota: Financial Examinations Divisions, 133 E. 7th St., 4th Floor, St. Paul 

55101; 651-296-2751 
Mississippi: P.O. Box 23729, Jackson 39205-3729; 601-359-1031 
Missouri: Division of Finance, P.O. Box 716, Jefferson City 65102; 573-751-3242 
Montana: 846 Front St., Helena 59620-0546; 406-444-2091 
Nebraska: The Atrium, 1200 N St., Suite 311, Lincoln 68509; 402-471-2171 
Nevada: Financial Institutions Division of the Department of Business and Industry, 

406 E. Second St., Carson City 89701; 702-687-4259 
New Hampshire: 56 Old Suncook Rd., Concord 03301; 603-271-3561 
New Jersey: 20 W. State St., CN040, Trenton 08625; 609-292-3420 
New Mexico: Financial Institutions Division, P.O. Box 25101, Santa Fe 87501; 

505-827-7100 
New York: 2 Rector St., New York 10006; 212-618-6557 
North Carolina: 4309 Mail Service Center, Raleigh 27699; 919-733-3016 
North Dakota: 2000 Schafer St., Suite G, Bismarck 58501; 701-328-9933 
Ohio: Division of Financial Institutions, 77 S. High St., 21st Floor, Columbus 

43266-0121; 614-466-2932 
Oklahoma: 4545 N. Lincoln Blvd., Suite 164, Oklahoma City 73105; 405-521


Oregon: 350 Winter St. Northeast, Room 410, Salem 97310; 503-378-4140 
Pennsylvania: 333 Market St., 16th Floor, Harrisburg 17101-2290; 717-787-6991 
Rhode Island: 233 Richmond St., Suite 231, Providence 02903-4231; 401-222-2405 
South Carolina: 1015 Sumter St., Room 309, Columbia 29201; 803-734-2001 
South Dakota: 7121.2 W. Missouri Ave., Pierre 57501-4590; 605-773-3421 
Tennessee: John Sevier Building, 4th Floor, Nashville 37243-0705; 615-741-2236 
Texas: 2601 N. Lamar Blvd., Austin 78705; 512-475-1300 


PART ONE: Maximizing Your Investment Options 

Utah: P.O. Box 89, Salt Lake City 84110; 801-538-8854 

Vermont: 89 Main St., Drawer #20, Montpelier 05620-3101; 802-828-3307 

Virginia: 1300 E. Main St., Suite 800, P.O. Box 640, Richmond 23218-0640; 
804-371-9657 

Washington: P.O. Box 41200, Olympia 98504-1200; 360-902-8707 

West Virginia: State Capitol Complex, Building 3, Room 311, Charleston 253050240; 
304-558-2294 

Wisconsin: Department of Financial Institutions, P.O. Box 7876, Madison 537088861; 
608-261-1622 

Wyoming: Herschler Building, 122 W. 25th St., 3rd Floor, East Wing, Cheyenne 
82002; 307-777-7797 

TRADE ASSOCIATIONS 

American Bankers Association (1120 Connecticut Ave., N.W., Washington, DC 
20036; 800-226-5377; www.aba.com). The main trade group representing commercial 
banks offers several free brochures about dealing with banks. 

America』s Community Bankers (900 19th St., N.W., Suite 400, Washington, DC 
20006; 202-857-3100; www.acbankers.org). Lobbies on behalf of savings and loans and 
savings banks and educates the public about banking and issues that face savings and 
loans and savings banks. Encourages policies that increase savings and keeps housing 
affordable through mortgage loans from its members. Was formed by the merger of the 
United States League of Savings and the National Council of Community Bankers. 

Consumer Bankers Association (1000 Wilson Blvd., Suite 2500, Arlington, VA 
22209; 703-276-1750; www.cbanet.org). Represents banks, savings and loans, and 
credit unions and educates the public about banking. 

Consumer Federation of America (1424 16th St., N.W., Suite 604, Washington, 
DC 20036; 202-387-6121; www.consumerfed.org). A consumer group that watches 
out for consumer interests. 

Credit Union National Association (CUNA, P.O. Box 431, Madison, WI 53701; 
608-231-4000; 800-356-9655; www.cuna.org). The trade group for credit unions. 
Lobbies on issues of importance to credit unions and helps people set up credit unions. 

The Independent Community Bankers of America (One Thomas Circle N.W., 
Suite 400, Washington, DC 20005; 202-659-8111; www.icba.org). This association is 
the primary voice for community banks in the United States. It is an advocate for some 
5,500 community banks with 16,700 locations nationwide representing the industry 
before congress, state legislators, and regulators. 

Investment Company Institute (1401 H St., N.W., Washington, DC 20005; 202326-
5800; www.ici.org). The trade group for mutual funds, including money-market 
mutual funds. 


CHAPTER 3 
Picking 
Winning Stocks 


If you』ve never invested in stocks or have only limited experience with them, 
you might be harboring a common misperception of the stock market: It』s a dangerous, 
volatile place where thousands of sophisticated professional traders and 
brokers lurk to steal your hard-earned money. 

The reality of the stock market—if you learn a little about it—could not be further 
from that myth. There are millions of small investors like you who have been 
able to finance their dreams by successfully buying and holding for years shares of 
profitable companies and of mutual funds that buy such shares. Millions of other 
investors depend on the regular income they earn from their stock and mutual fund 
holdings. 

Sure, stock prices go down at times, as well as up. Sometimes, like in the 508point 
crash of October 19, 1987, or the 554-point drop on October 27, 1997, they 
can plummet so fast that your heart palpitates. But this is the exception that proves 
the rule. If you look over the past few decades, prices of good-quality companies』 
stocks have invariably moved higher, as shareholders are rewarded by the performance 
of the firms they own. As a device to increase your net worth so you can 
achieve your financial goals, stocks or stock mutual funds are your best investment 
over the long run (see Figure 3.1). 

Investing in Stocks 

When you buy common shares in a company, you become a part owner in that 
firm, along with all the other people and institutions that own all the shares that have 
ever been issued. Because you are a part owner, you have a piece of equity in that 
company. That is why stocks are often called equities. The shares you own constantly 
rise and fall in value as investors buy and sell them based on their outlook for the 
company. The more people want to buy because they think profits will rise, the more 


PART ONE: Maximizing Your Investment Options 

Figure 3.1 1925–2000 Chart of Stocks, Bonds, Bills, and Inflation 

From 1925 to 2000 

Index 

$10,000 

$1,000 

$100 

$10 

$1 

$0 

Small Company 
Stocks 


Long-Term 
Government Bonds 
Large Company 
Stocks 
Treasury Bills 
Inflation 
$6,402.23 
$2,586.52 

$48.86 

$16.56 
$9.71 

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 
Year-End 

Source: (c) Stocks, Bonds, Bills, and Inflation 2000 Yearbook., Ibbotson Associates, Chicago (annually updates work by Roger G. 
Ibbotson and Rex A. Sinquefield). Used with permission. All rights reserved. 


CHAPTER 3: Picking Winning Stocks 

the share price increases. Theoretically, your opportunities for profit are boundless. 
However, if the firm』s prospects start to sour and it looks like profits will turn down, 
more people will want to sell than buy, and the share price will fall. 

Another way to own a piece of a company is through ownership of preferred 
shares. Owners of preferred shares, though they usually do not have voting rights on 
company matters, are entitled to receive their dividends before common shareholders, 
and if the company is liquidated, preferred claims are satisfied before common 
shareholders』 claims. Preferred dividends are set at the time the shares are issued and 
therefore cannot rise over time as common dividends can if the company performs 
well. In general, preferred stock is not as volatile as common stock; thus, it does not 
offer as much appreciation or depreciation potential. Some preferred issues, known 
as convertible preferreds, can be converted into common shares at a preset price. 

The Basics of Being a Shareholder 

As a shareholder, you are also entitled to receive quarterly updates on how 
your company is doing. You will be mailed a report that tells you whether profits 
were up or down and what other major corporate developments occurred in the last 
three months. You will also get a more detailed annual report outlining how the 
numbers for the latest year compare with prior years, as well as the company』s plan 
for the future. You will also be invited to vote at the firm』s annual meeting, either 
in person at the meeting or by a mail proxy ballot. You will vote on important matters, 
such as whether a major acquisition should be completed. At most companies, 
you get one vote for every share you own. So unless you own an enormous number 
of shares, you shouldn』t expect to have much influence over the company』s 
strategic direction. For the most part, you are along for the ride while the professionals 
running the company do their best to maximize profits. 

In addition to the profit potential from a rising share price, you can earn money 
from stocks by collecting dividends. If the corporation is profitable and the board 
of directors decides it is prudent, the firm will send you a quarterly check for your 
piece of the profits, known as a dividend. Dividends are normally paid by large, 
well-established companies that are sure they will achieve a certain level of profit 
each year. Smaller and newer firms usually do not pay dividends because they want 
to reinvest all of their profits back in the business to make it grow faster. 

Unlike other investment vehicles such as bonds, certificates of deposit (CDs), or 
futures contracts, shares in a company never mature or expire. As long as the company 
stays in business, the shares have some value. If the company goes out of 
business, however, your stock will probably become worthless because when a 
corporation is liquidated, shareholders get what』s left after the Internal Revenue 
Service (IRS), bankruptcy lawyers, and all other creditors, including bondholders 
and preferred shareholders, are paid. In most cases, that means the shareholders』 
stake is wiped out. On the bright side, you might still appreciate your stock certifi



PART ONE: Maximizing Your Investment Options 

cate as a wall hanging in your living room, as it might remind you of the hopes you 
had for the company issuing it. 

Why would a profitable company want to give you a chance to participate in 
its growth? Because it needs the money that the sale of stocks generate in order to 
run and expand the business. When a company offers shares to the public for the 
first time, known as an initial public offering, the proceeds of the sale help the 
company open new factories, research and develop new products, acquire other 
businesses, or pay down debt. Later, if the company needs more capital to grow, it 
can issue additional shares in what is known as a secondary offering. 

Most of the time when you buy shares, however, your money is going to the 
person or institution selling the shares, not to the company. The company benefits 
by having a constant market price for its shares so it knows how much money it can 
raise if it wants to do a secondary offering. 

The person selling you his or her shares might be doing so for several reasons. 
The person might have a big profit in the shares and want to cash in. The person 
might have found what he or she thinks is a better investment opportunity in another 
stock. He or she might need the money to meet expenses. Or the seller might 
think that the company』s stock is about to fall because this year』s profits will not be 
as high as people expect. 

Whatever a person』s reason may be, you will never know because you won』t 
meet the person selling you your stock. Because it would be difficult for you to 
find someone on your own who has shares and wants to sell, just as it would be 
impossible for him or her to find someone who wants to buy the shares, a centralized 
marketplace called a stock exchange has been set up to facilitate buying and 
selling. You can』t just go down to the stock exchange with your certificates and sell 
your shares on your own, however. You must execute trades through a brokerage 
firm that is a member of the exchange. 

The following are the five most common kinds of orders you can give a broker 
to buy or sell shares: 

Day order. This is an order to buy or sell a stock at a particular price on the 
day the order is placed. If the trade is not executed on that day, the order expires. 

Good-this-month (GTM) order. A GTM order tells a broker to buy or sell a 
stock at a particular price any time during the current month. If the trade is not executed 
by the end of the month, the order expires. A variation of this order is a 
good-this-week order, which expires within a week. 

Good-till-canceled (GTC) order. A GTC order tells your broker to buy or 
sell a particular stock when it hits a specific price, whenever that might be. Such an 
order remains in effect until it is canceled. As long as the GTC order is in effect, it 
is known as an open order. 

Limit order. With a limit order, you are telling your broker to buy or sell a 
particular stock at a certain price or better. For example, if you want to buy a stock 
for $27 a share that is now trading at $30, you can place a limit order at $27. If 


CHAPTER 3: Picking Winning Stocks 

the stock falls quickly below $27, your broker would execute the order at the lower 
price, saving you money. On the other hand, if you want to sell a stock at $40 that 
is now trading at $35 and the stock suddenly shoots up beyond $40, the broker 
would execute the limit order and obtain an even higher price for your shares. 

Stop order. With a stop order, you are trying to protect a profit or limit further 
losses. The most frequently used stop order, known as a stop-loss order, tells 
your broker to sell your stock at whatever the market price is when the stock hits 
a specific price less than the price for which it is currently trading. For example, 
say you bought a stock at $40 a share and it has since risen to $60. If you want to 
protect your profit, you can place a stop-loss order at $50. However, if the company 
suddenly announces that its earnings were far less than expected in the latest 
quarter and the stock plummets to $45, your order will be executed at $45, 
which is the next market price after the stock hits $50. If you want to make sure 
you get $50 a share, you should place a limit order. If you are selling short—that 
is, betting that a stock will fall in price—you can use a stop order to buy back 
shares at a particular price to prevent your losses from mounting. The risk in 
placing stop orders is that they may be executed because of a momentary setback 
in a stock』s price. This is why you should not set stop orders too close to the current 
market price. Most pros leave a 20 percent margin to avoid losing a stock 
that will bounce back. 

The following are three principal exchanges where you can buy and sell 
stocks: 

New York Stock Exchange (NYSE). Founded in 1792, the NYSE is the oldest, 
largest, and most prestigious of the stock exchanges. Located on the corner of 
Wall and Broad streets in downtown Manhattan, the Big Board, as it is called, is 
home to about 3,000 of the largest and most well-established companies in the 
United States. In addition, many foreign companies offer their shares for trading 
on the NYSE in the form of American depositary receipts (ADRs), which for all 
practical purposes are the same as U.S. shares. The listing requirements to trade on 
the NYSE are much more stringent than those to trade on other exchanges. 

The NYSE uses a specialist system for trading stocks, which means that a 
specialist is assigned to maintain a fair and orderly market in every stock. Under 
normal conditions, brokers representing buyers and sellers meet in front of the 
specialist』s post to agree on a price. However, when there is a sudden surge of 
buyers or sellers because of some dramatic event, the specialist must step in to 
take the other side of the trade. For example, if a company announces that it is 
being acquired at a much higher than market price, a stampede of buyers will descend 
on the trading post. The specialist must sell shares to those buyers though it 
would be at a higher price than the price of the shares right before the good news 
was announced. Similarly, if a company announces that its earnings were much 
lower in the latest quarter than people expected, there would be a flood of sell orders. 
The specialist would have to buy shares from the crowd, though it would be 


PART ONE: Maximizing Your Investment Options 

at a lower price than the price of the shares right before the bad news was announced, 
until the market for the stock stabilized. 

American Stock Exchange (AMEX). Known as the Curb Exchange until 
1921 because it conducted trading on the street curb, the AMEX, as it is now 
known, is home to about 800 medium- and small-sized growth companies. The 
American Stock Exchange is now along with Nasdaq a unit of NASD. The AMEX, 
however, still operates as a stand-alone unit. The AMEX is located near the NYSE 
in lower Manhattan at 86 Trinity Place. Like the NYSE, the AMEX hosts many 
companies, particularly Canadian ones, trading in the form of ADRs. The AMEX 
specializes in the trading of options, index options, and Exchange Traded Funds, 
which index various broad and narrow industry groups. The AMEX uses a specialist 
system just like that employed on the floor of the NYSE. 

Nasdaq National Market System. Nasdaq (National Association of Securities 
Dealers Automated Quotation system) stocks are, for the most part, smaller and less 
established than NYSE or AMEX companies』. Though Nasdaq stocks may be riskier 
and more volatile than traditional blue chips, in many cases, they also have more 
growth potential. Unlike the NYSE and AMEX, the National Market System (NMS) 
has no centralized floor where all trading on Nasdaq occurs. Instead, Nasdaq is a network 
of broker-dealers connected by an elaborate telephone and computer system. 
Instead of a specialist system, Nasdaq uses what are known as market makers to 
compete against each other and offer the best prices to buy and sell a stock at all 
times. Before this system was set up in 1972, trading in such stocks was called overthe-
counter (OTC) trading, so the Nasdaq market is still called the OTC market by 
some. From your perspective as a stock buyer or seller, though, it makes little difference 
whether your stock is traded on the NYSE, AMEX, or Nasdaq. You must know 
where it is traded only so that you can look up the stock』s price in the newspaper because 
all three exchanges are listed separately. 

Buying Stocks on Margin 

Most of the time, you will probably pay for your shares of stock in full. However, 
if you』re feeling so optimistic about a stock that you want to increase your 
risk in the hope of magnifying your return, you can look into buying on margin, or 
with borrowed funds. According to rules set by the Federal Reserve, brokers currently 
will lend you up to half the money you need to buy stocks, as long as they 
have some collateral of yours to seize in case your stocks lose value. That collateral 
must be in the form of other securities or cash, which would include money-
market fund shares. A broker charges you interest on the loan at the broker』s loan 
rate, which is typically about a percentage point over the prime rate. 

By doubling your bets (borrowing to match your own funds), you can make 
twice as much money if your stock goes up than you would if you were paying for 
your stock in full. For a margin loan to pay off well, the stock should rise quickly 
so that you can sell the shares and pay off the margin loan. 


CHAPTER 3: Picking Winning Stocks 

But margin loans clearly have tremendous risks. The first risk is that the value 
of the stock you buy will either remain fixed or decrease, thereby not earning the 
money to repay your margin loan. For you to break even, your stock must rise by 
the amount of your interest costs. More disastrously, if your stock price falls by 
half, you will be hit by the second most dreaded event in investing—a margin call. 
(A stock market crash is the most dreaded on our list.) When you receive a margin 
call from your broker, you must put up additional collateral to cover your loan or 
your position in the stock will be sold immediately, meaning you will have lost 
your entire investment. Meanwhile, if your collateral has declined in value as well, 
you will owe your broker even more money. 

Most beginning investors should stay clear of buying on margin because of 
such risks. Think of it as a game you can play with your excess profits when you』ve 
become a wildly successful investor. 

Selling Short 

If you think buying on margin is risky, wait until you hear about selling short. 
This technique is for people who think they can profit if a stock drops in price. Because, 
as we』ve said, stocks tend to rise in value over time, these people are trying 
to swim upstream. 

Of course, stock prices do fall, and if you』ve sold short in the right stock at the 
right time, you can make a great deal of money. The flip side is that your losses are 
unlimited because the stock you have shorted can rise forever (theoretically). The 
following example illustrates how selling short works. Assume that you want to 
short the stock of Smith Company because you think its new product is a flop and 
its earnings will be less than anyone expects, causing the stock price to plummet. 
You essentially borrow the shares from someone who owns them, typically your 
broker, with the promise that you will return them later. You then immediately go 
out and sell the borrowed shares at the current market price, which you think is inflated. 
(If the stock pays a dividend while you have possession of them, by the way, 
you must pay that amount to the lender.) 

When the share price plunges (if your hunch is right), you buy the same number 
of shares in the marketplace and return them to the lender. This is known as 
covering your short. Your profit is the difference between the price you sold the 
stock for in the first place and the price at which you bought it back. 

The specifics of this ideal short sale might be as follows: 

1. 
You 「short」 or borrow 100 shares of Smith Company stock at $70 a share, 
which you immediately sell for a total of $7,000. 
2. 
Smith』s poor earnings report comes out, and the stock plummets to $50 a 
share. 
3. 
You buy 100 shares of Smith at $50 each for a total of $5,000 and return 
the shares to your broker. Your profit is $2,000. 

PART ONE: Maximizing Your Investment Options 

However, suppose that Smith Company』s earnings report is actually better, not 
worse, than expected, and the stock soars. You won』t be happy, to put it mildly.The 
specifics of this short sale might be as follows: 

1. 
You borrow 100 shares of Smith Company stock at $70 a share, which you 
immediately sell for a total of $7,000. 
2. 
Smith』s good earnings report comes out, and the stock soars to $100 a 
share. 
3. 
You buy 100 shares of Smith at $100 each for a total of $10,000 and return 
the shares to your broker. Your loss is $3,000. 
From time to time, you will hear that stock prices are up one day because of short 
covering. That happens when stock prices start to rise and short sellers capitulate before 
their losses become too great; therefore, they buy shares to settle their loans. 

Short selling, like buying on margin, should be done only by experienced investors 
with nerves of steel. To make money at this game, you not only must accurately 
guess the direction of future stock prices but also the timing. It』s a dangerous 
game that only a few people win. 

How to Pick Winning Stocks 

Before you buy any stocks, remember that they are vehicles that can enable 
you to reach your financial goals. When you hear an exciting story about a hot 
growth stock, you may be tempted to put your life savings in it so you can become 
a quick millionaire. Resist the temptation. Recall all the work you did at the beginning 
of this book. Now is the time to use the conclusions you drew from the 
budgeting exercise and, most important, the examination of your tolerance for risk. 
Also remember to put stocks in their place in the investment pyramid (see Figure 
1.12) so that you are diversified against loss yet stand to gain. 

With that said, it』s time to discuss the different techniques you can use to pick 
winning stocks. First, a few general tips that should help you make profitable decisions 
follow. 

Plan to invest for the long term. Despite endless predictions by market gurus 
that stocks are about to soar or plunge, no one really knows what will happen to 
stock prices over the short term. So, for the most part, you should ignore most of 
the prognostications. The same advice holds for the economy, which is just as unpredictable 
as the stock market. 

Your emotions will probably get the best of you if you do a great deal of 
short-term trading. When prices are rising, you will tend to get caught up in the 
enthusiasm and buy more. When prices are falling, you will probably get depressed 
and sell out. Besides, excessive trading activity will generate hefty commissions 
for your broker and taxes on capital gains for Uncle Sam. Instead of 


CHAPTER 3: Picking Winning Stocks 

trading for the short term, buy stocks that have good market positions, are financially 
strong, and offer products or services that seem sensible. If you can』t explain 
what a company does in about two sentences, you probably shouldn』t invest in it. 

Buy stocks systematically. Instead of putting all your money into a stock in 
one lump sum, buy a fixed dollar amount of shares on a regular basis, whether 
that be monthly, quarterly, or annually. If you buy the same dollar amount of a 
stock, say $100 a month, you will automatically buy fewer shares when the price 
is high and more shares when the price is low, thereby assuring yourself of a low 
average price over time. This technique is known as dollar cost averaging. It』s a 
lot safer and easier than trying to determine when a stock has hit its low or high 
point. 

The following simple example demonstrates the value of dollar cost averaging 
(excluding the effect of commission costs). 

If you have $10,000 to invest in a stock, either you could invest it all at once or, 
using dollar cost averaging, you could buy $1,000 worth every month for ten 
months. The stock』s price most surely will rise and fall over those ten months, so 
let』s say the stock starts the year at $50 a share, steadily descends to $25 a share by 
June 1, then returns to $50 a share by November 1. If you were to put your entire 
$10,000 to work in January, your results would look like Figure 3.2. 

Figure 3.2 Investing $10,000 All at the Same Time 
Amount Share Shares Cumulative Cumulative 
Month Invested Price Purchased Shares Market Value 
January $10,000 $50 200 200 $10,000 
February 0 45 0 200 9,000 
March 0 40 0 200 8,000 
April 0 35 0 200 7,000 
May 0 30 0 200 6,000 
June 0 25 0 200 5,000 
July 0 30 0 200 6,000 
August 0 35 0 200 7,000 
September 0 40 0 200 8,000 
October 0 45 0 200 9,000 
November 0 50 0 200 10,000 
Total $10,000 $50* 200 200 $10,000 

*Average price 

If, instead of investing all your money at once, you invested $1,000 on the first 
of every month, your results would look like Figure 3.3. 


PART ONE: Maximizing Your Investment Options 

Figure 3.3 Investing $10,000 by Dollar-Cost-Averaging Strategy 

Amount Share Shares Cumulative Cumulative 
Month Invested Price Purchased Shares Market Value 

January $ 1,000 $50 20 20 $ 1,000 
February 1,000 45 22.2 42.2 1,899 
March 1,000 40 25 67.2 2,688 
April 1,000 35 28.5 95.7 3,350 
May 1,000 30 33.3 129 3,870 
June 1,000 25 40 169 4,225 
July 1,000 30 33.3 202.3 6,069 
August 1,000 35 28.5 230.8 8,078 
September 1,000 40 25 255.8 10,232 
October 1,000 45 22.2 278 12,510 
November 0 50 0 278 13,900 

Total $10,000 $37.5* 278 278 $13,900 

*Average price 

Notice that you would have ended up with $3,900 (or 39 percent) more if you 
had used the dollar-cost-averaging strategy than if you had bought all of your 
shares in January. The reason is that as the share price fell to a low of $25 on June 
1, you kept buying more shares for your $1,000 each month. By the time the stock 
recovered back to the $50 level on November 1, you would have accumulated 78 
more shares than if you had bought 200 shares in January. By buying ten times instead 
of once, you would incur ten commission charges, which would greatly reduce 
your gains. To avoid this problem, you can execute dollar cost averaging 
using a no-load mutual fund (see Chapter 4 on mutual funds), or enroll in a company』s 
dividend reinvestment plan (see later in this chapter), which allows you to 
buy shares commission free and in fractional share amounts. 

Figures 3.2 and 3.3 present a best-case scenario for dollar cost averaging because 
the price of the shares fell and then rebounded. Even in a less optimal case, 
where share prices rose and then dropped, you would still come out ahead with 
dollar cost averaging compared to investing all your money at once. That』s the 
power of systematic investing! 

Invest in stocks that you know well. Use your professional knowledge to spot 
companies that seem to be up and coming. For example, if you are a doctor, what 
new drugs seem to be particularly effective, and who manufactured the new medical 
equipment that your hospital just installed? If you are a car mechanic, what company 
is making the best components for new cars? If you are a homemaker, what new 
stores seem to be crowded, and what new products seem to be hot sellers at the supermarket? 
You have many stock tips at your disposal. Use them for profit. 


CHAPTER 3: Picking Winning Stocks 

Research your choices carefully. For some reason, people will spend weeks 
investigating every feature of a car costing $15,000, but when it comes to stocks, 
they will spend $15,000 based on a hot tip, a broker』s recommendation, or a mention 
in a newspaper story. Before you invest any money, know exactly what business 
the company is in, how profitable it is, whether it has much debt, which 
companies are competing with it, and what new products or services the company 
intends to introduce. Most of all, look at who is running the company. Firms can 
have great plans, but they need top-quality management to transform those plans 
into profitable reality. The best way to judge management is by looking at its track 
record. If the management team has succeeded in the past, chances are that the 
team can do it again. 

Monitor the company after you』ve bought shares. Read the quarterly and 
annual reports to see whether your projections are, in fact, coming to pass. Was the 
new product line successful? Did the company pay down its debt as you thought it 
would? Also keep an eye on the company』s stock price. You don』t need to check it 
every day—maybe once a week or at least once a month. If the stock price rises or 
falls dramatically, someone knows something about the stock that you will probably 
find out later. Also, you shouldn』t own so many stocks that you don』t have time 
to track them all. It』s possible to be overdiversified as well as underdiversified. 

Don』t be pressured to buy or sell just because everyone else is doing so. In 
fact, if everyone else is doing it, it』s probably the wrong time to be joining in. It 
takes courage, but you will most likely make the majority of your money by buying 
stocks when they are down and everyone dislikes them and by selling them 
when they are rising and every taxi cab driver lets you in on this latest 「hot」 tip. 

Don』t worry about missing out on a good stock. The best ones rise in value 
for years at a time, so you have plenty of opportunity to get in on them. If you had 
bought Wal-Mart stock any time in the early 1970s, you would have made more 
than 30 times your money if you had held until the 1990s. Just because a good 
stock moves up a few dollars, it』s not too late to invest. 

Have a selling target price in mind when you buy a stock. If the stock 
reaches that price, either you can sell some or all of it, or you can reconsider your 
position based on the company』s situation at that time. You should also know the 
price at which you would sell the stock at a loss. This might be between 25 percent 
and 50 percent less than you paid for it. One of the worst things you can do is to 
watch your stock』s price melt away as you hope it will recover. Remember, your 
stock does not know or care what price you paid for it, so it has no obligation to return 
to that price. 

Consider transaction costs before you buy. If you have only enough money 
to buy a few shares, the commission you will pay might not be worth the investment. 
Determine in advance whether you will buy the stock through a full-service 
broker, who offers advice but charges higher fees, or a discount broker, who only 
executes your order but at much lower commission rates. 


PART ONE: Maximizing Your Investment Options 

Understanding Key Financial Ratios 

With these general rules in mind, let』s look at the key financial ratios you must 
understand in order to pick a winning stock. 

Price-earnings (PE) ratio. The most common way to compare how investors 
value one stock against another is to measure how much they will pay for a dollar 
of earnings. To determine the PE ratio, divide the stock』s latest price by its earnings 
for the latest four quarters. For example, if a stock is selling for $10 a share and it 
earned $1 a share last year, it has a PE ratio of 10. 

$10 Current stock price 

= 10 PE 

$1 Past earnings per share 

This PE ratio, called the trailing PE ratio because it is based on the past, is the 
figure shown in the newspaper listing under the heading 「PE.」 

An even more useful PE ratio is based on estimates of future earnings. Investors 
value stocks not only on what the stocks have done in the past but even 
more for what they think a firm』s profits will be in the future. Stock analysts specialize 
in projecting earnings per share for the next two years, and even if they are 
not right on the button, you can get a sense of how the stock is valued based on the 
analysts』 expectations. In addition to looking at analysts』 reports, which you can 
get from a broker, you can study estimates of future earnings from the Value Line 
Investment Survey, Standard & Poor』s stock reports (available both in libraries and 
by subscription), and most newsletters』 commentary about individual stocks. To 
calculate a future, or forward, PE ratio, as it is known, divide the current stock 
price by analysts』 estimates of next year』s profits. 

$10 Current stock price 

= 5 PE 

$2 Projected earnings per share 

Once you』ve calculated the PE ratio, you must put it in proper context. The 
higher the PE ratio, the more earnings growth investors expect from the company. 
Any PE ratio over 20, for instance, means that investors have high expectations that 
the company』s profits will grow rapidly in the next year. A PE ratio between 10 and 
20 signals that investors expect solid growth. However, a PE ratio below 10 is a 
sign that investors do not anticipate much growth from the firm. 

Compare the stock you are investigating to both the overall market and its industry 
peers to determine whether the stock is in or out of favor. The best benchmark 
for the overall market is the PE ratio of the Standard & Poor』s 500 Index, which 
is published in Barron』s and in most analysts』 reports. Over the years, that PE ratio 
has ranged from a low of about 8 in the valleys of bear markets to around 20 at the 
peaks of bull markets. Because each industry has its own dynamics, you should also 
compare your stock to similar stocks』 PE ratios. For example, if you are looking into 
a major city bank』s stock, compare it to other big-city bank stocks. Do the same for 


CHAPTER 3: Picking Winning Stocks 

airlines, oil firms, retailers, semiconductor chip makers, or any other industry. If your 
stock』s PE ratio is higher than its peers, investors expect even better results from it 
than from its competitors. If your stock』s PE ratio is lower than its peers, investors 
expect less than industry-average results. 

You might be thinking that investing in stocks is easy because all you have to 
do is choose the stock with the highest PE ratio and, therefore, the brightest future. 
This is the essence of growth stock investing, described in more detail with the 
worksheet in Figure 3.5. Unfortunately, this strategy hardly ensures success; in 
fact, it almost guarantees disappointment. While stocks with high PE ratios do indeed 
have promising futures, they are also the most subject to disappointment. Let 
us assure you, one of the last places you want to have your money is in a stock with 
high expectations that, for whatever reason, lets down investors. The moment the 
bad news hits the streets, the stock』s price will plummet. 

Some investors use the opposite strategy: They purchase stocks with low PE 
ratios that have reason to improve. The thinking behind this approach is that a 
stock with a low PE ratio already has low investor expectations built into its price; 
therefore, if the company reports poor profits, the stock has little room to fall. If, 
however, the company reports better than expected profits, the stock has much 
room to rise. All of this sounds good in theory, but not every low-PE-ratio stock 
will spring to life some day. Some have low valuations for good reasons, and they 
will stay that way indefinitely. The kind of low-PE-ratio stock you want to buy is 
the one with a turnaround already underway that has not been perceived by most 
investors. For more on how to find such stocks, refer to the discussions with the 
worksheets in Figure 3.7 (out-of-favor stocks) and Figure 3.8 (value stocks). 

Price-book value ratio. Instead of comparing a stock』s current price to the 
company』s earnings, you can compare the price to the worth of the company』s 
assets, or what is known as the company』s book value. This includes the company』s 
real estate, patents, brand names, and all other assets, minus debts and other liabilities. 
To compute the ratio, divide the stock』s price by the book value per share, 
which you can get from the annual report, Standard & Poor』s company reports, or 
the Value Line Investment Survey. 

$10 Current stock price 

= 200% Price-book ratio 

$5 Book value per share 

A company selling over its book value indicates that investors think highly of 
the company and therefore have put a high value on its assets. A company selling 
at or below its book value indicates that investors have low expectations for the 
company and do not prize its assets. Investors who specialize in buying undervalued 
stocks peruse stocks selling at or below book value because they think they are 
getting a bargain if they can buy the stock for less than the company』s assets are 
worth. Such stocks might also be takeover bait because another company or a 
raider may smell the same bargain, acquire the company, and sell off its pieces for 


PART ONE: Maximizing Your Investment Options 

more than their current price. For more on finding undervalued stocks, see the discussion 
with the worksheet on value stocks in Figure 3.8. 

Measures of profitability. Another method used to size up a company is to 
analyze its level of profitability. In general, the more profitable a company is, the 
better its stock performs over the long term. Firms with high profitability usually 
have some proprietary niche product, or a large and growing market share, and 
strong finances that enable them to invest in research and development to improve 
their products or services. The more profitable a company is, the more it tends to 
attract competitors that want to replicate its success. So a company that is able to 
ward off imitators and retain a high level of profitability is probably a good company 
to invest in over the long run. 

The most commonly used measure of profitability is called return on equity 
(ROE). It is calculated by dividing a company』s earnings by total shareholders』 
equity. 

$20 million earnings 

= 20% ROE 

$100 million shareholders』 equity 

In general, a return on equity of more than 15 percent is considered excellent, 
so the company in this example is extremely profitable. 

As is the case with PE ratios and price-book value ratios, return on equity varies 
greatly by industry, so it is important to compare a company against its peers. 

Another way to determine profitability is by looking at a company』s net profit 
margin. This measure shows a company』s overall success not only in managing operations 
but in terms of borrowing money at a favorable rate, investing cash wisely, 
and taking advantage of tax benefits. To calculate it, divide net income by net sales. 

$20 million net income 

= 10% Net profit margin 

$200 million net sales 

Profit margins also vary widely by industry. Supermarkets are happy with 2 
percent margins, while newspaper publishers expect 20 percent margins. Therefore, 
compare the company you』re investigating to similar firms. 

Measures of debt. Just as it is in your personal life, debt can be either beneficial 
or detrimental to a company』s financial health, depending on what the company 
does with the borrowed money and how easily it is able to make the interest and principal 
payments. In general, the more debt a company owes, the riskier it is as an investment 
because if its profits sag, it may be overly burdened by interest payments. 

When you investigate a stock, look for its debt-equity ratio—the most common 
measure of indebtedness. The ratio is calculated by dividing a company』s total 
liabilities (debts) by total shareholders』 equity. 

$20 million total liabilities 

= 20% Debt-equity ratio

$100 million total shareholders』 equity 


CHAPTER 3: Picking Winning Stocks 

In this case, the company has a debt-equity ratio of 20 percent, which is usually 
very manageable. As with all other ratios discussed so far, the amount of 
debt companies owe differs greatly by industry. Electric utilities frequently have 
a debt-equity ratio of more than 50 percent because they constantly borrow to upgrade 
their generating plants. Small high-tech companies might have high debt 
levels because they fund new product research, which will pay off in the future but 
creates little revenue in the present. On the other hand, a well-established food 
manufacturer might have little or no debt because it has a steady flow of cash 
coming in from sales of its products. In general, a debt-equity ratio of more than 
50 percent means the company has a high level of debt. 

Dividend payout ratio. This measure tells you how much of a company』s 
profits is being paid out in dividends. To calculate it, divide the dividends per share 
by the earnings per share. 

$1 Dividends per share 

= 50% Dividend payout ratio 

$2 Earnings per share 

In this case, 50 percent of the company』s profits are going directly to the shareholders 
in the form of a cash dividend. In general, the more established a company, 
the higher its payout ratio. Electric utilities, which investors buy for their dividends, 
probably have the highest payout ratio of any industry, typically around 50 
percent. Other manufacturers might pay 30 percent to 40 percent of their profits as 
dividends and reinvest the rest in their businesses. 

A high dividend payout ratio—more than 70 percent—can signal that the dividend 
is about to be cut. If a company is paying out nearly all of its profits in dividends, 
it has little money left to reinvest in its business, which ultimately will make 
it less competitive. Therefore, don』t search for companies with very high payout 
ratios because you』re likely to find stocks about to slice their dividends. 

Categories of Stock 

Armed with an understanding of basic financial ratios, you are now equipped 
to choose individual stocks. There are many kinds of stocks, and some are more 
appropriate for you than others, depending on your risk profile and financial objectives. 
I will concentrate here on five categories of stocks (cyclical, growth, income, 
out-of-favor, and value) and provide worksheets, adapted with permission 
from worksheets I developed for Money magazine, that will tell you whether a 
stock you are interested in passes the test. 

CYCLICAL STOCKS 

Certain companies』 fortunes are very closely tied to the ups and downs of the 
economy, and if you time purchases and sales of such company stocks well, you can 
profit handsomely. Cyclical stocks, so called because they ride the economic cycle, 


PART ONE: Maximizing Your Investment Options 

Figure 3.4 Cyclical Stock Worksheet 
Sample Your 
Stock Stock 
Points Points 
Sample Stock 
Current stock price = $40 
= 66% 
Stock price at last cyclical peak = $60 
Your Stock 
Current stock price = $ 
= % 
Stock price at last cyclical peak = $ 
(If less than 75%, give your stock 2 points; if between 
75% and 100%, 1 point; if more than 100%, 0 points.) 2 
Sample Stock 
PE ratio at last cyclical peak = 20 
= 80% 
PE ratio now = 25 
Your Stock 
PE ratio at last cyclical peak = 
= % 
PE ratio now = 
(If less than 50%, give your stock 2 points; if between 
50% and 80%, 1 point; if more than 80%, 0 points.) 1 
Sample Stock 
Estimated sales gain for next quarter = 20% 
= 200% 
Gain for same quarter a year ago = 10% 
Your Stock 
Estimated sales gain for next quarter = % 
= % 
Gain for same quarter a year ago = % 
(If less than 125%, give your stock 2 points; if between 
100% and 125%, 1 point; if less than 100%, 0 points.) 2 
Sample Stock 
Next year』s estimated profit margin = 10% 
= 143% 
This year』s estimated profit margin = 7% 
Source: Reprinted from MONEY Guide/The Stock Market–1986, . 1986, Time Inc. All rights reserved. 


CHAPTER 3: Picking Winning Stocks 

Figure 3.4 (continued) 
Sample 
Stock 
Points 
Your Stock 
Next year』s estimated profit margin = % 
= % 
This year』s estimated profit margin = % 
(If more than 125%, give your stock 2 points; if between 
100% and 125%, 1 point; if less than 100%, 0 points.) 2 
Sample Stock 
Next year』s estimated return on equity = 15% 
= 150% 
This year』s return on equity = 10% 
Your Stock 
Next year』s estimated return on equity = % 
= % 
This year』s return on equity = % 
(If more than 125%, give your stock 2 points; if between 
100% and 125%, 1 point; if less than 100%, 0 points.) 2 
Total Points 9 
If your stock scores 6 points or more, you have probably found a cyclical 
stock about to take off. The example here is clearly a good investment. 
Your 
Stock 
Points 

are typically found in such heavy industries as auto manufacturing, paper, chemicals, 
steel, and aluminum. These companies all have relatively large fixed costs to run 
their factories. As a result, if the volume of the product they sell is high and the prices 
they receive are rising because of strong demand, they stand to cover those costs easily 
and earn enormous profits. However, when demand is weak and prices are falling, 
they are still burdened by the same costs, so their earnings plummet. 

Cyclical stock prices are even more volatile than the company』s earnings. Investors 
are constantly trying to determine whether the cycle is turning up or down 
because it has a tremendous impact on the company』s bottom line. While all stock 
prices reflect investors』 expectations of future profits, cyclical stocks are even more 
sensitive to perceptions about the future. 

The best time to buy cyclical stocks, as hard as it may be to do, is when they are 
still losing money in the bottom of a recession but their situation is no longer deteriorating. 
The moment that investors sense a turnaround, the stock will shoot up. 


PART ONE: Maximizing Your Investment Options 

Conversely, the time to sell a cyclical stock is when the company is earning record 
profits and everything seems to be going well. When investors sense that the rate of 
improvement is slowing or growth is stalling, the stock will decline rapidly. 

The worksheet in Figure 3.4 will help you evaluate where a cyclical stock is in 
its cycle and therefore whether now is a good time to buy it. All the numbers 
needed to complete this worksheet are available from Standard & Poor』s company 
profiles or the Value Line Investment Survey. We have provided sample numbers 
for a cyclical stock. 

GROWTH STOCKS 

The easiest way for most people to make money in stocks over the long term is 
to buy and hold shares in high-quality growth companies. If it is a true growth stock, 
its earnings will compound at 15 percent or more no matter what the overall economy 
is doing. Impossible, you say? Take a look at the track records of such stellar 
growth companies as tax preparation giant H&R Block, retailer Wal-Mart, tobacco 
and food company Philip Morris, and software king Microsoft, for starters. 

Growth stocks can perform so admirably because their companies offer proprietary 
niche products or services and have well-known brand names, strong finances, 
and top-flight management. As long as these factors remain constant, 
growth can continue indefinitely. At a certain point, though, as a company becomes 
huge, it is more difficult to generate the same percentage profit increases; however, 
some firms seem to keep the increases coming, despite the odds. 

So far, investing in growth stocks sounds like a breeze. But it isn』t quite that easy. 
The better the record a growth company establishes, the higher investors』 expectations 
soar and the higher the stock』s PE ratio climbs. As long as the growth continues 
unabated, no problem occurs. But the moment such a company reports a slight slip 
in its upward trajectory, the stock can take a seemingly senseless pounding. As we 
stated earlier, one of the last investments you want to own is a growth stock about to 
disappoint investors』 earnings expectations. Also, successful companies attract imitators, 
which usually try to copy the original company』s products or services and sell 
them cheaper. Sometimes that can slow the company』s profit growth. 

Growth stock investing is also plagued by fads. In the 1960s and early 1970s, 
stocks like Avon, Polaroid, and Xerox were Wall Street darlings, until they plummeted 
by 50 percent or more in 1973. In the late 1970s, gambling stocks were the 
rage as Atlantic City casinos began to open. In the 1990s and 2000s, biotechnology, 
computer, software, and Internet stocks all had their day, only to fade after expectations 
got too high. Whenever you invest in a growth stock that seems like a 
fad, sell your shares the moment you think the fad is fading. 

Growth stocks come in three sizes. The largest, with sales of at least $1 billion, 
are known as blue chip growth companies. Medium-sized growth companies, with 
sales of $500 million to $1 billion, are called mid-cap (「cap」 for capitalization, 


CHAPTER 3: Picking Winning Stocks 

which is the market value of the outstanding shares) growth stocks. Small companies, 
with sales of less than $500 million, are known as emerging growth 
companies. In general, the smaller the company, the bigger the growth potential 
because it is easier to grow quickly from a small base than from a big one. But 
investing in stocks of smaller companies also entails more risk because they do not 
have market positions as established as larger companies』 positions. 

One of the biggest mistakes people make when buying growth stocks is to get 
too excited by their prospects and pay too much for the stocks. An easy way to 
judge whether you are overpaying is to look at the stock』s PE ratio. The higher the 
PE ratio, the more enthusiastic investors are about the company. Compare the PE 
ratio of your stock with that of similar companies in the same industry. If your 
stock』s PE ratio is considerably higher, you could be paying too much. 

The other key indicator growth stock investors look for is the earnings growth 
rate, or the rate at which profits grow from year to year. In general, the higher the 
growth rate, the higher the stock』s PE ratio. The ideal growth stock is one selling 
at a PE ratio below its growth rate. For example, if Go-Go Computer』s profits are 
growing at 30 percent a year, its stock would be considered a bargain if it were 
selling for a PE ratio of 20. While producing a solid growth rate is important, 
consistent growth is also highly prized. A company with profits up 40 percent one 
year and down 20 percent the next will not earn as high a PE ratio as one that grows 
20 percent year after year. 

The worksheet in Figure 3.5 will help you evaluate your own growth stock. All 
the numbers needed to complete this worksheet are available from Standard & 
Poor』s company profiles or the Value Line Investment Survey. We have provided 
sample numbers for a growth stock. 

INCOME STOCKS 

While most people think of stocks as vehicles to achieve capital appreciation, 
they can also provide steady income. Good-quality income stocks have an advantage 
over bonds (see Chapter 5) for income investors. While the interest that a 
bond pays is fixed until the bond matures, a stock』s dividend can rise year after 
year. So although a bond usually provides a higher current yield, a stock with a 
solid record of dividend increases can actually pay more over time. Because those 
higher dividends are paid out of ever-increasing profits, the stock price should 
climb over time as well. 

Companies that pay high dividends usually are well-established, profitable 
firms. Some businesses that offer high-paying stocks include banking firms, real 
estate investment trusts, and electric, gas, telephone, and water utilities. Unlike 
faster growing younger companies, which reinvest profits in their own businesses, 
such firms traditionally pay out at least half their profits to shareholders in the form 
of dividends. 


PART ONE: Maximizing Your Investment Options 

Figure 3.5 Growth Stock Worksheet 
Sample Stock 
Projected five-year annual growth rate = 22% 
Sample 
Stock 
Points 
Your 
Stock 
Points 
Your Stock 
Projected five-year annual growth rate = 
(If more than 20%, give your stock 2 points; if between 
10% and 20%, 1 point; if less than 10%, 0 points.) 
% 
2 
Sample Stock 
Earnings growth rate for past five years = 25% 
Your Stock 
Earnings growth rate for past five years = 
(If more than 20%, give your stock 2 points; if between 
10% and 20%, 1 point; if less than 10%, 0 points.) 
% 
2 
Sample Stock 
Average return on equity for past three years = 18% 
Your Stock 
Average return on equity for past three years = 
(If more than 20%, give your stock 2 points; if between 
10% and 20%, 1 point; if less than 10%, 0 points.) 
% 
1 
Sample Stock 
Projected five-year earnings growth rate = 22% 
Stock』s current PE ratio = 16% 
= 137% 
Your Stock 
Projected five-year earnings growth rate = % 
= % 
Stock』s current PE ratio = % 
(If more than 160%, give your stock 2 points; if between 
125% and 160%, 1 point; if less than 125%, 0 points.) 1 

Source: Reprinted from MONEY Guide/The Stock Market–1986, . 1986, Time Inc. All rights reserved. 


CHAPTER 3: Picking Winning Stocks 

Figure 3.5 (continued) 
Sample Your 
Stock Stock 
Points Points 
Sample Stock 
Earnings consistency = Up 7% in each 
of past five years 
Your Stock 
Earnings consistency = Up % in each 
of past five years 
(If up 10% or more for each of the past five years, give 
your stock 2 points; if up for each of the past five years, 
1 point; if down in any of the past five years, 0 points.) 1 
Total Points 7 
If your stock scores 6 points or more, it has long-term growth potential. The 
example here looks like an attractive growth stock. 

Even more than prices of other stocks, high-yield stock prices are greatly influenced 
by the direction of interest rates. When rates on Treasury bonds fall, 
high-yield stock prices tend to rise because that stock』s dividends are more 
competitive with bonds. Conversely, when interest rates rise, high-yield stocks 
look less attractive, and their prices tend to drop. 

To make sure an income stock you are considering can continue to raise its 
dividend, you should determine that the company is financially strong. You can do 
this by analyzing the company』s debt. Debt that is more than 50 percent of the 
company』s equity may be a sign of trouble. Another quick way to gauge financial 
strength is to check the stock』s rating with a reputable credit rating agency』s ratings, 
such as Standard & Poor』s Stock Guide. Any rating over B+ means that the 
company is financially solid. 

The final ratio to inspect before you buy a stock for income is the payout ratio, 
the percentage of earnings that is paid out in dividends. A payout ratio below 60 
percent means that there is a sizable cushion for the company to fall back on before 
it has to cut its dividend. A low ratio also leaves room for the dividend to grow. 
On the other hand, a payout ratio above 60 percent might be a sign that the dividend 
may be cut. 

Don』t be entranced by a stock that sports an above-average yield, usually of 
more than 10 percent. There must be a reason why the yield is that high, and probably 
it is not positive. For example, the payout may be high because the stock price has 


PART ONE: Maximizing Your Investment Options 

Figure 3.6 Income Stock Worksheet 
Sample Stock 
Dividend yield = 7% 
Sample 
Stock 
Points 
Your 
Stock 
Points 
Your Stock 
Dividend yield = % 

(If more than 6%, give your stock 2 points; if between 
4% and 6%, 1 point; if less than 4%, 0 points.) 2 

Sample Stock 

Dividend growth rate for the past five years = 9% 

Your Stock 

Dividend growth rate for the past five years = % 

(If more than 8%, give your stock 2 points; if between 
5% and 8%, 1 point; if less than 5%, 0 points.) 2 

Sample Stock 

Projected five-year earnings growth rate = 10% 

Your Stock 

Projected five-year earnings growth rate = % 

(If more than 8%, give your stock 2 points; if between 
5% and 8%, 1 point; if less than 5%, 0 points.) 2 

Sample Stock 

Dividends per common share = $ 1 Dividend payout 

= 

ratio—50%

Earnings per common share = $ 2 

Your Stock 

Dividends per common share = $ Dividend payout 

= 

ratio— %

Earnings per common share = $ 

(If less than 60%, give your stock 2 points; if between 
60% and 70%, 1 point; if more than 70%, 0 points.) 

2 

Source: Reprinted from MONEY Guide/The Stock Market–1986, . 1986, Time Inc. All rights reserved. 


CHAPTER 3: Picking Winning Stocks 

Figure 3.6 (continued) 
Sample Your 
Stock Stock 
Points Points 
Sample Stock 
Financial strength rating = A. 
Your Stock 
Financial strength rating = 
(If the credit rating agency』s ratings is A or above, give 
your stock 2 points; if between B+ and A., 1 point; if 
lower than B+, 0 points.) 1 
Total Points 9 
If your stock scores 6 points or more, it should provide steady, attractive 
income. The example here is a stock that any retiree could count on to pay 
uninterrupted dividends for years. 

fallen in anticipation of a dividend cut. Or it may be high because the company is in 
the process of liquidation, and the high payouts are actually a return of shareholders』 
capital. Whatever the reason, be suspicious of stocks with ultra-high yields. 

All the numbers needed to complete the worksheet in Figure 3.6 are available 
from Standard & Poor』s company profiles or the Value Line Investment Survey. We 
have provided sample numbers for an income stock. 

OUT-OF-FAVOR STOCKS 

If the age-old way to make money in stocks is to buy low and sell high, then 
buying stocks when they are out of favor is a good way to buy low. Though this 
style of choosing stocks can be emotionally trying, it can be rewarding as well. Investors 
are not always rational. Just as they can bid up the price of a growth stock 
too high because they are so enthusiastic about its prospects, they can also pummel 
a stock that has momentarily slipped to unrealistically low prices. That』s where 
bargain hunters swoop in. They sell out when the stock recovers. 

The easiest way to spot neglected stocks is by looking for low PE ratios. A PE 
ratio of less than 10 signals that investors do not have much hope for the future 
of the company, which may, in fact, be an incorrect perception of the situation. The 
moment the company reports better-than-expected results, perceptions can change 
quickly, and the stock price can shoot up. Do your research first. Don』t be tempted 


PART ONE: Maximizing Your Investment Options 

Figure 3.7 Out-of-Favor Stock Worksheet 
Sample Your 
Stock Stock 
Points Points 
Sample Stock 
Current stock price = $40 
= 44% 
Book value per share = $90 
Your Stock 
Current stock price = $ 
= % 
Book value per share = $ 
(If less than 25%, give your stock 2 points; if between 
25% and 50%, 1 point; if more than 50%, 0 points.) 1 
Sample Stock 
Stock PE ratio = 10 
= 66% 
S&P 500 PE ratio = 15 
Your Stock 
Stock PE ratio = 
= % 
S&P 500 PE ratio = 
(If less than 80%, give your stock 2 points; if between 
80% and 100%, 1 point; if more than 100%, 0 points.) 2 
Sample Stock 
Estimated five-year earnings growth rate = 6% 
Your Stock 
Estimated five-year earnings growth rate = % 
(If more than 7%, give your stock 2 points; if between 
2% and 7%, 1 point; if less than 2%, 0 points.) 1 
Sample Stock 
Estimated capital expenditures = $50 
for this year million 
= 250% 
Capital expenditures for last year = $20 
million 
Source: Reprinted from MONEY Guide/The Stock Market–1986, . 1986, Time Inc. All rights reserved. 


CHAPTER 3: Picking Winning Stocks 

Figure 3.7 (continued) 
Sample Your 
Stock Stock 
Points Points 
Your Stock 
Estimated capital expenditures = $ 
for this year million 
= % 
Capital expenditures for last year = $ 
million 
(If more than 150%, give your stock 2 points; if between 
100% and 150%, 1 point; if less than 100%, 0 points.) 2 
Sample Stock 
Percentage of outstanding stock held by institutions = 30% 
Your Stock 
Percentage of outstanding stock held by institutions = % 
(If less than 25%, give your stock 2 points; if between 
25% and 50%, 1 point; if more than 50%, 0 points.) 1 
Total Points 7 
If your stock scores 6 points or more, you might have uncovered a worthy 
out-of-favor stock. The example here is a stock that has been neglected yet 
shows signs of a rebound. That means that its stock price should recover 
soon. 

to buy any stock with a low PE ratio, however. Some companies deserve their 
lowly valuation and, in fact, will not recover. 

In addition to a low PE ratio, bargain hunters usually look for industries that 
are currently out of favor. They also seek stocks with low price-book value ratios 
because such stocks are typically out of favor. Another sign of benign neglect is 
when few of the shares are held by institutional investors, such as mutual funds or 
banks, because it is not fashionable to own such depressed stocks. Finally, if brokerage 
analysts do not pay attention to a stock, it is probably out of favor. 

What you should look for is a stock with a fair chance at turnaround. You may 
infer that a recovery is on the way if sales and earnings are no longer deteriorating 
or if the company has a new product or service that has the potential to restart its 
growth. Another way to check for signs of life is to determine whether company 


PART ONE: Maximizing Your Investment Options 

executives are buying the stock themselves and whether they are increasing capital 
expenditures. If the people who know the company best are investing in it heavily, 
that could be a tip-off that recovery is at hand. 

Not every ugly duckling turns into a swan, however. If your stock remains depressed 
after a year or more, you probably should turn it in for another one. It takes 
only one or two dramatic recoveries for this strategy to pay off. 

All the numbers needed to complete the worksheet in Figure 3.7 are available 
from Standard & Poor』s company profiles or the Value Line Investment Survey. We 
have provided sample numbers for an out-of-favor stock. 

If your stock scores 6 points or more, you might have uncovered a worthy out-
of-favor stock. The example here is a stock that has been neglected yet shows signs 
of a rebound. That means that its stock price should recover soon. 

VALUE STOCKS 

If you could buy a stock worth $10 for $8, would you do it? Most people would 
because they know they are buying something for less than it is worth. In the stock 
market, this style of choosing stocks is known as value investing. 

The key to value investing is being able to perceive when a stock』s current price 
does not fully reflect the value of its assets. Those assets might include real estate, 
brand names, oil reserves, patented technology, or even cash or stocks in other companies. 
Value investors make money by buying when the stock』s assets are worth 
more than the stock』s price and selling when the value of the assets has been realized. 

Shareholders can be paid for the true value of their company』s assets in one of 
several ways. A company can be taken over by another company or by a raider at a 
premium price because the acquirer thinks it can sell the assets for even more. The 
company can by broken into pieces, leaving shareholders with several stocks worth 
more separately than they were worth as a whole. The company』s management can 
derive a way to make the formerly underused asset more productive, which would 
produce profits to boost the stock price. Or investors can finally realize the value of 
the company』s assets, and the stock price will rise to reflect that changed perception. 

Trying to determine the true value of assets is tricky and subjective. A valuable 
asset to one analyst may have far less worth to another. Still, you can get a sense 
of whether a stock is selling for less than its breakup value by looking at the 
company』s book value per share, tangible assets per share like land or oil reserves, 
and financial assets including cash and securities. A particularly stringent test is 
to compare the stock』s price to so-called net net working capital. That is the 
amount of cash a company could raise in a hurry if it were liquidated today. To calculate 
it, subtract short- and long-term debts from such current assets as cash, securities, 
receivables, and inventory. If the net net working capital of the stock you 
are looking at is 25 percent or more than the current price, you have found an 
undervalued stock. 


CHAPTER 3: Picking Winning Stocks 

The other way to identify a value stock is to see how much it would be worth 
if it continued in business. Take a look at the firm』s cash flow (profits plus depreciation) 
per share, and divide it by the current stock price. The lower the price-cash 
flow ratio, the cheaper the stock is. At a certain point, the cash the company is 
throwing off could finance an acquisition of the company, making it a likely 
takeover target. 

All the numbers needed to fill out the worksheet in Figure 3.8 are available 
from Standard & Poor』s company profiles or the Value Line Investment Survey. 

New Issues 

Probably one of the most exciting yet dangerous opportunities in the stock 
market is new issues, the initial public offerings (IPOs) of former privately held 
companies. Such companies usually 「go public」 with great fanfare and hype, 
which can make their stock prices soar immediately after they begin trading. In the 
most famous case, when Genentech, the first biotechnology company to go public, 
made its offering at $35 a share in the early 1980s, its stock soared to more than 
$80 a share by the end of the first day of trading. 

The new issues market is extremely sensitive to the general direction of the 
stock market. When stock prices are high and rising and investors are enthusiastic, 
many new issues go public. When prices are low and depressed and no one wants 
to hear about stocks, it is almost impossible to sell a new issue. 

IPOs usually occur when their industries are popular with investors. What』s 
hot goes in and out of fashion quite frequently. One year, semiconductor company 
stocks are popular; next, it can be environmental stocks. Biotech stocks have had 
their day, and specialty retailer stocks were the rage among new issues at one point. 
In the 1990s, stocks of companies that had been taken private in the leveraged buyout 
craze of the 1980s started going public again, making the hottest new issue a 
「reverse leveraged buyout.」 Who knows what Wall Street will think of next? 

By their nature, new issues are speculative because they usually have no history 
of performance as public corporations. Some might have very promising-
sounding products or services, but they may not be able to produce results when 
they finally get the money to bring the products or services to market. Several studies 
have shown that in the long term, about a third of all new issues do well, a third 
don』t move much from the price at which they go public, and a third go bankrupt. 
Another study found that IPOs jump an average of 15 percent on their first day of 
trading, then underperform the market by 44 percent over the ensuing three years. 

In deciding whether to buy a particular new issue, use the standard analysis 
tools we discussed earlier in this chapter. Also, you can get an offering statement, 
usually known as the red herring, from a broker, with all the company』s financial 
history and plans. Other criteria to analyze include: 


PART ONE: Maximizing Your Investment Options 

Figure 3.8 Value Stock Worksheet 
Sample Your 
Stock Stock 
Points Points 
Sample Stock 
Current stock price = $40 
= 89% 
Book value per share = $45 
Your Stock 
Current stock price = $ 
= % 
Book value per share = $ 
(If less than 100%, give your stock 2 points; if between 
100% and 140%, 1 point; if more than 140%, 0 points.) 2 
Sample Stock 
Cash per share = $ 5 
= 12.5% 
Current stock price = $40 
Your Stock 
Cash per share = $ 
= % 
Current stock price = $ 
(If more than 25%, give your stock 2 points; if between 
10% and 25%, 1 point; if less than 10%, 0 points.) 1 
Sample Stock 
Net net working capital per share = $ 6 
= 15% 
Current stock price = $40 
Your Stock 
Net net working capital per share = $ 
= % 
Current stock price = $ 
(If more than 25%, give your stock 2 points; if between 
0% and 25%, 1 point; if less than 0%, 0 points.) 1 
Sample Stock 
Current stock price = $40 
= 4 
Cash flow per share = $10 
Source: Reprinted from MONEY Guide/The Stock Market–1986, . 1986, Time Inc. All rights reserved. 


CHAPTER 3: Picking Winning Stocks 

Figure 3.8 (continued) 
Sample Your 
Stock Stock 
Points Points 
Your Stock 
Current stock price = $ 
= 
Cash flow per share = $ 
(If less than 5, give your stock 2 points; if between 
5 and 7, give it 1 point; if more than 7, 0 points.) 2 
Sample Stock 
$19 
Outstanding debt = million 
= 19% 
Total capital = $100 
million 
Your Stock 
$ 
Outstanding debt = million 
= % 
Total capital = $ 
million 
(If less than 20%, give your stock 2 points; if between 
20% and 30%, 1 point; if more than 30%, 0 points.) 2 
Total Points 8 
If your stock scores 4 points or more, you might be looking at an undervalued 
stock. The example here is a real bargain. 

. 
How are the company』s earnings affected by the issuance of millions of 
new shares in the IPO? 
. 
What unique product or service does this company have that will allow it to 
compete with more established firms? 
. 
How will the IPO』s PE ratio compare with that of other companies in the 
same industry at the proposed initial offering price? 
. 
Are company executives and other insiders on the board of directors using 
the IPO as a chance to unload their shares? 
. 
What is the record of the brokerage firm underwriting the offering? How 
have other issues the firm has sold performed in the past year? 

PART ONE: Maximizing Your Investment Options 

If a new issue with exciting prospects is coming to market, chances are that 
you will not be able to obtain many shares, if you get any at all. That』s because hot 
IPOs are parceled out to brokers』 best customers, almost as a favor. If the issue is 
so hot that its price soars immediately after it begins trading, many investors will 
「flip」 the stock back into the market and pocket an instant profit. Don』t expect to 
be a flipper, though, unless you are a steady customer of a broker with a great deal 
of pull at his or her firm. 

Another way to invest in a new company involves direct investing through the 
Internet. Many start-up companies now elect to bypass the underwriting broker and 
offer shares directly to the public through the Internet. The Internet company that 
handles the offering will provide all the information on the start-up company to potential 
investors. The risk is probably higher with this approach, because it is unlikely 
that the Internet company will perform the same level of investigation and 
due diligence on the start-up company as the underwriting broker in a conventional 
IPO will provide. 

In many cases, the best strategy for dealing with the new issues market is to 
wait for all the hype to calm down and buy the stock three months or so after the 
offering. By then, Wall Street will have moved on to other new issues, and these 
stocks tend to sink back to more reasonable levels. 

For more information on new issues, consult the following newsletters and 
magazine: 

. 
IPO Financial Network (212 Short Hills Ave., Springfield, NJ 07081; 
973-379-5100; www.ipofinancial.com). 
. 
New Issues (The Institute for Econometric Research, 2200 Southwest 10th St., 
Deerfield Beach, FL 33442; 954-421-1000; 800-327-6720; www.mfmag.com). 
. 
Red Herring (Suite 450, 1550 Bryant St., San Francisco, CA 94013; 415865-
2277; www.redherring.com). Magazine that profiles new issues and 
helps investors profit from the new issues market. 
You can also use the Internet to find out the latest information about initial 
public offerings. By retrieving information about coming offerings online, you will 
be able to find out and act on the best deals earlier than if you had to wait for a 
mailed newsletter. Here is a sampling of the most prominent IPO Web sites: 

. 
Bloomberg IPO Center  
. 
Capital Markets Financial Center  
. 
Cnet Investor  
. 
EDGAR Online IPO Express  
. 
IBChannel.com  
. 
InvestorGuide  
. 
IPO Alert  

CHAPTER 3: Picking Winning Stocks 

. IPO Center  
. IPO Central  
. IPO.com  
. IPO Data Systems  
. IPOfn Online  
. IPO Home.com  
. IPOMaven  
. IPO Monitor  
. IPOnder  
. IPO Pro』s  
. IPOs  
. IPO Spotlight  
. IPOWatch  
. IPOwebwatch.com  
. S&P Personal Wealth: IPO』s  
. The Syndicate  
. Tech Web  
. WebIPO  
Internet companies and Web sites are now appearing that use the vast reach of 
the Internet to bring small but qualified investors together with cash-needy start-up 
companies before or in lieu of the company going public with an IPO. A qualified investor, 
according to the SEC, is one with at least $1 million in assets (including a 
home), or someone whose individual income exceeded $200,000 in each of the two 
most recent years or whose joint income with a spouse exceeded $300,000. Typically, 
the minimum investment required by these companies is $25,000. The Internet 
company will in most cases offer a group of investors (known as angels) the opportunity 
to invest in a start-up company and will arrange meetings with the start-up 
company and the interested investors for company tours and presentations. 

There is always an element of risk investing in a start-up company, but if the 
investor is careful with his or her choice, this method may offer less risk than waiting 
for IPO shares to become available on the market at a higher price than company 
friends and suppliers were able to purchase them. The following is a list of 
Internet companies that provide this service: 

Direct Stock Market  
Garage.com  
MainStreetIPO.com (www.mainstreetipo.com> 
Offroad Capital  
SpringboardIPO.com  



PART ONE: Maximizing Your Investment Options 

Spiders and Diamonds 

The American Stock Exchange, which is now merged with Nasdaq, offers a 
fairly extensive array of index shares, which combine all the opportunities of indexes 
with the advantages of stock trading. The best-known among these index 
shares are 「Spiders,」 technically called Standard & Poor』s Depositary Receipts, or 
SPDRs, and 「Diamonds,」 or the Dow Jones index shares. The index shares can be 
bought and sold through regular, discount, or online brokers just like other securities. 
Like an index fund, the shares mimic the markets they represent. The Spider, 
for example, is a unit investment trust that holds shares of all the companies in the 
S&P 500 and closely tracks the price performance and dividend yield of the index. 
Slight misalignments occur when the trust must be rebalanced and must adjust for 
an inflow of dividends. Diamonds are set up the same way, only they use the 30 
stocks of the Dow Jones Industrial Average. The ticker symbol for Spiders is SPY, 
and the symbol for Diamonds is DIA. 

Although an investor pays the typical brokerage fee when buying or selling, 
neither of these instruments involves a sales load. Unless a stock is added to or 
deleted from an index, generally there is little trading within a fund, so capital 
gains taxes are kept at a minimum. However, owners of Spiders and Diamonds will 
be subject to taxes on the investor』s share of dividends as they are granted. In most 
cases, expenses for Spiders and other index products are lower than those on a mutual 
fund or even an index fund. Annual expenses for Spiders are 0.18 percent, or 
put another way, for an investment of $10,000 the annual expense would be $18. 
There are no 12b-1 fees or hidden costs sometimes found in mutual funds. As for 
performance, index products historically have outperformed actively managed mutual 
funds over the long term. 

At times when the markets are down, for those who have faith that they will revive 
given time, but feel unsure about which stocks will lead in the recovery, index-
based investments offer a conservative, easy-to-understand way to participate in 
the next bull market. To learn more about Spiders, Diamonds, and their strangely 
named relatives, log onto  or telephone the American Stock 
Exchange at 800-843-2639. 

Socially Conscious Investing 

If you are one of the growing number of people who not only want their 
investments to do well, but to do good as well, you might be interested in socially 
conscious investing. This is the practice of seeking out companies that meet standards 
of social performance in addition to normal financial criteria. Most social 
criteria are positive; that is, they are attributes that people look for in a company. 
However, some criteria are negative; that is, they are aspects of a company that 
would keep people from investing in it. 


CHAPTER 3: Picking Winning Stocks 

The most common positive social criteria are clean environmental records; 
widespread advancement of women and minority employees; action on child care 
and AIDS for workers; safe, nonpolluting products; active investment in community 
and social projects; promoting alternative energy sources such as solar and 
geothermal power; commitment to worker safety; and fair bargaining with unions. 

The most common negative social criteria are dealing with the military or arms 
business; operating nuclear power facilities; testing products on animals in a way 
that is considered cruel; selling tobacco or liquor; fostering gambling; and creating 
water or air pollution. 

The financial idea behind socially conscious investing is that if a company 
does not pollute and treats its workers well, in addition to promoting other progressive 
policies, it will probably be able to stay out of trouble with government 
agencies and the public. That will be good for business and, in the long run, the 
firm』s stock price. Conversely, a company that is constantly fined by the government 
for polluting, suffers strikes by oppressed workers, and experiences nuclear 
meltdowns is probably not going to offer profitable stock. 

One group that monitors corporate performance on a broad range of social issues 
is the Council on Economic Priorities (30 Irving Pl., New York, NY 10003; 212-4201133; 
800-729-4237; www.cepnyse.org). Another company that issues social and financial 
reports on individual stocks is Trillium Asset Management Corp. (711 
Atlantic Ave., Boston, MA 02111; 617-423-6655; www.trilliuminvest.com). It has a 
newsletter on the subject entitled Investing for a Better World that is published on 
their Web site. Two books on the topic are Investing with Your Conscience, by John 

C. Harrington (John Wiley & Sons, 605 Third Ave., New York, NY 10158; 212-8506000; 
www.wiley.com), and Socially Responsible Investing, by Amy Domini (Dearborn 
Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; 
www.dearborntrade.com). 
If you want a fund manager to make these sometimes tricky social screening 
decisions for you, there are about ten mutual funds that use ethical screens. Some 
of the better known funds include Calvert Income Fund (800-368-2748; www. 
calvertgroup.com), Dreyfus Third Century (800-645-6561; www.dreyfus.com), 
Parnassus (800-999-3505; www.parnassusfund.com), and Pax World (800-7671729; 
www.paxfund.com). 

SOCIALLY RESPONSIBLE FUNDS WEB SITES 

Most socially responsible funds screen companies in tobacco, alcohol, and gambling. 
But some, like those below, also tackle heated issues such as gay rights, abortion, 
and workplace equality, often handpicking companies with exemplary records. 

Citizens Emerging Growth  

Domini Social Equity  

Dreyfus Premier Third Century  


PART ONE: Maximizing Your Investment Options 

Friends Ivory Social Awareness  

Green Century Balanced  

Meyers Pride Value  

Noah Fund  

Pax World Fund  

Portfolio 21  

Women』s Equity  

Stock Indexes and Averages 

News reports about the stock market that you see or hear every day on television, 
on the radio, and in newspapers normally track the action of stock indexes 
and averages, not individual stocks. These reports can give you a sense of the general 
direction of stocks, though they will not tell you whether the stocks in your 
portfolio are up or down. Still, it is good to understand these indexes because they 
are commonly used as benchmarks for judging the performance of individual 
stocks. Each index is calculated slightly differently and measures a different sector 
of the market. The most commonly quoted indexes follow. 

AMEX Composite Index. This index tracks the average of stocks traded on 
the AMEX, which tend to be medium- and small-sized growth stocks. The index is 
weighted by the market capitalization of its component stocks, meaning that stocks 
with a larger number of shares outstanding and with higher stock prices affect the 
index more than smaller companies with lower prices. 

Dow Jones Industrial Average. The most commonly quoted average tracks 
the movement of 30 of the largest blue chip stocks traded on the NYSE. When people 
say 「How did the market do today?」 they are usually referring to the performance 
of this average. The Dow Jones is a price-weighted average, so it is more 
affected by the movement of higher priced shares than by lower priced ones, no 
matter how many shares are outstanding. 

The 30 component stocks in the Dow Jones industrials are Aluminum Company 
of America (Alcoa), American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-
Cola, Du Pont, Eastman Kodak, ExxonMobil, General Electric, General Motors, 
Hewlett-Packard, Home Depot, Honeywell International, IBM, Intel, International 
Paper, J.P. Morgan Chase & Co., Johnson & Johnson, McDonald』s, Merck & Company, 
Microsoft, Minnesota Mining and Manufacturing (3M), Philip Morris, Procter 
& Gamble, SBC Communications, United Technologies, Walt Disney, and 
Wal-Mart Stores. 

Dow Jones and Co., which maintains the average, also tracks utilities (electric 
and gas) in the Dow Jones Utilities Average and transportation stocks (airlines, 
railroads, and truckers) in the Dow Jones Transportation Average. The combined 
industrial, utilities, and transportation averages are called the Dow Jones Composite 
Average. 


CHAPTER 3: Picking Winning Stocks 

Nasdaq Composite Index. This index tracks the movement of all companies 
traded on the Nasdaq NMS. These tend to be smaller, more volatile companies 
than the blue chips in the Dow Industrial Average or the S&P 500. The Nasdaq 
Composite is market-value weighted, which gives more influence to larger and 
higher priced stocks. 

NYSE Composite Index. This is the index for the trading of all NYSE 
stocks. It is market-value weighted and expressed in dollars and cents. When commentators 
say, 「The average share lost 15 cents on the New York Exchange today,」 
for example, this is the index to which they are referring. 

Standard & Poor』s 500 Index. The S&P 500 is the benchmark against which 
most portfolio managers compare themselves. It is composed of 500 blue chip 
stocks, separated by industry, so that almost all key industries are represented. The 
index always tracks 400 industrial company stocks, 60 transportation stocks, and 
40 financial stocks, like banks or insurance companies. The S&P 500 is the fairest 
yardstick against which you can measure the performance of your stocks. 

Wilshire 5,000 Equity Index. The broadest measure of all indexes, the marketvalue-
weighted Wilshire includes all major NYSE, AMEX, and Nasdaq stocks and 
gives a good indication of the overall direction of all stocks, large and small. 

Foreign indexes. The key indexes used to track stock prices in other countries 
include the CAC-40 in France; the DAX in Germany; the Financial Times 100 
(known as the Footsie) in the United Kingdom; the Hang Seng Index in Hong 
Kong; the Nikkei 225 Index in Japan; the Toronto 300 Index in Canada; and the 
Zurich Index in Switzerland. 

Dividend Reinvestment Plans (DRIPs) 

If you own a stock that is paying a dividend, chances are that the company offers 
a terrific benefit called a dividend reinvestment plan, commonly known as a 
DRIP. If you don』t need the cash from your dividends to live on, you can reinvest 
the payment with the company and buy more shares of stock. About 1,000 companies 
offer a DRIP. 

Enrolling in a DRIP offers several advantages: 

You put the magic of compounding to work for you. The shares that you buy 
with reinvested dividends earn more dividends, which buy more shares, and so on. 
Over time, the number of shares you own in the company grows steadily, without 
your having to contribute more cash. 

Without even thinking about it, you are practicing dollar cost averaging. For 
example, say you receive $100 in dividends each quarter. When the share price is 
high, like $50, your dividends will buy fewer shares—in this case, two shares. But 
when the share price is low, like $20, the same dividends will buy more shares—in 
this case, five. This counteracts your normal emotional inclination to buy more 
shares when the price is high and rising and fewer when the price is low and 


PART ONE: Maximizing Your Investment Options 

falling. Over time, your average cost of buying shares will most likely be lower 
than it would if you tried to time your purchases. 

Most DRIPs are free of brokerage commissions and other charges. Because 
the company offering the plan wants to encourage shareholders to use it, the firm 
normally absorbs all brokerage commissions for buying the stock and the administrative 
costs of the program. 

More than 100 companies offer a sweetened version of the DRIP, called a discount 
DRIP. To encourage shareholder participation, the company gives up to an 
additional 5 percent discount on reinvested dividends. So, for example, if you reinvest 
$100 worth of dividends, you receive $105 worth of stock. This makes your 
holdings in the company grow even faster. 

The following is a sample of the companies that offer a 1 percent to 5 percent 
discount on reinvested dividends, provided courtesy of Charles Carlson, author of 
Buying Stocks Without a Broker (McGraw-Hill, P.O. Box 543, Blacklick, OH 
43004; 800-722-4726; www.mcgraw-hill.com). The book explains how DRIPs 
work and provides a directory of all plans, including a profile of each company, 
with its address and telephone number, whether it offers optional cash purchase 
plans, and other details of its plans. Carlson also is editor of the monthly newsletter 
The DRIP Investor (Dow Theory Forecasts, 7412 Calumet Ave., Hammond, IN 
46324; 219-931-6480; www.dowtheory.com). Here is a list of such plans and the 
phone numbers of the companies and/or transfer agents (usually toll-free numbers) 
that can help you set up an account at any of these companies: 

American Waterworks; Boykin Lodging Company; 

800-736-8001 800-622-6757 

Anadarko Petroleum Corp.; Bradley Real Estate Inc.; 

888-470-5786 888-697-7873 

Annaly Mortgage Management Cathay Bancorp, Inc.; 

Inc.; 800-301-5234 800-937-5449 

Anthracite Capital; 800-524-4458 CBL & Associates Properties; 

Anworth Mortgage Asset 781-575-3400 

Corporation; 212-509-4000 Chester Valley Bancorp; 

Atmos Energy Corporation; 800-937-5449 

800-543-3038 Coastal Financial Corporation; 

AvalonBay Communities, Inc.; 800-368-5948 

800-437-8736 Columbia Bancorp; 

Ball Corporation; 800-446-2617 800-368-5948 

Banyan Strategic Realty Trust; Commerce Bancorp, Inc.; 

201-324-0498 888-470-5884 

Boston Properties, Inc.; Commonwealth Bankshares; 

888-485-2389 757-446-6914 


CHAPTER 3: Picking Winning Stocks 

Countrywide Credit Industries; 
800-524-4458 

Data Research Associates, Inc.; 
312-360-5291 

Duke-Weeks Realty Corporation; 
800-937-5449 

E』Town Corporation; 
888-269-8845 

Equity Residential Property Trust; 
800-733-5001 

F&M Bancorp; 800-468-9716 

FCNB Corporation; 
800-278-4353 

First Colonial Group; 
610-746-7317 

FIRSTFED Bancorp, Inc.; 
800-241-5568 

First Federal Capital Corporation; 
800-468-9716 

First National Community 
Bancorp; 800-368-5948 

First Union Corporation; 
800-347-1246 

Fleming Companies, Inc.; 
800-317-4445 

Fuller (H.B.); 800-468-9716 

Gables Residential Trust; 
800-730-6001 

Green Mountain Power; 
800-851-9677 

Health Care REIT; 888-216-7206 

Healthcare Realty Trust; 
781-575-3400 

Hibernia Corporation; 
800-814-0305 

Highwoods Properties, Inc.; 
800-829-8432 

Home Properties of New York; 
888-245-0458 

Household International, Inc.; 
800-926-2335 

IMPAC Mortgage Holdings, Inc.; 
800-730-4001 

Innkeepers USA Trust; 
800-942-5909 

Jameson Inns, Inc.; 
800-829-8432 

JDN Realty Corporation; 
800-829-8432 

Kennametal, Inc.; 800-756-3353 

Liberty Property Trust; 
800-944-2214 

Media General, Inc.; 
800-937-5449 

Mercantile Bankshares 
Corporation; 800-524-4458 

Met-Pro Corporation; 
800-278-4353 

MGI Properties; 800-730-6001 

Mid-America Apartment 
Communities; 800-829-8432 

Monmouth Capital Corporation; 
800-526-0801 

Monmouth REIT; 800-526-0801 

National City Corporation; 
800-622-6757 

Old National Bancorp; 
800-677-1749 

Omega Healthcare Investor; 
800-622-6757 

Pan Pacific Retail Properties; 
800-524-4458 

Parkway Properties Inc.; 
877-588-4124 

Pennichuck Corporation; 
800-730-4001 

Pennsylvania Commerce Bancorp; 
717-975-5630 

Philadelphia Suburban Corporation; 
800-205-8314 

Piccadilly Cafeterias Inc.; 
800-633-4236 


PART ONE: Maximizing Your Investment Options 

Popular Inc.; 787-756-3908 

Post Properties, Inc.; 
800-633-4236 

Presidential Realty; 
800-937-5449 

Prison Realty Trust, Inc.; 
800-793-8940 

ProLogis Trust; 800-956-3378 

ReliaStar Financial Corporation; 
800-468-9716 

Sea Containers Limited; 
800-730-4001 

Second Bancorp, Inc.; 
800-278-4353 

Shoreline Financial Corporation; 
800-468-9716 

Sizeler Property Investors, Inc.; 
800-524-4458 

South Financial Group, Inc.; 
800-368-5948 

South Jersey Industries Inc.; 
888-754-3100 

Southwest Water Company; 
800-356-2017 

Sovereign Bancorp, Inc.; 
800-685-4524 

Sovran Self Storage; 
800-278-4353 

Suffolk Bancorp; 800-937-5449 

Summit Properties; 
800-829-8432 

Sussex Bancorp; 800-278-4353 

Telephone & Data Systems; 
312-360-5337 

Thornburg Mortgage Asset; 
800-509-5586 

UnionBanCal Corporation; 
800-554-3406 

United Dominium Realty Trust; 
888-237-5723 

United Investors Realty Trust; 
800-969-3371 

Unitil Corporation; 
800-736-3001 

USX-Marathon Group; 
412-433-4801 
USX-U.S. Steel Group; 
412-433-4801 

UtiliCorp United; 800-884-5426 

Valley Resources , Inc.; 
800-524-4458 

Western Resources; 
800-527-2495 

York Financial Corporation; 
800-278-4353 

Several hundred companies not only allow you to reinvest your dividends; they 
offer optional cash purchase plans. These plans enable you to invest your own 
money, along with your dividends, in more shares at no cost. While that alone is a 
great deal, some firms even offer optional cash purchase at a discount. The companies 
that offer a 5 percent DRIP discount also extend the discount to any additional 
money you invest. Most of these programs, however, put limits on optional 
cash purchases, usually of about $25,000 a year. (The companies don』t want to 
give away too much free money, after all.) 

Several companies not only allow you to reinvest dividends and optional cash 
at no charge; they also make it easy to buy your original shares directly from the 
companies themselves, without commissions. Theoretically, you could buy shares 
in these firms, enroll in their DRIPs and optional cash programs, and build up a 


CHAPTER 3: Picking Winning Stocks 

stake of hundreds of shares without ever paying a commission! (Don』t tell your 
broker that you know about this one, or he or she won』t return your calls!) 

Another resource to keep you up-to-date on which companies are offering 
dividend reinvestment plans is the DRP Authority newsletter (The Moneypaper, 
Inc., 1010 Mamaroneck Ave., Mamaroneck, NY 10543; 800-388-9993; www. 
moneypaper.com). In addition to the monthly newsletter listing new developments 
in the DRIP world, Moneypaper publishes a complete fact-filled Guide to Dividend 
Reinvestment Plans that has all the information you will ever need to get 
started with this sensible form of investing. 

DIRECT INVESTING IN STOCKS 

Another way to avoid brokerage commissions as you invest in individual 
stocks is by enrolling in the direct investment option at a growing number of companies. 
Following is a partial list of companies allowing direct initial stock purchases. 
This list is provided by Charles Carlson, editor of the No-Load Stock 
Insider newsletter (7412 Calumet Ave., Suite 200, Hammond, IN 46324; 219-8523230), 
which maintains a current list of such plans. Carlson refers to such stocks 
obtained through these plans as no-load stocks. The companies using the phone 
number 800-774-4117 are participating in the Direct Stock Purchase Plan Clearinghouse, 
which offers direct enrollment for many stocks around the world. 

Abaxis, Inc.; 781-575-3100 American Electric Power Co., Inc.; 

ABT Building Products Corp.; 800-955-4740 

800-286-9178 American Express Co.; 

Adams Express Company; 800-842-7629 

800-432-8224 American States Water; 

Advanta; 800-225-5923 888-816-6998 

Aetna, Inc.; 800-955-4741 American Water Works Co., Inc.; 

AFLAC, Inc.; 800-227-4756 800-736-3001 

AGL Resources, Inc.; AmerUS Life Holdings, Inc.; 

800-633-4236 800-813-3324 

Air Products & Chemicals, Inc.; Anadarko Petroleum Corporation; 

800-519-3111 800-842-7629 

Allegheny Technologies Inc.; Andover Bancorp, Inc.; 

800-406-4850 800-730-4001 

Alliant Energy Corp.; 800-356-5343 Annaly Mortgage Management, 

Allstate Corp.; 800-448-7007 Inc.; 212-696-0100 

AMB Property Corporation; Archstone Communities Trust; 

877-285-3111 800-851-9677 

Ameren Corporation; Arrow Financial Corp.; 

800-255-2237 518-793-4121 


PART ONE: Maximizing Your Investment Options 

Ascent Entertainment Group, Inc.; 
800-727-7033 
Associates First Capital 

Corporation; 888-297-6879 
Almos Energy Corp.; 800-382-8667 
Avery Dennison Corp.; 

800-649-2291 
AXA Financial Inc.; 800-437-8736 
Bank of America Corp.; 

800-642-9855 
Bank of New York Co., Inc.; 

800-727-7033 
Bard (C.R.), Inc.; 800-828-1639 
Becton, Dickinson and Company; 

800-955-4743 
Bedford Property Investors, Inc.; 

800-774-5476 
Bell Atlantic Corp.; 800-631-2355 
BellSouth; 888-887-2965 
Blyth Industries, Inc.; 877-424-1968 
Bob Evans Farms, Inc.; 

800-272-7675 
Borg-Warner Automotive, Inc.; 
800-851-4229 
Boston Beer Co., Inc.; 

888-266-6780 
Bowne & Co., Inc.; 800-524-4458 
BP Amoco Corp.; 888-638-5672 
Bradley Real Estate, Inc.; 

888-697-7873 
BRE Properties, Inc.; 800-368-8392 
Calgon Carbon Corporation; 

888-775-2650 
California Water Service Group; 

800-337-3503 
Campbell Soup Co.; 800-649-2160 
Capstead Mortgage Corp.; 

800-468-9716 
Carey Diversified LLC; 
800-842-7629 


Carolina Power & Light Co.; 
800-662-7232 

Carpenter Technology Corp.; 

800-822-9828 
Carver Bancorp Inc.; 800-278-4353 
Cascade Natural Gas Corp.; 

800-524-4458 
Caterpillar Inc.; 309-675-1000 
Central & South West Corp.; 

800-527-5797 
Central Vermont Public Service 

Corp.; 800-354-2877 
CH Energy; 888-280-3848 
Chase Corp.; 800-278-4353 
Chevron Corp.; 800-286-9178 
CMS Energy Corp.; 313-436-9200 
Coastal Corp.; 800-788-2500 
Cohoes Bancorp, Inc.; 

800-278-4353 
Columbus McKinnon Corporation; 
800-278-4353 
Community Bank System, Inc.; 
800-842-7629 
Compaq Computer Corp.; 

888-216-4373 
COMSAT Corp.; 800-727-7033 
Conectiv, Inc.; 800-365-8495 
Connecticut Water Service, Inc.; 

800-426-5523 
Conoco Inc.; 800-317-4445 
Consolidated Freightways Corp.; 

800-727-7033 
Corn Products International, Inc.; 

800-446-2617 
Cross Timbers Oil Co.; 
888-877-2892 


Crown American Realty Trust; 

800-278-4353 
CSX Corp.; 800-521-5571 
Curtiss-Wright Corp.; 

888-266-6793 
CVS Corporation; 877-287-7526 
Darden Restaurants, Inc.; 

800-829-8432 


CHAPTER 3: Picking Winning Stocks 

Deere and Co.; 800-268-7369 
Delhaize America; 888-232-9530 
Delphi Automotive Systems Corp.; 

800-818-6599 
Delta Natural Gas Co., Inc.; 

606-744-6171 
Diebold, Inc.; 800-542-7792 
Disney (Walt) Co.; 800-948-2222 
Dollar General Corp.; 

888-266-6785 
Dominion Resources, Inc.; 
800-552-4034 
Dow Jones and Company, Inc.; 

800-842-7629 
DQE, Inc.; 800-247-0400 
DTE Energy Company; 

800-551-5009 
Duke Energy Corp.; 800-488-3853 
Duke-Weeks Realty Corp.; 

800-278-4353 
Eastern Company; 800-633-3455 
Eastman Kodak Co.; 

800-253-6057 
EMCEE Broadcast Products, Inc.; 

888-200-3167 
Energen Corp.; 800-946-4316 
Enron Corp.; 800-662-7662 
Entergy Corp.; 800-225-1721 
Equifax, Inc.; 800-462-9853 
Equity Office Properties Trust; 

888-752-4831 
Equity Residential Properties Trust; 
800-337-5666 
Essex Property Trust, Inc.; 

800-945-8245 
Exxon Mobil Corp.; 800-252-1800 
Fannie Mae; 888-289-3266 
FedEx Corp.; 800-524-3120 
Finova Group, Inc.; 800-734-6682 
First Financial Holdings, Inc.; 

800-998-9151 
FirstEnergy Corp.; 800-736-3402 

Florida Progress Corp.; 

800-352-1121 
Ford Motor Co.; 800-555-5259 
Frontier Insurance Group, Inc.; 

888-200-3162 
GenCorp Inc.; 800-727-7033 
General Electric Co.; 

800-786-2543 
General Growth Properties, Inc.; 

888-291-3713 
Gillette Co.; 800-643-6989 
Glenborough Realty Trust Inc.; 

800-998-9151 
Goodyear Tire and Rubber Co.; 
800-453-2440 
Gray Communication Systems, 
Inc.; 888-835-2868 
Green Mountain Power Corp.; 
802-864-5731 
Green Point Financial Corp.; 

800-842-7629 
Guidant Corp.; 800-537-1677 
Harland (John H.) Company; 

800-649-2202 
Hawaiian Electric Industries, Inc.; 

808-543-5662 
Heinz (H.J.) Co.; 800-253-3399 
Hershey Foods Corp.; 800-842-7629 
Hillenbrand Industries, Inc.; 

888-665-9611 
Home Depot, Inc.; 800-928-0380 
Home Properties of NY, Inc.; 

800-937-5449 
Huffy Corp.; 800-942-5909 
Idaho Power Co.; 800-635-5406 
Interchange Financial Services 

Corp.; 201-703-2265 
International Business Machines 

Corp.; 888-421-8860 
Intimate Brands, Inc.; 800-955-4745 
Investors Financial Services Corp.; 

888-333-5336 


PART ONE: Maximizing Your Investment Options 

IPALCO Enterprises, Inc.; 

800-877-0153 
ITT Industries, Inc.; 800-254-2823 
Jefferson Smurfit Group plc; 

800-428-4237 
Johnson Controls, Inc.; 

800-524-6220 
Justin Industries, Inc.; 800-727-7033 
Kaman Corp.; 800-842-7629 
Kellwood Company; 314-576-3100 
Kelly Services, Inc.; 800-829-8259 
Kerr-McGee Corp.; 800-786-2556 
Kilroy Realty Corp.; 

888-816-7506 
Kmart Corp.; 800-336-6981 
Lear Corp.; 800-524-4458 
Lehman Brothers Holdings Inc.; 

800-824-5707 
Libbey Inc.; 800-727-7033 
Liberty Property Trust; 

800-944-2214 
Lilly (Eli) & Co.; 800-451-2134 
Lincoln National Corp.; 

800-442-2001 
Longs Drug Stores Corp.; 
888-213-0886 
Lowe』s Companies, Inc.; 

800-633-4236 
Lubrizol Corp.; 800-278-4353 
Lucent Technologies Inc.; 

888-582-3686 
Macerich Co.; 800-567-0169 
Madison Gas & Electric Co.; 

800-356-6423 
Mallinckrodt Inc.; 800-446-2617 
Marriott International, Inc.; 

800-446-2617 
Mattel, Inc.; 888-909-9922 
McCormick & Co., Inc.; 

800-424-5855 
McDermott International, Inc.; 
800-446-2617 

McDonald』s Corp.; 800-228-9623 
McGraw-Hill Cos., Inc.; 
888-201-5538 
MCN Energy Group Inc.; 
800-955-4793 
MDU Resources Group, Inc.; 
800-813-3324 
Meadowbrook Insurance Group, 
Inc.; 800-649-2579 
Mellon Financial Corporation; 

800-842-7629 
Merck & Co., Inc.; 800-613-2104 
Meritor Automotive, Inc.; 

800-483-2277 
Met-Pro Corporation; 800-278-4353 
Michaels Stores, Inc.; 800-577-4676 
MidAmerican Energy Holdings 

Co.; 800-247-5211 
MidSouth Bancorp, Inc.; 

800-842-7629 
Mills Corp.; 800-446-2617 
Minnesota Power Inc.; 

800-535-3056 
Montana Power Co.; 800-245-6767 
Morgan Stanley Dean Witter & Co.; 

800-622-2393 
Motorola, Inc.; 800-704-4098 
National Fuel Gas Co.; 

800-648-8166 
National Service Industries, Inc.; 
888-836-5069 
Nationwide Financial Services, 

Inc.; 800-409-7514 
NCR Corp.; 800-278-4353 
Nevada Power Co.; 800-662-7575 
New England Business Service, 

Inc.; 800-736-3001 
New Jersey Resources Corp.; 

800-817-3955 
Newport Corp.; 888-200-3169 
Newport News Shipbuilding, Inc.; 

800-649-1861 


CHAPTER 3: Picking Winning Stocks 

Northern States Power Co.; 

800-527-4677 
Northwestern Corp.; 605-978-2908 
NSTAR; 800-338-8446 
NUI Corp.; 800-374-5775 
OGE Energy Corp.; 800-842-7629 
Old Kent Financial Corp.; 

800-652-2657 
Old National Bancorp; 

800-677-1749 
Oneok Inc.; 800-955-4798 
Otter Tail Power Co.; 218-739-8200 
Owens Corning; 800-472-2210 
Pacific Century Financial, Inc.; 

808-643-3888 
PacifiCorp; 800-233-5453 
Pan Pacific Retail Properties, Inc.; 

800-524-4458 
Penney (J.C.) Co., Inc.; 
800-565-2576 
Peoples Energy Corp.; 
800-228-6888 


Petroleum & Resources 

Corporation; 800-432-8224 
Pfizer Inc.; 800-733-9393 
Pharmacia Corp.; 877-881-5964 
Phelps Dodge Corp.; 

800-279-1240 
Philadelphia Suburban Corp.; 

800-205-8314 
Phillips Petroleum Co.; 
888-887-2968 


Piedmont Natural Gas Co., Inc.; 
800-438-8410 
Pier 1 Imports, Inc.; 
800-842-7629 
Pinnacle West Capital Corp.; 

800-457-2983 
Popular Inc.; 787-759-7740 
Procter & Gamble Co.; 

800-742-6253 
ProLogis; 800-956-3378 

Providian Financial Corp.; 
800-482-8690 
Public Service Enterprise Group, 
Inc.; 800-242-0813 
Public Service of New Mexico; 
800-545-4425 
Puget Sound Energy, Inc.; 

800-997-8438 
Quaker Oats Co.; 800-344-1198 
Quanex Corp.; 800-937-5449 
Questar Corp.; 800-729-6788 
Reader』s Digest Association, Inc.; 

800-242-4653 
Redwood Trust, Inc.; 800-526-0801 
Regions Financial Corp.; 

800-922-3468 
Reliant Energy, Inc.; 800-231-6406 
Roadway Express, Inc.; 

800-991-8947 
Robbins & Myers, Inc.; 
800-622-6757 


Rockwell International Corp.; 

800-842-7629 
Sanderson Farms, Inc.; 
800-842-7629 

SBC Communications Inc.; 

888-836-5062 
SCANA Corp.; 800-763-5891 
Schnitzer Steel Industries, Inc.; 

800-524-4458 
Sears, Roebuck & Co.; 

800-732-7780 
SEMCO Energy, Inc.; 800-255-7647 
Sempra Energy; 877-773-6772 
Sierra Pacific Resources; 

800-662-7576 
Snap-On, Inc.; 800-501-9474 
Sonoco Products Co.; 800-864-2246 
South Jersey Industries, Inc.; 

609-561-9000 
Southern Company; 800-554-7626 
Southern Union Co.; 512-477-5852 


PART ONE: Maximizing Your Investment Options 

Southwest Gas Corp.; 702-876-7237 
Synovus Financial Corp.; 

800-337-0896 
Tandy Corp.; 888-218-4374 
Target Corp.; 888-268-0203 
Taubman Centers, Inc.; 

888-877-2889 
Tektronix, Inc.; 800-842-7629 
Tenneco Automotive, Inc.; 

800-519-3111 
Texaco, Inc.; 800-283-9785 
Thornburg Mortgage, Corp.; 

800-509-5586 
Timken Co.; 888-347-2453 
Total System Services, Inc.; 

800-503-8903 
Transocean Sedco Forex, Inc., 

800-524-4458 
Tribune Company; 800-924-1490 
TXU Corp.; 800-828-0812 
Tyson Foods, Inc.; 800-822-7096 
US West, Inc.; 800-537-0222 
United Water Resources, Inc.; 

800-230-2685 
United Wisconsin Services, Inc.; 

414-226-6900 
Unitrin, Inc.; 800-446-2617 
Urban Shopping Centers, Inc.; 

800-992-4566 
USEC Inc.; 888-485-2938 
USG Corporation; 877-360-5385 

USX - Marathon Group; 
412-433-1121 
USX - U.S. Steel Group; 

412-433-1121 
UtiliCorp United Inc.; 800-487-6661 
Valspar Corp.; 800-842-7629 
Vodafone AirTouch Pic; 

800-727-7033 
Walgreen Co.; 800-286-9178 
Wal-Mart Stores, Inc.; 

800-438-6278 
Waste Management; 800-286-9178 
Weingarten Realty Investors; 

888-887-2966 
Western Resources, Inc.; 

800-527-2495 
Westvaco Corp.; 212-688-5000 
Whirlpool Corp.; 800-409-7442 
Whitman Corp.; 800-446-2617 
Winston Hotels, Inc.; 

877-282-1180 
Wisconsin Energy Corp.; 

800-558-9663 
WLR Foods, Inc.; 540-896-7001 
WPS Resources Corp.; 

800-236-1551 
XXsys Technologies, Inc.; 

888-200-3166 
Yahoo! Inc.; 408-731-3300 
York International Corp.; 

800-437-6726 

This list of companies is always expanding, since more and more companies 
want to attract shareholders buying their stock directly. In addition to Carlson』s 
newsletter mentioned above, you may be interested in the Direct Investing newsletter 
(The Moneypaper, Inc., 1010 Mamaroneck Ave., Mamaroneck, NY 10543; 800388-
9993; www.moneypaper.com), which also tracks developments in the field. You 
also can get a current list of no-load stocks at several Web sites, including: Direct 
Purchase Stock Plans (www.natcorp.com/ir/direct.html), NetStock Direct (www. 
netstockdirect.com), and No-Load Stocks (www.noloadbase.org). 

To enroll in a company』s dividend reinvestment plan, you must have the stock 
registered in your own name. Normally, if you buy stock through a brokerage firm, 


CHAPTER 3: Picking Winning Stocks 

the broker holds it in its street name—that is, under a consolidated name for all of 
its accounts. A company offering a DRIP, however, must know the name of the participating 
shareholder so it can set up a reinvestment account. Therefore, if you 
have your stock with a broker, you must reregister it with the company, which the 
company will gladly take care of for you. After you』re enrolled in the plan, you will 
receive quarterly statements from the company informing you how many shares 
your dividends purchased and how many total shares you now own. 

Shareholder Freebies 

In addition to dividends and DRIPs, many companies offer shareholders a variety 
of free and discounted products and services, which can make buying a company』s 
stock even more rewarding. Companies do this to engender good will 
among their shareholders and to encourage them to hold onto their stock for the 
long term. 

In some cases, you must attend the annual meeting, where the freebies are 
handed out to—or, in some cases, devoured by—shareholders. In other cases, you 
can receive discount coupons or tickets by writing to the company. To learn what 
a specific company offers, call its investor relations department. To learn about 
benefits, in general, consult the latest edition of Gene Walden』s book, The 100 Best 
Stocks to Own in America (Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 
60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). With his permission, 
the following are a few benefits companies now offer. 

Abbott Laboratories. At the annual meetings, shareholders receive a sampling 
of Abbott』s consumer products such as Selsun Blue, Murine, and Ensure nutritional 
drink. 

American Home Products Corp. Occasionally, the company sends out coupons 
for some of its foods and health care products along with the dividend check. 

Anheuser-Busch Companies, Inc. New shareholders of record are sent a 
letter of welcome, a fact book on the company, and a pamphlet on its dividend 
reinvestment plan. The company makes a point of moving its annual meetings 
around the country. Those who attend get a chance to sample all the company』s 
brews. Shareholders are also entitled to a discount on admission to the company』s 
amusement parks. 

Campbell Soup Company. The company hands out a bag of freebies at the 
annual meeting, including a variety of soups and other Campbell』s products. 

ConAgra, Inc. At the annual meeting, the company passes out a gift pack of 
some of its foods to shareholders, and it sometimes sends out discount offers along 
with its quarterly earnings reports. 

The Gillette Company. Shareholders who attend the annual meeting receive 
an excellent selection of products. Gifts include a Gillette Mach3 razor, dental 
floss, new roller jell pen, and a pack of Duracell Ultra PowerCheck batteries. 


PART ONE: Maximizing Your Investment Options 

H. J. Heinz Company. At the annual meeting, shareholders receive a gift 
package of some of the company』s newer products. 
Hershey Foods Corp. Shareholders attending the annual meeting may be 
treated to a free packet of Hershey』s new product samples as well as a gift certificate 
offering discounts on a variety of food and gift items. 

McDonald』s Corp. A wealth of literature on McDonald』s and its locations and 
product ingredients is available to shareholders (or anyone else requesting it). The 
company also provides an investor hot-line (not toll-free) that gives company news. 

Newell Corp. (Rubbermaid, Inc.) At the annual meeting, the company often 
hands out product samples or special gifts to shareholders. 

Sara Lee Corp. Each year at the annual meeting, Sara Lee shareholders 
receive a gift box of Sara Lee products, including such items as coupons, bath 
soaps, and other company products. 

Schering-Plough Corp. Schering-Plough gives a sample packet of products 
to shareholders at its annual meetings. The packets include such products as Coppertone 
sun tan lotion, Afrin nasal spray, Gyne-Lotrimin, and other over-thecounter 
remedies. 

Walgreen Company. At the annual meeting, shareholders usually receive 
one or two Walgreen products, such as vitamins or other personal care products. 

Using Technical Analysis to Choose Stocks 

Instead of concentrating on a company』s earnings, book value, or products, 
some analysts look only at its stock』s trading action to see whether the stock is 
worth buying or selling. This way of choosing stocks is called technical analysis, 
in contrast to fundamental analysis, which we have focused on so far. 

For the novice, technical analysis can be mysterious and intimidating. Instead 
of understanding a company』s products, you must interpret charts and graphs. 
However, even if you want to concentrate mostly on fundamentals, it is still a good 
idea to glance at the charts and graphs to see what the market action can tell you 
about the stock. The two key indicators that technical analysts use to determine 
whether a stock is headed up or down are price action and volume of trading. 

Price action. Technicians look at a stock』s price history and draw many 
conclusions from it. For example, a stock』s low point is often called its support 
level, meaning that it is likely to find support from stock buyers when it hits that 
price. Conversely, a stock』s high is called its resistance level, meaning that in order 
to lock in their profits, shareholders will tend to sell when the stock reaches that 
price. In general, technicians recommend buying when a stock is near its support 
level and selling as it approaches resistance. 

Volume of trading. The number of shares that a stock trades over a particular 
period of time gives technicians many clues about its future direction. High vol



CHAPTER 3: Picking Winning Stocks 

ume in a stock that is rising in price is considered bullish, and low volume in a 
stock that is falling in price is considered bearish. 

People can dedicate their lives to analyzing each latest wrinkle in a stock』s 
trading action. If you want to learn more about technical analysis, consult the following 
classics in the field: Martin Pring』s Technical Analysis Explained: The Successful 
Investor』s Guide to Spotting Investment Trends and Turning Points (McGraw-
Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill. 
com) and Technical Analysis of Stock Trends, by Robert E. Edwards and John 
Magee (Prentice Hall Professional Publishing, One Lake St., Upper Saddle River, 
NJ 07458; 201-236-7156; 800-382-3419; www.prenticehall.com). 

Choosing Stocks with an Investment Club 

If you don』t want to choose stocks on your own, you have another alternative 
—starting an investment club or joining one that is already up and running. An investment 
club is a group of people, usually between 5 and 30, who pool their 
money and decide on stocks to buy or sell. Club members usually start the club by 
contributing $100 each, then make a monthly deposit of $25 or $50. 

Investing through such a club has several advantages: 

. 
You will hear about stocks you probably never would have heard about on 
your own. Because members of the club will come from all walks of life, 
they often will have insights into companies that are doing well in industries 
in which they work. 
. 
You can gain valuable experience from other members that you can apply 
to your own portfolio. 
. 
Through the club, you can be part of a more diversified portfolio than you 
could probably afford on your own. 
. 
The club will probably pay lower commissions than you would because it 
is buying more shares in each transaction. 
. 
You may make social or business contacts that are important beyond the investment 
club』s scope. 
You might think that putting a group of amateur investors together would be a 
recipe for disaster. In fact, just the opposite is true. The National Association of Investors 
Corporation (NAIC), the trade group for investment clubs, says that more 
than half of all clubs beat the Standard & Poor』s 500 Index every year—a feat 
many investment pros fail to achieve. There seems to be some magic in the 
consensus-style stock selection process that makes many investment clubs successful. 
Most clubs would not agree to invest in the ideas of an eccentric member 
who recommends risky stocks. 


PART ONE: Maximizing Your Investment Options 

Most successful investment clubs have a strategy that guides their stock 
selection. Some clubs might concentrate on local stocks, while others look for 
growth stocks or undervalued companies. Whatever the style, it provides a framework 
for club members to research companies that might be of interest to the club. 

If you want to set up a club, hook up with a good broker who likes working 
with clubs. Although the broker can provide investment ideas and analysts』 reports, 
do not let him or her dominate the club. Remember, the idea of the club is not only 
to make money; it is also to learn about choosing stocks by doing the research 
yourself. A good broker should offer the club attractive discounts on commissions 
not only because he or she wants to keep the club』s business but also because the 
broker wants to capture club members as individual clients. 

Another way to keep commission costs under control is to enroll in the NAIC』s 
Low-Cost Investment Plan. This allows clubs to buy as little as one share of many 
blue chip companies at a minimal fee. It also allows dividends to be reinvested 
automatically at no charge. 

The easiest way to get your club started is to send away for the step-by-step 
manual published by the NAIC (P.O. Box 220, Royal Oak, MI 48068; 248-5836242; 
877-275-6242; www.better-investing.org). The guide will tell you how to get 
a federal tax identification number, open a brokerage account, and set up a record-
keeping system so the club』s treasurer can track deposits and withdrawals. 

Club members are required to report realized gains or losses, as well as dividend 
income, from the club』s portfolio on their personal tax returns every year. On 
the other hand, your portion of the club』s expenses, such as subscriptions to 
newsletters or accounting fees, will earn you deductions if you qualify. 

Most people enjoy their investment club experiences not only as a way to learn 
about and profit from investing but also as a way to have fun. 

Foreign Stocks 

When buying stocks, you do not have to limit yourself to U.S. shares. In fact, 
the U.S. market currently accounts for only about a third of the world』s total stock 
market value. Europe and Asia account for the other thirds. So if you restrict yourself 
to domestic stocks, you exclude two-thirds of the world』s growth potential. 

You don』t have to take an overseas trip to buy foreign stocks. In fact, hundreds 
of foreign-based-corporation stocks are available on the NYSE and AMEX, as well 
as on the Nasdaq NMS. When they trade here, foreign stocks are sold in the form 
of American depositary receipts (ADRs). Technically, an ADR is a receipt for 
shares of the foreign-based corporation and is held in the vault of a U.S. bank. The 
ADR entitles the bearer to all dividends and capital gains that shareholders in the 
home country receive. As a convenience, all dividends are converted from the 
home country currency into dollars before they are paid. Also, ADR holders 


CHAPTER 3: Picking Winning Stocks 

receive quarterly and annual reports in English that adhere to U.S. accounting 
rules. For all practical purposes, ADRs trade just like U.S. stocks. 

Like any investment in foreign securities, ADRs can be affected by swings in 
the value of the U.S. dollar against other currencies. In general, a declining dollar 
boosts the price of an ADR because the company does most of its business in foreign 
currencies that are appreciating. Conversely, a rising dollar tends to depress 
the price of an ADR. 

Because today』s world is so interdependent, you will surely recognize many 
ADR names because they have significant presence in U.S. consumer markets. 
There are hundreds of ADRs traded in the United States today, representing every 
major industrialized country. Following are just a few names of some prominent 
ADRs, along with their product lines and home countries: 

Akzo: pharmaceuticals, Netherlands 

Allied Irish Banks: banking, Ireland 

Anglogold Ltd.: precious metals, South Africa 

Laura Ashley: furnishings, United Kingdom 

Bank Leumi: banking, Israel 

Barclays Bank: banking, United Kingdom 

Benetton Group: clothing, Italy 

British Airways: airline, United Kingdom 

British Energy: gas, electricity, United Kingdom 

BPAmoco: oil, United Kingdom 

British Telecommunications: phone company, United Kingdom 

Cable and Wireless: telecommunications, United Kingdom 

Cadbury Schweppes: food, United Kingdom 

Canadian National Railway Co: railroad, Canada 

China Eastern Airlines Corp: airline, China 

China Telecom: telecommunications, Hong Kong 

Daimler Chrysler AG: automobiles, Germany 

Deutsche Telekom: telecommunications, Germany 

Ducati Motor Holding SPA: motorcycles, Italy 

Elf Aquitaine: oil, France 

Fiat: auto manufacturing, Italy 

France Telecom: telecommunications, France 

Glaxo Wellcome: drugs, United Kingdom 

Hanson: conglomerate, United Kingdom 

Hitachi: consumer electronics, Japan 

Honda Motor: car and motorcycle maker, Japan 

Hong Kong Telecommunications: phone company, Hong Kong 

Imperial Chemical Industries: chemicals, United Kingdom 

KLM Royal Dutch Airlines: airline, Netherlands 


PART ONE: Maximizing Your Investment Options 

L』Oreal: cosmetics, France 

Matsushita: electronics, Japan 

Montedison: chemicals, Italy 

National Westminster Bank PLC: banking, United Kingdom 

News Corporation: media conglomerate, Australia 

NT&T Corp: telecommunications, Japan 

Koninklijke Philips Electronics N.V.: consumer electronics, Netherlands 

Orbital Engine Corporation: industrial, Australia 

Royal Dutch Petroleum*: oil, Netherlands 

Scania: trucks, Sweden 

Seagram Company LTD: liquor, Canada 

Sony Corporation: consumer electronics, Japan 

Telefonos de Mexico: phone company, Mexico 

Toyota Motor Corp: automobiles, Japan 

Unibanco: banking, Brazil 

Unilever*: consumer products, Netherlands 

*These are New York shares, which are foreign common shares traded on the NYSE. 

For further information on ADRs, consult The McGraw-Hill Handbook of 
American Depositary Receipts, by Richard J. Coyle (McGraw-Hill, P.O. Box 543, 
Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). The book describes 
what ADRs are and how they work and offers a complete list of issues, 
with analyses of each company. 

These two best newsletters follow ADRs: The Mercer ADR Review (Mercer 
Inc., 379 W. Broadway, Suite 400, New York, NY 10012; 212-334-6212) and 
Global Investing (Vivian Lewis, P.O. Box 1945, Fort Collins, CO 80522-1945; 
212-758-9480; 800-388-4237; www.adrs@compuserve.com). 

The following are Web sites that specialize in ADR stocks: , 
, , and . 

Making Sense of Stock Tables 

To track the value of stocks in your portfolio or look up the prices of and activity 
in stocks you are thinking of buying, you must be able to decipher stock tables—the 
way most people get this information. They may look intimidating at first, but with a 
little explanation, they can reveal significant data that will help you choose stocks. 

NEWSPAPER STOCK TABLES 

Though there are slight variations between the tables displayed in your local 
newspaper and the ones in national publications like Barron』s, Investor』s Business 
Daily, or The Wall Street Journal, the basic elements of the stock tables remain the 
same. These tables describe the consolidated trading activity in individual stocks, 


CHAPTER 3: Picking Winning Stocks 

combining data from the NYSE, regional exchanges, and the Nasdaq NMS. Most 
newspapers provide more detail for NYSE and AMEX listings than for Nasdaq 
listings. Following is a typical line in the tables: 

52-Week 
High1 Low2 Stock3 Sym4 Div5 Yld6 
PE 
Ratio7 
Vol 
100s8 High9 Low10 Close11 
Net 
Chng12 
35 12 Exxon-XOM 
Mobil 
1.00 2.8 17 3000 34.75 33 34.75 +.50 

The following explanations correspond to the number above each column: 

1. 
High means the highest price that the stock has reached over the past 
52 weeks, up to but not including, yesterday』s trading. The difference 
between the high price and the low price (column 2) of the last year 
indicates whether the stock is stable or volatile. The wider the difference, 
the more volatile the stock』s price. 
2. 
Low means the lowest price that the stock has reached over the past 52 
weeks, up to but not including yesterday』s trading. By comparing the 
numbers in columns 1 and 2 to yesterday』s closing price (column 11), 
you can determine whether the stock is currently trading near its high or 
low price for the past 12 months. 
3. 
This column displays the common stock』s name. Unless the company 
has a short name, it is abbreviated. The stocks are listed alphabetically by 
their full names, so the letters you see might look out of order. 
Several letters occasionally follow a stock』s name. Some are upper case 
and some, lower case. Following are the letters you will see in the tables 
and an explanation of what they mean. 


A or B—There are different classes of stock, such as class A or class B, 
with different voting rights. 
dd—The company lost money in the most recent four quarters. 
f—The stock has changed exchanges within the past month. 
h—The company has a temporary exception to Nasdaq qualifications. 
n—The stock was a new issue during the past year. 
pf—It is a preferred stock issue. 


pp—The holder of the stock owes installments of the purchase price. 
pr—It is preference stock, which has a higher claim on dividends than 
preferred stock, in case of the liquidation of the company. 


rt—It is a right to buy a security at a specified price. 


PART ONE: Maximizing Your Investment Options 

s—The stock has split within the past year by at least 20 percent. 
(For example, a 2-for-1 stock split means that for every share you used to 
have, you now have two shares, and the price of the shares splits in half.) 


un—The stock is a unit, including more than one security. 
v—Trading has been suspended in the primary market. 
vj—The company is in bankruptcy or receivership or is being reorga


nized under bankruptcy law. 
wd—Trades will be settled when the stock is distributed. 
wi—Trades will be settled when the stock is issued. 
wt—The issue is a warrant, giving you the right to buy more stock. 
ww—The stock trades with a warrant attached. 
x—The stock is trading ex-dividend, which indicates that yesterday was 


the first day it traded without the right to receive the latest quarterly 
dividend. The price change is adjusted to reflect this fact. 
xw—The stock trades without a warrant attached. 


4. 
The stock symbol is the trading symbol used to identify the stock by 
computerized quotations systems. 
5. 
The dividend is the dollar amount of the dividend per share paid in cash 
over the past four quarters. In the example, the dividend is $1. The 
dividend rate may have risen or fallen since the last quarterly payment, 
so you should not assume you will receive this amount over the next four 
quarters. Several letters might follow the dividend rate. 
a—extra dividend 
b—the annual rate plus another dividend paid in stock, not cash 
c—a liquidating dividend, which implies that a company is selling off its 

pieces and distributing the proceeds to shareholders as dividends 

e—an irregular dividend, which means that the annual dividend rate is 
based on the latest dividend figure 
f—the dividend at an annual rate but increased for the latest quarter 
g—a dividend paid in Canadian dollars 
i—a dividend declared after a stock dividend or split 
j—a dividend that was paid this year, but recently dividend payments 

were suspended 

k—a dividend that was paid this year, which includes dividends that 
were owed from the past but still not paid (known as dividends in arrears) 
m—the dividend on an annual rate but reduced starting with the latest 

quarter 


CHAPTER 3: Picking Winning Stocks 

p—initial dividend, or the first time this company has paid a dividend 

r—declared or paid in the preceding 12 months, plus a dividend paid in 
stock 
t—paid in stock in the preceding 12 months. This figure is the estimated 

cash value of the stock dividend on the ex-dividend date. 
y—ex-dividend and volume that are noted in full, not in hundreds 

6. 
The yield is how much dividend you receive as a percentage of the stock 
price, rounded off to the nearest tenth of a point. In the example, it is 2.8 
percent, which is the $1 dividend (column 5) divided by the $34.75 stock 
price. The higher the dividend yield, the less volatile the stock usually is, 
and the more appropriate it is for income-oriented investors. 
7. 
PE ratio means price-earnings ratio, which is the stock』s price divided 
by the company』s earnings for the past four quarters, rounded to the 
nearest whole number. In the example, the PE ratio of 17 shows investors 
expect ExxonMobil Corporation to produce solid earnings gains over the 
next year. The higher the PE ratio, the more profit growth investors expect 
from the company. A PE ratio of 20 or more indicates a growth company. 
A PE ratio of less than 10 indicates the company』s stock is not in 
great demand by investors. In two cases, a letter (or letters) follows the 
PE ratio. A cc means the PE ratio is 100 or more and therefore not meaningful. 
A q means that the stock is actually a closed-end fund, which has 
no PE ratio. 
8. 
Vol 100s shows the stock』s trading volume in yesterday』s market in 
hundreds of shares. In the example, 3,000 means that 300,000 shares 
were traded. By watching the volume pattern over several days, you can 
tell whether the volume of trading is low or high. A z following the volume 
means that it is the total number of shares traded. An underlined z 
means that the volume on this day was particularly heavy, which might 
indicate that there were important corporate developments. 
9. 
A stock』s high is the highest price the shares traded during yesterday』s 
session. In the example, that was $34.75 per share. A u following the 
high means that this price is a 52-week high as well. 
10. 
A stock』s low is the lowest price the shares traded during yesterday』s 
session. In the example, that was $33 per share. A d following the low 
means that this price is a 52-week low as well. 
11. 
The close (sometimes labeled last) is the price of the shares when trading 
stopped. In the example, ExxonMobil Corporation stock closed yesterday 
at $34.75 per share, which was also its highest price of the day. 
The high, low, and closing prices are all expressed in dollars and cents. 

PART ONE: Maximizing Your Investment Options 

12. 
The net change is the amount the price of the shares moved up or down 
compared to the previous day』s close. In the example, the shares rose 
one-half of a point, or 50 cents per share. A 「+」 following the change 
means that the shares rose, and a 「.」 means the shares fell in price. Net 
changes are expressed in minimums of eighths of a point. 
DIVIDEND AND EARNINGS REPORT TABLES 

The other two important tables you will see in many newspapers report both 
action on dividends and quarterly earnings. 

Dividend report tables. These tell you whether a corporation』s board of 
directors declared a higher, a lower, or the same dividend as the previous quarter or 
omitted the payout altogether. 

Stock of Date 
Stock1 Period2 Amount3 Record 4 Payable5 
ExxonMobil Corp. Q .25 3–10 3–30 

The following explanations correspond to the number above each column: 

1. 
The first column states the name of the company declaring the dividend. 
2. 
Period refers to the time in which the dividend will be paid, normally Q, for 
quarterly. A means annually; M, monthly; S, semiannually. 
3. 
Amount is the per-share amount of the dividend. In the example, a $.25 
quarterly dividend means an annual rate of $1. An h following the figure 
means that the amount is paid from earned income. A k signifies that it is 
paid from realized capital gains, usually taken by a closed-end mutual 
fund. An n means that it is an initial distribution or the first one ever paid 
by this stock. A t signals that it is the approximate dollars amount of the 
dividend from a foreign company traded in the United States as an ADR. 
4. 
The fourth column indicates that the dividend will be paid to shareholders 
of record on the date noted—in the example, March 10. The day after the 
record date, the stock goes ex-dividend, meaning that buyers will no 
longer receive the dividend. So if you buy the stock on March 11, in the 
example, you will not receive the $.25 dividend. However, the stock 
normally drops in price by the amount of the dividend when it enters the 
ex-dividend period. 
5. 
The date payable is the date the dividend is actually paid. 

CHAPTER 3: Picking Winning Stocks 

Earnings report tables. Companies report their earnings on a quarterly basis, 
and newspapers usually run columns of reports that look like the following: 

ExxonMobil Corporation (N) 

2 Quar Dec. 31: This Year Last Year 
3 Revenues $20,000,000 $18,000,000 
4 Net income 1,000,000 800,000 
5 Share earns .10 .08 
6 Avg. shares outstanding 10,000,000 9,000,000 

The following explanations correspond to the number beside each line: 

1. 
The first line notes the company that is reporting earnings. A letter will 
follow in parentheses. 
A—American Stock Exchange 
B—Boston Stock Exchange 
F—foreign stock exchange 
M—Midwest Stock Exchange 
Mo—Montreal Stock Exchange 
N—New York Stock Exchange 
O—over-the-counter market 
P—Philadelphia Stock Exchange 
Pa—Pacific Stock Exchange 
T—Toronto Stock Exchange 
In the example, ExxonMobil Corporation trades on the NYSE. 


2. 
The quarter that is being reported ends on the date noted in line 2. In the 
example, the quarter ends on December 31. 
3. 
Revenues is the gross sales figure for the company, comparing the latest 
quarter with the same quarter a year ago. In the example, sales rose from 
$18 million to $20 million. 
4. 
The fourth line reports net income, the amount of profit earned in dollars 
during the quarter. This also is compared to the same quarter a year ago. 
5. 
Share earns indicates how much of the profit noted in the previous line is 
attributable to each common share outstanding. This earnings-per-share 

PART ONE: Maximizing Your Investment Options 

number is used to compute the PE ratio. It also is compared to the same 
quarter a year ago. 

6. 
Line 6 shows the number of common shares that were outstanding, on average, 
during the quarter. An increase in the number of shares means that 
the same amount of earnings would create a lower earnings-per-share figure. 
Fewer shares outstanding means that the same earnings would create 
a high earnings-per-share result. 
Often, earnings report tables will use additional lines to account for special 
circumstances. Some of the most common abbreviations you will see include the 
following: 

Acctg adj—a significant accounting adjustment during the quarter 

Extrd chg—an extraordinary charge during the quarter, such as a losing business 
was sold or a division』s assets were written down to a lower value 

Extrd cred—an extraordinary credit during the quarter, such as a business』s 
value was upgraded or a large profit was made by selling securities 

Inco cnt op—income from continuing operations, or businesses that continue 
as part of the company 

Inco dis op—income from discontinued operations, which means the company 
received income during the quarter from a business that has since been 
sold or liquidated 

Usually, earnings reports are released the trading day before you see them in 
the newspaper, so the stock market has already had time to react positively or 
negatively. Earnings report tables are only summaries of the most important 
aspects of the reports. As a shareholder, you will receive a more detailed quarterly 
earnings report in the mail a few weeks after it is released. 

Using Your Computer to Invest in Stocks 

Perhaps in no other area of personal finance is the computer better suited to 
help you make money than in picking and following a stock portfolio. The computer』s 
ability to store and analyze data, get you online to find the latest news, and 
execute trades with lightning speed are perfectly suited to investing in individual 
stocks. 

The first step in buying stocks, of course, is analyzing what individual securities 
are worth buying at current prices. By using a combination of analysis software 
and Web sites, you can get the data you need and the tools to crunch numbers 
to produce the result you want. Some software does fundamental analysis, screen



CHAPTER 3: Picking Winning Stocks 

ing stocks for price-earnings ratios, earnings growth rates, yields, book values, and 
the like. Other programs specialize in technical analysis, trying to predict future 
price movements based on trading patterns. There are online versions of both fundamental 
and technical analysis programs available at the Web sites listed in the 
「Resources」 section of this chapter. 

Web sites also allow you to keep up with news developments as they affect 
individual stocks. You can either search out stocks that have announced major developments 
on a particular day, or look up a company』s history and see all the news 
stories about that company for the past few months. In either case, it is a good idea 
for you to be familiar with a company』s financial, management, and operational 
history before you invest in it. The online world is loaded with financial advisors 
recommending individual stock trades. Before you take any of their counsel, you 
should know what you are getting into. 

Once you have bought several stocks, software and Web sites will allow you to 
track your portfolio』s value. You also can place price alerts so that the computer 
will signal you when a stock hits a certain price at which you want to buy or sell 
shares. You also can enter alerts to tell you when there is unusually heavy trading 
activity in a stock, which is often a signal that major news is about to break. 

Of course, there are thousands of Web sites on the Internet offering help in 
picking individual stocks. In the following Resources section, I have chosen the 
best, easiest-to-use, and most comprehensive sites to help you put the power of 
your computer to work for you picking winning stocks. 

Resources 

BOOKS 

All About Stocks: The Easy Way to Get Started, by Esme E. Faerber (McGraw-Hill, 

P.O. Box 543, Blacklick, OH 43004, 800-634-3961; www.mcgraw-hill.com). Covers 
stock market basics for newcomers with concise and understandable answers to 
today』s most-asked stock market questions. 
Beating the Street, by Peter Lynch (Simon & Schuster, 100 Front St., Riverside, NJ 
08075; 212-698-7000; 800-223-2348; www.simonandschuster.com). Written by the 
legendary manager of the Fidelity Magellan Fund, who explains how he picks stocks. 
Details how he first heard about companies and where he found the information so 
critical to deciding whether to invest in them. Also offers advice on buying mutual 
funds and putting together an investment program. 

Benjamin Graham on Value Investing: Lesson from the Dean of Wall Street, by 
Janet Lowe (Penguin Putnam, 405 Murray Hill Pkwy., East Rutherford, NJ 07073; 
800-788-6262; www.penguinputnam.com). A book about the famous investor Benjamin 


PART ONE: Maximizing Your Investment Options 

Graham that includes his successful value investment philosophy and his investment 
record. 

Buying Stocks Without a Broker, by Charles B. Carlson (McGraw-Hill, P.O. Box 
543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Shows how individual 
investors can avoid paying broker』s commissions by buying stock directly from 
the issuing company. 

Common Sense Global Investing: How to Successfully Navigate the International 
Marketplace, by Maurice K. Thompson (Dearborn Trade, 155 N. Wacker Dr., Chicago, 
IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Helps the investor 
diversify and profit from today』s volatile international markets. Shows how to invest in 
the best countries for stability and profits. 

The Complete Idiot』s Guide to Online Investing, by Douglas Gerlach (MacMillan 
Publishing Company, 866 Third Ave., New York, NY 10022; 800-428-5331; 
www.macmillan.com). Provides users with an easy-to-understand book on the basics 
of investing and computing, researching options, and using the Internet for portfolio 
management. 

Contrarian Investing: Buy and Sell When Others Won』t and Make Money Doing It, 
by Anthony M. Gallea and William Patalon, III (New York Institute of Finance, 2 
World Trade Center, 17th Floor, New York, NY 10048; 212-390-5000; 800-227-6943; 
www.nyif.com). Describes contrarian strategy and shows best percentage of a portfolio 
to have in contrarian stocks. 

Contrarian Investment Strategies: The Next Generation: Beat the Market by Going 
against the Crowd, by David N. Dreman (Simon & Schuster, 1230 Avenue of the Americas, 
New York, NY 10020; 212-698-7000; 800-223-2348; www.simonandschuster. 
com). Combines proven techniques for selecting undervalued stocks with fresh insights 
on how to defy and thereby profit from the popular generally accepted fears or 
optimism of the moment. 

The Craft of Investing: Growth and Value Stocks, Emerging Markets, Market Timing, 
Mutual Funds, Alternative Investments, Retirement and Estate Planning, Tax Savings, 
by John Train (HarperBusiness, P.O. Box 588, Dunmore, PA 18512; 
212-207-7000; 800-331-3761; www.harpercollins.com). Addresses everything from 
the psychology of the market to practical portfolio management tips. Explains growth 
investing, value investing, when to buy, and when to sell. 

The Dictionary of Finance and Investment Terms, by John Downes and Jordan E. 
Goodman (Barron』s Educational Series, 250 Wireless Blvd., Hauppauge, NY 11788; 
631-434-3311; 800-645-3476; www.barronseduc.com). The standard reference work 
of finance and investment, defining more than 5,000 terms in simple language. 

The Dividend Rich Investor: Building Wealth with High Quality, Dividend Paying 
Stocks, by Joseph Tigue and Joseph Lisanti (McGraw-Hill, P.O. Box 543, Blacklick, 


CHAPTER 3: Picking Winning Stocks 

OH 43004; 800-634-3961; www.mcgraw-hill.com). Learn why dividends are so important, 
what to look for in a dividend paying stock, and red-flag signals to avoid. 

Divining the Dow: 100 of the World』s Most Widely Followed Stock Market Prediction 
Systems, by Richard J. Maturi (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 
800-634-3961; www.mcgraw-hill.com). Explains all of the major stock market prediction 
systems and how to use them to forecast stock price movements. 

Eight Steps to Seven Figures, by Charles B. Carlson (Bantam Books–Random 
House, 400 Hahn Rd., Westminster, MD 21157; 800-733-3000; www.randomhouse. 
com). The author brings together in-depth interviews with over 200 everyday people 
whose investments have made them millionaires. 

Electronic Trading: Day Trading Online, a Comprehensive Guide to One of 
Today』s Hottest Forms of Trading, by Christopher A. Farrell (New York Institute of Finance, 
2 World Trade Center, 17th Floor, New York, NY 10048; 212-390-5000; 800227-
6943; www.nyif.com). Overview of how to make a successful living, whether 
full-time or part-time, by trading over the Internet. 

The Empowered Investor, by Robert E. Karoly (Dearborn Trade, 155 N. Wacker 
Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Investors 
are shown how to practice safe investing and how to recognize 「rogue」 stockbrokers. 
Learn about the mysteries of brokerage firm statements, concealed losses, and 
firms』 attitudes toward their clients. 

The Finance and Investment Handbook, by John Downes and Jordan E. Goodman 
(Barron』s Educational Series, 250 Wireless Blvd., Hauppauge, NY 11788; 631-4343311; 
800-645-3476; www.barronseduc.com). The complete book about everything 
you need to know about finance and investing. Contains explanations of investment 
alternatives and how to read the financial pages of newspapers and annual reports; a 
dictionary of 5,000 terms; and lists of stocks, mutual funds, futures and options, currencies, 
and more. 

The First Time Investor: How to Start Safe, Invest Smart & Sleep Well, by Larry 
Chambers (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www. 
mcgraw-hill.com). Packed with easy-to-use information on every aspect of investing. 

Getting Started in Online Investing, by David L. Brown and Kassandra Bentley 
(John Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875-1272; 212-850-6000, 800-2255945; 
www.wiley.com). Has current information on the best sites for research and trading 
news and has a well-informed up-to-date primer that helps investors navigate the 
information explosion connected with online investing. 

Getting Started in Stocks, by Alvin Hall (John Wiley & Sons, 1 Wiley Dr., Somerset, 
NJ 08875-1272; 212-850-6000; 800-225-5945; www.wiley.com). A primer on 
the basics of stock investing. 


PART ONE: Maximizing Your Investment Options 

The Gorilla Game: Picking Winners in High Technology, by Geoffrey A. Moore, 
Paul Johnson, and Tom Kippola (HarperBusiness, P.O. Box 588, Dunmore, PA 18512; 
212-207-7000; 800-331-3761; www.harpercollins.com). Helps reader find high-tech 
stocks that dominate their market niches, looks at how the market values technology 
stocks, and provides case studies where 「gorillas」 have been born. 

How the Stock Market Works, by John Dalton (New York Institute of Finance, 2 
World Trade Center, 17th Floor, New York, NY 10048; 212-390-5000; 800-227-6943; 
www.nyif.com). Explains the workings of the securities industry, including the mechanisms 
of the market, types of stocks, buy/sell and processing procedures, and the 
major theories of market analysis. 

How to Be a Value Investor: Essential Guides to Today』s Most Popular Investment 
Strategies, by Lisa Holton (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800634-
3961; www.mcgraw-hill.com). Explains how to search for bargains, how to fit 
stocks into an overall financial strategy, how to establish a value portfolio, and how to 
gauge investment performance over time. 

How to Buy Stocks, by Louis Engel and Henry R. Hecht (Time Warner Trade Publications, 
3 Center Plaza, Boston, MA 02108; 800-343-9204; www.timewarner.com). 
A readable book about the stock market that has become the classic in the field. 

How to Buy Stocks the Smart Way, by Stephen Littauer (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). A guide to reducing risk, spotting rising stocks, and getting the most from 
investments. 

How to Invest $50–$5,000: The Small Investor』s Step-by-Step, Dollar-by-Dollar 
Plan for Low-Risk, High-Value Investing, by Nancy Dunnan (HarperBusiness, P.O. 
Box 588, Dunmore, PA 18512; 212-207-7000; 800-331-3761; www.harpercollins. 
com). Written with the beginning investor in mind; covers the full range of personal finance 
investment. 

How to Invest the Smart Way: In Stocks, Bonds, and Mutual Funds, Stephen L. Littauer 
(Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800245-
2665; www.dearborntrade.com). How to achieve financial independence with as 
little as $50 a month to invest. Starts from basics and covers planning, strategies, techniques, 
and markets. Covers stocks, bonds, and mutual funds. 

How to Profit from Reading Annual Reports, by Richard B. Loth (Dearborn 
Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www. 
dearborntrade.com). Explains how to interpret the numbers and language of annual 
reports. 

If You』re Clueless About the Stock Market and Want to Know More, by Seth Godin 
(Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-2452665; 
www.dearborntrade.com). 


CHAPTER 3: Picking Winning Stocks 

InvestBeyond.com: A New Look at Investing in Today』s Changing Markets, by Victoria 
Collins (Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 
800-245-2665; www.dearborntrade.com). 

Investing on a Shoestring, Barbara M. O』Neill (Dearborn Trade, 155 N. Wacker Dr., 
Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Takes 
readers step-by-step through the process of putting together an investing plan, including 
investing with small dollar amounts, choosing the right financial advisor, and understanding 
the power of compound interest, and offers resources for shoestring investors. 

Investing Online for Dummies, by Kathleen Sindell (IDG Books, 919 E. Hillsdale 
Blvd., Suite 400, Foster City, CA 94404; 650-653-7000; 800-434-3422; www.idg.com, 
www.dummies.com). Covers all the basics for the online investor, including setting 
up stock screens, selecting mutual funds, looking for IPOs, and online banking and 
trading. 

Investment Clubs: A Team Approach to the Stock Market, by Kathryn Shaw (Dearborn 
Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; 
www.dearborntrade.com). A simple step-by-step guide that shows the investor how to 
start and run a successful money-making investment club. 

Mastering Online Investing, by Michael C. Thomsett (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Offers readers a program and an approach to Internet investing that covers the 
basics within the framework of Internet tools and resources. Investors will be able to 
find online sources about a company』s fundamentals, analyze mutual fund performance, 
and use the Internet to track an options portfolio. 

The Neatest Little Guide to Stock Market Investing, by Jason Kelly (Penguin-
Putnam, 405 Murray Hill Parkway, East Rutherford, NJ 07073; 800-788-6262; www. 
penguinputnam.com). Provides friendly guidance, sound financial expertise, and all 
the information needed to make smart stock choices. 

The New Money Masters, by John Train (HarperCollins, P.O. Box 588, Dunmore, 
PA 18512; 800-331-3761; www.harpercollins.com). Profiles some of the most successful 
money managers of all time—people you can emulate. 

The 100 Best Internet Stocks to Own for the Long Run: Investing in the Internet 
Economy and the Companies That Make It Click, by Gene Walden and Tom Shaughnessy 
(Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800245-
2665; www.dearborntrade.com). Includes a compilation of the top Internet 
industries, an industry overview, analysis of nine key sectors, explanation of key technologies, 
market niches, the economic business model, and future prospects. 

The 100 Best Stocks to Own for Under $25, by Gene Walden (Dearborn Trade, 155 

N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). 

PART ONE: Maximizing Your Investment Options 

The 100 Best Stocks to Own in America, by Gene Walden (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Profiles 100 top-quality growth companies and reveals shareholders』 perks each 
company offers. 

One Up on Wall Street, by Peter Lynch (Simon & Schuster, 200 Old Tappan Rd., 
Old Tappan, NJ 07675; 800-223-2336; www.simonandschuster.com). A compendium 
of sensible advice from the former manager of Fidelity』s legendary Magellan Fund. 

Online Investing, by Jon D. Markman (Microsoft Press, One Microsoft Way, Redmond, 
WA 98052-6399; 425-882-8080; www.microsoft.com). Learn how to find, evaluate, 
and use sites that offer the most comprehensive sets of fundamental data, 
technical-analysis charting tools, and corporate financial statements. 

Online Investing: Become a Successful Internet Investor, by Reporters and Editors 
of The Wall Street Journal (Random House, Order Dept., 400 Hahn Rd., Westminster, 
MD 21157; 800-733-3000; www.randomhouse.com). This book is loaded with Web 
sites and information about online investing. Discusses regulator sites, calculators, 
screening, and charting, and sites where these can be found. 

Online Investing the Smart Way, by Stephen L. Littauer (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Identifies the best Internet sites for investors, recommends online brokers, shows 
how to use computer programs to screen for investment selections, offers tips on online 
investing, and warns against scams. 

Online Investing with Quicken, by Susan Price and Maria Langer (McGraw-Hill, 

P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Along 
with the financial software package Quicken, this book shows the reader how to track 
a portfolio on the Web. Unique blend of investing book with Quicken coverage. Offers 
worksheets, charts, and sidebars. 
The Online Trading Survival Guide, by Jack Guinan (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). 

Profiting from Emerging Market Stocks, by Mitchell Posner (New York Institute of 
Finance, 2 World Trade Center, 17th Floor, New York, NY 10048; 212-390-5000; 800227-
6943; www.nyif.com). Explains exactly how investors can realize big gains in the 
global market. Features a unique step-by-step approach to global investing. 

Profiting from IPOs and Small Cap Stocks, by Norman H. Brown (New York Institute 
of Finance, 2 World Trade Center, 17th Floor, New York, NY 10048; 212-3905000; 
800-227-6943; www.nyif.com). Advice on investing in small-cap stocks through 
initial public offerings. 


CHAPTER 3: Picking Winning Stocks 

A Random Walk Down Wall Street, by Burton G. Malkiel (W.W. Norton & Co., 
Inc., 500 Fifth Ave., New York, NY 10110; 212-354-5500; www.wwnorton.com). This 
comprehensive guide to investing in the stock market is an investment classic; it covers 
stock analysis and investment strategies. 

Security Analysis: Principles and Techniques, by Benjamin Graham and David 
Dodd (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www. 
mcgraw-hill.com). Written by the fathers of fundamental stock analysis, this book is 
their seminal work on the subject. Might be too dense for first-time investors. 

Six Secrets to Successful Technology Investing in the New Millennium, by Michael 
Murphy (Technology Investing, Dept 40Q001, 7811 Montrose Rd., Potomac, MD 
20897-5961). The author suggests that using traditional methods to evaluate today』s 
tech stocks will not work and will lead to losses. He describes a different method in 
this book which he claims will provide good returns. 

The Small Investor Goes to Market: A Beginner』s Guide to Buying Stocks, by 
Jim Gard (Ten Speed Press, P.O. Box 7123, Berkeley, CA 94707; 510-559-1600; 
800-841-2665; www.tenspeedpress.com). This book takes the novice step-by-step 
through the process of evaluating a stock, working with a broker, and managing 
investments. 

Socially Responsible Investing: Making a Difference and Making Money, by Amy L. 
Domini (Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800245-
2665; www.dearborntrade.com). Select investments to meet specific social criteria, 
environment, justice, etc.; investors can profit and feel good about making a 
difference with their investments. 

The Stock Market, by Dian Vujovich (IDG Books, 919 E. Hillsdale Blvd., Suite 
400, Foster City, CA 94404; www.idg.com, www.dummies.com). Offers strategies on 
when to buy or when to sell stocks, tips on using discount brokers and online services, 
and descriptions of different stock categories. 

Stock Picking: The 11 Best Tactics for Beating the Market, by Richard Maturi 
(McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgrawhill.
com). Simple, time-tested techniques for choosing winning stocks in any market 
environment. 

Take Stock: A Roadmap to Profiting from Your First Walk Down Wall Street, by 
Ellis Traub (Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 
800-245-2665; www.dearborntrade.com). Beginning investors can invest in individual 
companies using the interactive, step-by-step process outlined in this book. Includes a 
CD-ROM to allow interactive use. 


PART ONE: Maximizing Your Investment Options 

Teach Yourself Investing Online, by Thomas S. Gray and Claire Mencke (IDG 
Books, 919 E. Hillsdale Blvd., Suite 400, Foster City, CA 94404; 650-653-7000; 800434-
3422; www.idg.com, www.dummies.com). Step-by-step instructions on how to 
properly research, buy, sell, and manage investments. 

24 Essential Lessons for Investment Success: Learn the Most Important Investment 
Techniques from the Founder of Investor』s Business Daily, by William J. O』Neil 
(McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgrawhill.
com). William O』Neil distills his 40 years of experience, study, and analysis of the 
market into a series of lessons about how to buy and sell stocks. 

Understanding Wall Street, by Jeffrey Little and Lucian Rhodes (Tab Books/ 
McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgrawhill.
com). An in-depth look at how to evaluate stocks and bonds and how the brokerage 
industry works. 

The Unofficial Guide to Investing, by Lynn O』Shaughnessy (IDG Books, 919 E. 
Hillsdale Blvd., Suite 400, Foster City, CA 94404; 650-653-7000; 800-434-3422; 
www.idg.com, www.dummies.com). Demystifies the range of investment options 
available today and provides practical tools that will help readers make financially 
sound decisions. 

Value Investing Made Easy, by Janet Lowe (McGraw-Hill, P.O. Box 543, 
Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Describes value investing 
methods as espoused and used by Benjamin Graham in an easy-to-readand-
understand format. 

Value Investing Today, by Charles Brandes (McGraw-Hill, P.O. Box 543, Black-
lick, OH 43004; 800-634-3961; www.mcgraw-hill.com). International look at value 
investment approach from one of its most famed practitioners. 

What You Need to Know Before You Invest: An Introduction to the Stock Market 
and Other Investments, by Rod Davis (Barron』s Educational Series, 250 Wireless 
Blvd., Hauppage, NY 11788; 516-434-3311; 800-645-3476; www.barronseduc.com). 
Explains the stock market, how it works, and the Dow. Advises how to select a broker, 
open a brokerage account, invest in bonds, mutual funds, and how to read financial 
statements. 

Winning on Wall Street, by Martin Zweig (Time Warner Books, 3 Center Plaza, 
Boston, MA 02108; 800-343-9204; www.timewarner.com). Written by a famous 
money manager and regular panelist on the Wall Street Week TV show, who explains 
how to choose winning stocks according to his theories on the economy and investor 
psychology. 

Woman』s Guide to Investing, by Virginia B. Morris (McGraw-Hill, P.O. Box 543, 
Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). This pocket-sized 
guide is a broad-based investing book that tackles all aspects of investing, based on research 
of women』s issues. 


CHAPTER 3: Picking Winning Stocks 

The Worth Guide to Electronic Investing: Everything You Need to Know to Use 
Your Home Computer to Make More Money in the Stock Market, by Jim Jubak 
(HarperBusiness, P.O. Box 588, Dunmore, PA 18512; 212-207-7000; 800-331-3761; 
www.harpercollins.com). Explains how to analyze stocks, choose mutual funds, and 
take advantage of the extensive financial resources available online. 

MAGAZINES 

Weekly and monthly investment magazines usually give far more detail on 
individual stocks than do newspapers. Articles are also researched in more depth, 
giving you a better basis to judge whether you are interested in a particular company. 
The best magazines are as follows: 

Business Week (McGraw-Hill, 1221 Avenue of the Americas, 39th Floor, New 
York, NY 10020; 212-512-2511; www.businessweek.com). Although it concentrates 
more on the economy and business strategy, Business Week also has columns about 
Wall Street and personal investing. 

Equities (160 Madison Ave., 3rd Floor, New York, NY 10016; 212-213-1300; 
800-237-8400, ext. 21, for credit card orders and subscriptions only; members.aol. 
com/equitymag/index). Formerly known as OTC Review, focuses on the outlook for 
individual emerging growth stocks. 

Forbes (60 Fifth Ave., New York, NY 10011; 212-620-2200; 800-888-9896; 
www.forbes.com). Known for its acerbic and witty style. Uncovers good stocks and 
exposes stocks it considers overpriced. 

Fortune (1271 Avenue of the Americas, New York, NY 10020; 212-522-1212; 
800-541-1000; www.fortune.com). A business magazine with extensive coverage of 
Wall Street and stock selection. Fortune also publishes an annual Investor』s Guide with 
many stock ideas. 

Individual Investor (125 Broad St., New York, NY 10004; 888-616-7677; www. 
individualinvestor.com). Specializes in coverage of individual stocks for individual 
investors. 

Money (Time and Life Building, Rockefeller Center, New York, NY 10020; 
212-522-1212; 800-541-1000; www.pathfinder.com/money). A popular magazine that 
publishes several articles each month on individual stocks and mutual funds. It also 
covers all other areas of personal finance, including banking, taxes, real estate, and financing 
college education. 

NEWSLETTERS 

Hundreds of newsletters give stock advice. These letters usually reflect the 
personality and interests of the letter writer. Some use technical analysis and are 
therefore loaded with graphs and charts. Others rely on fundamental analysis and 
explain the prospects for a company』s business. Still others focus on takeovers, for



PART ONE: Maximizing Your Investment Options 

eign stocks, IPOs, or emerging growth stocks. Some newsletters provide solid advice, 
but many do not. To some extent, the success of a letter』s recommendations 
depends on how the kinds of stocks it favors are doing at the moment. 

The referee for this chaotic field is Mark Hulbert, who publishes the Hulbert 
Financial Digest, which ranks the monthly performance of recommendations in 
the most influential newsletters. To find out which letter has had a good record recently, 
you can subscribe to the Digest at 5051 B. Blacklick Rd., Annandale, VA 
22003; 703-750-7060; . Newsletter performance is also 
tracked by Timer Digest (P.O. box 1688, Greenwich, CT 06836; 203-629-3503; 
800-356-2527). 

For more on what kind of stock information each letter contains, you can call 
or write it at the phone number or address given below. In many cases, the 
newsletter will send you a free sample so you can see what the letter is like. You 
can also get at trial subscription to most of these newsletters through Select Information 
Exchange (244 W. 54th St., New York, NY 10019; 212-247-7123; 
www.stockfocus.com). The following list of newsletters covers the ones tracked by 
Hulbert, which are the most widely followed publications: 

Achieve Profits (2800 S. Ocean Blvd., #5-G, Boca Raton, FL 33432; 561-393-8438) 

The Aden Forecast (P.O. Box 66710, St. Louis, MO 63166; 888-ADENMKT) 

All Star Alpha Fund Timer (P.O. Box 203427, Austin, TX 78720; 800-299-4223) 

All Star Fund Trader (P.O. Box 203427, Austin, TX 78720; 800-299-4223) 

Analyst Watch (155 N. Wacker Dr., Chicago, IL 60606; 800-399-6659) 

BI Research (P.O. Box 133, Redding, CT 06875; 203-270-9244) 

Babson-United Investment Report (400 Talcott Ave., Watertown, MA 02472; 781235-
0900) 

Beating the Market (Audio-Tech Business Book Summaries Inc., 825 75th St., #C, 
Hinsdale, IL 60521; 800-776-1910) 

Beating the Dow (P.O. Box 2069, Rivervale, NJ 07675; 800-477-3400) 

Bert Dohmen』s Wellington Letter (1132 Bishop St., Suite 1500, Honolulu, HI 96813; 
808-545-2243) 

The Big Picture (1750 Old Meadow Rd., Suite 301, McLean, VA 22102; 800-8322330) 


Blue Chip Advisor (12254 Nicollet Ave., South, Burnsville, MN 55337; 612-8080148) 


The Blue Chip Investor (575 Anton Blvd., #510, Costa Mesa, CA 92626; 714-6413579) 



CHAPTER 3: Picking Winning Stocks 

Bob Brinker』s Marketimer (P.O. Box 229, Irvington, NY 10533; 914-591-2655) 
Bob Carlson』s Retirement Watch (3700 Annandale Rd., Annandale, VA 22033; 

800-552-1152) 

The Bowser Report (P.O. Box 6278, Newport News, VA 23606; 757-877-5979) 

The Buy Low, Sell High! Small-Cap Canadian Stocks Review (CanStock Informa


tion Services Corp. 35-750, Fortune Dr., Kamloops, B.C., CANADA V2B-2L2; 250554-
3101) 

The Buyback Letter (3625 Surfwood Rd., Malibu, Ca 90265; 310-459-9196) 

The Cabot Market Letter (P.O. Box 3067, 176 North St., Salem, MA 01970; 978745-
5532) 

Cabot』s Internet Stock of the Week (176 North St., P.O. Box 2049, Salem, MA 
01970; 978-745-5532) 

California Technology Stock Letter (Murenove, Inc., P.O. Box 308, Half Moon 
Bay, CA 94019; 650-726-8495) 

The Chartist (P.O. Box 758, Seal Beach, CA 90740; 562-596-2385) 

The Chartist Mutual Fund Letter (P.O. Box 758, Seal Beach, CA 90740; 562-5962385) 


Closed-End Country Fund Report (725 15th St., #501, Washington, DC 20005; 
202-783-7051) 

Closed-End Fund Digest & Real Estate Securities (4521 Campus Dr., PMB, #283, 
Irvine, CA 92612; 949-737-5966) 

The Contrarian』s View (132 Moreland St., Worcester, MA 01609; 508-757-2881) 

Coolcat Explosive Small Cap Growth Stock Report (c/o El Sol, 408 Tamarack, 
Sanger, CA 93657; 559-875-0613) 

Crawford Perspectives (1382 Third Ave., Suite 403, New York, NY 10021; 212744-
6973) 

Dennis Slothower』s on the Money (2230 N. University Pkwy., Suite 9-D, Provo, 
UT 84604; 801-373-3381) 

The Dines Letter (P.O. Box 22, Belvedere, CA 94920; 800-84LUCKY) 

Donoghue』s Action Gram (P.O. Box 309, Milford, MA 01757; 800-982-2455) 

Dow Theory Forecasts (7412 Calumet Ave., Hammond, IN 46324; 219-931-6480) 

Dow Theory Letters (P.O. Box 1759, La Jolla, CA 92038; 619-454-0481) 


PART ONE: Maximizing Your Investment Options 

The Elliott Wave Financial Forecast (P.O. Box 1618, Gainesville, GA 30503; 770536-
0309) 

Equity Fund Outlook (P.O. Box 76, Boston, MA 02117; 800-982-0055) 

Eric Dany』s Stock Prospector (16 Thornwood Ct., Moline, IL 61265; 309-7369376) 


The F.X.C. Newsletter (62-19 Cooper Ave., Glendale, NY 11385; 800-FXC-0992) 

Fabian Premium Investment Resource (P.O. Box 2538, Huntington Beach, CA 
92647; 800-950-8765) 

Fidelity Independent Advisor (P.O. Box 387, Williamstown, MA 01267; 800-5483797) 


Fidelity Insight (Mutual Fund Investors Association, P.O. Box 9135, Wellesley 
Hills, MA 02481; 800-444-6342) 

Fidelity Investor (Phillips Publishing, 7811 Montrose Rd., Potomac, MD 20859; 
800-718-8291) 

Fidelity Monitor (P.O. Box 1270, Rocklin, CA 95677; 800-397-3094) 

Fidelity Sector Investor (7811 Montrose Rd., Potomac, MD 20854; 800-219-8596) 

Ford Investment Review (11722 Sorrento Valley Rd., Suite I, San Diego, CA 
92121; 858-755-1327) 

fredhager.com (2000 Post Rd., Fairfield, CT 06430; 203-319-0115) 

Fund Kinetics Investor (1200 Westlake Ave., N., Suite 700, Seattle, WA 98109; 
800-423-4893) 

FundAdvice.com (1200 Westlake Ave., N., Suite 700, Seattle, WA 98109; 800423-
4893) 

Fundline (P.O. Box 663, Woodland Hills, CA 91365; 818-346-5637) 

FundsNet Insight (20 William St., P.O. Box 9131, Wellesley Hills, MA 02181; 
617-369-2500) 

Futures Hotline/Mutual Fund Timer (P.O. Box 6275, Jacksonville, FL 32236; 904693-
0355) 

Gerald Appel』s Systems and Forecasts (150 Great Neck Rd., Great Neck, NY 
11021; 516-829-6444) 

Gerald Perritt』s Mututal Fund Letter (12514 Starkey Rd., Largo, FL 33773; 800326-
6941) 

The Gilder Technology Report (P.O. Box 660, Housatonic, MA 01236; 413-2740211) 



CHAPTER 3: Picking Winning Stocks 

Global Investing (1040 First Ave., #305, New York, NY 10022; 800-388-4-ADR) 
Global Markets Advisory (P.O. Box 572494, 5049 Cottonwood Ln., Salt Lake 

City, UT 84157; 801-424-2385) 

Good Fortune (P.O. Box 1500, Woodland, CA 95776; 530-661-7394) 

The Granville Market Letter Inc. (P.O. Box 413006, Kansas City, MO 64141; 816


474-5353) 
Graphic Fund Forecaster (6 Pioneer Circle, P.O. Box 673, Andover, MA 01810; 

800-532-2322) 

Ground Floor (P.O. Box 2069, Rivervale, NJ 07675; 800-477-3400) 

Growth Fund Guide (Growth Fund Research Building, Box 6600, Rapid City, SD 

57709; 605-341-1971) 

Growth Stock Outlook (P.O. Box 15381, Chevy Chase, MD 20825; 301-654-5205) 

Hidden Value Stocks (P.O. Box 22431, Minneapolis, MN 55422; 612-533-0474) 

Hussman Econometrics (3525 Ellicott Mills Dr., Suite D, Ellicott City, MD 

21043; 410-750-3900) 

Income Fund Outlook (The Institute for Econometric Research, 2200 S.W. 10th 
St., Deerfield Beach, FL 33442; 800-442-9000) 

Independent Adviser for Vanguard Investors (Fund Family Shareholder Assn., 
7811 Montrose Rd., Potomac, MD 20854; 800-777-5005) 

Individual Investor Special Situations Report (1633 Broadway, 38th Floor, New 

York, NY 10019; 212-843-2777) 

individualinvestor.com (212-742-2277) 

The Insiders (The Institute for Econometric Research, 2200 S.W. 10th St., Deer


field Beach, FL 33442; 800-442-9000) 

The International Harry Schultz Letter (HSL P.O. Box 622, CH-1001, Lausanne-
Switzerland; (32)16-5336-84) 

InvesTech Market Analyst (2472 Birch Glen, Whitefish, MT 59937; 800-9558500) 


InvesTech Mutual Fund Advisor (2472 Birch Glen, Whitefish, MT 59937; 800955-
8500) 

Investment Quality Trends (7440 Girard Ave., Suite 4, La Jolla, CA 92037; 858459-
3818) 


PART ONE: Maximizing Your Investment Options 

The Investment Reporter (133 Richmond St., W., Suite 700, Toronto, Ontario, 
Canada M5H-3MB; 416-869-1177) 

Investor』s Guide to Closed-End Funds (P.O. Box 161465, Miami, FL 33116; 305271-
1900) 

Investor』s World (7811 Montrose Rd., Potomac, MD 20854; 800-804-0942) 

Investors Intelligence (Chartcraft, Inc., P.O. Box 2046, 30 Church St., New 
Rochelle, NY 10801; 914-632-0422) 

Jack Adamo』s Inside Track (Phillips Publishing, Inc., 7811 Montrose Rd., Potomac, 
MD 20854; 800-211-6362) 

Kinsman』s Stock Pattern Recognition Service (1601 Sobre Vista Rd., Sonoma, CA 
95476; 707-935-6504) 

LaLoggia』s Special Situation Investor (P.O. Box 547, Rochester, NY 14603; 800450-
0551) 

Listed Insight (P.O. Box 5759, Walnut Creek, CA 94596; 800-955-9566) 

Louis Navellier』s Blue Chip Growth Letter (Phillips Publishing, Inc., 7811 Montrose 
Rd., Potomac, MD 20854; 800-718-8289) 

Louis Rukeyser』s Mutual Funds (1750 Old Meadow Rd., 3rd Floor, McLean, VA 
22102; 800-892-9702) 

Louis Rukeyser』s Wall Street (1750 Old Meadow Rd., 3rd Floor, McLean, VA 
22102; 800-892-9702) 

The Low Priced Stock Survey (7412 Calumet Ave., Suite 200, Hammond, IN 
46324; 219-852-3200) 

Lowry』s Power & Velocity Ratings (631 U.S. Highway One, #305, North Palm 
Beach, FL 33408; 561-842-3514) 

MPT Review (1 East Liberty, Third Floor, Reno, NV 89501; 800-454-1395) 

Maedel』s Mini-Cap Analyst (P.O. Box 28011, Harbour Centre, Vancouver, BC 
Canada V6B-5LB; 604-669-8270) 

Mark Skousen』s Forecasts & Strategies (7811 Montrose Rd., Potomac, MD 
20854; 301-424-3700) 

Market Logic (The Institute for Econometric Research, 2200 S.W. 10th St., Deerfield 
Beach, FL 33442; 800-442-9000) 

Medical Technology Stock Letter (P.O. Box 40460, Berkeley, CA 94704; 510-8431857) 


Michael Schaeffer』s Outstanding Investments (c/o Publishers』 Management Corp., 

P.O. Box 84905, Phoenix, AZ 85071; 800-528-0559) 

CHAPTER 3: Picking Winning Stocks 

Moneyflow (P.O. Box 1076, Brookings, OR 97415) 

Moneyletter (360 Woodland St., P.O. Box 6020, Holliston, MA 01746; 800-8909670) 


Morningstar Mutual Funds (225 W. Wacker Dr., Chicago, Il 60606; 312-4244288) 


Morningstar Stock Investor (225 W. Wacker Dr., Chicago, IL 60606; 800-735


0700) 

Motley Fool (123 N. Pitt St., Alexandria, VA 22314; 703-838-3665) 

Mutual Fund Forecaster (The Institute for Econometric Research, 2200 S.W. 10th 

St., Deerfield Beach, FL 33442; 800-442-9000) 

Mutual Fund Investing (7811 Montrose Rd., Potomac, MD 20854; 800-777-5005) 

Mutual Fund Prospector (16 Thornwood Ct., Moline, IL 61265; 309-736-9376) 

The Mutual Fund Strategist (P.O. Box 446, Burlington, VT 05402; 800-355-FUND) 

NAIC Investor Advisory Service (P.O. Box 220, Royal Oak, MI 48068; 810-583


6242) 

Nate』s Notes (P.O. Box 667, Healdsburg, CA 95448; 707-433-7903) 

National Trendlines (National Investment Advisors, 14001 Berryville Rd., North 

Potomac, MD 20874; 800-521-1585) 

Natural Contrarian (7720B El Camino Real, #172, Rancho La Costa, CA 92009; 
760-941-7771) 

NoLoad Fund*X (235 Montgomery St., Suite 662, San Francisco, CA 94104; 800763-
8639) 

No-Load Fund Analyst (4 Orinda Way, Suite 230-D, Orinda, CA 94563; 800-7769555) 


The No-Load Fund Investor (One Bridge St., P.O. Box 318, Irvington-on-Hudson, 
NY 10533; 800-252-2042) 

No-Load Mutual Fund Selections & Timing Newsletter (100 N. Central Express


way, Suite 1112, Richardson, TX 75080; 800-800-6563) 

No-Load Portfolios (8635 W. Sahara, Suite 420, The Lakes, NV 89117) 

OTC Insight (Insight Capital Management, Inc., P.O. Box 5759, Walnut Creek, CA 

94596; 800-955-9566) 

The Oberweis Report (951 Ice Cream Dr., #200, North Aurora, IL 60542; 800323-
6166) 

The Option Advisor (Box 46709, Cincinnati, OH 45246; 800-327-8833) 


PART ONE: Maximizing Your Investment Options 

The Outlook (Standard & Poor』s Corp., 55 Water St., New York, NY 10041; 800852-
1641) 

Overpriced Stock Service (Murenove, Inc., P.O. Box 308, Half Moon Bay, CA 
94019; 650-726-8495) 

The Oxford Club (105 W. Monument St., Baltimore, MD 21201; 800-992-0205) 

P. Q. Wall Forecast, Inc. (P.O. Box 15558, New Orleans, LA 70175; 504-895-4891) 
The PAD System Report (P.O. Box 43285, Cincinnati, OH 45243; 513-529-2863) 
Personal Finance (1750 Old Meadow Rd., Suite 301, McLean, VA 22102; 800832-
2330) 

The Peter Dag Portfolio Strategy & Management (65 Lakefront Dr., Akron, OH 
44319; 800-833-2782) 

Peter Eliades』 Stockmarket Cycles (P.O. Box 6873, Santa Rosa, CA 95406; 707


769-4800) 

Professional Timing Service (P.O. Box 7483, Missoula, MT 59807; 406-543-4131) 

Prudence and Performance (22112 N.E. 23rd St., Redmond, WA 98053; 425-836


4744) 

The Prudent Speculator (P.O. Box 1438, Laguna Beach, CA 92652; 949-4977657) 


The Pure Fundamentalist (7412 Calumet Ave., Hammond, IN 46324; 219-852


3200) 

Real Asset Investor (1217 St. Paul St., Baltimore, MD 21202; 800-433-1528) 

Reminiscences (P.O. Box 711, Westport, CT 06881; 203-341-0833) 

The Retirement Letter (P.O. Box 60042, Potomac, MD 20859; 800-804-0941) 

Richard E. Band』s Profitable Investing (7811 Montrose Rd., Potomac, MD 20854; 

301-424-3700) 

Richard Geist』s Strategic Investing (1905 Beacon St., Waban, WA 02168; 617332-
3323) 

Richard Schmidt』s Stellar Stock Report (7100 Peachtree-Dunwoody, #100, Atlanta, 
GA 30328; 800-728-2288) 

Richard Young』s Intelligence Report (Phillips Publishing, Inc., 7811 Montrose 

Rd., Potomac, MD 20854; 301-424-3700) 
The Ruff Times (P.O. Box 887, Springville, UT 84663; 801-489-8681) 
Scientific Investing (12254 Nicollet Ave., S., Burnsville, MN 55337; 800-336-2679) 


CHAPTER 3: Picking Winning Stocks 

Sector Fund Timer (12254 Nicollet Ave., S., Burnsville, MN 55337; 612-808-0148) 

Short On Value (2779 Clairmont Rd., Suite F-9, Atlanta, GA 30329; 404-6331911) 


Smart Money (184 Central Ave., P.O. Box 2069, Old Tappan, NJ 07675; 201-767


4100) 

Sound Advice (156 Diablo Rd., #200, Danville, CA 94526; 925-838-6710) 

Sound Mind Investing (2337 Glen Eagle Dr., Louisville, KY 40222; 502-426-7420) 

The Spear Report (1224 Farmington Ave., P.O. Box 271030, West Hartford, CT 

06127; 800-491-7119) 

Special Situations (160 Madison Ave., 3rd Floor, New York, NY 10016; 888-4175400) 


Standard & Poor』s Emerging & Special Situations (Standard & Poor』s Corp, 25 
Broadway, New York, NY 10004; 800-852-1641) 

Technology Investing (Phillips Publishing, 7811 Montrose Rd., Potomac, MD 

20854; 800-809-9612) 

Timer Digest (P.O. Box 1688, Greenwich, CT 06839; 203-629-3503) 

Todd Market Forecast (26861 Trabuco Rd., Suite E182, Mission Viejo, CA 92691; 

949-581-2457) 

Top Down Market Forecast (P.O. Box 33233, North Royalton, OH 44133; 440877-
1731) 

The Turnaround Letter (New Generation Research, Inc., 225 Friend St., Suite 801, 
Boston, MA 02114; 800-468-3810) 

U.S. Investment Report (25 Fifth Ave., Suite 4-C, New York, NY 10003; 215-8621313) 
Ultimate Timing Service (12254 Nicollet Ave., S., Burnsville, MN 55337; 612808-
0148) 

Undiscovered Tech Stocks (P.O. Box 109665, Palm Beach Gardens, FL 33410; 
561-627-3300) 

Utility Forecaster (1750 Old Meadow Rd., 3rd Floor, McLean, VA 22102; 800832-
2330) 

The Value Line Convertibles Survey (220 E. 42nd St., New York, NY 10017; 800634-
3583) 

The Value Line Investment Survey (220 East 42nd St., New York, NY 10017; 800634-
3583) 


PART ONE: Maximizing Your Investment Options 

The Value Line Investment Survey—Expanded Edition (220 E. 42nd St., New York, 
NY 10017; 800-634-3583) 

The Value Line Mutual Fund Survey (220 E. 42nd St., New York, NY 10017; 800634-
3583) 

The Value Line Special Situations Service (220 E. 42nd St., New York, NY 
10017; 800-634-3583) 

Vantage Point: An Independent Report for Vanguard Investors (300 Mt. Lebanon 
Blvd., Suite 2218-A, Pittsburgh, PA 15234; 412-594-4749) 

Vickers Weekly Insider Report (Vickers Stock Research Corporation, 226 New 
York Ave., Huntington, NY 11743; 800-645-5043) 

The Wall Street Digest (One Sarasota Tower, #602, Sarasota, FL 34236; 941-9545500) 


Wall Street Winners (1750 Old Meadow Rd., Suite 301, McLean, VA 22102; 800832-
2330) 

NEWSPAPERS 

While your local newspaper may have a few stories about companies in your 
region and a few general stock stories, it does not normally present enough information 
to expose you to a wide range of investment ideas. The best national newspapers 
aimed at investors are the following: 

Barron』s National Business and Financial Weekly (200 Liberty St., New York, NY 
10281; 212-416-2700; 800-822-7229). Tabloid that features incisive articles on stocks 
and the stock market, and the best array of statistics around. 

Investor』s Business Daily (12655 Beatrice St., Los Angeles, CA 90066; 310-4486000; 
800-831-2525; www.investors.com). Daily paper with many short articles about 
individual companies, as well as many pages of statistics, graphs, and charts. 

The New York Times, 「Business Day」 Section (229 W. 43rd St., New York, NY 
10036; 212-556-1234; 800-631-2580; www.nytimes, com). An influential section that 
covers corporate news and features columns about individual stocks. 

USA Today, 「Money」 section (1000 Wilson Blvd., Arlington, VA 22229; 703-2763400; 
800-872-8632; www.usatoday.com). A Gannett paper with many short articles 
on individual stocks and the stock market. Also carries a wide range of statistics on 
stock market activity. 

The Wall Street Journal (200 Liberty St., New York, NY 10281; 212-416-2000; 
800-228-3880; www.wsj.com). The most influential daily newspaper. Covers the stock 
market, particularly in the paper』s third section, 「Money and Markets.」 


CHAPTER 3: Picking Winning Stocks 

TELEVISION AND RADIO 

Several local TV and radio stations provide excellent coverage of the stock 
market. On radio, there are several all-business news stations, such as WBBR in 
New York City, which is run by Bloomberg Financial Markets. On a national level, 
several programs and cable channels can help you choose stocks. Among the best 
are the following: 

CNBC (Consumer News and Business Channel, 2200 Fletcher Ave., Ft. Lee, NJ 
07024; 201-585-2622; www.cnbc.com). The only round-the-clock cable channel devoted 
to business and financial news. During trading day, stock market ticker crawls 
at the bottom of the TV screen. Features interviews with prominent market analysts, 
fund managers, economists, and other stock gurus. Produces This Morning』s Business, 
aired on local stations nationwide in the morning, which highlights the day』s financial 
news and offers interviews with investment experts. 

CNN Business News (Cable News Network, 5 Penn Plaza, New York, NY 10001; 
212-714-7848; www.cnn.com). Airs two business news shows in the morning and one, 
called Moneyline, in the evening. Every hour while the market is open, updates what 
is happening to the stock market. 

CNN Money (Cable News Network Financial Network, 5 Penn Plaza, New York, 
NY 10001; 212-714-7848). A 24-hour financial news network using staff members 
from Cable News Network devoted to business and financial news. CNN Money provides 
in-depth coverage of the financial markets, interviews with newsmakers, opportunities 
for viewers to call in with questions and comments, and much more. The 
service also has a Web site (www.cnnmoney.com) that tracks the markets and offers 
information about programs on the channel. 

Marketplace (Minnesota Public Radio, 3716 S. Hope St., Suite 130, Los Angeles, 
CA 90007; 213-514-1500; www.marketplace.org). A daily radio show airing in 
the morning (Marketplace Morning Report) and the evening (Marketplace) on Public 
Radio International stations. Jordan Goodman, author of this book, comments 
every Thursday morning on the 「Road to Riches」 personal finance segment. Covers 
the day』s financial and economic news in more depth than is commonly found on 
radio. 

Nightly Business Report (14901 Northeast 20th Ave., Miami, FL 33181; 305-9498321; 
www.nightlybusiness.org). A daily TV show that airs on PBS stations. Covers 
the action in the stock market and features interviews with investment experts. 

Sound Money (45 E. 7th St., St. Paul, MN 55101; 651-290-1212; 800-228-7123; 
www.mpr.org). A weekly call-in radio show produced by Minnesota Public Radio that 
features hosts Chris Farrell and other investment experts, who answer listeners』 questions. 

Wall Street Week with Louis Rukeyser (Maryland Public Television, 1167 Owings 
Mills Blvd., Owings Mills, MD 21117; 410-356-5600; www.mpt.org). The grand



PART ONE: Maximizing Your Investment Options 

daddy of TV shows about selecting stocks. A PBS offering, airs on Friday nights and 
stars host Louis Rukeyser, who, along with an esteemed panel of investment pros, 
interviews prominent stock analysts and money managers. You can call your local PBS 
station to find out when the show airs in your area. 

SOFTWARE 

You can identify stocks of interest to you by using a software package designed 
to select stocks. These programs allow you to enter certain criteria, such as 
earnings growth rates, PE ratios, dividend yields, or debt levels, and screen for the 
stocks that fit your specifications. For a more detailed listing of software that 
chooses stocks, consult Computerized Investing (American Association of Individual 
Investors, 625 N. Michigan Ave., Suite 1900, Chicago, IL 60611; 312-2800170; 
www.aaii.com). The best ones follow: 

Smarter Investing for Beginning Investors (101 Montgomery St., San Francisco, 
CA 94101; 800-4-SCHWAB; www.schwab.com). This product is an educational CDROM 
for beginning investors and is designed to introduce new customers to investing 
concepts, tools, and services available at Schwab. 

Value Line Investment Survey (220 E. 42nd St., New York, NY 10017; 800-6343583). 
Monthly, weekly, or quarterly, subscription to computer CD-ROMs with data 
on all the companies followed by Value Line. Allows you to screen stocks by many different 
criteria. 

TRADE ASSOCIATIONS AND STOCK EXCHANGES 

American Association of Individual Investors (625 N. Michigan Ave., Chicago, IL 
60611; 312-280-0170). A nonprofit group that educates individual investors about the 
stock market through publications, conferences, and seminars. You also can contact 
them at their Web site , which includes the Information Guide, a 
directory of regulatory agencies, exchanges, NASD offices, financial journals, data 
sources, and places to take complaints. The AAII Web site also provides extensive articles 
on the basics of investing, as well as a reference section allowing you to find information 
on a wide variety of topics, such as annuities, mutual funds, dividend 
reinvestment plans, and discount brokers. 

American Stock Exchange (86 Trinity Pl., New York, NY 10006; 212-306-1000). 
An exchange that lists mostly medium- and small-sized growth companies. Now part 
of Nasdaq-AMEX. Offers various pamphlets about investing in stocks. 

Investment Counsel Association of America (1050 17th St., N.W., Suite 725, 
Washington, DC 20036-5503; 202-293-4222; www.icaa.org). Represents money managers 
who select stocks for individual and institutional clients. 

Investors Alliance (707-571-2311). A nonprofit group formed to help individual 
investors become more capable and knowledgeable through diverse programs of invest



CHAPTER 3: Picking Winning Stocks 

ment education and research. Offers easy-to-use software for screening stocks by various 
criteria, as well as software to help users choose mutual funds. Publishes the 
monthly IA Investor Journal letter for members, which provides information on stock 
and mutual fund investing techniques. 

National Association of Investors Corporation (P.O. Box 220, Royal Oak, MI 
48068; 248-583-6242; 877-275-6242). Promotes the growth of investment clubs. The 
group』s Web site  provides a great amount of data for investors 
of all levels of sophistication. There are reprints from NAIC』s Better Investing 
magazines, and you can download NAIC software programs to screen stocks based on 
fundamental factors. The site also makes it easy to find out about investment clubs near 
you, as well as investor fairs and other educational opportunities. You also can learn 
about NAIC』s Low Cost Investment Plan, which allows you to purchase a single share 
of stock in many companies for a small fee over the purchase price. After that, you can 
buy additional shares of the stock directly from the company』s dividend reinvestment 
plan at little or no commission. 

National Association of Securities Dealers (1735 K St., N.W., Washington, DC 
20006-1500; 202-728-8000; 800-289-9999; www.nasd.com). Oversees the Nasdaq 
NMS and polices securities markets and brokers』 actions. Offers the following publications: 
NASD Disciplinary Procedures; NASD Manual; Basics of Saving & Investing 
Brochure; Investor Insight; Investor Protection Kit; Investor Series; NASD Back-
grounder; Women & Investing: It』s Your Money. 

New York Stock Exchange (11 Wall St., New York, NY 10005; 212-656-3000; 
www.nyse.com). The Big Board, where the largest and most well-known stocks trade. 
Offers many pamphlets and other literature about investing in stocks. 

Securities Industry Association (120 Broadway, New York, NY 10271; 212-6081500; 
www.sia.com). Represents the securities industry in lobbying activities and educates 
the public about the stock market. Offers The SIA Yearbook, a listing of all the 
brokerage houses that are SIA members. Sponsors The Stock Market Game, which 
teaches students about the stock market. 

WEB SITES 

BigCharts.com. Offers three-month stock price history charts for any company 
you choose. Companies are listed by industry, best and worst performers, or all companies 
in that industry, or you can access charts and latest quotes by entering the stock 
symbol.  

Bloomberg.com. Comprehensive site offering current stock quotes, financial news, 
stock market update, after-hours trading data, chart data for one year history of stocks, 
and an S&P snapshot. Also has an IPO center with current information on IPO stocks. 
 


PART ONE: Maximizing Your Investment Options 

Briefing.com. This site is strong on currency analysis, foreign exchange, and 
fixed-income markets. Offers free live market coverage and three-times-a-day bond 
coverage. For a fee, you can have access to the IPO calendar, stock analysis, live bond 
coverage, and Fed policy analysis.  

BusinessWeek online. Has investing section that provides market news, stock 
quotes, and industry discussion. Free S&P stock reports are available, with analysis 
and daily profile. You can set up and track your portfolio in the Personal Wealth section. 
You must register, but it』s all free.  

BUYandHOLD.com. Allows you to buy individual stocks with monthly investments 
as low as $10 and $20. Charges $2.99 per trade.  

CBS MarketWatch. Offers stock quotes, stock interactive charting, broker research, 
IPO watch, industry analysis, stock alerts, and a stock tracker. Offers free links 
to Market Guide, Hoover』s, Multex, Annual Reports Club, Zacks, Investools.com, Net-
Stock Direct, Investment Data, and eSignal for free company reports, newsletters, 
analyses, direct stock buying, and other services.  

CNBC.com. This site is full of information on stocks, mutual funds, and bonds. 
Has a Loan Center where you can research your loan and use calculators, and a Small 
Business Center, a Tax Center, and an Account Tracker where you can set up and track 
your portfolio. There are good search, screening, and calculating tools.  

Data Broadcasting Corporation. (22 Crosby Dr., Bedford, MA 07130; 781-6878388; 
800-762-7538; www.dbc.com). This quote service provides a wide variety of 
prices for stocks, bonds, futures, options, foreign exchange, and mutual funds. DBC』s 
Marketwatch feature allows you to create your own portfolio and is constantly being 
updated. DBC also offers quote services through its handheld QuoTrek and wireless 
receiver Signal system, which use radio receivers to get information so you do not have 
to pay telephone charges. 

Drip Investor. This is the site for The Drip Investor newsletter. You can join the site 
and subscribe to the newsletter. There are a few links to other DRIP sites and descriptions 
of Charles B. Carlson』s books, and you can set up and track your own portfolio 
on this site.  

EarningsWhispers.com. The site offers expert estimates of earnings by industry or 
company. Has an earnings warning program.  

EduStock. A Web site designed to help students learn about the stock market and 
how to pick individual stocks. The site includes a real-time stock market simulation 
and allows you to set up and track a stock portfolio.  

FinancialWeb.com. Good financial information site with links to many good sites 
for auto loans, ATMs, credit cards, credit unions, mortgages, Internet banks, home 


CHAPTER 3: Picking Winning Stocks 

equity loans, and other services. Includes current financial news, lots of investment 
tools, and a directory of mutual funds.  

GainsKeeper. This site will track your portfolio and includes events such as splits, 
spin-offs, mergers, distributions, liquidations, and wash sale trading activity that affect 
your portfolio but are not usually included in portfolio trackers. You can register for 
this service for $35/year, if you keep your activity under 100 trades per year. 
 

Hoover』s Online. Extensive data on over 10,000 public and private companies, 
including financial performance, news, Web addresses, and corporate profiles.  

iexchange.com. Post your stock picks on this site, and the site will track the accuracy 
and average return of your picks and rate you as an 「analyst」 against other analysts. 
 

insiderscores.com. This site lets you track company insiders. You can look up any 
company』s insider buys, sells, and exercised options for the past two years. The site 
also scores individual executives』 predictive prowess based on the timing of their previous 
buys and sells, and it ranks the insiders according to their transactions』 average 
return and consistency.  

Investools.com. You can read articles from different investment newsletters for a 
fee. Has stock research and charting capability and offers current stock market status. 
You can set up and track your own portfolio.  

Investorama. A site full of investment information with links to some 12,000 Internet 
sites. Has directory of and links to discount and full-service brokers, day traders, 
money managers, and online brokerages. You can set up and track your own portfolio on 
this site. Lots of educational materials for adults and children.  

InvestorGuide. A massive site with links to thousands of other investment-related 
sites. The site also has a great deal of basic information on the principles of finance and 
investing, and what to watch for when you take others』 advice. The site links you to articles 
of interest in the major personal finance magazine, as well.  

InvestorPlace.com. This is a free portfolio tracking service. Registration is required. 
The site will send you daily e-mails with current information and news updates 
about the investments in your portfolio, plus a market overview of that day』s market 
activity.  

Investors Edge. One of the best sites around to track your portfolio and research 
stocks. Investors Edge will constantly update the value of your portfolio at the end of 
each day, so that you can see your net worth rising and falling with every market 
fluctuation. The site is also linked to IPO Online, allowing you to see monthly calendars 
of new stock issues. It also offers access to Nelson』s Company Research Sum



PART ONE: Maximizing Your Investment Options 

maries, which provide the latest research on stocks from major brokerage firms. 
 

IPO.com. Packed with worldwide initial public offering information. Shows status 
of current week』s IPOs, new IPO filings, current prices of recent IPOs, and news and 
commentary on IPOs in general.  

IPO Central. This is a Hoover』s site listing each day』s IPO debuts, latest IPO filings, 
pricings, news, scorecard, and statistics. Includes links to a Hoover』s capsule description 
of each IPO company, describing their operations and market, and including 
address, phone numbers, and Web site.  

Market Guide. Provides charts and quotes and lists companies』 vital statistics. Offers 
company financial data, including real-time quotes, price-to-cash-flow and price-to-sales 
ratios, return on equity, return on assets, and profit margin.  

Money.AltaVista.com. Lots of stock information and financial news, with the ability 
to set up and track your own portfolio. Information on IPOs, earnings, stock splits, 
dividends, and other company data. You can shop for a mortgage and real estate on this 
site.  

Money Central. This is a Microsoft MSN site. You can get stock quotes, market reports, 
stock research, charts, news, analyst ratings, and alerts. There is also an IPO center 
and a link to the Charles Schwab site.  

Money Online. Money magazine』s personal finance Web site allows you to track 
your portfolio, get news, and access articles in Money. The site also publishes Money 
Daily, a wrapup of events affecting individual investors and consumers.  

The Moneypaper. This site is associated with the monthly publication The Money-
paper, which contains lots of information on DRIPs. Subscribe to this site and you can 
join their Dividend Reinvestment Program (DRIP) and get the magazine. The site also 
has plenty of information about DRIPs and DRIP companies in which you can invest. 
 

The Motley Fools. A popular investment site, also accessible through America 
Online, provides a great deal of educational material based on the Foolish theory 
popularized by founders Tom and David Gardner. The idea is that the average individual 
investor, usually considered 「foolish」 by the Wall Street establishment, can 
do better on their own than with advice from most financial newsletters and brokers 
and outperform many mutual funds, based on the commonsense approach used in the 
site. The site includes Fool』s School for novice investors and several forums in which 
investors can communicate with each other about stocks and mutual funds.  

MultexInvestor. This site allows investors to order copies of reports from a 
range of brokerage houses and independent research firms over the Internet. Some 


CHAPTER 3: Picking Winning Stocks 

of the reports are free; however, most are available on a pay-per-view basis.  

Netstock.com. This site has a Sharebuilder plan that allows you to buy stocks from 
an inventory of 2,000 stocks at $2 per stock. You can pay for these using automatic 
monthly withdrawal from your checking account of say $100/month. Normal trades 
are $19.95 each.  

The Online Investor. This site offers investment education and advice and focuses 
on stock research and data, articles on investment, and daily investment tips. 
 

Quicken.com. Comprehensive financial site with lots of information for the investor. 
You can get real-time stock quotes, look at company financial statements, read 
analyst estimates and research, look at insider trading activity, look at SEC 10-Q and 
10-K filings, which include company management discussion, and look at charts of the 
stock』s historical activity. You can set up and track your portfolio on this site—all for 
free.  

Quote.com. One of the largest and best-known sites specializing in stock quotes. 
In addition to providing stock prices, Quote.com offers earnings, price-earnings ratios, 
yield, and 52-week high and low prices. The service also presents technical charts and 
lists of major market movers each day.  

Raging Bull. Provides investors with stock quotes, news, and access to discussions 
and information on over 15,000 discussion boards.  

Reuters Money Network on the Web. A Web version of the Reuters Money Network 
offering portfolio tracking, stock and bond price quotes, corporate and economic news, 
and price charts. The network also offers extensive research and annual reports.  

SchwabNOW. This site has current stock quotes, research and analyst reports, and 
investor education and covers mutual funds. Lots of investor information on this site, 
and of course the ability to trade online. Gives you access to stock quotes from 
Quote.com, charts from BigCharts, and company information from Hoover』s Online. 
 

Securities & Exchange Commission. This site has 10-K reports of company financial 
data as reported to the SEC. This information will help you understand the financial 
condition of any company you are considering for investment.  

ShareBuilder. This site specializes in dollar-based investing, which lets you buy 
shares of stock in dollar amounts on a regular basis. For a fee, Sharebuilder purchases 
your choice of stock for you and consolidates the stock into a growth portfolio. 
 


PART ONE: Maximizing Your Investment Options 

SiliconInvestor. Offers stock quotes, market news, stock research, charts, screener, 
IPOs, and online trading. You can set up and track your portfolio. Requires registration, 
but the services are free.  

S&P Personal Wealth. This Standard and Poor』s site offers up-to-the-minute market 
information, and if you join as a member, you will have access to U.S. and global 
stock quotes. As a member, you can set up a personal portfolio and track it. You have 
free access to IPO information and stock market news and commentary.  

Smallcapcenter.com. Offers in-depth coverage about the small-cap market segment. 
Find news, information, opinions, and in-depth analysis covering small-cap and 
micro-cap stocks on this site.  

The Small-Cap Investor. A site specializing in small-capitalization companies. 
They bill themselves as 「The Unofficial Directory of Nasdaq SmallCap Stocks on the 
Web.」 They provide company summaries, stock price histories, SEC filings, and links 
to small-cap Web sites. There is also a general introduction for novices investing in 
small companies.  

SmartMoney.com. Offers hourly stock updates, market news, and stock screen, 
and will track your portfolio. Includes tools, calendar, asset allocator, broker meter, 
Dow tracker, and sector tracker.You have access to the Smart Money University, which 
offers one of the best investor primers available. You can access the interactive Wall 
Street Journal and Barron』s sites from this site. ,  

SPDRindex.com. This is a Standard and Poor』s site with information about 
SPDRs. The S&P 500 is divided into nine sector index SPDR funds. You can customize 
your investments by picking the sectors that meet your investment goals. The 
nine sectors are: basic industries, consumer services, consumer staples, cyclical/transportation, 
energy, financials, industrials, technology, and utilities. You can buy or sell 
Select Sector SPDR shares on the American Stock Exchange throughout the trading 
day.  

Standard & Poor』s Index Services. Offers a snapshot of each global industry』s performance. 
S&P global indexes are used by investors for investment performance measurement 
and as the basis for a wide range of financial instruments. Has links to the 
American Stock Exchange, Chicago Board Options Exchange, Chicago Mercantile 
Exchange, Montreal Exchange, Sydney Futures Exchange, Tokyo Stock Exchange, 
and Toronto and Montreal stock exchanges.  

StockCharts.com. On this site, you can conduct your own technical analysis using 
interactive tools offered there. These tools allow you to chart a stock』s performance as 
far back as three years; you can then add trend lines and moving averages in search of 
a turning point in the stock』s price.  


CHAPTER 3: Picking Winning Stocks 

StockSheet. Provides company financial information for the past several years in 
an easy-to-view and easy-to-print format. A link to other businesses in the sector lets 
you see how the company stacks up against the competition.  

TheStreet.com. Offers daily commentary on the market』s highs and lows from 
well-known financial pundits. Includes analyst rankings of companies, a section on 
tech stocks, and a basic course on investing. Subscription-based site that offers a 30day 
free trial.  

Thomson Investors Network. For a fee, will provide stock analysis, earnings estimates, 
research, and valuation. Tracks your portfolio.  

ValueLine.com. Online site for the well-respected Value Line Investment Survey. 
For a fee, members can access Value Line information and advice on approximately 
1,700 stocks, more than 90 industries, the stock market, and the economy. The site offers 
three parts: the Ratings & Reports section contains one-page reports on the companies 
and industries; the Summary & Index section contains an index of all stocks in 
the publication as well as up-to-date statistics on the companies; and the Selection & 
Opinion section contains Value Line』s latest economic and stock market forecasts. 
 

Wall Street City. A wealth of stock market information awaits you at this site. 
There is market commentary, stock search capability, and reports on companies. You 
can even create your own stock ticker with the issues you want to follow most. 
 

TheWhisperNumber.com. This site offers stock information, charts, stock analysis, 
and earnings estimates. You can set up and track your portfolio on this site.  

Yahoo!Finance.com. Track stocks, read market news and research, scan the message 
boards for the latest whispers and rumors, listen to earnings calls, or create a custom 
portfolio.  

Yardeni.com. This is Dr. Yardeni』s site who is Deutche Bank Securities』 chief 
global economist and investment strategist. The site concentrates on new economy 
stocks, offering statistics, historical charts, and his own writings.  

Zack』s Analyst Watch. This site offers one of the best ways to track analysts』 
opinions and earnings estimates for publicly traded stocks. Since stock prices react 
quickly to changes in analyst opinion, this information can help improve your investment 
results significantly. The Web site can alert you to changes in opinion through 
daily e-mail. It also tracks positive and negative earnings surprises and allows you to 
screen stocks based on earnings estimates.  


PART ONE: Maximizing Your Investment Options 

FEDERAL GOVERNMENT REGULATORS 

Securities and Exchange Commission (SEC, 450 5th St., N.W., Washington, 
DC 20549; 202-942-8088; 800-732-0330; www.sec.gov). The principal federal 
government agency that regulates the stock and bond markets. Offers the following 
free brochures: 「Affinity Fraud: How to Avoid Investment Scams That Target Groups」; 
「Arbitration Procedures」; 「Ask Questions」; 「Broken Promises: Promissory Note 
Fraud」; 「Bankruptcy」; 「Certificates of Deposit: Tips for Investors」; 「Cold Calling」; 
「Complaints and Inquiries: How the SEC Handles Them」; 「Financial Facts Tool Kit」; 
「Internet Fraud: How to Avoid Internet Investment Scams」; 「The Investor』s Advocate」; 
「Microcap Stock: A Guide for Investors」; 「Tips for Online Investing」; 「Trade 
Execution: What Every Investor Should Know.」 Has 11 regional offices, the addresses 
and telephone numbers of which follow: 

California: 5670 Wilshire Blvd., 11th Floor, Los Angeles 90036-3648; 323-9653998; 
44 Montgomery St., Suite 1100, San Francisco, 94104; 415-705-2500 

Colorado: 1801 California St., Suite 4800, Denver 80202-2648; 303-391-6800 

Florida: 1401 Brickell Ave., Suite 200, Miami 33131; 305-536-4700 

Georgia: 3475 Lenox Rd., N.E., Suite 1000, Atlanta 30326-1232; 404-842-7600 

Illinois: Citicorp Center, 500 W. Madison St., Suite 1400, Chicago 60661-2511; 
312-353-7390 

Massachusetts: 73 Tremont St., Suite 600, Boston 02108; 617-424-5900 

New York: 7 World Trade Center, Suite 1300, New York 10048; 212-748-8000 

Pennsylvania: Curtis Center, 601 Walnut St., Suite 1120 East, Philadelphia 191063322; 
215-597-3100 

Texas: 801 Cherry St., 19th Floor, Fort Worth 76102; 817-978-3821 

Utah: 500 Key Bank Tower, Suite 500, 50 South Main St., Salt Lake City 841140402; 
801-524-5796 

The SEC』s huge database of all filings is now accessible directly to the public 
over the EDGAR system (www.sec.gov/edgarhp.htm). EDGAR stands for Electronic 
Data Gathering and Retrieval. The system offers all quarterly and annual reports, 
tender offers and takeovers, insider purchases and sales, and much more. 
The data are usually posted within 24 hours of being filed. 

Securities Investor Protection Corporation (SIPC, 805 15th St., N.W., Suite 
800, Washington, DC 20005-2215; 202-371-8300; www.sipc.org). The agency 
that insures your brokerage account against loss due to the failure of the brokerage 
firm. Offers the following free publication: 「How SIPC Protects You.」 

STATE SECURITIES REGULATORS 

North American Securities Administrators Association (10 『G』 St., N.E., Suite 
710, Washington, DC 20002; 202-737-0900; www.nasaa.org). A group representing 
state securities enforcement agencies. Offers several free pamphlets on avoid



CHAPTER 3: Picking Winning Stocks 

ing scams, including those on blind pool offerings, dirt pile gold swindles, penny 
stock fraud, and unsuitable investments. Also offers a book titled Investor Alert! 
How to Protect Your Money from Schemes, Scams, and Frauds. The following are 
the state offices of securities regulators: 

Alabama: 770 Washington Ave., Suite 570, Montgomery 36130-4700; 334-242


2984 
Alaska: P.O. Box 110807, Juneau 99801; 907-465-2521 
Arizona: 1300 W. Washington, 3rd Floor, Phoenix 85040; 602-542-4242 
Arkansas: Heritage West Building, 201 E. Markham, 3rd Floor, Little Rock 

72201-1692; 501-324-9260 
California: 320 W. 4th St., Suite 750, Los Angeles 90013; 213-576-7500 
Colorado: Colorado Division of Securities, 1580 Lincoln St., Suite 420, Denver 

80203-1506; 303-894-2320 
Connecticut: 260 Constitution Plaza, Hartford 06103; 860-240-8299 
Delaware: State Office Building, 820 N. French St., 5th Floor, Wilmington 19801; 

302-577-8424 
District of Columbia: 717 14th St., N.W., Suite 200, Washington 20005; 202-626


9161 
Florida: 101 E. Gaines St., Tallahassee 32399-0350; 850-410-9805 
Georgia: 2 Martin Luther King Dr., Suite 802, West Tower, Atlanta 30334; 

404-656-3920 
Hawaii: 1010 Richards St., Honolulu 96813; 808-586-2744 
Idaho: P.O. Box 83720, Boise 83720-0031; 208-332-8004 
Illinois: 520 South 2nd St., Springfield 62701; 217-782-2256 
Indiana: 302 W. Washington, Suite E-111, Indianapolis 46204; 317-232-6681 
Iowa: Iowa Securities Bureau, 340 Maple St., Des Moines 50325; 515-281-4441 
Kansas: 618 S. Kansas Ave., 2nd Floor, Topeka 66603; 785-296-3307 
Kentucky: Department of Financial Institutions, 1025 Capitol Center Dr., Suite 

200, Frankfort 40601-3868; 502-573-3390 
Louisiana: 8660 United Plaza Blvd., 2nd Floor, Baton Rouge 70809; 222-925-4512 
Maine: 121 State House Station, Augusta 04333; 207-624-8551 
Maryland: 200 St. Paul Pl., 20th Floor, Baltimore 21202-2020; 410-576-6360 
Massachusetts: One Ashburton Place, Room 1701, Boston 02108; 617-727-3548 
Michigan: The Michigan Department of Commerce, 6546 Mercantile Way, Lan


sing 48909; 517-241-6370 
Minnesota: 133 E. 7th St., St. Paul 55101; 651-296-4026 
Mississippi: 202 N. Congress St., Suite 506, Jackson 39202; 601-359-6371 
Missouri: P.O. Box 1276, Jefferson City 65102; 573-751-4136 
Montana: Mitchell Building, 840 Helena Ave., Helena 59601; 406-444-2040 
Nebraska: The Atrium, 1200 N St., Suite 311, Lincoln 68509; 402-471-3445 
Nevada: 555 E. Washington Ave., Suite 5200, Las Vegas 89101; 702-486-2440 
New Hampshire: State House, Room 204, Concord 03301-4989; 603-271-1463 
New Jersey: 153 Halsey St., Newark 07102; 201-504-3600 


PART ONE: Maximizing Your Investment Options 

New Mexico: P.O. Box 25101, 725 Saint Michaels Dr., Santa Fe 87505; 505827-
7140 

New York: 120 Broadway, 23rd Floor, New York City 10271 

North Carolina: Secretary of State Securities Division, 300 N. Salisbury St., Suite 
100, Raleigh 27603; 919-733-3924 

North Dakota: North Dakota Securities Commissioner, State Capitol, 600 E. 
Boulevard Ave., 5th Floor, Bismarck 58505; 701-328-2910 

Ohio: 77 S. High St., 22nd Floor, Columbus 43215; 614-644-7381 

Oklahoma: First National Center, 120 N. Robinson St., Suite 860, Oklahoma City 
73102; 405-280-7700 

Oregon: Department of Consumer and Business Services, Finance and Corporate 
Securities, 350 Winter St. Northeast, Room 21, Salem 97310; 503-378-4387 

Pennsylvania: 1010 N. Seventh St., 2nd Floor, Harrisburg 17102-1410; 717-7834689 


Rhode Island: 233 Richmond St., Suite 232, Providence 02903-4232; 401-2773048 


South Carolina: Office of the Attorney General, Securities Section, 1000 Assembly 
St., Columbia 29211-1549; 803-734-0032 

South Dakota: 118 W. Capitol Ave., Pierre 57501-2013; 605-773-4823 

Tennessee: Davy Crockett Building, 500 James Robertson Pky., Suite 680, Nashville 
37243-0575; 615-741-2947 

Texas: P.O. Box 13167, Austin 78711; 512-305-8300 

Utah: Box 146760, 160 E. 300 South, 2nd Floor, Salt Lake City 84114-6760; 
801-530-6600 

Vermont: 89 Main St., Drawer 20, Montpelier 05620-3101; 802-828-3420 

Virginia: P.O. Box 1197, Richmond, 23218; 804-371-9051 

Washington: P.O. Box 9033, Olympia 98507; 360-902-8760 

West Virginia: 106 Dee Dr., Charleston 25311; 304-558-2257 

Wisconsin: Division of Securities, P.O. Box 1768, Madison 53702; 608-266-3432 

Wyoming: State Capitol Building, Cheyenne 82002-0020; 307-777-7370 

SECURITIES PURCHASE PROGRAM 

Another way to enroll in dividend reinvestment plans without paying brokerage 
commissions is to enroll in the First Share Program (305 Mitchell Mountain 
Rd., Westcliffe, CO 81252-0222; 719-783-2929; www.firstshare.com). For a $30 
enrollment fee, First Share allows you to buy one share of about 250 blue chip 
companies and sign up for direct purchase and dividend reinvestment programs. 


CHAPTER 4 
Selecting 
Mutual Funds 


If the process of selecting individual stocks seems a bit overwhelming, one alternative 
offers the benefits of stock ownership without the complications of 
choosing stocks: mutual funds that invest in stocks. 

Mutual funds, which have been around since the 1920s, have, in recent years, 
blossomed into the most commonly used vehicle for average Americans to own 
stocks. That』s because they are easy to use and understand, and they provide several 
great services at a low cost. 

Put simply, a stock mutual fund is a pool of money that a fund manager invests 
in stocks to achieve a specific objective. The fund is sponsored by a mutual fund 
company, which may be an independent firm, such as Fidelity, T. Rowe Price, or 
Vanguard, or a division of a brokerage or insurance company, like Merrill Lynch, 
Salomon Smith Barney, or Kemper. 

Load versus No-Load Funds 

There are two basic kinds of mutual funds, differentiated by the method by 
which they are sold. When you pay a commission to a salesperson, financial 
planner, or broker, that fee is called a load. One kind of fund therefore is called a 
load mutual fund because you have to pay a commission to buy it. The other kind 
of fund, called a no-load fund, is sold directly by the mutual fund company, with 
no salesperson involved. To buy no-load shares, you call the mutual fund company 
directly, usually at a toll-free 800 number, and it sends you the necessary prospectus 
and application forms. Sending them back with a check opens your 
account. 


PART ONE: Maximizing Your Investment Options 

Both load and no-load funds have their roles in the marketplace, and you must 
decide which is best for your needs. The advantage of a load fund is that you receive 
professional advice on which fund to choose. Such advice may be well 
worthwhile because it might be difficult for you to isolate the few funds that are 
best for your situation among the more than 8,000 funds in existence. Ideally, the 
salesperson helping you will not only tell you when to buy the fund but also when 
to sell your shares and move your money into a better fund. 

The disadvantage of a load fund is that the commission you must pay immediately 
reduces the amount of money you have at work in the fund. The load can 
amount to as much as 8.5 percent of your initial investment though many funds 
today charge 3 percent or 4 percent. Thus, for every dollar you sink into the fund, 
only 91.5 cents will earn money if you pay the full 8.5 percent load. If you pay a 
3 percent load, 97 cents of every dollar will be invested in stocks. In the short term, 
therefore, you are starting at a disadvantage over a no-load fund, where all of your 
dollar is at work from the beginning. Over a longer time period, however, if the 
load fund performs better than the no-load fund, the up-front charge will pale in 
significance. 

Clearly, the advantage of the no-load fund is that you have all of your money 
working for you from the moment you open your account. The disadvantage of a 
no-load fund is that you will not receive much, if any, guidance on which fund to 
buy. When you call a no-load company』s toll-free number, the phone representative 
can explain the differences among all of the firm』s offerings. He or she can 
describe each fund』s investment objective, track record, dividend yield, size in 
assets, management style, and fees, and the stocks currently in its portfolio. But 
because the person does not know you or your situation, and chances are will 
never speak to you again, he or she cannot advise you on which fund to buy. If 
you already have made up your mind based on information you have received 
about the fund from the fund company itself or reports in the press, that may be 
no problem. Just realize that you are taking full responsibility for your investment 
decisions when you buy a no-load fund. No salesperson will call to sell you 
more of the fund, and no one will tell you when to sell your shares and move to 
a better performing fund. 

People often wonder how no-load companies can offer mutual funds if they do 
not charge for the service. In fact, they charge plenty, but it is not in the form of an 
explicit fee for which you must write a check. Both no-load and load funds levy 
what is known as a management fee every year to compensate them for the services 
they render. The management fee, which ranges from as little as .2 percent of your 
assets to as much as 2 percent, is deducted from the value of the fund automatically. 
So, if a fund charges a 1 percent management fee, for example, and the 
fund』s stock portfolio rose 10 percent over the past year, you will earn a 9 percent 
return. As long as you keep your money in a fund, you will pay the management 
fee though you might never realize it. A management fee, listed in a fund』s selling 


CHAPTER 4: Selecting Mutual Funds 

literature as part of the expense ratio, should not be much more than 1.25 percent 
of its (and therefore your) assets for it to be considered fair and reasonable. 

The Advantages of Mutual Funds 

Mutual funds offer several key advantages over individual stocks, which can 
make the management fee very worthwhile. 

A professional skilled in choosing stocks does all of your work for you. Managers 
of stock mutual funds spend their entire day determining which stocks to buy and 
sell. They have instant access to information about every stock around the world at 
the push of a few computer keys. They work in companies where teams of research 
analysts pore over corporate quarterly and annual reports and managers and analysts 
visit company executives and factories to evaluate the firms』 prospects firsthand. 
You have almost no opportunity to become as knowledgeable as these fund 
managers without quitting your job and taking up investing full-time. 

A mutual fund gives you instant diversification. If you have only $1,000 or 
$5,000 to invest, the money will not buy many shares of a single stock, and it will 
certainly not buy many different stocks. By putting your money in only two or 
three stocks, you are exposed to the possibility that one of them will plummet in 
price, wiping out much of your investment capita. Instead, when you put your 
$1,000 or $5,000 in a mutual fund, your money buys into a portfolio that may comprise 
50 stocks, or maybe 500 different issues. If one or two stocks in the portfolio 
get hit hard, your losses will be much more limited because many of the other 
stocks will probably be going up at the same time. 

A fund exists for every financial goal and risk tolerance level. Armed with 
your goals and risk level from the first chapter, you can find a fund that fits your 
situation. The different types of funds are described in more detail later in this 
chapter, but in broad terms, there are funds designed for various degrees of growth 
and for varying levels of income, as well as funds that combine both growth and income 
objectives. 

Transaction costs are much lower. When you invest in a mutual fund, you 
benefit from the brokerage commission rates paid by the fund company, which are 
far lower than you would pay to make the same trades. Mutual funds are among 
the largest institutional investors on Wall Street, and because they buy and sell 
billions of dollars』 worth of stock every day, they pay between $.02 and $.05 a 
share per trade. You would be lucky to pay $.10 a share at most brokerage firms, 
and if you trade in quantities of less than $1,000, you might have to pay as much 
as $.40 or $.50 a share. Over time, the lower transaction costs that the mutual fund 
pays will boost your return because you will have more money invested and less 
paid out in fees. 

You can get into and out of a mutual fund easily. All it takes is a phone call 
to your broker or the fund. By law, a fund must allow you to buy shares at the 


PART ONE: Maximizing Your Investment Options 

fund』s closing price on the day the fund gets your money. The closing price, called 
net asset value (NAV), is the value of the stock portfolio at the end of the day divided 
by the number of shares in the fund. Conversely, if you want to sell, the fund 
must redeem your shares at the NAV on the day you give your instructions. This instant 
liquidity can be a big advantage when you want to buy or sell stocks quickly. 
For example, say stock prices are shooting up and you still haven』t determined 
which stocks to buy, or you can』t get your broker on the phone. Instead of watching 
helplessly on the sidelines, you can participate in the rally by buying a stock 
fund. On the other hand, if stock prices are plunging, it may be difficult to get decent 
prices if you have only a handful of shares to sell. When you sell the mutual 
fund, you know you will receive the fund』s closing price that day, no matter what 
problems the fund manager has selling stocks. 

In addition to buying and selling fund shares on your request, mutual funds can 
set up automatic systems to add or subtract money from your account. Most mutual 
funds will automatically transfer a set amount—usually as little as $25—from your 
bank account or money-market mutual fund into the stock or bond fund of your 
choice on a regular basis, whether that be weekly, monthly, or annually. Many mutual 
funds actually waive their normal initial minimum investment amount of $1,000 
if you sign up for such a plan. This is a simple way to invest on autopilot. You probably 
won』t even miss the money from your checking account, but over time, you will 
build up your capital in the mutual fund. On the other hand, if you are retired and 
want a regular income, most mutual funds will automatically withdraw a certain 
amount of money and send you a monthly check. This is called an automatic withdrawal 
program, which allows you to withdraw a regular amount of money from 
your funds every month. It is targeted mostly to retired people living off their funds. 

You can easily switch from one fund to another within a fund family. Most mutual 
fund companies offer a broad array of mutual funds so that as your views of the 
stock market or your needs change, you can simply switch from one fund to another. 
This is known as an exchange. For instance, you may have invested money in a 
growth stock fund for years to build capital for retirement. When you retire, you can 
exchange some of the shares in the growth fund for shares in a stock fund paying 
high dividends on a monthly basis, on which you will live. All fund families allow 
exchanges not only between stock funds but also from stock funds to bond funds and 
money-market funds, which may act as havens when stock prices are falling. 

The fund will reinvest dividends and capital gains automatically. If you want 
the power of compounding to work for you, you can instruct your mutual fund to 
reinvest in more fund shares all dividends it has earned from the stocks in its 
portfolio. In addition, as the fund captures capital gains by selling stocks at a profit, 
it disburses the proceeds as capital gains distributions. You can have the fund reinvest 
those distributions in more shares as well. Remember to pay taxes on both reinvested 
dividends and capital gains in the tax year you receive them even though you have 
reinvested the money unless you hold shares in a tax-deferred retirement account. 


CHAPTER 4: Selecting Mutual Funds 

Over time, the shares you own from reinvestment produce more shares, and 
the compounding effect can dramatically increase your capital. For example, if you 
had invested $10,000 in the Denver-based Berger Growth Fund on September 30, 
1974, you would have accumulated $371,479 by December 31, 2000, assuming 
you had reinvested all dividends and capital gains distributions. In contrast, your 
$10,000 would have grown to only $64,503 if you had taken the distributions. The 
graph in Figure 4.1 clearly illustrates the power of compounding. 

More on Fund Fees 

Some mutual funds levy additional charges, which you should be aware of before 
you invest. The funds cannot sneak these charges by you. They are all 
disclosed in a standardized fee table on the front of all mutual fund prospectuses. 
Prospectuses are the official legal documents describing funds. The section, titled 
「Fund Expenses,」 appears in the example in Figure 4.2. 

Note that funds are required to detail their expenses by category for the last 
year. In addition, they must project what that level of expenses would cost investors 
if they invested $1,000 over the next year, three years, five years, and ten years. 
You can use this section of the prospectus to compare one mutual fund with a 
similar fund in another fund family. 

An explanation of the most common fund fees follows. 

Back-end loads. To compete with no-load funds, many broker-sold funds now 
waive a charge when you buy them but hit you with a fee if you sell the funds before 
a particular period of time elapses. This is also called a contingent deferred 
sales charge. Usually, the back-end load operates on a sliding scale, so you will 
pay 4 percent of the money you invested if you sell the fund in the first year you 
hold it, 3 percent in the second year, 2 percent in the third year, and 1 percent in the 
fourth year. If you hold the fund for at least four years, you will not pay the back-
end load. A brokerage firm needs this system because it pays the broker his or her 
commission up front when you buy the fund even though the firm doesn』t receive 
the money from you to pay the commission. If you sell the fund before the brokerage 
firm has had a chance to recoup that fee through management fees, it wants to 
be able to charge you. 

Dividend reinvestment loads. Although most mutual funds do not levy a sales 
commission on reinvested dividends, some fund groups do. This fee usually 
amounts to 4 percent of the reinvested funds. Because dividend reinvestment is automatic 
and no sales advice is given, it is best to avoid funds that charge for counsel 
you are not receiving. 

Exchange fees. Some fund groups charge a fee if you exchange one fund for 
another within a fund family. The fee covers administrative costs and usually 
amounts to about $5 per transaction. 


PART ONE: Maximizing Your Investment Options 

Figure 4.1 The Effect of Compounding on a 
Berger Growth Fund Investment 

BERGER GROWTH FUND 



From Investment 
From Capital Gains 
From Dividends 

Dividends and Capital Gains Reinvested 


Past performance shows the fund』s history and does not guarantee future results. The figures include 
changes in share price and reinvestment of dividends and capital gains, which will fluctuate so that 
shares, when redeemed, may be worth more or less than their original costs. The figures include the 
deduction of 12b-1 fees beginning in June 1990. 

Source: Reprinted with permission of Berger Associates and TowersData. 


CHAPTER 4: Selecting Mutual Funds 

Figure 4.2 Sample Charges That Funds Levy 


Source: Reprinted by permission of OppenheimerFundsSM. 


PART ONE: Maximizing Your Investment Options 

12b-1 fees. These charges, like management fees, are deducted automatically 
from the fund』s assets each year. They cover distribution costs, which include advertising, 
promotion, literature, and sales incentives to brokers, and range from .25 
percent to as much as 1.25 percent of the fund』s assets each year. The idea behind 
these fees is that if a mutual fund increases its assets through more promotion, fund 
shareholders will benefit because the fund』s expenses will be spread over a wider 
customer base, thereby lowering each shareholder』s cost. In many cases, however, 
expenses do not decrease as fund assets grow. In general, unless you invest in a 
fund that has a superb record or some other compelling reason to buy it, avoid 
funds that impose 12b-1 fees. 

Buying and Monitoring Shares in a Stock Mutual Fund 

THE PROSPECTUS 

Mutual fund companies have made it as easy as possible to open an account, 
but there is still a certain amount of legal paperwork you must go through in the 
process. In protecting consumers and making sure they receive enough information 
about a fund, the Securities and Exchange Commission (SEC) requires that 
potential fund shareholders receive a prospectus and an application form from the 
fund. While you shouldn』t expect the prospectus to compete with your favorite 
novel for light reading, it does contain several important facts you should understand 
before you give the fund any money. The following are the most important 
areas the prospectus covers: 

. 
The fund』s investment objective. It may be aiming for aggressive growth, 
steady income, or something in between. 
. 
The investment methods the fund uses to achieve its goals. It may restrict itself 
to certain kinds of stocks, or it may use complex hedging strategies involving 
futures and options to prevent losses. The fund will also tell you 
what kinds of stocks it will not buy. 
. 
The fund』s investment advisor. The prospectus will outline the background 
of the fund company and usually tell you which portfolio manager makes 
the decisions about what stocks to buy and sell. Ultimately, the fund』s performance 
is determined by the quality of the investment advisor. Some 
firms use a team approach, while others are run by an individual who decides 
what to buy or sell. 
. 
The amount of risk the fund will assume. Depending on the type of fund, the 
prospectus will reveal how volatile the fund』s price is. The more risks the 
fund takes, the more its price will jump around. 
. 
The tax consequences of holding the fund. For example, the prospectus will 
mention that you must pay taxes on all dividend and capital gains 
distributions. 

CHAPTER 4: Selecting Mutual Funds 

. 
A list of services provided by the fund. The prospectus will tell you whether 
the fund is suitable for individual retirement accounts (IRAs) and Keogh 
accounts, whether you can reinvest dividends and capital gains automatically, 
and whether you can set up an automatic investment or withdrawal 
program. The prospectus will also tell you the minimum initial investment 
to get into the fund, as well as the minimum amount to make subsequent 
investments. 
. 
A financial summary of the fund』s performance for the past ten years if it 
has been around that long. A table will track the fund』s price, dividends, 
and capital gains distributions that have been paid and expenses. 
. 
A listing of all funds fees. This table will summarize the management fee, 
12b-1 fees, sales charges, and any other fees charged to shareholders. 
THE APPLICATION FORM 

When you』ve decided that you want to invest in a particular fund, you must fill 
out the application and return it to the fund with a check. Once you』ve completed 
this form, you will not have to do so again for this fund group. To guide you 
through the application process, we have reproduced a sample form here (see Figure 
4.3), printed with permission from the Oppenheimer group of funds. Following 
are the key areas of information about which you will be questioned, coded by 
number according to the sections on the sample application: 

1A. Account ownership. You should record the exact name(s) in which you want 
the fund registered. If you hold assets in joint name with your spouse, include 
both names. 

1B. Trust, corporation, or other entity. This section is for other than individual 
or joint account owners. If this account is for a trust, the trustee must sign 
here. 

1C. Gifts/Transfers to a minor. If this account is for a minor, or is a gift for a 
minor, the custodian and successor custodian (if applicable) must fill in 
their name(s) along with the minor』s name, Social Security number, and 
date of birth. 

2. 
Address information. Enter the address to which you want your statements 
sent—normally your home address. 
3. 
Fund and dividend options. Check off the fund(s) in which you want to 
invest. Dividends and long-term gains will automatically be reinvested 
unless you mark the instructions offered on this form. 
4. 
Options 
A. 
Reduce the sales charge on Class A shares. This offers a reduced 
sales charge on Class A shares by either signing a letter of intent indicating 
the total amount you intend to invest over the next 13 months, 

PART ONE: Maximizing Your Investment Options 

Figure 4.3 Oppenheimer』s New Account Application Form 


Source: Reprinted by permission of OppenheimerFundsSM. 


CHAPTER 4: Selecting Mutual Funds 

Figure 4.3 (continued) 



PART ONE: Maximizing Your Investment Options 

Figure 4.3 Oppenheimer』s New Account Application Form 
(continued) 



CHAPTER 4: Selecting Mutual Funds 

Figure 4.3 (continued) 



PART ONE: Maximizing Your Investment Options 

Figure 4.3 Oppenheimer』s New Account Application Form 
(continued) 



CHAPTER 4: Selecting Mutual Funds 

Figure 4.3 (continued) 



PART ONE: Maximizing Your Investment Options 

or through right of accumulation, if you already own Class A or B 
shares in other Oppenheimer funds. 

B. 
Asset builder plan. Allows you to buy shares automatically by transferring 
money from your bank account each month. 
C. 
Systematic change. Allows you on a monthly, quarterly, semiannual, 
or annual basis to exchange shares for shares in another fund. Shares 
must be the same class and have the same account registration. 
D. 
Systematic withdrawal plan. You can set up monthly, quarterly, semiannual, 
or annual electronic payment of your proceeds to your bank 
account. 
E. 
Send payment to others. You can send payment of dividends, gains, 
or share redemptions to other people or entities. 
F. 
Transfer money to and from your bank account. Fill in your bank』s 
name, address, phone number, ABA routing number (look at your 
bank deposit slip for the number), bank account number, and bank 
account holder(s), so that the fund holder can automatically transfer 
funds from your bank to purchase shares on your instructions. 
G. 
Modify your automatic telephone and Internet privileges. Authorizes 
you and Oppenheimer to make and act on share purchase or sale instructions 
via telephone or the Internet and holds the fund holder 
harmless if there is an error that causes a loss. 
H. 
Establish checkwriting. Allows checkwriting to purchase funds. You 
can also checkmark joint account owners to be able to write checks 
without the other account holder』s signature. 
5. 
Signature. Make sure that you or anyone else signs the form. This is important, 
because the signature(s) will be used for comparison if you want to 
withdraw funds or close the account. At that point, the fund holder will request 
a signature guarantee to prove that you are the rightful owner of the 
funds. By signing you also accept the fund holder』s terms and conditions. 
Once you have completed and mailed the application, your account should be 
established within a few days. You will receive a confirmation statement from the 
fund showing how much you invested, how many shares you received and the 
current price per share. Unlike stocks, certificates are not usually issued as evidence 
of ownership of mutual fund shares. Some mutual fund companies will issue 
certificates but only if requested. 

MONITORING YOUR FUND 

Tracking the value of your fund holdings is simple. Just multiply the current 
price (NAV) by the number of shares you own. For example: 


CHAPTER 4: Selecting Mutual Funds 

500 Shares of Oppenheimer Total Return Fund × $10 Per share = 
$5,000 Total value 

If you reinvest your distributions in more shares (which is probably a good 
idea), remember that the number of shares you own will continue to increase. 
Make sure to use the latest number of shares on your statement in calculating the 
value of your holdings. 

The easiest way to determine the current price is to call your fund company 
or broker. Most fund companies have automated voice systems so you can even 
call after hours. 

You can also look up your fund』s NAV in a local newspaper or in national papers 
like the New York Times, USA Today, or Investor』s Business Daily. Following is 
a typical listing, along with an explanation of each column: 

Offer NAV 
NAV 2 Price3 Change4 
OppenheimerFunds1 
Asset Allocation 11.63 12.34 +.02 
Blue Chip 16.76 17.78 ..03 
Discovery 33.91 35.98 +.10 
Total Return 7.80 8.28 +.15 
Vanguard Group 
Explorer 43.69 N.L. +1.43 

1. 
The fund family』s name comes first, followed by the names of all the funds 
in the family. The fund names are usually abbreviated. Each family lists 
several types of funds, including different kinds of stock and bond funds. 
2. 
The NAV (net asset value) is the per-share price of the fund』s assets, including 
expenses. This is the price per share, in dollars and cents, you 
would receive if you sold the shares on this day. In the example, the price 
of the Oppenheimer Blue Chip Fund is $16.76 per share. Some newspapers 
list this column under the heading 「Sell.」 
3. 
Offer price is the amount you must pay, in dollars and cents, to buy shares 
on this day. For load funds that carry a sales charge, the difference between 
this column and the NAV column is the commission that goes to the 
broker. In the case of the Blue Chip Fund, that difference is $1.02 per 
share, or 5.7 percent. To calculate the load, divide the difference by the 
offer price. No-load funds, because they do not charge commissions, 
usually record an 「N.L.」 (which stands for no-load) in this column. The 
example』s Vanguard Explorer Fund, for instance, is a no-load. Some 
newspapers list this column under the heading 「Buy.」 

PART ONE: Maximizing Your Investment Options 

4. 
The NAV change shows, in dollars and cents, how much the price of the 
shares changed in the last day』s trading. In the example, the Oppenheimer 
Blue Chip Fund lost $.03, while the Total Return Fund gained $.15 and the 
Vanguard Explorer Fund gained $1.43. 
Various abbreviations appear in the mutual fund tables found in local and 

national newspapers. Among the most common are the following: 
e—ex-distribution, which signifies that the fund just distributed capital 
gains and the share price has been adjusted downward to reflect the payout 

f—previous day』s closing price, if no price was available for the latest day 
N.L.—no load, signifying the fund charges no sales commission 
p—Distribution costs, such as a 12b-1 fee, apply to the fund. 
r—Redemption charges or back-end loads may apply if you sell the fund 

before such charges have been phased out. Usually, such charges are 
levied on a sliding scale. For example, one fund provides that if you sell 
the fund in the first year, you are assessed a 4 percent charge; in the second 
year, 3 percent; in the third year, 2 percent; in the fourth year, 1 percent. 
There would be no charge if you sold the fund after having held the shares 
four years. 

s—stock split or dividend, if the fund split its price (A fund at $50 a share 
might split 2 for 1, which would lower its price to $25 a share and double 
the number of shares outstanding.) 

t—Both 12b-1 fees and redemption charges may apply to the fund. 
x—ex-dividend, which signifies that the fund just distributed a dividend 
and the share price has been adjusted downward to reflect the payout 

The Wall Street Journal enhances the traditional listing of mutual funds. Following 
is a Journal listing, along with an explanation of each additional column: 

1. 
The fund』s investment objective may be growth, income, or a combination 
of the two. The fund may achieve its objective by investing in stocks, 
bonds, or a combination of stocks and bonds. The Journal provides the 
following abbreviations for ten categories of mutual funds: 
Stock Funds 
SEC—sector funds, which invest in only one industry. These include 
environmental, financial services, gold-oriented, health/biotechnology, 

natural resources, real estate, science and technology, specialty and miscellaneous, 
and utility industries. 
SML—small-company funds, which buy shares in small growth 

companies 


CHAPTER 4: Selecting Mutual Funds 211 
Total Return 
Investment Offer NAV 26 4 
Objective1 NAV Price Change YTD2 Weeks3 Years4 R5 
OppenheimerFunds 
Asset Allocation S&B 11.63 12.34 +.02 +10.30 +15.65 +9.5 A 
Blue Chip STK 16.76 17.78 ..03 +12.45 +13.56 +10.6 C 
Discovery SML 33.91 35.98 +.10 +15.43 +12.57 +20.6 D 
Total Return STK 7.80 8.28 +.15 +10.43 +20.56 +14.7 B 
Vanguard Group 
Explorer SML 43.69 N.L. +1.43 +11.23 +23.45 +15.6 A 

Source: Reprinted by permission of The Wall Street Journal, . 2001 Dow Jones & Company, Inc. All Rights Reserved 
Worldwide. 

STK—general U.S. stock funds, which buy shares in U.S. companies. 
These include capital appreciation, equity income, growth, growth and income, 
and option income companies. 

WOR—world stock funds, which invest in companies around the world. 
These include Canadian, European region, global, international, Japanese, 
Latin American, Pacific region, and small-company global companies. 

Bond Funds 

BHI—bond high-yield funds, which buy high-current-yield bonds, commonly 
known as junk bonds 
BND—intermediate and long-term bond funds, which buy bonds matur


ing in about 3 years to as long as 30 years. These include intermediate 

U.S. Treasury, intermediate U.S. government, general U.S. Treasury, 
general U.S. government, GNMA (Ginnie Mae), U.S. mortgage, corporate 
debt—A-rated, corporate debt—BBB-rated, intermediate investment 
grade, general, flexible income, and target maturity bonds, which use 
zero-coupon bonds to mature at a particular date in the future. 
BST—bond short term, which buy short-term bonds maturing in three 
years or less. These include adjustable-rate preferred, adjustable-rate 
mortgage, short U.S. Treasury, short U.S. government, and short investment 
grade bonds. 

MUN—municipal bonds of all maturities, which buy tax-free bonds issued 
by states and local municipalities. These include short municipal debt, general 
municipal debt, intermediate municipal debt, insured municipal debt, 


PART ONE: Maximizing Your Investment Options 

high-yield municipal debt, and single-state municipal, single-state insured 


municipal, and single-state intermediate municipal bonds. 
WBD—world bond funds, which buy bonds issued by governments and 
corporations around the world. These include short world multimarket, 
short world single-market, and general world income bonds. 


Stock and Bond Funds 
S&B—stock and bond blended funds, which buy varying combinations of 
equities and fixed-income securities. These include balanced, balanced 
target maturity, convertible security, flexible portfolio, global flexible 
portfolio, and income fund bonds. 


2. 
The total return, year to date (YTD), is the gain or loss in value of the 
fund』s shares, plus any dividends and interest paid out so far this year. 
These mutual fund tables assume that all capital gains and dividend 
payouts are reinvested in more shares of the fund. For example, the Oppenheimer 
Asset Allocation Fund』s total return has been 10.3 percent so 
far this year. That return might have been composed of 5 percent in 
dividends and 5.3 percent in capital gains. 
3. 
Total return, 26 weeks, shows the capital gain or loss, plus interest and 
dividends received, over the past 26 weeks, or half a year. 
4. 
Total return, 4 years, shows the capital gain or loss, plus interest and 
dividends received, over the past four years, expressed as an annual average 
rate. In the case of the Oppenheimer Asset Allocation Fund, for instance, 
shareholders have received an average annual return of 9.5 
percent for each of the past four years. 
The Wall Street Journal publishes long-term total returns for several time 
periods. On Tuesdays, it lists 4-week and one-year performances. On 
Wednesdays, it reports 13-week and three-year results. On Thursdays, it 
lists 26-week and four-year performances. On Fridays, it prints 39week 
and five-year results. By looking at how a fund has performed over 
various time periods, you will get a better sense of the consistency of its 
performance. 

5. 
R stands for ranking, which indicates how each fund』s total return performance 
ranks for the longest time period published that day. Funds are 
separated into five groups: A funds finish in the top 20 percent for their investment 
objective for a particular time period; B funds, in the second 20 
percent; C funds, in the third 20 percent; D funds, in the fourth 20 percent; 
and E funds, in the bottom 20 percent. In the example, the Oppenheimer 
Asset Allocation Fund has an A ranking, meaning its 9.5 percent average 
annual return over the past four years puts it among the top 20 percent of 
all stock and bond funds. 

CHAPTER 4: Selecting Mutual Funds 

In addition to these listings, the Journal publishes sales charge and annual expense 
data every Monday. Under the heading 「Maximum Initial Charge,」 a 
percentage of up to 8.5 percent will be listed. This means that a sales fee of up to 

8.5 percent of the amount you invest will be deducted as a commission to the 
salesperson. 
The Journal also lists a total expense ratio. This number represents the total 
annual operating expenses of the fund, expressed as a percentage of the fund』s 
assets in the prior year. Operating expenses include management fees, 12b-1 
distribution fees, and other charges levied on shareholders. A figure of 1 percent 
in this column, for example, means you will automatically be charged an annual 
fee amounting to 1 percent of your fund』s value. 

Types of Stock Funds: Choosing the Best for You 

Now that you understand the mechanics of buying and monitoring stock funds, 
it』s time to determine which is best for you. As with all investments, before you 
sink your money into any fund, you should review your financial goals, your risk 
tolerance level, and everything else you assessed in the first chapter of this book. 
Also, you should place each fund you consider at its appropriate level in the investment 
pyramid. 

The following is a rundown of the different categories of stock funds, separated 
into the sectors of the investment pyramid. 

HIGH-RISK APEX FUNDS 

Aggressive growth funds. These funds buy stocks of fast-growing companies 
or of other companies that have great capital gains potential. Or they might 
buy stocks in bankrupt or depressed companies, anticipating a rebound. Such funds 
often trade stocks frequently in hope of catching small price gains. They are also 
known as maximum capital gains funds. 

Foreign stock funds. These funds buy stocks of corporations based outside 
of the United States. In addition to the usual forces affecting stock prices, fluctuations 
in the value of the U.S. dollar against foreign currencies can dramatically affect 
the price of these funds』 shares, particularly over the short term. 

Sector funds. Sector funds buy stocks in just one industry or sector of the 
economy. Some examples would be environmental stocks, oil company shares, and 
stocks in automakers and gold-mining companies. Because these funds are undiversified, 
they soar or plummet on the fate of the industry in which they invest. 

Small-company growth funds. Such growth funds invest in stocks of small 
companies, typically those having outstanding shares with a total market value of 
$500 million or less. These companies have enormous growth potential, yet the 
stocks they invest in are much less established—and therefore riskier—than blue 
chip stocks. 


PART ONE: Maximizing Your Investment Options 

Special situation funds. These funds often place large bets on a small number 
of stocks, anticipating a big payoff. The 「special situation」 the fund manager 
looks for might be a takeover or a liquidation of the company at a price higher than 
the shares currently sell for. Some funds offer venture capital financing for privately 
held firms, hoping to cash in when the companies offer shares to the public 
in the future. 

MODERATE-RISK SECTOR FUNDS 

Growth funds. Growth funds invest in shares of well-known growth companies 
that usually have a long history of increasing earnings. Because the stock market 
fluctuates, growth funds rise and fall over time as well though not as much as 
funds holding smaller, less proven stocks. 

Equity-income funds. Such funds own shares in stocks that pay higher dividends 
than do growth funds. Whereas a growth fund』s payout may be 1 percent or 
2 percent, an equity-income fund might yield 4 percent or 5 percent. That higher 
yield tends to cushion the fund』s price when stock prices fall. When stock prices 
rise, equity-income funds tend to increase less sharply than do pure growth funds. 
A slightly more aggressive version of an equity-income fund is called a growth and 
income fund or a total return fund because it strives for gains from both income 
and capital appreciation. 

Index funds. These funds buy the stocks that make up a particular index to allow 
investors』 returns to match the index. The most popular index used is the Standard & 
Poor』s 500. Proponents of index funds argue that because many money managers fail 
to match or beat the S&P 500 each year, investors can come out ahead by just matching 
the index. The management fees of an index fund are much lower than those of a 
regular stock fund because the fund manager just replicates an index; he or she does 
not research or make decisions on which stocks to buy and sell. 

Option-income funds. These funds buy stocks and write options on the 
shares, which generate more income for shareholders. This usually results in a 
higher dividend than growth funds offer. On the other hand, if stock prices rise, the 
funds lose their position in the stocks because the options are exercised. Therefore, 
these funds have limited appreciation potential. 

Socially conscious funds. Such funds look for companies that meet certain 
criteria, such as advancing minority and female employees or helping clean up the 
environment. These funds screen out stocks of companies that are major polluters, 
defense contractors, or promoters of gambling or tobacco. (See the section on socially 
conscious investing in Chapter 3 for more on these funds.) 

LOW-RISK SECTOR FUNDS 

Balanced funds. Balanced funds keep a fairly steady mix of high-yielding 
stocks and conservative bonds. This allows the funds to pay a fairly high rate of 
current income and still participate in the long-term growth of stocks. 


CHAPTER 4: Selecting Mutual Funds 

Flexible portfolio funds. These funds have the latitude to invest in stock, 
bonds, or cash instruments, depending on the fund manager』s market outlook. If 
he or she thinks stock prices are about to fall, the manager can shift all the fund』s 
assets into cash instruments, thereby avoiding losses. If he or she thinks stock 
prices are about to rise, the manager can move all the fund』s assets into stocks. 
Usually, the fund will have some money in stocks, bonds, and cash, which tends 
to stabilize its performance. These funds are also known as asset allocation 
funds. 

Utilities funds. Such funds buy shares in electric, gas, telephone, and water 
utilities. Because all these companies are regulated monopolies, they have steady 
earnings and pay high dividends. Utilities funds are subject to swings in interest 
rates, however. Nonetheless, for a high-yielding and relatively stable stock fund, 
it』s hard to beat a utilities fund. 

Another way to look at this trade-off between risk and return is illustrated in 
the dial in Figure 4.4. 

Figure 4.4 Trading Risk for Return: A Mutual Fund Dial 


Source: The Investor』s Guide to Low-Cost Mutual Funds. Reprinted by permission of The Mutual Fund Education Alliance. 


PART ONE: Maximizing Your Investment Options 

SELECTING A FUND WITHIN A CATEGORY 

Once you have chosen the fund category that fits your needs, you must narrow 
your options further by looking at the best funds within the category. 

Performance. The first criterion in selecting a particular fund is performance. 
You want to choose a fund that has established a solid long-term record of achieving 
its objectives. It is also preferable if the fund has had the same manager for a long 
time so that you can be assured that the fund』s style will remain consistent. 

Several independent fund-monitoring organizations rank fund performance. 
The two biggest and best known are Lipper Analytical Services (74 Trinity Pl., New 
York, NY 10006; 212-393-1300) and Morningstar (225 W. Wacker Dr., Chicago, 
IL 60606; 800-876-5005). Results from both are published regularly in The Wall 
Street Journal, USA Today, and Investor』s Business Daily, as well as Money magazine 
and other reputable personal finance journals. You can also track fund performance 
in the many newsletters that follow this action. The names, addresses, and 
telephone numbers of these newsletters are listed at the end of this chapter. 

The best measure of fund performance is called total return. This combines all 
dividends and capital gains distributions with changes in a fund』s price. It is a far 
better yardstick to use when comparing funds than just the change in a fund』s price 
over a period of time. The listings for total return you will see from the ratings 
services and in the media normally show a fund』s results thus far in the current 
year, over the past 52 weeks and over the last three, five, and ten years. They will 
also refer to the average annual return, which is the averaging of returns over 
longer periods of time. Any average annual return of more than 15 percent for at 
least five years is considered exemplary. 

In choosing a fund, you should feel comfortable with its style. What exactly is 
a fund』s style? It is a methodology of selecting stocks that differentiates one fund 
from another. Some styles work well at certain points in a stock market cycle, while 
others take over as the stock market changes. The two broadest kinds of stock-
choosing styles are growth and value. Growth refers to selecting stocks with ever-
rising earnings, while value means buying stocks temporarily out of favor that the 
manager expects will become popular again. Therefore, you can often determine a 
fund』s style by its name. For instance, the Kemper Growth Fund is a classic growth 
stock fund, while the T. Rowe Price Small-Cap Value Fund looks for small stocks 
that are currently out of favor. In general, growth stocks shine when the economy 
is well into an economic recovery, while value stocks tend to outperform others 
when the economy is in recession or is just starting to emerge from a recession. 

It is difficult for the average investor, as well as the Wall Street professional, 
to evaluate whether growth or value stock funds are on the upswing at any particular 
moment. For that reason, the best long-term strategy is to diversify among 
styles. If half your holdings are in growth stocks and the other half are in value 
stocks, you will perform better over time than if you invest all your money in one 
style of stock. 


CHAPTER 4: Selecting Mutual Funds 

Another difference in investment styles is based on whether the fund manager 
makes market timing decisions. A fund run by a market timer, even though it is 
a stock fund, can sell most or all of its stocks if the manager senses the stock 
market is about to tumble. This fund is designed to protect shareholders』 capital 
from huge losses. Funds operating under the other style maintain that it is impossible 
to time the stock market』s ups and downs, so it is best to be nearly fully 
invested in stocks at all times. These funds will be more volatile than funds that 
try to time the market. This means that fully invested funds will rise faster when 
stocks rise but fall further when stocks tumble. The managers of such funds leave 
the market timing to you. 

Convenience. The second criterion you should use to choose a fund is convenience. 
Though you might receive a higher return by having holdings in the top 
ten funds in ten different fund families, the recordkeeping and headaches in 
following so many funds are most likely not worth the higher return. It』s probably 
best to find a top-quality fund family or two and keep most of your capital with 
them. Most families offer consolidated statements, meaning you can see all of your 
fund holdings on one statement. Also, you will be able to transfer money from one 
fund to another easily if you keep most of your assets in one place. 

You have one way around this problem of proliferating fund families. Several 
discount brokers, including Charles Schwab, Fidelity, and TD Waterhouse, allow 
you to buy almost any mutual fund in any family and keep it in one account. 
Schwab calls its service the Mutual Fund Marketplace or OneSource; Fidelity calls 
its equivalent FundsNetwork. For many funds, you pay no loads, transaction fees, 
or commissions. By consolidating all of your fund holdings under one custodian, 
you can save yourself much frustration and still participate in the best funds. 

Quality of service. The quality of the service you receive is also important 
in choosing a fund family. While most fund complexes offer good service, there 
are variations. Following are a few services that top fund groups offer. You should 
have access to each of them. 

. 
Automated phone answering systems that can give you prices, yields, and 
other information about your funds, as well as allow you to make transactions. 
In many cases, these systems operate 24 hours a day, seven days a week. 
. 
Knowledgeable and helpful telephone service representatives. Remember 
that phone reps at no-load funds will describe funds but will not advise you 
on which fund to buy. Some large fund companies have walk-in investor 
centers in large cities where you can discuss your investing needs with a 
fund representative in person. 
. 
Easy-to-read statements.You should not have to be a lawyer or mutual fund 
expert to be able to make sense of your statement. It should clearly spell out 
how many shares you have, how many shares you bought or sold in your 
latest transactions, the yields on your funds, and other relevant data. Most 
funds will calculate your cost basis, which is the amount of money you 

PART ONE: Maximizing Your Investment Options 

spent to buy your shares. That can be quite complex to ascertain on your 
own if you have been buying shares with reinvested dividends and capital 
gains for years. You will need your cost basis to determine the amount of 
taxes you owe when you sell fund shares. 

Once you have opened an account with a fund that meets your criteria, hold onto 
it unless its performance starts to deteriorate, its fees shoot up, its star manager 
leaves, its style changes dramatically, or you have some other major reason to sell 
the fund. That includes, of course, a change in your financial situation or your stage 
in the life cycle. Otherwise, continue to add to the fund and watch it grow! 

Closed-End Mutual Funds 

So far, all of our discussion of mutual funds has pertained to open-end funds. 
Another variety of fund is called a closed-end fund, which has its own advantages 
and disadvantages. 

Like open-end funds, closed-end funds offer the advantages of professional 
management, diversification, convenience, and automatic reinvestment of dividends 
and capital gains. 

The difference between the two types of funds comes in the way they sell 
shares. Open-end funds create new shares continually, as more money is invested 
in them. When cash is taken out of the fund, the number of outstanding shares 
shrinks. The portfolio manager therefore is faced with an ever-changing pool of assets 
that can be small one month and huge the next. This can make it difficult to 
manage the fund because millions of dollars usually pour into the fund after it has 
had a hot record and stock prices are high, and millions leave the fund when it 
has underperformed the market and stock prices are falling. This pattern of 
volatile cash flow can severely harm the fund』s performance because the manager 
is forced to buy stocks when prices are high and sell them when prices are low. 

Closed-end funds are designed to avoid this problem. Instead of constantly 
creating and redeeming shares, these funds issue a limited number of shares, which 
trade on the New York or American Stock Exchange or on the Nasdaq National 
Market System. Instead of dealing with the fund company directly when you buy 
or sell shares, as you do with open-end funds, you trade closed-end shares with 
other investors, just as you do any publicly traded stock. You pay standard brokerage 
commissions to buy and sell them, and you can look up the fund』s price in the 
stock tables of the newspaper every day. 

From the closed-end fund manager』s point of view, there is no need to worry 
about huge flows of cash into and out of the fund. The manager knows how much 
money he or she must invest and selects stocks based on the fund』s investment objective. 
This allows the manager to concentrate on meeting long-term objectives because 
he or she does not have to keep a stash of cash around to meet redemptions. 


CHAPTER 4: Selecting Mutual Funds 

Like an open-end fund, a closed-end fund always has a certain NAV (the worth 
of all the stocks in its portfolio divided by the number of shares). But unlike an 
open-end fund, a closed-ender can sell for more or less than the value of its portfolio, 
depending on demand for the shares. 

When the fund sells for more than its portfolio is currently worth, that is 
called selling at a premium. This usually happens when the fund is extremely 
popular and it offers some unique style or investing niche, which make investors 
willing to pay a high price for it. For example, the Korea Fund, which at the time 
was the only fund granted permission to invest in fast-growing Korea by the Korean 
government, soared to a 100 percent premium at one point because investors 
had no other way of investing in Korea. That means that investors were willing 
to pay $20 a share—or double the $10 that the underlying portfolio of Korean 
stocks was worth. Another reason a fund might sell at a premium is that it is 
named after a famous money manager with a good track record, so brokers actively 
sell it. Funds that meet this description include the Gabelli Fund, the Templeton 
Emerging Markets Fund, and the Zweig Fund. 

In general, closed-end funds tend to jump to premiums immediately after they 
first issue shares to the public because the brokerage firms that underwrite the issues 
actively promote them for a few months. Often, once the brokers have moved 
on to the next closed-end issue, the older funds drop to a discount. The moral of the 
story: It almost never pays to buy a new issue of a closed-end fund. 

On the other hand, a fund investing in an unpopular category of stocks can fall 
to a steep discount. For example, the Brazil Fund dropped to a 35 percent discount 
when the country was suffering through a bout of political scandals and hyperinflation. 
That means a buyer paid only $6.50 per share, or 65 percent of the $10 
value of the Brazilian stock portfolio. Closed-end funds can also drop to discounts 
because few people pay attention to them and, therefore, there is little demand for 
them. That can provide an opportunity to buy assets cheaply. In fact, if a fund』s 
discount remains too deep for too long a time, raiders will often swoop in. Their 
game is to buy millions of shares at a discount, then force a vote to convert the fund 
from closed-end to open-end status. Because open-end funds always trade at the 
worth of their underlying portfolios, the raiders can walk off with huge profits. 

Therefore, you should assess two factors when you buy a closed-end fund. The 
first is the fund manager』s record in choosing winning stocks that allow the fund to 
achieve its investment objective. The second factor is whether you are buying the 
fund at a premium or a discount. Some investors』 entire strategy with closed-end 
funds is to buy them at a discount and wait for them to rise to a premium, at which 
point they sell. 

To determine whether a fund is selling at a premium or a discount, you can 
look in Monday』s Wall Street Journal in the 「Money and Investing」 section or in 
Barron』s. A sample table, along with an explanation of each column, follows: 


PART ONE: Maximizing Your Investment Options 

Stock Net Asset 
Fund 1 Exchange2 Value3 Stock Price4 % Difference5 
General American Investors NYSE $ 9.00 $10.00 +11% 
China Fund NYSE 13.00 10.00 .23% 

Source: Reprinted by permission of The Wall Street Journal, . 2001 Dow Jones & Company, Inc. All Rights Reserved Worldwide. 

1. 
Column 1 lists the name of the fund. Funds are broken down alphabetically 
by categories, such as diversified funds, specialized equity funds, 
and bond funds. 
2. 
The second column notes the exchange where the fund』s shares are traded. 
In the example, both the General American shares and the China Fund 
trade on the New York Stock Exchange. 
3. 
The NAV is the total per-share worth of the underlying portfolio of securities 
on this day. In the example, all of the stocks in General American, divided 
by the number of fund shares, are worth $9 per mutual fund share. 
4. 
The stock price is the dollar amount that the fund currently sells for on the 
New York Stock Exchange. 
5. 
The difference is the percentage difference between the stock price and the 
NAV. In the example, General American is trading at an 11 percent premium, 
while the China Fund is selling at a 23 percent discount. 
There are several kinds of closed-end funds, each with its own objective and 
risk characteristics. Some of the most common types follow. 

Bond funds. These funds buy either taxable government or corporate bonds or 
tax-free municipal bonds and pass the income on to shareholders. 

Diversified equity funds. These funds buy a portfolio of stocks in many industries. 
If the fund manager is bearish (the manager thinks that the stock prices 
are about to fall), though, the fund can hold cash or some bonds. The objective of 
diversified equity funds is usually growth. 

International funds. International funds buy stocks in countries around the 
world. Their prices are therefore affected not only by changes in stock prices but 
also by fluctuations of foreign currencies against the U.S. dollar. Some international 
funds specialize in a particular area of the world, like Europe or Asia. Some 
specialize in stocks of developing countries. Some funds buy stocks in a particular 
industry, like health care or telecommunications, on a worldwide basis. 

Sector and specialty funds. These funds specialize in the stocks of a particular 
industry such as banking, media, natural resources, or health care. Such funds 
have more potential for gain if the industry you pick does well but also have a 
higher risk of loss if the industry falls out of favor. 


CHAPTER 4: Selecting Mutual Funds 

Single-country funds. Such funds invest in the stocks of a single country. 
This makes them more volatile than broadly diversified international funds. For 
example, on the euphoria about the possibilities of German reunification, the Germany 
Fund shot up sharply to a huge premium after the Berlin Wall fell. A few 
years later, when it was clear that reunification would take longer and be more 
costly than expected, shares in the Germany Fund fell to a deep discount. 

Using Your Computer to Pick Mutual Funds 

The World Wide Web provides a great resource to help you pick and monitor 
a mutual fund portfolio. By tapping into several of the Web sites listed in the Resources 
section of this chapter, you can screen databases of funds, such as the one 
maintained by Morningstar, to identify funds that meet your investment objectives. 
For example, you could search for funds with the highest long-term total 
return that take the lowest risk. Or, if you are an income investor, you can search 
for funds with the highest, safest yields. You also can identify funds with low 
expense ratios, which automatically gives you an advantage over buying high-
expense funds. Once you have identified funds that sound promising, you can 
go to their Web sites to find out more detail and even ask for applications and 
prospectuses online. Many mutual funds, and discount brokers offering mutual 
funds, make it easy to buy shares right from your computer. 

By participating in online discussions and chat groups, you may be able to pick 
up useful information on good mutual funds. Be careful, however, to know who is in 
these groups and what their hidden agendas and levels of expertise may be. Two good 
places to look for chat groups are the Mutual Funds section of America Online and 
the various discussion groups hosted by major personal finance magazines such as 
Money, Mutual Funds Magazine, Smart Money, and Worth. 

Once you have opened an account with a mutual fund company, you can use its 
Web page to monitor the value of your holdings and receive information on how the 
fund is doing and what its current investment strategy is. Many mutual fund company 
Web sites also have extremely helpful tools to help you in all areas of personal finance, 
such as calculators to help you figure out your financial needs in retirement, 
or the pros and cons of rolling over money from a regular IRA to a Roth IRA. You 
also can ask your mutual fund questions online, such as how to calculate your cost 
basis if you have been reinvesting dividends and capital gains for years. 

The profusion of thousands of mutual funds may at first make it seem more 
difficult than ever to pick the funds that are right for you. But adept use of your 
computer for research and portfolio monitoring may make your job of fund-
picking significantly easier. 

For both beginning and sophisticated investors, there is probably no better way 
to set up a diversified portfolio than through mutual funds. Both open and closed-
end funds offer many services at reasonable cost. The wide array of choices of 


PART ONE: Maximizing Your Investment Options 

different types of funds means that there is a fund for every investing need you may 
ever have, from the most aggressive to the most conservative. Millions of shareholders 
who have studied about and invested in funds are satisfied with their 
holdings. With the explanation of mutual funds provided by this chapter, you 
should now feel confident about choosing the best fund for your situation. 

Resources 

For further information on stock mutual funds, we recommend that you consult 
the following list of resources. It includes the names, addresses, and telephone 
numbers, where applicable, of books, newsletters, software, major fund companies, 
ratings services, and trade associations. The fund companies will provide a 
list of their funds, along with such data as current performance and fees. 

There are several ways to follow the action in closed-end funds. Some brokerage 
house analysts issue research reports on the funds, and you will spot occasional 
stories about closed-end funds in financial newspapers and magazines. For more 
in-depth coverage, consult those books and newsletters in the following list written 
specifically about closed-end funds. 

BOOKS ABOUT STOCK MUTUAL FUNDS 

The Art of Astute Investing: Building Wealth with No-Load Mutual Funds, by C. 
Todd Conover (AMACOM, 1601 Broadway, New York, NY 10019; 212-586-8100; 
800-262-9699; www.amanet.org). This step-by-step commonsense book teaches readers 
how to use their investment dollars to their best advantage with no-load mutual 
funds. 

Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, by John C. 
Bogle (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www. 
mcgraw-hill.com). Bogle, the founder and chairman of the Vanguard mutual funds 
group, gives sage advice on setting up a portfolio of funds to meet investment objectives, 
spotting excessive fees and false advertising claims, and interpreting mutual fund data. 

Building Wealth with Mutual Funds, by John H. Taylor (Windsor Books, Box 280, 
Brightwaters, NY 11718; 516-321-7830; 800-321-5934; www.windsorbooks.com). 
Offers a step-by-step approach to investing in mutual funds. Covers, among other topics, 
international investing, index funds, variable annuity funds, and socially responsible 
investing. 

Business Week Guide to Mutual Funds, by Jeffrey M. Laderman (McGraw-Hill, 

P.O. Box 548, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Explains 
the different types of funds in an easy-to-read format. Recommends investment strategies 
for all ages and explains why some funds may work better than others. Explains 
how loads and high expenses can ruin investment returns. 

CHAPTER 4: Selecting Mutual Funds 

But Which Mutual Funds?: How to Pick the Right Ones to Achieve Your Financial 
Dreams, by Steven T. Goldberg (Kiplinger Washington Editors, 1729 H Street, Washington, 
DC 20006; 800-280-7165; www.kiplinger.com). Walks readers through the 
basics of mutual funds, helping decide how much they』ll need to invest and for how 
long, and at what level of risk. Includes tables and worksheets. 

Buying Mutual Funds for Free, by Kirk Kazanjian (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). How to put together a diversified portfolio of the world』s finest funds by opening 
an account at one of the discount brokers and selecting from the list of no-load, notransaction-
fee offerings. 

CDA Wiesenberger Mutual Funds Update (CDA Wiesenberger, 1455 Research 
Blvd., Rockville, MD 20850; 800-232-2285). A detailed monthly compilation of mutual 
fund performance statistics. 

Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor, by 
John C. Bogle (John Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875; 212-850-6000; 
800-225-5945; www.wiley.com). Teaches the basic principle that for investments in mutual 
funds to provide wealth in the long term, the reader must abandon the current popular 
gambling on the latest mutual fund fad and invest in solid, low-cost no-load funds. 

The Complete Guide to Managing a Portfolio of Mutual Funds, by Ronald K. 
Rutherford (McGraw-Hill, P.O. Box 548, Blacklick, OH 43004; 800-634-3961; 
www.mcgraw-hill.com). Explains investment philosophy development techniques, explores 
all asset classes of mutual funds, and covers statistical and nonstatistical issues 
involved in selecting and managing a balanced portfolio of mutual funds. 

Getting Started in Mutual Funds, by Alvin D. Hall (John Wiley & Sons, 1 Wiley 
Dr., Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). Easy-tofollow 
commonsense guide for successful mutual fund investing. Suitable for novices; 
provides everything they need to know about mutual funds. 

The Handbook for No-Load Fund Investors, by Sheldon Jacobs (McGraw-Hill, 

P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). The definitive 
guide to mutual funds that do not levy sales commissions. 
How to Buy Mutual Funds the Smart Way, by Stephen Littauer (Dearborn Trade, 155 

N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). A thorough introduction to mutual funds for the financial do-it-yourselfer who 
likes to be in control, reduce costs, and rely on his or her own judgment. 
Kurt Brouwer』s Guide to Mutual Funds: How to Invest with the Pros, by Kurt 
Brouwer (John Wiley & Sons, 605 Third Ave., New York, NY 10158; 212-850-6000; 
www.wiley.com). A good book explaining how mutual funds work and the best 
strategies for buying and selling them. 

Mutual Funds for Dummies, by Eric Tyson and James C. Collins (IDG Books, 919 

E. Hillsdale Blvd., Suite 400, Foster City, CA 94404; 650-653-7000; 800-434-3422; 

PART ONE: Maximizing Your Investment Options 

www.idg.com, www.dummies.com). Contains all new market data and analysis about 
the ever-changing world of mutual funds. Simplifies financial planning and points to 
the mutual fund investments best suited for you. 

New York Institute of Finance Guide to Mutual Funds, 2000, by Kirk Kazanjian 
(Prentice Hall Press, One Lake St., Upper Saddle River, NJ 07458; 201-236-7156; 
800-382-3419; www.prenticehall.com). Performance data for 8,000 funds from Value 
Line Mutual Fund Survey, profiles of the year』s 100 most-promising fund performers, 
25 Web sites, model portfolios, and worksheets. 

Smart Money Moves: Mutual Fund Investing from Scratch, by James Lowell 
(Penguin-Putnam, 405 Murray Hill Pkwy., East Rutherford, NJ 07073; 800-788-6262; 
www.penguinputnam.com). Mutual fund investing guide, with strategies and information 
for investing online. Shows readers how to choose the right funds and how to explore 
online investing. 

Straight Talk about Mutual Funds, by Dian Vujovich (McGraw-Hill, P.O. Box 
543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). A primer on the 
basics of mutual funds. 

The Ultimate Mutual Fund Guide: 20 Experts Pick the 46 Top Funds You Should 
Own, by Warren Boroson (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800634-
3961; www.mcgraw-hill.com). Identifies the best mutual funds according to leading 
fund experts in all major categories, including money-market, stock, bond, and 
sector funds. Presents performance data and an interview with the fund manager for 
each of the highlighted funds. 

Well-Kept Secrets Every Vanguard Investor Should Know, by Dan Wiener (Fund 
Family Shareholder Association, Dept. 48F002, 7811 Montrose Rd., Potomac, MD 
20859-0014; 800-211-6359). Tips and ideas on how to avoid fees and lower costs, how 
to open two accounts for the price of one, how to get into closed-end funds, when to 
use Vanguard』s variable annuity, how to sidestep taxable switches, and how to deal 
with other issues. 

BOOKS ABOUT CLOSED-END MUTUAL FUNDS 

Herzfeld』s Guide to Closed-End Funds, by Thomas J. Herzfeld (McGraw-Hill, 

P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www. mcgraw-hill.com). A thorough 
review of everything you need to know to profit in closed-end funds. Profiles 
more than 300 fund portfolios and provides statistical analysis and rankings for most 
closed-end funds. 
Investing in Closed-End Funds: Finding Value and Building Wealth, by Albert 
Freedman and George Cole Scott (Prentice Hall Press, One Lake St., Upper Saddle 
River, NJ 07458; 201-236-7156; 800-382-3419; www.prenticehall.com). A more sophisticated 
overview of strategies for buying and selling closed-end funds. 


CHAPTER 4: Selecting Mutual Funds 

The Thomas J. Herzfeld Encyclopedia of Closed-End Funds, by Thomas J. Herzfeld 
(Thomas J. Herzfeld & Co., P.O. Box 161465, Miami FL 33116; 305-271-1900). 
An annual book filled with detail on the performance of all closed-end funds, along 
with strategies for buying and selling funds. 

NEWSLETTERS ABOUT STOCK MUTUAL FUNDS 

All Star Alpha Fund Timer (P.O. Box 203427, Austin, TX 78720; 800-299-4223) 

CDA Mutual Fund Report (Thomson Financial, 1455 Research Blvd., Rockville, 
MD 20850; 301-545-4000; www.cda.com) 

The Chartist Mutual Fund Letter (P.O. Box 758, Seal Beach, CA 90740; 310-5962385) 


Closed-End Fund Digest (4521 Campus Dr., PMB #283, Irvine, CA 92612; 949


737-5966) 

Equity Fund Outlook (P.O. Box 76, Boston, MA 02117; 617-397-6844) 

Fidelity Independent Advisor (P.O. Box 387, Williamstown, MA 01267; 800-548


3797) 

Fidelity Insight (Mutual Fund Investors Association, 20 William St., P.O. Box 
9135, Wellesley Hills, MA 02180; 617-369-2500; 800-444-6342; www.cobren.com) 

Fidelity Monitor (P.O. Box 1270, Rocklin, CA 95677; 800-397-3094; www. 
fidelitymonitor.com) 

Fund Advice (1200 Westlake Ave., N., Suite 700, Seattle, WA 98109; 800-4234893; 
www.paulmerriman.com) 

Fund Kinetics Investor (1200 Westlake Ave., N., Suite 700, Seattle, WA 98109; 
800-423-4893; www.paulmerriman.com) 

FundNet Insight (Mutual Fund Investors Association, 20 William St., Wellesley 
Hills, MA 02181; 617-369-2500; 800-444-6342; www.cobren.com) 

Gerald Perritt』s Mutual Fund Letter (12514 Starkey Rd., Largo, FL 33773; 800326-
6941; www.mutletter.com) 

Graphic Fund Forecaster (6 Pioneer Circle, P.O. Box 673, Andover, MA 01810; 

800-532-2322; www.tysfred.com) 

Growth Fund Guide (P.O. Box 6600, Rapid City, SD 57709: 605-341-1971) 

Income Fund Outlook (Institute for Econometric Research, 2200 S.W. 10th St., 

Deerfield Beach, FL 33442; 800-442-9000) 

Independent Adviser for Vanguard Investors (Fund Family Shareholder Association, 
7811 Montrose Rd., Potomac, MD 20854; 800-777-5005) 


PART ONE: Maximizing Your Investment Options 

Investech Mutual Fund Advisor (2472 Birch Glen, Whitefish, MT 59937; 406862-
7777; 800-955-8500; www.investech.com) 

Louis Rukeyser』s Mutual Funds Newsletter (1750 Old Meadow Rd., Suite 300, 
McLean, VA 22102; 800-892-9702) 

Maverick Advisor (P.O. Box 2538, Huntington Beach, CA 92647; 800-950-8765) 

Morningstar Mutual Funds (225 W. Wacker Dr., Chicago, IL 60606; 312-4244288; 
www.morningstar.com) 

Mutual Fund Forecaster (Institute for Econometric Research, 2200 S.W. 10th St., 
Deerfield Beach, FL 33442; 954-421-1000; 800-442-9000; www.mfmag.com) 

Mutual Fund Guide (Commerce Clearing House, 4025 W. Peterson Ave., Chicago, 
IL 60646; 800-835-5224; www.cch.com) 

Mutual Fund Investing (7811 Montrose Rd., Potomac, MD 20854; 800-777-5005) 

Mutual Fund Prospector (16 Thornwood Ct., Moline, IL 61265; 309-736-9376) 

Mutual Funds Magazine (Institute for Econometric Research, 2200 S.W. 10th St., 
Deerfield Beach, FL 33442-8799; 954-421-1000; 800-442-9000; www.mfmag.com) 

Mutual Fund Strategist (P.O. Box 446, Burlington, VT 05402; 802-658-3513; 
800-355-3863; www.mutualfundstrategist.com) 

Mutual Fund Timer (P.O. Box 6275, Jacksonville, FL 32236; 904-693-0355) 

Mutual Fund Trends (P.O. Box 6600, Rapid City, SD 57709; 605-341-1971) 

No-Load Fund Analyst (4 Orinda Way, Suite 230D, Orinda, CA 94563; 925-2549017) 


No-Load Fund Investor (P.O. Box 318, Irvington-on-Hudson, NY 10533; 914693-
7420; 800-252-2042; www.sheldonjacobs.com) 

**NoLoad Fund*X (3705 Haven Ave., Menlo Park, CA 94025; 650-482-3050; 
800-567-2683; www.investools.com) 

No-Load Mutual Fund Selections and Timing Newsletter (100 N. Central Expressway, 
Suite 1112, Richardson, TX 75080-5328; 800-800-6563) 

No-Load Portfolios (8635 W. Sahara, Suite 420, The Lakes, NV 89117; 702-8714710) 


Sector Fund Timer (12254 Nicollet Ave., South Burnsville, MN 55337; 612-8080148) 


Value Line Mutual Funds Survey (220 E. 42nd St., New York, NY 10017; 800-6343583) 


Vantage Point Newsletter for Vanguard Investors (2927 W. Liberty Ave., Suite 195, 
Pittsburgh, PA 15216; 412-594-4749) 


CHAPTER 4: Selecting Mutual Funds 

NEWSLETTERS ABOUT CLOSED-END MUTUAL FUNDS 

Closed-End Country Fund Report (725 15th St., N.W., Suite 501, Washington, DC 
20005; 202-783-7051) 

Investor』s Guide to Closed-End Funds (Thomas J. Herzfeld Advisors, P.O. Box 
161465, Miami, FL 33116; 305-271-1900) 

SOFTWARE AND WEB SITES 

BusinessWeek Online: Mutual Fund Corner. Features articles, quotes, charts, quarterly 
and annual scoreboards, portfolio tracking, and excerpts from 「Business Week』s 
Guide to Mutual Funds.」 Registration required.  

CBS MarketWatch: SuperStar Funds. Features articles, news headlines, top fund 
performers, quotes and charts, and a research directory. Includes links to fund families 
and a list of individual funds.  

Charles Schwab Mutual Fund Marketplace. Includes more than 1,000 no-load 
mutual funds—all available without transaction fees.  

Closed-End Fund Investor. A comprehensive site focusing on closed-end funds. It 
provides profiles, charts, holdings, and reports on hundreds of funds. There is also a tutorial 
on how to invest in closed-end funds.  

Forbes Digital Tool: Mutual Fund Information Center. Forbes-Lipper has a database 
of some 5,500 funds, with closing performance updated daily. Lists the 25 largest stock 
and bond funds and provides fund performance rankings by investment objective. Includes 
articles on fund investing.  

FundAlarm. Updated monthly, this site offers information and commentary to help 
you decide when to sell a mutual fund. Includes data for 1,200 funds and a list of recent 
fund manager changes.  

Fundscape. A service allowing you to update data about your mutual fund holdings. 
You can calculate the value of your portfolio and your rates of return in a series 
of customized reports.  

Fund Spot. Links to mutual fund companies and investment sites. Includes a 
weekly list of links to the best mutual fund articles available on the Web.  

ICI Mutual Fund Connection. Sponsored by the Investment Company Institute, 
this site offers information on mutual funds, closed-end funds, and unit investment 
trusts. Includes a mutual fund fact book, statistics, economic commentary, and retirement 
planning. Also includes full listing of member mutual funds and companies. 
 


PART ONE: Maximizing Your Investment Options 

Infofund. Presents information on more than 6,000 U.S. and Canadian mutual 
funds. Includes portfolio tracking, press releases, a chat room, and a bookstore.  

The Internet Closed-End Fund Investor. CDA/Wiesenberger presents information 
on 500 closed-end funds. Includes an investing guide, daily and weekly charts, fund 
profiles, and performance and market sentiment indicators. Most services by subscription 
only.  

INVESTools. A large part of this comprehensive investing Web site is devoted to 
mutual funds. It offers access to the Morningstar OnDemand service, in which you can 
screen thousands of mutual funds by their track records, Morningstar star rating, investment 
objective, and other measures.  

Invest-o-rama: Mutual Funds. A directory of links to mutual fund analysis and information. 
Feature articles cover no-load funds, risk tolerance, and diversification. Includes 
links to mutual fund families.  

InvestorGuide: Mutual Funds. Full explanations about mutual funds and how 
they work. Multiple links to other mutual fund sites, including Morningstar.  

Manhattan Analytics. A sophisticated Web site to help pick mutual funds. The 
company offers Monocle software to help you track fund performance, screen for 
funds meeting your criteria, and keep track of tax liabilities in fund portfolios.  

Micropal. Standard & Poor』s Micropal monitors over 38,000 mutual funds in 19 
countries. Includes a fund management group directory, performance tables, fund fact 
sheets, market reviews, and a searchable database.  

Money.com. Has database of 7,500 funds to research. Includes day』s best-performing 
fund, worst-performing fund, and overall top performers.  

Mutual Fund Investor』s Center. Sponsored by the Mutual Fund Education Alliance, 
a group of no-load fund families, this site is designed to educate you about how 
to invest in mutual funds. It also provides links to the Web sites of all the Alliance』s 
member fund groups.  

Mutual Funds Central. Rates mutual funds with their performance numbers and 
lists the top 100 mutual funds with links to their Web sites, links to lots of mutual-fundrelated 
Web sites. Has research capability and will deliver quotes.  

Mutual Funds Interactive. Full performance and other information available on any 
mutual fund. Lists and links to articles on mutual funds.  


CHAPTER 4: Selecting Mutual Funds 

Mutual Funds Magazine Online. The Institute for Econometric Research offers 
many tools to pick mutual funds. There is access to current and back issues of Mutual 
Funds Magazine. The site also features extensive performance rankings, fund profiles, 
and screening capability.  

Quicken.com: Mutual Funds. Feature articles, commentary, top funds, Morningstar 
profiles, a retirement planner, and links to related sites.  

Researchmag.com. Information on 10,000 stocks and 5,000 mutual funds. Includes 
quotes and charts. Registration required.  

Smart Money.com. Information about fees and taxes, database of 6,000 funds that 
can be screened with your financial goals in mind, fund analyzer tools, and fund portfolio 
builder.  

MUTUAL FUND COMPANIES 

Most mutual fund firms offer Web sites that provide information about the 
company』s funds and often far more. If you have an account with a fund family, 
you can look up how many shares you own, how much you have invested in them, 
and the value of your holdings. Some sites allow you to buy and sell shares online. 
Funds provide a large amount of educational material about asset allocation, how 
funds are taxed, profiles of fund managers, commentary on the state of the economy 
and the stock and bond markets, and much more. Here is a list of all the major 
mutual fund companies, along with their addresses, phone numbers, and Web sites 
(if they have one): 

AAL Mutual Funds (222 W. College Ave., Appleton, WI 54919-0007; 800-5536319; 
www.aal.org) 

AARP Investment Program from Scudder (Two International Place, Boston, MA 
02110-4101; 800-253-2277; http://aarp.scudder.com) 

ABN AMRO Funds (P.O. Box 60549, King of Prussia, PA 19406-0549; 800-4434725; 
www.abnamrofunds-usa.com) 

Achievement Funds Trust (The) (One Freedom Valley Dr., Oaks, PA 19456; 800472-
0577; www.achievementfunds.com) 

Acorn Funds (227 W. Monroe St., Suite 3000, Chicago, IL 60606-5016; 800-9226769; 
www.wanger.com) 

Advantus Funds (400 Robert St. North, St. Paul, MN 55101-2015; 800-665-6005) 

Advisors』 Inner Circle Fund (One Freedom Valley Dr., Oaks, PA 19456; 800-3425734) 



PART ONE: Maximizing Your Investment Options 

Advisors Series Trust (4455 E. Camelback Rd., Suite 261-E, Phoenix, AZ 85018; 
602-952-1100; www.firstfund.com) 

Aegis Value Fund (1100 N. Glebe Rd., Suite 1040, Arlington, VA 22201; 703-5287788; 
www.bgbinc.com) 

Aetna Funds (151 Farmington Ave., Hartford, CT 06156; 800-367-7732) 

AGA Series Trust (2929 Allen Pkwy., Houston, TX 77019; 800-424-4990) 

AIG Fund Group (175 Water St., 24th Floor, New York, NY 10038; 800-8623984) 


AIM Family of Funds (P.O. Box 4333, Houston, TX 77210-4333; 800-347-1919; 
www.aimfunds.com) 

Alger Funds (One World Trade Ctr., Suite 9333, New York, NY 10048; 800-9923863; 
www.algerfunds.com, www.spectrafund.com) 

Alleghany Funds (171 N. Clark St., Chicago, IL 60601-3203; 800-992-8151; 
www.alleghanyfunds.com) 

Allegiance Investment Trust (800 N. Brand Blvd., Suite 300, Glendale, CA 91203; 
800-247-5331; www.vdh.com) 

Alliance Funds (1345 Avenue of the Americas, New York, NY 10105-0302; 800221-
5672; www.alliancecapital.com) 

Alliance Variable Products Funds (P.O. Box 1520, Secaucus, NJ 07096-1520; 800221-
5772; www.alliancecapital.com) 

Allmerica Investment Trust (440 Lincoln St., Worcester, MA 01653; 800-8280540; 
www.allmerica.com) 

American AAdvantage Funds. (P.O. Box 419643, Kansas City, MO 64141-6643; 
800-388-3344; www.aafunds.com) 

American Century Investments Family of Funds (4500 Main St., P.O. Box 
419200, Kansas City, MO 64141-6200; 800-345-2021; www.americancentury.com) 

American Diversified Funds (10900 Wilshire Blvd., Suite 930, Los Angeles, CA 
90024; 800-433-1998) 

American Express Funds (901 Marquette Ave., S., Suite 2810, Minneapolis, MN 
55402-3268; 800-328-8300; www.americanexpress.com/advisors) 

American Funds (333 S. Hope St., Los Angeles, CA 90071-1406; 800-41-0180; 
www.amiericanfunds.com) 

American Growth Fund (110 16th St., Suite 1400, Denver, CO 80202; 800-5252406) 



CHAPTER 4: Selecting Mutual Funds 

American Odyssey Funds (Two Tower Ctr., East Brunswick, NJ 08816-1063; 732514-
2000) 

American Performance Funds (3435 Stelzer Rd., Columbus, OH 43119-3035; 
800-762-7085; www.apfunds.com) 

American Skandia Trust (One Corporate Dr., Shelton, CT 06484; 800-628-6039; 
www.americanskandia.com) 

Amerindo Funds Inc. (399 Park Ave., 22nd Floor, New York, NY 10022; 888TECHFUND; 
www.amerindo.com) 

AmeriPrime Funds (1793 Kingswood Dr., Suite 200, Southlake, TX 76092; 800298-
1995) 

AmSouth Mutual Funds (3435 Stelzer Rd., Columbus, OH 42319-3035; 800-4518382; 
www.amsouthfunds.com) 

Amway Funds (7575 Fulton St. East, Ada, MI 49355-001; 800-346-2670) 

Anchor Funds (579 Pleasant St., Suite 4, Paxton, MA 01612; 508-831-1171) 

Anchor Pathway Funds (773 Third Ave., New York, NY 10017-3204; 800-8588850; 
www.sunamerica.com) 

Anchor Series Trust (733 Third Ave., New York, NY 10017-3204; 800-858-8850; 
www.sunamerica.com) 

API Trust (2303 Yorktown Ave., P.O. Box 2529, Lynchburg, VA 24501-2529; 800544-
6060; www.apitrust.com) 

AquilaSM Group of Funds (380 Madison Ave., Suite 2300, New York, NY 10017; 
212-697-6666; www.aquilafunds.com) 

Aquinas Funds (5310 Harvest Hill Rd., Suite 248, Dallas, TX 75230-5800; 800423-
6369; www.aquinasfunds.com) 

Arbor Fund (One Freedom Valley Dr., Oaks, PA 19456; 800-342-5734) 

Ariel Mutual Funds (307 N. Michigan Ave., Suite 500, Chicago, IL 60601-5305; 
800-292-7435; www.arielmutualfunds.com) 

Ark Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-624-4116) 

Armada Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-622-3863; www. 
armadafunds.com) 

Armstrong Associates, Inc. (750 North St. Paul, Suite 1300, LB 13; Dallas, TX 
75201-7105; 214-720-9101) 

Artisan Funds, Inc. (1000 N. Water St., Suite 1770, Milwaukee, WI 53202; 800399-
1770) 


PART ONE: Maximizing Your Investment Options 

Atlas Funds (794 Davis St., San Leandro, CA 94577; 800-933-2852) 

Babson Funds (BMA Tower, 700 Karnes Blvd., Kansas City, MO 64108-3306; 
800-4-BABSON; www.jbfunds.com) 

Babson-Stewart Ivory International Fund, Inc. (BMA Tower, 700 Karnes Blvd., 
Kansas City, MO 64108-3306; 800-4-BABSON; www.jbfunds.com) 

Badgley Funds, Inc. (c/o Firstar Mutual Fund Services, LLC; 6115 E. Michigan 
St., Milwaukee, WI 53202; 877-223-4539) 

Bankers Trust Family of Funds (One South St., Baltimore, MD 21203; 800-4226577) 


Barclays Global Investors Funds, Inc. (111 Center St., Little Rock, AR 72201; 
800-458-6589) 

Baron Funds (767 Fifth Ave., 49th Floor, New York, NY 10153; 800-99-BARON; 
www.baronfunds.com) 

Barr Rosenberg Mutual Funds (Four Orinda Way, Suite 300E, Orinda, CA 945632523; 
800-447-3332; www.brmf.com) 

Battery Park Funds (Two World Trade Ctr., Bldg. B, New York, NY 10281-1198; 
888-848-7800) 

Baupost Fund Group (444 Brattle St., P.O. Box 381288, Cambridge, MA 02238; 
617-497-6680) 

Baxter Financial Funds (1200 N. Federal Hwy., Suite 424, Boco Raton, FL 334322847; 
800-749-9933; www.wamnet.net.) 

BB&K Funds (950 Tower Lane, Suite 1900, Foster City, CA 94404-2131; 800882-
8383) 

BB&T Mutual Funds Group (3435 Stelzer Rd., Columbus, OH 43219-3035; 800228-
1872; www.bbtfunds.com) 

Bear Stearns Funds (245 Park Ave., 15th Floor, New York, NY 10167; 800-7664111; 
www.bearstearns.com) 

Bear Stearns Investment Trust (245 Park Ave., 15th Floor, New York, NY 10167; 
800-766-4111; www.bearstearns.com) 

Berger Funds (210 University Blvd., Suite 900, Denver, CO 80206-4626; 800333-
1001; www.bergerfunds.com) 

Bernstein Funds Group (767 Fifth Ave., New York, NY 10153-0185; 212-7564097) 


Bishop Street Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-262-9565) 


CHAPTER 4: Selecting Mutual Funds 

Bjurman Funds (10100 Santa Monica Blvd., Suite 1200, Los Angeles, CA 90067; 
800-227-7264; www.bjurmanfunds.com) 

BlackRock Funds (103 Bellevue Pkwy., Wilmington, DE 19809-3748; 800-3888734; 
www.blackrock.com) 

Blue Ridge Funds (105 W. Washington St., P.O. Drawer 69, Rocky Mount, NC 
27802; 800-525-FUND) 

BNY Hamilton Funds, Inc. (3435 Stelzer Rd., Columbus, OH 43219; 800-7599363) 


Boston Partners Family of Funds (28 State St., Boston, MA 02109; 888-261-4073) 

Boston 1784 Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-252-1784; 
www.bankboston.com) 

Bramwell Funds (745 Fifth Ave., New York, NY 10151; 800-272-6227; www. 
bramwell.com) 

Brandes Investment Trust (12750 High Bluff Dr., San Diego, CA 92130-2018; 
858-755-0239) 

Bridges Investment Fund (8401 W. Dodge Rd., 256 Durham Plaza, Omaha, NE 
68114-3493; 800-939-8401) 

Bridgeway Funds (5615 Kirby Dr., Suite 518, Houston, TX 77005-2448; 800-6613550; 
www.bridgewayfund.com) 

Brinson Funds (209 S. LaSalle St., Chicago, IL 60604-1295; 800-448-2430) 

Brundage, Story & Rose Investment Trust (312 Walnut St., 21st Floor, Cincinnati, 
OH 45202-4024; 800-545-0103) 

BSG Funds (1105 Schrock Rd., Suite 437, Columbus, OH 43229; 800-733-2265; 
www.bancstockgroup.com) 

Buffalo Funds (BMA Tower, 700 Karnes Blvd., Kansas City, MO 64108-3306; 
800-492-8332; www.buffalofunds.com) 

Builders Fixed Income Fund (2190 S. Mason Rd., Suite 208, St. Louis, MO 
63131; 877-923-5626) 

Bullfinch Family of Mutual Funds (Two Lantern Lane, Honeoye Falls, NY 14471; 
888-BULLFINCH) 

Burnham Fund (1325 Avenue of the Americas, 17th Floor, New York, NY 100196026; 
800-874-FUND) 

Cadre Institutional Investors Trust (905 Marconi Ave., Ronkonkoma, NY 11799; 
212-668-0340) 


PART ONE: Maximizing Your Investment Options 

Calamos Fund (1111 E. Warrenville Rd., Naperville, IL 60563-1493; 800-8237386; 
www.calamos.com) 

Caldwell & Orkin Funds (2050 Tower Place, 3340 Peachtree Rd., Atlanta, GA 
30326; 800-237-7073) 

Calvert Funds (4550 Montgomery Ave., Suite 1000-N, Bethesda, MD 208143343; 
800-368-2748; www.calvertgroup.com) 

Canada Life Funds (330 University Ave., Toronto, OT, M5G 1R8; Canada, 416597-
1456; www.canadalife.com) 

Capital Management Investment Trust (140 Broadway, 44th Floor, NewYork , NY 
10005; 888-626-3863) 

Capstone Group of Mutual Funds (5847 San Felipe Dr., Suite 4100, Houston, TX 
77057-3011; 800-262-6631; www.capstonefinancial.com) 

Carillon Funds (1876 Waycross Rd., Cincinnati, OH 45240-2825; 800-999-1840) 

Cash Resource Trust (P.O. Box 1357, Richmond, VA 23211-1357; 800-382-0016) 

Catholic Funds (1100 W. Wells St., Milwaukee, WI 53233; 877-222-2402) 

CCB Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-386-3111) 

CDC MPT+Funds (P.O. Box 8122, Boston, MA 02266-8122; 800-774-9838) 

Centura Funds (3435 Stelzer Rd., Columbus, OH 43219-3035; 614-470-8000) 

Centurion Counsel Funds (11545 W. Bernardo Ct., No. 100, San Diego, CA 
92127; 800-878-8536) 

Century Shares Trust (One Liberty Sq., Boston, MA 02109-4825; 800-321-1928; 
www.quickencom/investments) 

CGM Funds (222 Berkeley St., 10th Floor, Boston, MA 02116-3748; 800-3454048; 
www.cgmfunds.com) 

Chaconia Funds (24 W. Carver St., Huntington, NY 11743; 800-368-3332) 

Chapman Funds, Inc. (World Trade Center, 401 E. Prat St., 28th Floor, Baltimore, 
MD 21202-3117; 800-752-1013) 

Chase Funds (c/o One Chase Manhattan Plaza, 3rd Floor, New York, NY 10081; 
888-524-2730; www.chasefunds.com) 

Chase Vista Mutual Funds (c/o One Chase Manhattan Plaza, 3rd Floor, New York, 
NY 10081; 800-348-4782; www.chasevista.com) 

CitiFunds Family of Funds (153 E. 53rd St., 6th Floor, New York, NY 100224611; 
800-625-4554; www.ssbciti.com) 


CHAPTER 4: Selecting Mutual Funds 

CitiSelect Funds (153 E. 53rd St., 6th Floor, NewYork, NY 10022-4611; 800-6254554; 
www.ssbciti.com) 

Citizens Funds; 230 Commerce Way, Suite 300; Portsmouth, NH 03801; 800-2237010; 
www.citizensfunds.com) 

Clipper Funds (9601 Wilshire Blvd., Suite 800, Beverly Hills, CA 90210-5210; 
800-776-5033) 

Clover Funds (11 Tobey Village Office Park, Pittsford, NY 14534; 800-224-6312) 

CNI Charter Funds (400 N. Roxbury Dr., Beverly Hills, CA 90210; 888-889-0799) 

Cohen & Steers Funds (757 Third Ave., 20th Floor, New York, NY 10017-2013; 
800-437-9912; www.cohenandsteers.com) 

College Retirement Equities Funds (730 Third Ave., New York, NY 10017-3206; 
800-842-2733; www.tiaa-cref.org) 

Colorado Double Tax-Exempt Bond Fund (600 17th St., Suite 2610 South, Denver, 
CO 80202; 800-279-4426; www.coloradoxx.com) 

Columbia Family of Funds (P.O. Box 1350, Portland, OR 97207-1350; 800-5471707) 


Commerce Funds (922 Walnut St., P.O. Box 13686, Kansas City, MO 641993686; 
800-993-6365; www.comercebank.com) 

Concorde Funds, Inc. (1500 Three Lincoln Centre, 5430 LBJ Freeway, Dallas, TX 
75240-2387; 800-338-1579) 

Conseco Mutual Funds (11815 N. Pennsylvania St., Carmel, IN 46032, 800-9863384; 
www.consecofunds.com) 

CornerCap Group of Funds (1355 Peachtree St., N.E., Suite 1700, Atlanta, GA 
30305; 800-728-0670) 

Countrywide Funds (312 Walnut St., 21st Floor, Cincinnati, OH 45202-4024; 800543-
8721; www.countrywideinvestments.com) 

Coventry Group (3435 Stelzer Rd., Columbus, OH 43219-3035; 800-438-6375) 

Crowley Funds (3201-B Millcreek Rd., Wilmington, DE 19808; 302-994-4700) 

CU Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-538-9683) 

Cutler Trust (503 Airport Rd., Medford, OR 97504-4159; 800-228-8537; www. 
cutler.com) 

Daruma Funds, Inc. (60 E. 42nd St., Suite 1112, New York, NY 10165; 800-4355076) 



PART ONE: Maximizing Your Investment Options 

Davis Funds (124 E. Marcy St., Santa Fe, NM 87501; 800-279-0279; www. 
davisfunds.com) 

Dean Family of Funds (2480 Kettering Tower, Dayton, OH 45423; 800-327-3656; 
www.chdean.com) 

Declaration Investment Funds (555 North Ln., Suite 6160; Conshohocken, PA 
19428-2233; 800-423-2345) 

Delaware Investments (1818 Market St., Philadelphia, PA 19103-3682; 800-5231918; 
www.delawareinvestments.com) 

Dessauer Global Equity Fund (P.O. Box 1689; Orleans, MA 06253-1689; 800560-
0086) 

Deutsche Funds, Inc. (31 W. 52nd St., New York, NY 10019; 888-433-8872; www. 
deutsche-funds.com) 

Diversified Investors Fund Group (4 Manhattanville Rd., Purchase, NY 105772119; 
800-926-0044) 

DLB Fund Group (One Memorial Dr., Cambridge, MA 02142-1300; 888-7-BABSON) 


DLJ Winthrop Funds (277 Park Ave., 24th Floor, New York, NY 10172; 800-2258011; 
www.dljwinthropfunds.com) 

Dodge & Cox Funds (One Sansome St., 35th Floor, San Francisco, CA 941044448; 
800-621-3979; www.dodgeandcox.com) 

Domini Funds (11 W. 25th St., 7th Floor, New York, NY 10010-2001; 800-7626814; 
www.domini.com) 

Dresher Family of Funds (715 Twining Rd., Suite 202, Dresher, PA 19025; 215881-
7000) 

Dreyfus Funds (200 Park Ave., NewYork, NY 10166; 800-645-6561; www.dreyfus. 
com) 

Dreyfus Premier Funds (200 Park Ave., New York, NY 10166; 800-554-4611; 
www.dreyfus.com) 

Driehaus Mutual Funds (25 E. Erie St., Chicago, IL 60611; 800-688-8819) 

Eastcliff Funds (900 Second Ave., South, 300 International Centre, Minneapolis, 
MN 55402; 800-595-5519) 

Eaton Vance Funds (The Eaton Vance Building, 255 State St., Boston, MA 02109, 
800-225-6265; www.eatonvance.com) 

Eclipse Funds (470 Park Ave., South, 16th Floor, New York, NY 10016; 800-8722710; 
www.eclipsefund.com) 


CHAPTER 4: Selecting Mutual Funds 

Elfun Funds (3003 Summer St., P.O. Box 120074, Stamford, CT 06905-4316; 
800-242-0134; www.elfun.org/funds) 

Elite Funds Group (1325 Fourth St., Suite 2144, Seattle, WA 98101-2509; 800423-
1068; www.mcmelite.com) 

Endeavor Series Trust (2101 E. Coast Hwy., No. 300, Corona Del Mar, CA 926251900; 
800-204-1819; www.endeavorgroup.com) 

Enterprise Group of Funds (3343 Peachtree Rd., Suite, 450, Atlanta, GA 303261022; 
800-432-4320; www.enterprisefunds.com) 

EquiTrust Fund Family (5400 University Ave., West Des Moines, IA 50266-5997; 
800-247-4170; www.fbfs.com) 

ESC Strategic Funds (3435 Stelzer Rd., Coumbus, OH 43219; 800-261-FUND) 

E*Trade Funds (2400 Geng Rd., Palo Alto, CA 94303; 800-786-2575; www. 
etrade.com) 

Eureka Funds (3435 Stelzer Rd., Columbus, OH 43219; 888-890-8121) 

Evergreen Funds (2500 Westchester Ave., Purchase, NY 10577-2515; 800-8072940) 


Excelsior Funds (114 W. 47th St., New York, NY 10036-1510; 800-446-1012; 
www.excelsiorfunds.com) 

Excelsior Institutional Funds (114 W. 47th St., New York, NY 10036-1510; 800446-
1012) 

Excelsior Tax-Exempt Funds (114 W. 47th St., New York, NY 10036-1510; 800446-
1012; www.excelsiorfunds.com) 

Exeter Funds (P.O. Box 41118, Rochester, NY 14604; 800-466-3863) 

Expedition Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-992-2085) 

Fairport Funds (4000 Chester Ave., Cleveland, OH 44103-3612; 800-332-6459; 
www.fairport.com) 

FAM Funds (111 N. Grand St., P.O. Box 399, Cobleskill, NY 12043-0399; 800932-
3271; www.famfunds.com) 

Farmers Investment Trust (222 S. Riverside Plaza, Chicago, IL 60606; 877-3278899) 


FBR Family of Funds (1001 Nineteenth St., North, Arlington, VA 22209; 888888-
0025; www.fbrfunds.com) 

Federated Investors Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7000; 800341-
7400; www.federatedinvestors.com) 


PART ONE: Maximizing Your Investment Options 

FTW Funds, Inc. (200 Park Ave., 46th Floor, New York, NY 10166; 800-7624848) 


Fidelity Advisor Funds (82 Devonshire St., Boston, MA 02109-3605; 800-5260084; 
www.fidelity.com) 

Fidelity Funds (82 Devonshire St., Boston, MA 02109-3605; 800-526-0084; 
www.fidelity.com) 

Fifth Third Funds (3435 Stelzer Rd., Columbus, OH 43219-3035; 800-554-3862) 

59 Wall Street Funds (40 Water St., Boston, MA 02109; 800-625-5759) 

First American Funds (601 Second Ave., South, Minneapolis, MN 55402; 800637-
2548) 

Firstar Funds (615 E. Michigan St., P.O. Box 3011, Milwaukee, WI 53201-3011; 
800-982-8909; www.firstarfunds.com) 

Firstar Stellar Funds (c/o Firstar Mutual Fund Services, P.O. Box 701, Milwaukee, 
WI 53201-0701; 800-677-FUND; www.firstarstellarfunds.com) 

Firsthand Funds (101 Park Center Plaza, Suite 1300, San Jose, CA 95113; 888883-
3863; www.firsthandfunds.com) 

First Eagle Funds (1345 Avenue of the Americas, New York, NY 10105-4300; 
800-451-3623; www.firsteaglefunds.com) 

First Investors Fund (95 Wall St., 23rd Floor, New York, NY 10005-4201; 800423-
4026; www.firstinvestors.com) 

First Pacific Mutual Fund, Inc. (2756 Woodlawn Dr., No. 6-201, Honolulu, HI 
96822; 808-988-8088) 

Flag Investors Funds (One South St., Baltimore, MD 21202; 800-767-3524) 

Fleming Capital Mutual Fund Group (P.O. Box 5354, Cincinnati, OH 452015354; 
800-264-0592) 

Flex Funds (6000 Memorial Dr., Dublin, OH 43017-9767; 800-325-FLEX; www. 
flexfunds.com) 

Fortis Funds (500 Bielenberg Dr., Woodbury, MN 55125; 800-800-2000; www. 
us.fortis.com) 

Forum Funds (Two Portland Sq., Portland, ME 04101; 800-94-FORUM; www. 
forum-financial.com) 

Forward Funds (433 California St., Suite 101, San Francisco, CA 94101; 800-9996809; 
www.forwardfunds.com) 


CHAPTER 4: Selecting Mutual Funds 

Founders Funds, Inc. (2930 E. Third Ave., Denver CO 80206-5002; 800-5252440; 
www.founders.com) 

FPA Funds (11400 W. Olympic Blvd., Suite 1200, Los Angeles, CA 90064-1568; 
800-982-4372) 

Franklin Group of Funds (777 Mariners Island Blvd., San Mateo, CA 94404-1584; 
800-632-2180; www.franklin-templeton.com) 

Franklin Mutual Series Fund (51 J.F. Kennedy Pkwy., Short Hills, NJ 07078-2702; 
800448-3863; www.franklin-templeton.com) 

Frank Russell Mutual Funds (909 A St., P.O. Box 1591, Tacoma, WA 98402-5111; 
800-972-0700; www.russell.com) 

Freedom Group of Money Funds (One Beacon St., Boston, MA 02108; 800-3449033) 


Fremont Mutual Funds, Inc. (50 Beale St., Suite 100, San Francisco, CA 941051813; 
800-548-4539; www.fremontfunds.com) 

Frontier Funds, Inc. (101 W. Wisconsin Ave., Pewaukee, WI 53072-3457; 800231-
2901) 

FTI Funds (5800 Corporate Dr., Pittsburgh, PA 15437-7010; 888-FIDUCIARY) 

Fulcrum Funds (440 Lincoln St., Worcester, MA 01653; 800-917-1909; www. 
allamerica.com) 

FundManager Portfolios (One Beacon St., Boston, MA 02108; 800-344-9033; 
www.fund-manager.com) 

Gabelli Funds (One Corporate Ctr., Rye, NY 10580-1434; 800-422-3554; www. 
gabelli.com) 

Gabelli Westwood Funds (One Corporate Ctr., Rye, NY 10580-1434; 800-4223554; 
www.gabelli.com/westwood) 

Galaxy Funds (4400 Computer Dr., Westboro, MA 01581; 800-628-0414; www. 
galaxyfunds.com) 

GAM Funds, Inc. (135 East 57th St., New York, NY 10022-2009; 800-426-4685; 
www.gam.com) 

Gannett Welsh & Kotler Funds (222 Berkeley St., Boston, MA 02116; 888-4953863) 


Gardner Lewis Investment Trust (105 N. Washington St., P.O. Drawer 69, Rocky 
Mount, NC 27802-0069; 800-430-FUND) 

Gateway Funds (400 TechneCenter Dr., Suite 220, Milford, OH 45150-2746; 800354-
6339) 


PART ONE: Maximizing Your Investment Options 

GCG Trust (1475 Dunwood Dr., West Chester, PA 19380-1478; 800-366-0066) 

GE Funds (3003 Summer St., Stamford, CT 06905-4316; 800-242-0134; www. 
gefinancialassurance.com/mutualfunds/) 

General Securities Fund (5100 Eden Ave., South, Suite 204, Edina, MN 55436; 
800-577-9217) 

Golden Oak Family of Funds (One Freedom Valley Dr., Oaks, AP 19456; 800545-
6331) 

Goldman Sachs Funds (4900 Sears Tower, Chicago, IL 60606-6391; 800-6212550; 
www.gs.com) 

Goldman Sachs Money Market Trust (32 Old Slip, New York, NY 10005; 212902-
0800) 

Golf Associated Fund (2801 Ocean Dr., Suite 203, Vero Beach, FL 32963; 877


623-4653; www.golf-fund.net) 

Governor Funds (3435 Stelzer Rd., Columbus, OH 43219-8025; 800-766-3960) 

Govett Funds (250 Montgomery St., Suite 1200, San Francisco, CA 94104; 800


821-0803) 

Granum Series Trust (c/o Firstar Trust Company, Mutual Fund Services, 615 E. 
Michigan St., Milwaukee, WI 53202; 888-547-2686) 

Great Hall Investment Funds (60 S. Sixth St., Suite 2000, Minneapolis, MN 

55402-4400; 800-934-6674) 

Great Plains Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-568-8257) 

Green Century Funds (29 Temple Pl., Suite 200, Boston, MA 02111-1350; 800


93-GREEN; www.greencentury.com) 

Greenspring Fund (2330 Joppa Rd., Suite 110, Lutherville, MD 21093-4609; 800366-
3863) 

Growth Fund of Washington (1101 Vermont Ave., N.W., Suite 600, Washington, 
DC 20005-3521; 800-972-9274; www.chasvista.com) 

Guinness Flight Investment Funds (225 S. Lake Ave., Suite 777, Pasadena, CA 
91101-3016; 800-434-5623; www.gffunds.com) 

Hansberger Institutional Series (515 E. Las Olas Blvd., Suite 1300, Fort Laud


erdale, FL 33301; 800-414-6927) 

Harbor Fund (One SeaGate, Toledo, OH 43666; 800-422-1050) 

Harris Insight Funds (111 W. Monroe St., Chicago, IL 60603; 800-982-8782; 

www.harrinsight.com) 


CHAPTER 4: Selecting Mutual Funds 

Hartford Funds (200 Hopmeadow St., P.O. Box 2999, Hartford, CT 06104-2999; 
800-862-6668; www.thehartford.com) 

Heartland Group (790 N. Milwaukee St., Milwaukee, WI 53202-3712; 800-4327856); 
www.heartlandfunds.com) 

Henssler Funds (1281 Kennestone Circle, Suite 100, Marietta, GA 30066; 800936-
3863; www.henssler.com) 

Heritage Funds (880 Carillon Pkwy., St. Petersburg, FL 33716-1102; 800-4214184) 


Hibernia Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-999-0124) 

HighMark Group of Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-4336884; 
www.highmark-funds.com) 

Hillard-Lyons Funds (P.O. Box 32760, Louisville, KY 40232; 800-444-1854; 
www.hilliard.com) 

HomeState Group Trust (1857 William Penn Way, Lancaster, PA 17601-6741; 
800-232-0224; www.homestatefunds.com) 

Homestead Funds, Inc. (4301 Wilson Blvd., RSI8-305, Arlington, VA 222031860; 
800-258-3030; www.nreca.org) 

Horace Mann Mutual Funds (One Horace Mann Plaza, P.O. Box 4657, Springfield, 
IL 62708-4657; www.horacemann.com) 

Hotchkis and Wiley Funds (800 W. Sixth St., 5th Floor, Los Angeles, CA 900172704; 
800-236-4479) 

Hough Group of Funds (100 Second Ave., South, Suite 800, St. Petersburg, FL 
33701-4337; 800-557-7555) 

HSBC Funds (3435 Stelzer Rd., Columbus, OH 43219; 800-634-2536) 

Hudson Investors Fund, Inc. (790 Bloomfield Ave., P.O. Box 2070, Clifton, NJ 
07010; 800-HUDSON-4) 

Hudson River Trust (1345 Avenue of the Americas, New York, NY 10105-0302; 
800-221-5672; www.alliancecapital.com) 

Hughes Funds (741 Cox Rd., Moorestown, NJ 08057; 609-234-3903) 

Huntington Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-342-5734) 

IAA Trust Mutual Funds (808 IAA Dr., Bloomington, IL 61701-2220; 800-2452100) 


IAI Family of Funds (601 Second Ave., South, Minneapolis, MN 55402-4303; 
800-945-3863; www.iaifunds.com) 


PART ONE: Maximizing Your Investment Options 

ICM Funds (4400 Computer Dr., P.O. Box 5182, Westborough, MA 01581; 800472-
6114; www.icmfunds.com) 

ICON Funds (12835 E. Arapahoe Rd., Tower II – Penthouse, Englewood, CO 
80112; 800-828-4881; www.iconfunds.com) 

IDEX Mutual Funds (570 Carillon Pkwy., St. Petersburg, FL 33716-1202; 888233-
4339; www.idexfunds.com) 

Impact Management Investment Trust (1875 Ski Time Square Dr., Suite 1, Steamboat 
Springs, CO 80487; 800-879-1189) 

Independence One Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800334-
2292) 

Infinity Mutual Funds, Inc. (3435 Stelzer Rd., Columbus, OH 43219-3035; 800852-
0045) 

Integrity Mutual Funds (One N. Main St., Minot, ND 58703; 800-276-1262; 
www.integrityfunds.com) 

INTRUST Funds (3435 Stelzer Rd., Columbus, OH 43219; 888-266-8787) 

INVESCO Funds Group (7800 E. Union Ave., Denver, CO 80237-2752; 800-5258085; 
www.invesco.com) 

Investor Service Center Funds (11 Hanover Square, New York, NY 10005-3452; 
888-503-FUND; www.mutualfunds.net) 

Investors Research Fund, Inc. (3757 State St., Suite 204, Santa Barbara, CA 
93105; 800-473-8631) 

IPS Funds (1225 Weisgarber Rd., Suite 5-380, Knoxville, TN 37909; 800-2329142; 
www.ipsfunds.com) 

ISI Funds (717 Fifth Ave., New York, NY 10022; 800-955-7175) 

Ivy Mackenzie Group of Funds (700 S. Federal Hwy., Suite 300, P.O. Box 5007, 
Boca Raton, FL 33432; 800-456-5111; www.ivymackenzie.com) 

Jefferson Fund Group Trust (839 N. Jefferson St., Suite 200, Milwaukee, WI 
53202; 800-871-3863) 

Jefferson Pilot Variable Funds (One Granite Place, Concord, NH 03301-3258; 
800-258-3648; www.jpfinancial.com) 

JNL Series Trust (5901 Executive Dr., P.O. Box 25127, Lansing, MI 48909-9979; 
800-322-8257; www.jacksonnational.com) 

John Hancock Funds (101 Huntington Ave., Boston, MA 02199-7603; 800-2255291; 
www.jhancock.com) 


CHAPTER 4: Selecting Mutual Funds 

Johnson Mutual Funds (3777 W. Fork Rd., Cincinnati, OH 45247; 800-541-0170) 

J.P. Morgan Funds (522 Fifth Ave., 11th Floor, New York, NY 10036; 800-7667722; 
www.jpmorgan.com) 
J.P. Morgan Institutional Funds, J.P. Morgan Funds (522 Fifth Ave., 11th Floor, 
New York, NY 10036; 800-766-7722; www.jpmorgan.com) 
JPM Series Trust (522 Fifth Ave., 11th Floor, New York, NY 10036; 800-7667722; 
www.jpmorgan.com) 

JPM Series Trust II (522 Fifth Ave., 11th Floor, New York, NY 10036; 800-7667722; 
www.jpmorgan.com) 

Jurika & Voyles Fund Group (P.O. Box 9291, Boston, MA 02266-9291; 800-5846878; 
www.jurika.com) 

Kaufmann Fund (140 East 45th St., 43rd Floor, New York, NY 10017; 800-2610555; 
www.kaufmann.com) 

Kelmoore Strategic Trust (2741 E. Bayshore Rd., No. 501, Palo Alto, CA 94303; 
800-486-3717) 

Kemper Funds (222 S. Riverside Plaza, Chicago, IL 60606; 800-621-1048; 
www.kemper.com) 

Kenilworth Fund, Inc. (One First National Plaza, Suite 2594, Chicago, IL 60603; 
312-236-5388) 

Kent Funds (P.O. Box 182201, Columbus, OH 43218-2201; 800-633-KENT; 
www.kentfunds.com) 

Kenwood Funds (c/o Firstar Mutual Fund Services, LLC, 615 E. Michigan St., 
Milwaukee, WI 53202; 800-536-3863) 

Kirr, Marbach Partners Funds (P.O. Box 701, Milwaukee, WI 532301-0701; 800870-
8039) 

Kobren Insight Funds (20 William St., Suite 310, Wellesley Hills, MA 02181; 800456-
2736; www.kobren.com) 

Kobrick Cendant Funds (101 Federal St., Boston, MA 02110; 888-KCFUND1; 
www.kcfund.com) 

Kopp Funds, Inc. (7701 France Ave., South, Suite 500, Edina, MN 55435; 888533-
KOPP; www.koppfunds.com) 

KPM Funds, Inc. (10250 Regency Circle, Suite 500, Omaha, NE 68114-3723; 
800-776-5782) 


PART ONE: Maximizing Your Investment Options 

Labrador Mutual Fund (2344 Corte De La Jara, Pleasanton, CA 94566; 925-4611848; 
www.labradorfund.com) 

La Crosse Funds (c/o Sunstone Investor Services, LLC; 207 E. Buffalo St., Suite 
315, Milwaukee, WI 53202) 

Lake Forest Funds (270 E. Westminister Rd., 3rd Floor, Lake Forest, IL 600451899; 
888-295-5707; www.lakeforestfunds.com) 

Lazard Freres Funds (30 Rockefeller Plaza, New York, NY 10112; 800-823-6300) 

Lebenthal (120 Broadway, 12th Floor, New York, NY 10271; 800-221-5822; 
www.lebenthal.com) 

Legends Fund, Inc. (515 W. Market St., 8th Floor, Louisville, KY 40202-3319; 
800-325-8583; www.armfinancial.com) 

Legg Mason Funds (100 Light St., Baltimore, MD 21202; 800-822-5544; 
www.leggmason.com) 

Lexington Funds (Park 80 West, Plaza Two, P.O. Box 1515, Saddle Brook, NJ 
07663-1515; 800-526-0056; www.lexingtonfunds.com) 

Liberty Funds Distributor, Inc. (One Financial Center, Boston, MA 02111-2621; 
800-426-3750; www.libertyfunds.com) 

Life and Annuity Trust (111 Center St., Little Rock, AR 72201-4402; 800-2228222; 
www.wellsfargo.com) 

LKCM Funds (301 Commerce, Suite 1600, Fort Worth, TX 76102-4116; 800-6885526; 
www.lkcm.com) 

Longleaf Partners Funds (6410 Poplar Ave., 9th Floor, Memphis, TN 38819; 800445-
9469) 

Loomis Sayles Funds (One Financial Center, Boston, MA 02111; 800-633-3330; 
www.loomissayles.com) 

Lord Abbett Family of Funds (The General Motors Bldg., 767 Fifth Ave., New 
York, NY 10153-0002; 800-201-6984; www.lordabbett.com) 

Lou Holland Trust (35 W. Wacker Dr., Suite 3260, Chicago, IL 60601; 800-2959779) 


LPT Variable Insurance Series (1755 Creekside Oaks Dr., Sacramento, CA 95833; 
800-852-3152) 

Lutheran Brotherhood Fund Family (625 Fourth Ave., South, Minneapolis, MN 
55415-1624; www.luthbro.com) 

Magna Funds (3435 Stelzer Rd., Columbus, OH 43219; 800-219-4182) 


CHAPTER 4: Selecting Mutual Funds 

MainStay Funds (300 Interpace Pkwy., Bldg. A, Parsippany, NJ 07054-1108; 800625-
6782; www.mainstayfunds.com) 

MainStay Institutional Funds (300 Interpace Pkwy., Bldg. A, Parsippany, NJ 
07054-1108; 800-625-6782; www.mainstayfunds.com) 

MainStay VP Series Fund Inc. (51 Madison Ave., New York, NY 10010; 800-5982019; 
www.newyorklife.com) 

Mairs and Power Balanced Fund, Inc. (W-1420 First National Bank Bldg., 332 
Minnesota St., St. Paul, MN 55101; 651-222-8478) 

Mairs and Power Growth Fund, Inc. (W-1420 First National Bank Bldg., 332 
Minnesota St., St. Paul, MN 55101; 800-304-7404) 

Managers Funds (40 Richards Ave., Norwalk, CT 06854-2319; 800-835-3879; 
www.managersfunds.com) 

Manufacturers Investment Trust (73 Tremont St., Suite 1300, Boston, MA 021083915; 
800-344-1029; www.manulife-venture.com) 

Market Street Funds, Inc. (P.O. Box 1717, Valley Forge, PA 19482-1717; 302-4524000) 


Marshall Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-580FUND; 
www.marshallfunds.com) 

Marsico Funds (1200 17th St., Suite 1300, Denver, CO 80202; 888-860-8686; 
www.marsicofunds.com) 

MAS Funds (One Tower Bridge, West Conshohocken, PA 19428; 800-354-8185) 

Mason Street Funds (818 E. Mason St., Milwaukee, WI 53202; 888-627-6678; 
www.masonstreetfunds.com) 

MassMutual Funds (1295 State St., Springfield, MA 01111-0001; 888-743-5274; 
www.massmutual.com) 

Masters』 Select Funds (Four Orinda Way, Suite 230-D, Orinda, CA 04563; 800960-
0188) 

Matthews International Funds (655 Montgomery St., Suite 1438, San Francisco, 
CA 94111; 800-789-ASIA; www.matthewsfunds.com) 

Matthew 25 Fund (605 Cloverly Ave., Jenkintown, PA 19046; 888-M25-FUND) 

Maxus Funds (1301 E. Ninth St., Cleveland, OH 44114-1800; 800-44-MAXUS; 
www.maxusgroup.com) 

MEMBERS Mutual Funds (5910 Mineral Point Rd., Madison, WI 53705; 800877-
6089; www.cimcofunds.com) 


PART ONE: Maximizing Your Investment Options 

Mentor Funds (901 E. Byrd St., Richmond, VA 23219-4069; 800-382-0016) 

Mentor International Funds (901 E. Byrd St., Richmond, VA 23219-4069; 800869-
6042) 

Mercantile Mutual Funds (3435 Stelzer Rd., Columbus, OH 43219-3035; 800452-
4015) 

Mercury Asset Management Funds (P.O. Box 9011, Princeton, NJ 08543-9011; 
888-763-2260) 

Meridian Funds (60 E. Sir Francis Drake Blvd., Suite 306, Larkspur, CA 949391714; 
800-446-6662) 

Merrill Lynch Funds (P.O. Box 9011, Princeton, NJ 08543-9011; 800-637-3863; 
www.merrill-lynch.ml.com) 

Merriman Funds (1200 Westlake Ave., North, Suite 700, Seattle, WA 98109-3529; 
800-423-4893; www.merrimanfunds.com) 

MFS Funds (500 Boylston St., Boston, MA 02116-3740; 800-343-2829; 
www.mfs.com) 

Monterey Mutual Fund (1299 Ocean Ave., Suite 210, Santa Monica, CA 90401; 
800-251-1970) 

Montgomery Funds (101 California St., 35th Floor, San Francisco, CA 941112701; 
800-572-3863; www.montgomeryfunds.com) 

Monument Funds Group, Inc. (7920 Norfolk Ave., Suite 500, Bethesda, MD 
20814; 301-215-7550; www.monumentfunds.com) 

MONY Series Fund, Inc. (1740 Broadway, New York, NY 10019; 800-786-6244; 
www.mony.com) 

Morgan Grenfell Investment Trust (885 Third Ave., 32nd Floor, New York, NY 
10022-4834; 800-814-3401) 

Morgan Keegan Funds (50 Front St., 21st Floor, Memphis, TN 38103; 800-2387127) 


Morgan Stanley Dean Witter Family of Funds (Two World Trade Center, 72nd 
Floor, New York, NY 10048-0203; 800-869-NEWS; www.deanwitter.com) 

Morgan Stanley Dean Witter Institutional Funds Inc. (c/o Chase Global Funds 
Svcs. Co., P.O. Box 2798, Boston, MA 02208-2798; 800-548-7786; www.msdw.com) 

Mosaic Funds (1655 Fort Dr., 10th Floor, Arlington, VA 22209-3108; 888-6703600; 
www.mosaicfunds.com) 

M.S.D. & T. Funds (3435 Stelzer Rd., Columbus, OH 43119-3035; 800-551-2145) 

CHAPTER 4: Selecting Mutual Funds 

Muhlenkamp Fund (12300 Perry Hwy., Suite 306, Wexford, PA 15090-8318; 800860-
3863; www.muhlenkamp.com) 

Munder Funds, Inc. (P.O. Box 9755, Providence, RI 02940-9755; 800-239-3334) 

Munder Funds Trust (P.O. Box 9755, Providence, RI 02940-9755; 800-239-3334; 
www.munder.com) 

Mutual of America Funds (320 Park Ave., New York, NY 10022-6839; 800-4683785) 


Mutual Selection Fund (2610 Park Ave., Muscatine, IA 52761-5639; 800-3348920) 


Nations Funds (One NationsBank Plaza, 33rd Floor, Charlotte, NC 28255; 800321-
7854; www.bankofamerica.com/nationsfunds/) 

Nations LifeGoal Funds, Inc. (One NationsBank Plaza, 33rd Floor, Charlotte, NC 
28255; 800-321-7854; www.bankofamerica.com/nationsfunds) 

Nationwide Advisory Funds (Three Nationwide Plaza, P.O. Box 1492, Columbus, 
OH 43215-2423; 800-848-0920; www.nationwidefunds.com) 

Navellier Funds (One E. Liberty, 3rd Floor, Reno, NV 89501; 800-887-8671; 
www.navellier.com) 

Neuberger Berman Funds (605 Third Ave., 2nd Floor, New York, NY 10158-0180; 
800-877-9700; www.nbfunds.com) 

Nevis Fund (P.O. Box 446, Portland, ME 04112; 877-44-NEVIS) 

New Alternatives Fund, Inc. (150 Broadhollow Rd., Suite 306, Melville, NY 
11747-4901; 800-423-8383) 

New Century Funds (20 William St., Suite 330, Wellesley, MA 02481; 888-6390120) 


New England Funds (399 Boylston St., Boston, MA 02116-3305; 800-225-7670; 
www.mutualfunds.com) 

New England Zenith Fund (399 Boylston St., Boston, MA 02116-3305; 800-2257670; 
www.nefn.com) 

New Providence Investment Trust (105 N. Washington St., P.O. Box 69, Rocky 
Mount, NC 28720-0069; 800-639-7768) 

Newpoint Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-627-1289) 

Nicholas-Applegate Institutional Funds (600 W. Broadway, 29th Floor, San Diego, 
CA 92101-8643; www.nacm.com) 


PART ONE: Maximizing Your Investment Options 

Noah Fund (P.O. Box 727, Edgemont, PA 19078; 800-794-NOAH; www.noahfund. 
com) 

Namura Asset Funds (180 Maiden Ln., 26th Floor, New York, NY 10038-4925; 
800-833-0018) 

North American Funds (286 Congress St., Boston, MA 02210; 800-872-8037; 
www.northamericanfunds.com) 

Northern Funds (50 S. LaSalle St., Chicago, IL 60675; 800-595-9111; www. 
northernfunds.com) 

Northern Institutional Funds (50 S. LaSalle St., Chicago, IL 60675; 800-6371380; 
www.northerntrust.com) 

Northstar Funds (300 First Stamford Place, Stamford, CT 06902; 800-595-7827) 

Norwest Advantage Funds (Two Portland Square, Portland, ME 04101; 800-3381348; 
www.norwest.com) 

Nottingham Investment Trust II (105 N. Washington St., P.O. Drawer 69, Rocky 
Mount, NC 27802-0069; 800-525-FUND) 

Numeric Investors Family of Funds (One Memorial Dr., 4th Floor, Cambridge, 
MA 02142; 800-686-3742; www.numeric.com) 

Nuveen Mutual Funds (333 W. Wacker Dr., Chicago, IL 60606-1218; 800-2578787; 
www.nuveen.com) 

Oakmark Family of Funds (Two N. LaSalle St., Suite 500, Chicago, IL 606023703; 
800-625-6275; www.oakmark.com) 

Oak Value Fund (3100 Tower Blvd., Suite 800, Durham, NC 27707; 800-6804199; 
www.oakvaluefund.com) 

Oberweis Funds (951 Ice Cream Dr., Suite 200, Aurora, IL 60542; www. 
oberweisfunds.com) 

OFFITBANK investment Funds (c/o PFPC, Inc., P.O. Box 8701, Wilmington, DE 
19899; 800-618-9510; www.offitbank.com) 

Ohio National Funds (One Financial Way, Cincinnati, OH 45242; 800-578-8078) 

Old Westbury Funds, Inc. (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800607-
2200) 

Olstein Funds (Four Manhattanville Rd., Purchase, NY 10577; 800-799-2113; 
www.olsteinfunds.com) 

One Group Mutual Funds (1111 Polaris Pkwy., P.O. Box 710211, Columbus, OH 
43271-0211; 800-480-4111; www.onegroup.com) 


CHAPTER 4: Selecting Mutual Funds 

OpCap Advisors Funds (Two World Financial Center, New York, NY 10281-1697; 
800-700-VALU; www.opcap.com/advisors/index.html) 

OppenheimerFunds Family (Denver) (6803 S. Tucson Way, Englewood, CO 
80112; 800-525-7048; www.oppenheimerfunds.com) 

OppenheimerFunds Family (New York) (Two World Trade Center, New York, NY 
10048-0203; 800-525-7048; www.oppenheimerfunds.com) 

OppenheimerFunds Family (Quest Funds) (Two World Trade Center, New York, 
NY 10048-0203; 800-525-7048; www.oppenheimerfunds.com) 

OppenheimerFunds Family (Rochester Funds) (350 Linden Oaks, Rochester, NY 
14625-2807; 800-552-1149; www.oppenheimerfunds.com) 

Orbitex Group of Funds (410 Park Ave., 18th Floor, New York, NY 10022; 888ORBITEX; 
www.orbitexusa.com) 

ORI Funds (P.O. Box 701, Milwaukee, WI 53201-0701; 800-407-7298; network. 
galt.com) 

O』Shaughnessy Funds, Inc. (35 Mason St., Greenwich, CT 06830; 877-673-8637; 
www.osfunds.com) 

Pacific Advisors Funds (206 N. Jackson St., Suite 201, Glendale, CA 91206; 800989-
6693; www.pacificadvisorsfund.com) 

Pacific Capital Funds (3435 Stelzer Rd., Columbus, OH 43219-3035; 800-2589232) 


Pacific Innovations Trust (3435 Stelzer Rd., Columbus, OH 43219; 800-7225558) 


Paine Webber Funds (1285 Avenue of the Americas, Paine Webber Bldg., New 
York, NY 10019-6028; 800-647-1568) 

Papp & Associates Funds (6225 N. 24th St., Suite 150, Phoenix, AZ 85016; 800421-
4004) 

Park Avenue Portfolio (201 Park Ave., South, New York, NY 10003-1605; 800221-
3253; www.theguardian.com) 

Parkstone Group of Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-6623863) 


Parnassus Funds (One Market St., Steuart Tower, No. 1600, San Francisco, CA 
94105; 800-999-3505; www.parnassus.com) 

PATHFINDER FUND (4023 W. Sixth St., Los Angeles, CA 90020-4403; 800444-
4778) 


PART ONE: Maximizing Your Investment Options 

Pauze Funds (14340 Torrey Chase Blvd., Suite 170, Houston, TX 77014; 800-3277170) 


Pax World Fund (222 State St., Portsmouth, NH 03801-3853; 800-767-1729; 
www.paxfund.com) 

Payden & Rygel Investment Group (333 S. Grand Ave., 32nd Floor, Los Angeles, 
CA 90071-1504; 800-5PAYDEN; www.payden.com) 

PBHG Family of Funds (P.O. Box 419534, Kansas City, MO 64141-6534; 800433-
0051; www.pbhgfunds.com) 

PB Series Trust (400 W. Market St., Louisville, KY 40202; 502-560-3210) 

Penn Capital Funds (52 Haddonfield-Berlin Rd., Suite 1000, Cherry Hill, NJ 
08034; 800-224-6312) 

Penn Series Funds, Inc. (600 Dresher Rd., Horsham, PA 19044; 800-818-8184) 

Performance Funds (3435 Stelzer Rd., Columbus, OH 43219-3035; 800-7373676) 


Perritt Micro Cap Opportunities Funds, Inc. (120 S. Riverside Plaza, Suite 1745, 
Chicago, IL 60606-3911; 800-331-8936; www.perrittcap.com) 

Phillips Capital Investments, Inc. (15400 Knoll Trail, Suite 100; P.O. Box 796787, 
Dallas, TX 75379-6787; 972-458-2448) 

Phoenix-Engemann Funds (600 N. Rosemead Blvd., Pasadena, CA 91107-2138; 
800-648-8050; www.phoenixinvestments.com) 

Phoenix-Euclid Funds (900 Third Ave., 31st Floor, New York, NY 10022-4728; 
800-272-2700; www.euclidfunds.com) 

Phoenix Funds (101 Munson St., Greenfield, MA 01301-9659; 800-243-1574; 
www.phoenixinvestments.com) 

Phoenix-Seneca Funds (909 Montgomery St., Suite 500, San Francisco, CA 
94133; 800-828-1212; www.phoenixinvestments.com) 

Phoenix-Zweig Funds (900 Third Ave., New York, NY 10022-4728; 800-2722700; 
www.zweig.com) 

Pilgrim Funds (Two Renaissance Sq., 40 N. Central Ave., Suite 1200, Phoenix, AZ 
85004-4424; 800-992-0180; www.pilgrimfunds.com) 

Pillar Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-342-5734) 

PIMCO Funds (840 Newport Ctr. Dr., Suite 300, Newport Beach, CA 92660; 800927-
4648; www.pimco.com) 


CHAPTER 4: Selecting Mutual Funds 

Pioneer Funds (60 State St., Boston, MA 02109-1803; 800-225-6292; www. 
pioneerfunds.com) 

Planters Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-238-7125) 

Preferred Group of Funds (100 N.E. Adams St., Peoria, IL 61629-7310; 800-662GROW; 
www.preferredgroup.com) 

Primary Trend Funds (First Financial Centre, 700 N. Water St., Milwaukee, WI 
53202-4226; 800-443-6544; www.primarytrendfunds.com) 

Principal Mutual Funds (The Principal Financial Group, Des Moines, IA 503920200; 
800-247-4123; www.principal.com) 

Principal Preservation Funds (215 N. Main St., West Bend, WI 53095-3317; 800826-
4600) 

Professionally Managed Portfolios (915 Broadway, Suite 1605, New York, NY 
10010; www.firstfund.com) 

Profit Funds Investment Trust (8720 Georgia Ave., Suite 808, Silver Spring, MD 
20910; 888-335-6629; www.profitfunds.com) 

ProFunds (7900 Wisconsin Ave., Suite 300, Bethesda, MD 20814; 888-776-3637; 
www.profunds.com) 

Progressive Funds (579 Pleasant St., Suite 4, Paxton, MA 01612; 508-831-1171) 

Protective Investment Funds (2801 Hwy. 280 South, Birmingham, AL 352232407; 
800-627-0220) 

Provident Funds (300 N. Lake Ave., Pasadena, CA 91101-4106; 800-618-7643) 

Provident Institutional Funds Group (400 Bellevue Pkwy., Wilmington, DE 198093748; 
800-422-6538; www.pif.com) 

Prudential Mutual Funds (Gateway Center Three, 100 Mulberry St., Newark, NJ 
07102-4077; 800-225-1852; www.prudential.com) 

Public Employees Retirement Trust (P.O. Box 1138, St. Michaels, MD 21663; 
410-745-2156) 

Purisima Funds (13100 Skyline, Woodside, CA 94062; 800-841-2858) 

Putnam Family of Funds (One Post Office Sq., Boston, MA 02109-2103; www. 
putnaminv.com) 

Quantitative Group of Funds (55 Old Bedford Rd., Lincoln, MA 01773; 800-3311244; 
www.quantfunds.com) 


PART ONE: Maximizing Your Investment Options 

Rainier Investment Management Mutual Funds (601 Union St., Suite 2801, Seattle, 
WA 98101; 800-280-6111) 

Regions Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-433-2829) 

Reich & Tang Mutual Funds (600 Fifth Ave., New York, NY 10020-2302; 800676-
6779) 

Republic Funds (P.O. Box 182845, Columbus, OH 43218-2845; 800-782-8283) 

Riggs Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-934-3883) 

Rightime Family of Funds (218 Glenside Ave., Wyncote, PA 19095-1534; 800866-
9393) 

RNC Mutual Fund Group (11601 Wilshire Blvd., PH, Los Angeles, CA 900251770; 
800-431-7249; www.mccapital.com) 

Rochdale Funds (570 Lexington Ave., NewYork, NY 10022-6837; 212-702-3500) 

Rodney Square Funds (Rodney Sq. North, 1100 N. Market St., Wilmington, DE 
19890-0001; 800-336-9970) 

Royce Family of Funds (1414 Avenue of the Americas, New York, NY 100192514; 
800-221-4268; www.roycefunds.com) 

RS Funds (388 Market St., Suite 200, San Francisco, CA 94111; 800-766-3863; 
www.rsim.com) 

Rydex Series Trust (6116 Executive Blvd., Suite 400, Rockville, MD 20852; 800820-
0888; www.rydexfunds.com) 

SAFECO Family of Funds (P.O. Box 34890, Seattle, WA 98124-1890; 800-6245711; 
www.safecofunds.com) 

Salomon Brothers Institutional Investment Series (Seven World Trade Center, 
New York, NY 10048-1102; 800-446-1013; www.ssbciti.com) 

Salomon Brothers Investment Series (Seven World Trade Center, New York, NY 
10048-1102; 800-725-6666; www.ssbciti.com) 

Saturna Capital (1300 N. State, Bellingham, WA 98225; 800-728-8762; www. 
saturna.com) 

Schroder Fund Advisors Inc. (787 Seventh Ave., 34th Floor, New York, NY 
10019-6018; 800-464-3108) 

Schwab Annuity Portfolios (101 Montgomery St., San Francisco, CA 941044122; 
800-435-4000; www.schwab.com) 


CHAPTER 4: Selecting Mutual Funds 

SchwabFunds Family. (101 Montgomery St., San Francisco, CA 94104-4122; 
800-435-4000; www.schwab.com) 

Schwartz Investment Trust (3707 W. Maple Rd., Bloomfield Hills, MI 483013212; 
248-644-8500) 

SCM Investment Trust (107 N. Washington St., P.O. Box 4365, Rocky Mount, NC 
27803-0365; 800-773-3863) 

Scudder Funds (Two International Place, Boston, MA 02110-4101; 800-2252470; 
www.investments.scudder.com) 

Seasons Series Trust (733 Third Ave., New York, NY 10017-3204; 800-858-8850; 
www.sunamerica.com) 

Security Benefit Funds Group (700 Harrison St., Topeka, KS 66636-0001; 800888-
2461; www.securitybenefit.com) 

Security Capital Real Estate Mutual Funds Inc. (11 S. LaSalle St., Chicago, IL 
60603; 888-SECURITY; www.securitycapital.com) 

SEI Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-342-5734; 
www.seic.com) 

Selected Funds (124 E. Marcy St., Santa Fe, NM 87501; 800-243-1575; www. 
selectedfunds.com) 

Seligman Funds (100 Park Ave., New York, NY 10017-5516; 800-221-2450; 
www.seligman.com) 

Sentinel Funds (National Life Dr., P.O. Box 1499, Montpelier, VT 05601-1499; 
800-282-3863) 

Sentry Fund (1880 N. Point Dr., Stevens Point, WI 54481-1283; 800-533-7827) 

SG Cowen Funds (One Financial Sq., New York, NY 10005-3500; 800-262-7116; 
www.cowen.com) 

SIFE Trust Fund (100 N. Wiger Ln., Walnut Creek, CA 94598; 800-524-7433; 
www.sife.com) 

Sit Mutual Funds (4600 Norwest Ctr., 90 S. Seventh St., Minneapolis, MN 554024130; 
800-332-5580; www.sitfunds.com) 

Skyline Funds (311 S. Wacker Dr., Suite 4500, Chicago, IL 60606; 800-828-2759) 

SM&R Mutual Funds (2450 S. Shore Blvd., Suite 400, League City, TX 775507948; 
800-231-4639; www.smrinvest.com) 


PART ONE: Maximizing Your Investment Options 

Smith Barney Funds (Two World Trade Center, 100th Floor, New York, NY 
10048-0203; 212-464-6000; www.ssbciti.com) 

Smith Breeden Mutual Funds (100 Europa Dr., Suite 200, Chapel Hill, NC 275142310; 
800-221-3138; www.smithbreeden.com) 

SoGen Funds (1221 Avenue of the Americas, 8th Floor, New York, NY 100201605; 
212-278-5800) 

SouthTrust Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-8438618) 


SSgA Funds (One International Place, 27th Floor, Boston, MA 02110; 800-6477327; 
www.ssgafunds.com) 

STAAR Investment Trust (604 McKnight Park Dr., Pittsburgh, PA 15237-6533; 
800-332-7738; www.staarinvest.com) 

Stagecoach Funds, Inc. (111 Center St., Little Rock, AR 72201-4402; 800-2228222; 
www.wellsfargo.com) 

Stagecoach Trust (111 Center St., Suite 300, Little Rock, AR 72201-4402; 800458-
6589; www.wellsfargo.com) 

Standish, Ayer & Wood Investment Trust (One Financial Center, Boston, MA 
02111-2621; 800-221-4795; www.standishfunds.com) 

State Farm Funds (One State Farm Plaza, Bloomington, IL 61710-0001; 800-4470740) 


State Street Research Funds (One Financial Center, 31st Floor, Boston, MA 
02111-2621; 800-562-0032; www.ssrfunds.com) 

Stein Roe Mutual Funds (One S. Wacker Dr., Chicago, IL 60606-4614; 800-3382550; 
www.steinroe.com) 

SteinRoe Variable Funds (One S. Wacker Dr., Chicago, IL 60606-4614; 800-3673653) 


STI Classic Funds (One Freedom Valley Dr., Oaks, PA 19456; 800-342-5734) 

Strategist Mutual Fund Group (IDS Tower 10, Minneapolis, MN 55440; 800-2977378; 
www.americanexpress.com/direct) 

Stratton Mutual Funds (610 W. Germantown Pike, Suite 300, Plymouth Meeting, 
PA 19462-1050; 800-634-5726; www.strattonmgt.com) 

Stratus Funds (1225 I St., Suite 200, Lincoln, NE 68508; 800-279-7437) 


CHAPTER 4: Selecting Mutual Funds 

Strong Funds (P.O. Box 2936, Milwaukee, WI 53201; 800-368-3863; 
www.strongfunds.com) 

Strong Schafer Value Fund (P.O. Box 2936, Milwaukee, WI 53201; 800-3681030; 
www.strongfunds.com) 

Style Select Series, Inc. (733 Third Ave., New York, NY 10017-3204; 800-8588850; 
www.sunamericafunds.com) 

Summit Investment Trust (3435 Stelzer Rd., Columbus, OH 43219-3035; 800554-
3862; www.summitfunds.com) 

SunAmerica Equity Funds (733 Third Ave., New York, NY 10017-3204; 800-8588850; 
www.sunamericafunds.com) 

SunAmerica Income Funds (733 Third Ave., New York, NY 10017-3204; 800858-
8850; www.sunamericafunds.com) 

SunAmerica Money Market Funds, Inc. (733 Third Ave., New York, NY 100173204; 
800-858-8850; www.sunamericafunds.com) 

SunAmerica Series Trust (733 Third Ave., New York, NY 10017-3204; 800-8588850; 
www.sunamericafunds.com) 

SunAmerica Strategic Investment Series (733 Third Ave., New York, NY 100173204; 
800-858-8850; www.sunamericafunds.com) 

Sun Capital Advisers Funds (One Sun Life Executive Park, Wellesley Hills, MA 
02481; 800-432-1102) 

Target/United Funds (6300 Lamar, P.O. Box 29217, Shawnee Mission, KS 662024247; 
800-366-5465; www.waddell.com) 

Tax Free Fund of Vermont (87 N. Main St., Rutland, VT 05701; 800-675-3333) 

TCW Galileo Funds, Inc. (865 S. Figueroa St., Suite 1800, Los Angeles, CA 
90017-2543; 800-386-3929; www.tcwgroup.com) 

Templeton Group of Funds (100 Fountain Pkwy., St. Petersburg, FL 33716; 800342-
5236; www.franklin-templeton.com) 

Texas Capital Value Funds, Inc. (1600 W. 38th St., Suite 412, Austin, TX 787316407; 
800-628-4077; www.texasfunds.com) 

Third Avenue Funds (767 Third Ave., 5th Floor, New York, NY 10017-2023; 800443-
1021; www.mjwhitman.com) 

Thomas White Funds Family (440 S. LaSalle St., Suite 3900, Chicago, IL 606051028; 
800-811-0535; www.thomaswhite.com) 


PART ONE: Maximizing Your Investment Options 

Thompson Plumb Funds (1200 John Q. Hammons Dr., Madison, WI 53717; 800999-
0887; www.thompsonplumb.com) 

Thurlow Funds (1256 Forest Ave., Palo Alto, CA 94301; 888-848-7569; www. 
thurlowfunds.com) 

TIAA-CREF Life Funds (730 Third Ave., New York, NY 10017-3206; 800-8422733; 
www.tiaa-cref.org) 

TIAA-CREF Mutual Funds (730 Third Ave., New York, NY 10017-3206; 800223-
1200; www.tiaa-cref.org) 

TIAA Separate Account VA-1 (730 Third Ave., New York, NY 10017-3206; 800842-
2733; www.tiaa-cref.org) 

Time Horizon Funds (3435 Stelzer Rd., Columbus, OH 43219; 800-737-5438; 
www.bankamerica.com) 

Timothy Plan Fund (1304 W. Fairbanks Ave., Winter Park, FL 32789-4804; 800846-
7526; www.timothyplan.com) 

TIP Funds (1235 Westlakes Dr., Suite 350, Berwyn, PA 19312; 800-224-6312; 
www.turner-invest.com) 

Tocqueville Fund (1675 Broadway, 16th Floor, New York, NY 10019-5820; 212698-
0800) 

Torray Fund (6610 Rockledge Dr., Suite 450, Bethesda, MD 20817-1811; 800443-
3036) 

Touchstone Family of Funds (311 Pike St., Cincinnati, OH 45202; 800-669-2796; 
www.touchstonefunds.com) 

Transamerica Premier Funds (1150 S. Olive St., Los Angeles, CA 90015; 800892-
7597; www.funds.transamerica.com) 

T. Rowe Price Family of Funds (100 E. Pratt St., Baltimore, MD 21202-1009; 800638-
5660; www.troweprice.com) 
Trust for Credit Unions (P.O. Box 16931, St. Louis, MO 63105; 800-305-2140) 
Turner Funds (1235 Westlakes Dr., Suite 350, Berwyn, PA 19143; 888-TIP-7654; 
www.turner-invest.com) 
Tweedy, Browne Fund Inc. (52 Vanderbilt Ave., 8th Floor, New York, NY 100173808; 
800-432-4789) 
UAM Funds (211 Congress St., Boston, MA 02110; 800-826-5465) 
UC Investment Trust (P.O. Box 1280, Bristol, VA 24203-1280; 877-823-8637) 



CHAPTER 4: Selecting Mutual Funds 

Unified Funds (P.O. Box 6110, Indianapolis, IN 46206-6110; 800-408-4682; 
www.unifiedfunds.com) 

United Funds (6300 Lamar, P.O. Box 29217, Shawnee Mission, KS 66202-4247; 
800-366-5465; www.waddell.com) 

Universal Capital Growth Fund (100 S. Wacker Dr., Suite 2100, Chicago, IL 
60606; 312-782-1515; www.gbgs.com) 

USAA Funds (9800 Fredericksburg Rd., San Antonio, TX 78288-0001; 800-3828722) 


U.S. Global Accolade Funds (7900 Callaghan Rd., San Antonio, TX 78229-2327; 
800-873-8637; www.us-global.com) 
U.S. Global Investors Funds (7900 Callaghan Rd., San Antonio, TX 78229-2327; 
800-873-8637; www.us-global.com) 
VALIC Funds (2929 Allen Pkwy., Houston, TX 77019-2142; 713-526-5251) 
Value Line Funds (220 E. 42nd St., New York, NY 10017-5806; 800-223-0818; 
www.valueline.com) 
Van Eck (99 Park Ave., New York, NY 10016; 800-221-2220; www.vaneck.com) 
Vanguard Group of Funds (Vanguard Financial Center, P.O. Box 2600, Valley 
Forge, PA 19482-2600; 800-662-7447; www.vanguard.com) 
Van Kampen Funds, Inc. (One Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, 
IL 60181-5555; 800-225-2222; www.vankampen.com) 
Victory Portfolios, (3435 Stelzer Rd., Columbus, OH 48219-3035; 800-539-3863; 
www.keybank.com) 
Viking Mutual Funds (P.O. Box 500, Minor, ND 58702-0500) 
Vintage Mutual Funds (2203 Grand Ave., Des Moines, IA 50312-5338; 800-7981819; 
www.vintagefunds.com) 
Vision Funds (P.O. Box 4556, Buffalo, NY 14240-4556; 800-836-2211) 
Volumetric Fund, Inc. (87 Violet Dr., Pearl River, NY 10965-1212; 800-541-3863; 
www.volumetric.com) 
Vontobel Funds (1500 Forest Ave., Suite 223, Richmond, VA 23229-5104; 800527-
9500; www.vusa.com) 
Wachovia Funds (101 Greystone Blvd., SC-9215, Columbia, SC 29226; 800-9944414) 



PART ONE: Maximizing Your Investment Options 

Wade Fund (5100 Poplar Ave., Suite 2224, Memphis, TN 38137-2201; 901-6824613) 


Wanger Funds (227 W. Monroe St., Suite 3000, Chicago, IL 60606-5016; 800592-
6437; www.wanger.com) 

Warburg Pincus Funds (466 Lexington Ave., New York, NY 10017-3147; 800927-
2874; www.warburg.com) 

Wasatch Funds (150 Social Hall Ave., 4th Floor, Salt Lake City, UT 84111; 800551-
1700; www.wasatchfunds.com) 

Waterhouse Investors Family of Funds, Inc. (100 Wall St., New York, NY 10005; 
800-934-4410; www.waterhouse.com) 

Wayne Hummer Funds (300 S. Wacker Dr., Chicago, IL 60606-6610; 800-6214477; 
www.whummer.com) 

WCT Funds (5800 Corporte Dr., Pittsburgh, PA 15237-7010; 888-5-WCTFUND) 

Weiss Peck & Greer Funds (One New York Plaza, 31st Floor, New York, NY 
10004-1902; 800-223-3332; www.wpginivest.com) 

Weitz Funds (One Pacific Place, Suite 600, 1125 South 103 St., Omaha, NE 
68124-6008; 800-232-4161; www.weitzfunds.com) 

Wells Family of Real Estate Funds (3885 Holcomb Bridge Rd., Norcross, GA 
30092-2295; 800-448-1010; www.wellsref.com) 

WesMark Funds (5800 Corporate Dr., Pittsburgh, PA 15237-7010; 800-368-3369) 

West University Fund, Inc. (3030 University Blvd., Houston, TX 77005; 800-4655657) 


William Blair Mutual Funds (222 W. Adams St., Chicago, IL 60606; 800-7427272; 
www.wmblair.com) 

Williamsburg Investment Trust (312 Walnut St., P.O. Box 5354, Cincinnati, OH 
45201-5354; 800-443-4249) 

WM Group of Funds (1201 Third Ave., Suite 1400, Seattle, WA 98101; 800-2225852) 


World Equity Benchmark Shares (WEBS) (WEBS c/o Funds Distributor, Inc., 60 
State St., Suite 1300, Boston, MA 02109; 800-810-WEBS; www.websontheweb.com) 

Wright Funds (The Eaton Vance Building, 255 State St., Boston, MA 02109; 800888-
9471; www.wisi.com) 

WRK Series Fund (570 Carillon Pkwy., St. Petersburg, FL 33716; 800-851-9777) 


CHAPTER 4: Selecting Mutual Funds 

CLOSED-END STOCK FUNDS 

Following is a list of some of the biggest and most actively traded closed-end 
stock funds. Each entry includes the fund』s name, its stock symbol, the exchange 
where the fund is traded (NYSE—New York Stock Exchange; AMEX—American 
Stock Exchange; Nasdaq—Nasdaq National Market System), its address, and its 
telephone number. Upon request, the fund will send its latest quarterly or annual 
report, which lists the fund』s performance history and holdings. 

Adams Express Company (7 St. Paul St., Suite 1140, Baltimore, MD 21202; 800638-
2479; 410-752-5900; www.adamsexpress.com) 

Advantage Advisers Inc. (c/o CIBC World Markets Corp. One World Financial 
Center, 200 Liberty St., New York, NY 10281; 800-421-4777) 

Alliance Capital Management (1345 Avenue of the Americas, New York, NY 
10105; 800-221-5672; 201-319-4000; 800-219-4218; www.alliancecapital.com) 

Allied Capital Corporation (1919 Pennsylvania Ave., N.W., Washington, DC 
20006; 888-818-5298; 202-331-1112; www.alliedcapital.com) 

Allmerica Asset Management, Inc. (440 Lincoln St., Worcester, MA 01653; 800432-
8224; 508-855-3498) 

Apex Municipal Fund, Inc. (Box 9011, Princeton, NJ 08543; 800-543-6217; 609282-
2800; www.ml.com) 

Asia Pacific Fund, Inc. (155 Bishopsgate, London, UK EC2M 3XY; 212-7788838; 
800-426-5523; www.asiapacificfund.com) 

Bank Julius Baer and Co. Ltd. (330 Madison Ave., Floor 12A, New York, NY 
10017; 800-EURO-WRS; 212-297-3878; 212-297-3828; www.europeanwarrantfund. 
com) 

Bergstrom Capital Corporation (221 First Ave., West, Suite 320, Seattle, WA 
98119-4224; 206-283-0529) 

Bexil Corporation (11 Hanover Square, 12th Floor, New York, NY 10005; 888847-
4200; 212-363-1100; www.bexil.com) 

BlackRock Trust (345 Park Ave., 29th Floor, New York, NY 10154; 800-2277236; 
212-754-5505; www.blackrock.com) 

Blue Chip Value Fund (1225 17th St., 26th Floor, Denver, CO 80202; 303-3125100; 
800-624-4190; www.blu.com) 

Boulder Total Return Fund (1680 38th St., Suite 800, Boulder, CO 80301; 303444-
5483) 


PART ONE: Maximizing Your Investment Options 

Brantley Capital Corporation (20600 Chagrin Blvd., Suite 1150, Cleveland, OH 
44122; 216-283-4800) 

Capital Southwest Corporation (12900 Preston Rd., Suite 700, Dallas, TX 75230; 
972-233-8242; www.capitalsouthwest.com) 

Central European Equity Fund (280 Park Ave., 7-East, New York, NY 10017; 212454-
1695; 800-GERMANY; www.ceefund.com) 

Central Fund of Canada (P.O. Box 7319, Ancaster, Ontario, Canada L9G 3N6; 
905-648-7878; www.centralfund.com) 

Central Securities Corp. (375 Park Ave., Suite 3404, New York, NY 10152-0055; 
212-688-3011; www.centralsecurities.com) 

Chartwell Dividend and Income Fund, Inc. (1235 Westlakes Dr., Suite 330, 
Berwyn, PA 19312; 610-296-1400) 

Circle Income Shares, Inc. (P.O. Box 77004, Indianapolis, IN 46277-7004; 317321-
7544; 317-321-8180) 

Citigate Dewe Rogerson Inc. (1400 Broadway, 16th Floor, New York, NY 10018; 
800-343-9567; 212-688-6840; www.roctaiwanfund.com) 

Clemente Strategic Value Fund (Carnegie Hall Tower, 152 W. 57th St., 25th Floor, 
New York, NY 10019; 212-765-0700; www.clementecapital.com) 

CNA Income Shares, Inc. (CNA Plaza, 23 South, Chicago, IL 60685; 312-8224181; 
www.cna.com/cnaisi) 

Cohen & Steers Funds (757 Third Ave., 20th Floor, New York, NY 10017; 800330-
REIT; 212-832-3232; www.cohenandsteers.com) 

Colonial Funds (One Financial Center, Boston, MA 02111-2621; 800-426-3750; 
617-426-3750; 800-730-6001; www.libertyfunds.com) 

Conseco Strategic Income Fund (11825 N. Pennsylvania St., Carmel, IN 46032; 
800-852-4750; 888-754-3409; 317-817-5390; www.conseco.com) 

Corporate High Yield Funds, Inc. (P.O. Box 9011, Princeton, NJ 08543-9011; 609282-
2800; www.ml.com) 

Credit Suisse Asset Management (152 E. 53rd St., 57th Floor, New York, NY 
10022; 800-293-1232; 212-878-9529; www.cefsource.com) 

Current Income Shares, Inc. (445 S. Figueroa St., 3rd Floor, Los Angeles, CA 
90071; 888-465-2825; 213-236-7088; www.highmarkcapmgmt.com) 

Daiwa Securities Trust Company (One Evertrust Plaza, 9th Floor, Jersey City, NJ 
07302; 201-915-3650; 800-933-3440; www.daiwast.com) 


CHAPTER 4: Selecting Mutual Funds 

Davis/Dinsmore Management Co. (65 Madison Ave., Suite 550, Morristown, NJ 
07960; 973-631-1177; www.bcvecf.com) 

Debt Strategies Funds, Inc. (P.O. Box 9011, Princeton, NJ 08543-9011; 609-2822800; 
www.ml.com) 

Delaware Investments (1818 Market St., Philadelphia, PA 19103; 800-362-7500; 
215-255-1918; www.delawarefunds.com) 

Deutsche Asset Management, Inc. (855 Third Ave., 32nd Floor, New York, NY 
10022; 800-550-6426; 800-730-1313; 212-230-2575; www.morgan-grenfell.com) 

DLJ High Yield Bond Fund (One Pershing Plaza, 10th Floor, Jersey City, NJ 
07399; 888-649-5711; 201-413-3586; www.dljassetmanagement.com) 

Dresdner RCM Global Investors (Four Embarcadero Center, San Francisco, CA 
94111; 800-237-4218; 415-263-5127; www.dsfund.com) 

Dreyfus Funds (200 Park Ave., New York, NY 10166; 800-334-6899; www.dreyfus. 
com) 

Duff & Phelps Funds (55 E. Monroe St., Chicago, IL 60603; 312-263-2610) 

Eaton Vance Municipal Income Trusts (255 State St., Boston, MA 02109; 800225-
6265 x 8436; 617-482-8260; www.eatonvance.com) 

1838 Bond-Debenture Trading Fund (Five Radnor Corporate Center, Suite 320, 
100 Matsonford Rd., Radnor, PA 19087; 914-765-3302; 610-254-4723; www.1838ia. 
com) 

Emerging Markets Funds (Seven World Trade Center, New York, NY 10048; 800937-
5449; 212-783-0460) 

Engex, Inc. (44 Wall St., New York, NY 10005; 212-495-4200) 

Equus II, Inc. (The America Tower, 2929 Allen Pkwy., Suite 2500, Houston, TX 
77019-2120; 713-529-0900; 800-856-0901; www.equuscap.com) 

Fidelity Investments (P.O. Box 770002, Cincinnati, OH 45277-0081; 800-5227297; 
800-840-6333) 

First American Asset Management (601 Second Ave., South, Minneapolis, MN 
55402; 619-973-2000; 800-722-7161) 

First Australia and Commonwealth Funds, Inc. (45 Broadway, 31st Floor, New 
York, NY 10006; 800-522-5465; 212-968-8800; www.equitilink.com) 

First Capital Group/First Union (123 S. Broad St., 2nd Floor, Philadelphia, PA 
19109; 617-210-3533) 


PART ONE: Maximizing Your Investment Options 

First Financial Fund, Inc. (Gateway Center Three, 100 Mulberry St., Newark, NJ 
07102-4077; 800-451-6788; 800-426-5523) 

First Philippine Fund (Carnegie Hall Tower, 152 W. 57th St., 25th Floor, New 
York, NY 10019; 212-765-0700; www.clementecapital.com) 

Flaherty & Crumrine Incorporated (301 E. Colorado Blvd., Suite 720, Pasadena, 
CA 91101; 800-331-1710; 626-795-7300; www.preferredincome.com) 

Fort Dearborn Income Securities, Inc. (209 S. LaSalle St., 12th Floor, Chicago, IL 
60604-1295; 312-346-0676) 

Fortis Financial Group (P.O. Box 64284, St. Paul, MN 55164-0284; 800-800-2000 
x 3012; 651-738-4352) 

France Growth Fund, Inc. (666 Third Ave., New York, NY 10017-7411; 800-4570849; 
646-658-4530; www.francegrowthfund.com) 

Franklin Trusts (P.O. Box 997151, Sacramento, CA 95899-9983; 800-223-2141; 
www.franklin-templeton.com) 

Fred Alger Management, Inc. (One World Trade Center, Suite 93333, New York, 
NY 10048; 800-992-3863; 201-547-3657) 

Gabelli Funds and Trusts (One Corporate Center, Rye, NY 10580-1434; 800GABELLI; 
800-422-3554; 914-921-5130; www.gabelli.com) 

General American Investors Company, Inc. (450 Lexington Ave., Suite 3300, New 
York, NY 10017-3904; 800-436-8401; 212-916-8400) 

German Fund (280 Park Ave., 7 East, New York, NY 10017; 212-454-1695; 800GERMANY; 
www.germanyfund.com) 

Global Income Fund (11 Hanover Square, 12th Floor, New York, NY 10005; 888847-
4200; 212-363-1100; www.globalincomefundinc.com) 

Global Partners Income Fund (Seven World Trade Center, New York, NY 10048; 
800-937-5449; 212-783-0460) 

Greenwich Street California Municipal Fund (Seven World Trade Center, New 
York, NY 10048; 800-331-1710; 212-783-0460) 

H&Q Investors (50 Rowes Wharf, 4th Floor, Boston, MA 02110; 617-310-0567; 
800-451-2597; www.hqcm.com) 

Hatteras Income Securities, Inc. (One Bank of America Plaza, Mail Code NC-00233-
31, 101 S. Tryon, Charlotte, NC 28255; 800-635-9270; 704-386-2459) 

Herzfeld Caribbean Basin Fund, Inc. (P.O. Box 161465, Miami, FL 33116; 800TJH-
FUND; 305-271-1900; www.herzfeld.com) 


CHAPTER 4: Selecting Mutual Funds 

High Income Opportunity Fund (Seven World Trade Center, New York, NY 
10048; 800-331-1710; 212-783-0460) 

High Yield Income Funds, Inc. (Gateway Center Three, 8th Floor, 100 Mulberry 
St., Newark, NJ 07102; 800-451-6788; 800-426-5523) 

HSBC Securities Inc. (140 Broadway, 5th Floor, New York, NY 10005; 888-CHNCALL; 
201-896-2624) 

Hyperion Capital Management, Inc. (One Liberty Plaza, 165 Broadway, 36th 
Floor, New York, NY 10006; 800-HYPERION; 212-549-8400; 800-497-3746) 

Income Opportunities Fund 2000 Inc. (P.O. Box 9011, Princeton, NJ 08543; 800543-
6217; 609-282-2800; www.ml.com) 

Invesco (1166 Avenue of the Americas, New York, NY 10036; 800-331-1710; 
212-278-9309) 

INVESCO Fund Group, Inc. (7800 E. Union Ave., Suite 300, Denver, CO 80237; 
303-930-6432; 800-528-8765; www.ghs.invesco.com) 

Investor Relations (865 S. Figueroa St., Suite 2200, Los Angeles, CA 90017; 800FUND-
TCW; 213-244-0000; 213-244-0023; www.tcwgroup.com) 

Italy Fund, Inc. (Seven World Trade Center, New York, NY 10048; 800-331-1710; 
212-783-0460) 

Jakarta Growth Fund, Inc. (180 Maiden Ln., 26th Floor, New York, NY 10038; 
800-833-0018; 212-509-1534; 212-509-8181; www.nomura-asset.com) 

Japan OTC Equity Fund, Inc. (180 Maiden Ln., 26th Floor, New York, NY 10038; 
800-833-0018; 212-509-1534; 212-509-8181; www.nomura-asset.com) 

John Hancock Funds and Trusts (101 Huntington Ave., Boston, MA 02199-7603; 
800-843-0090; 617-375-1839; www.jhfunds.com) 

J&W Seligman & Co., Inc. (100 Park Ave., New York, NY 10017; 800-622-4597; 
212-850-1301; 212-697-0144; www.tricontinental.com) 

Korean Equity Fund (180 Maiden Ln., 26th Floor, NewYork, NY 10038; 800-8330018; 
212-509-1534; 212-509-8181; www.nomura-asset.com) 

LCM Internet Growth Fund (223 W. Lake St., Chicago, IL 60606; 877-LCM7528; 
312-705-3028; www.lcmfunds.com) 

Liberty Funds (Federal Reserve Plaza, 600 Atlantic Ave., 23rd Floor, Boston, MA 
02210; 800-241-1850; 617-722-6036; 800-542-3863; www.libertyallstar.com) 

LGN Associates (P.O. Box 269, Florham Park, NJ 07932; 973-377-3535; 
www.asaltd.com) 


PART ONE: Maximizing Your Investment Options 

Managed Funds (Seven World Trade Center, New York, NY 10048; 800-3311710; 
212-783-0460) 

Massachusetts Health & Education Tax-Except Trust (The Eaton Vance Building, 
255 State St., Boston, MA 02109; 800-225-6265 x 8436; 617-482-8260; www. 
eatonvance.com) 

MassMutual Corporate Investors (1295 State St., Springfield, MA 01111-0001; 
800-647-7374; 413-744-8480; www.massmutual.com/mci) 

MassMutual Participation Investors (1295 State St., Springfield, MA 01111-0001; 
800-647-7374; 413-744-8480; www.massmutual.com/mpv) 

Mentor Investment Advisors, LLC (Riverfront Plaza, 901 E. Byrd St., Richmond, 
VA 23219; 800-426-5523; 804-782-3741) 

meVC Draper Fisher Jurvetson Fund I, Inc. (991 Folsom St., San Francisco, CA 
94107; 877-474-6382; 415-977-6150 x 28; www.mevc.com) 

Mexico Fund, Inc. (Impulsora del Fondo Mexico, S.A. de C.V., Aristoteles 77302, 
Col. Olanco, Mexico DF 11560, Mexico; 800-224-4134; Mexico 001-525-2828900; 
www.themexicofund.com) 

MFS Trusts (500 Boylston St., Boston, MA 02116; 800-225-2606; 617-954-5000; 
617-954-6383; www.mfs.com) 

Mitchell Hutchins Asset Management Inc. (1285 Avenue of the Americas, New 
York, NY 10019; 201-352-5450) 

Morgan Stanley Dean Witter Asset Management (1221 Avenue of the Americas, 
5th Floor, New York, NY 10020; 212-762-7200; 800-221-6726; www.msdw.com/ 
institutional/investmentmanagement) 

MuniFunds (P.O. Box 9081, Princeton, NJ 08543; 800-543-6217; 609-282-2800; 
www.ml.com) 

Municipal Funds (Seven World Trade Center, New York, NY 10048; 800-3311710; 
212-783-0460) 

NAIC Growth Fund (711 W. Thirteen Mile Rd., Madison Heights, MI 48071; 877275-
6242; 248-583-6242; www.better-investing.org/grf/grf.html) 

Nations Funds and Trusts (1 NationsBank Plaza, 101 S. Tryon St., NC1-002-3331, 
Charlotte, NC 28255; 800-321-7854; 800-982-2271; www.nations-funds.com) 

New America High Income Fund (33 Broad St., 9th Floor, Boston, MA 02109; 
617-263-6400; www.newamerica-hyb.com) 


CHAPTER 4: Selecting Mutual Funds 

New Germany Fund (280 Park Ave., 7-East, New York, NY 10017; 212-454-1695; 
800-GERMANY; www.newgermanyfund.com) 

Nuveen Investor Services, (P.O. Box 5186, Bowling Green Station, New York, NY 
10274-5186; 800-257-8787; www.nuveen.com) 

Oppenheimer Multi-Sector Income Trust (Two World Trade Center, Suite 3400, 
New York, NY 10048-0203; 212-323-0200; 800-525-7048; www.oppenheimerfunds. 
com) 

Pacholder High Yield Fund, Inc. (8044 Montgomery Rd., Suite 480, Cincinnati, 
OH 45236; 800-336-6782; 513-985-3200; www.phf-hy.com) 

Pacific American Income Shares (100 Light St., 29th Floor, Baltimore, MD 
21202; 410-454-2430) 

Petroleum & Resources Corporation (7 St. Paul St., Suite 1140, Baltimore, MD 
21202; 800-638-2479; 410-752-5900; www.peteres.com) 

PFPC Inc. (3200 Horizon Dr., King of Prussia, PA 19406; 800-Go-To-IRL) 

Pilgrim Prime Rate Trust (7337 E. Doubletree Rand Rd., Scottsdale, AZ 85258; 
800-331-1080; www.pilgrimfunds.com) 

PIMCO Advisors LP (800 Newport Center Dr., Newport Beach, CA 92660; 800426-
0170) 

Pioneer Interest Shares (60 State St., Boston, MA 02109; 800-288-9541; 800-2256292; 
617-742-7825; www.pioneerfunds.com) 

Princeton Administrators, LP (780 Third Ave., New York, NY 10017; 800-5436217; 
609-282-4600) 

Prospect Street High Income Portfolio (60 State St., Suite 3750, Boston, MA 
02109; 877-532-2834; 617-342-3800; www.prospectstreet.net) 

Putnam Investments (P.O. Box 41203, Providence, RI 022940-1203; 800-6341587; 
617-292-1000; 617-760-8829; www.putnaminv.com) 

Rand Capital Corporation (2200 Rand Building, Buffalo, NY 14203; 716-8530802) 


Renaissance Capital Growth & Income III (8080 N. Central Expressway, Suite 
210, LB 59, Dallas, TX 95206-1857; 214-891-8294; www.rencapital.com) 

Royce Trusts (1414 Avenue of the Americas, New York, NY 10019; 212-5084552; 
800-59-ROYCE; www.roycefunds.com) 

S&P Protected Equity Fund (P.O. Box 9081, Princeton, NJ 08543; 800-543-6217; 
609-282-2800; www.ml.com) 


PART ONE: Maximizing Your Investment Options 

Salomon Brothers Funds, Inc. (Seven World Trade Center, New York, NY 10048; 
800-432-8824; 212-783-0460) 

Scudder Kemper Investments, Inc. (345 Park Ave., New York, NY 10154; 800349-
4281; 212-326-6258; www.kemper.com) 

Seligman Quality Municipal Fund (100 Park Ave., New York, NY 10017; 212697-
0144; 800-597-6068; www.jwseligman.com/individual/individual/htm) 

Senior High Income Portfolio, Inc. (Box 9011, Princeton, NJ 08543; 800-5436217; 
609-282-2800; www.ml.com) 

Smith Barney Funds (Seven World Trade Center, New York, NY 10048; 800-3311710; 
212-783-0460) 

Source Capital, Inc. (11400 W. Olympic Blvd., Suite 1200, Los Angeles, CA 
90064; 800-982-4372; 310-473-0225) 

Southeastern Thrift and Bank Fund, Inc. (101 Huntington Ave., Boston, MA 
02199; 800-843-0090; 617-375-1839; www.jhfunds.com) 

Sterling Capital Corporation (635 Madison Ave., 18th Floor, New York, NY 
10022; 800-949-3456; 212-980-3360) 

Swiss Helvetia Fund (630 Fifth Ave., Suite 630, New York, NY 1011; 888-7947700; 
212-332-7931; www.swz.com) 

Taiwan Fund (225 Franklin St., Boston, MA 02209; 800-636-9242; 800-4265523) 


Templeton Funds (P.O. Box 33030, 100 Fountain Pkwy., St. Petersburg, FL 
33733-8030; 800-342-5236; www.franklin-templeton.com) 

Time Square Capital Management, Inc. (900 Cottage Grove Rd., S-210, Hartford, 
CT 06150-2210; 800-426-5523; 860-726-3726; www.cigna.com) 

Transamerica Income Shares, Inc. (1150 South Olive, Los Angeles, CA 90015; 
800-288-9541; 213-742-2222; 213-742-4141) 

Traveler Corporate Loan Fund, Inc. (Seven World Trade Center, New York, NY 
10048; 800-331-11710; 212-783-0460) 

T. Rowe Price Services, Inc. (100 E. Pratt St., Baltimore, MD 21289-2900; 800638-
8540; 410-625-6761) 
Tuxis Corporation (11 Hanover Square, 12th Floor, New York, NY 10005; 888847-
4200; 212-363-1100; www.tuxis.com) 

United States Trust Company of New York (114 W. 47th St., 14th Floor, NewYork, 
NY 10036; 800-257-2356; 212-852-3732) 


CHAPTER 4: Selecting Mutual Funds 

Van Kampen Trusts (One Parkview Plaza, Oakbrook Terrace, IL 60181; 800-3412929; 
630-684-6000; www.vankampen.com) 

Variable Annuity Insurance Co. (2929 Allen Pkwy., Houston, TX 77019; 713-8315321) 


Worldwide DollarVest Fund (P.O. Box 9011, Princeton, NJ 08543; 609-282-2800; 
www.ml.com) 

Zenix Income Fund (Seven World Trade Center, New York, NY 10048; 800-3311710; 
212-783-0460) 

Z-Seven Fund (1819 S. Dobson Rd., Suite 109, Mesa, AZ 85282; 480-897-6214) 

Zweig Funds (900 Third Ave., New York, NY 10022; 800-272-2700; 413-7724000; 
www.phoenixfunds.com) 

RATING SERVICES 

The following companies rate the performance of mutual funds: 

AMG Data Services (5440 Ericson Way, Arcata, CA 95521; 707-822-4888; www. 
amgdata.com) 

CDA (1355 Piccard Dr., Suite 220, Rockville, MD 20850; 301-975-9600; 800232-
2285; www.cda.com) 

CDA Weisenberger (1355 Piccard Dr., Suite 220, Rockville, MD 20850; 301975-
9600; 800-232-2285; www.cda.com) 

Computer Directions Advisors (1355 Piccard Dr., Rockville, MD 20850; 301975-
9600; www.cda.com) 

Lipper Analytical Services (74 Trinity Pl., New York, NY 10006; 212-393-1300; 
www.lipperweb.com) 

Morningstar (225 W. Wacker Dr., Chicago, IL 60606; 800-876-5005; www. 
morningstar.com) 

TRADE ASSOCIATIONS 

Closed-End Fund Association (P.O. Box 28037, Kansas City, MO 64188; 212916-
8400; www.closed-endfunds.com). Trade group representing closed-end funds. 
Offers a free brochure, 「Understanding the Advantages of Closed-End Funds.」 

Investment Company Institute (1401 H St., N.W., Suite 1200, Washington, DC 
20005; 202-326-5800; www.ici.org www.msdc.com). The trade group for lobbying 
and public education on mutual fund issues. Will send you a copy of the following free 
pamphlets: 「A Close Look at Closed-End Funds」; 「Money Market Mutual Funds: A 
Part of Every Financial Plan」; 「Planning for College? The Mutual Fund Advantage 


PART ONE: Maximizing Your Investment Options 

Becomes a Parent」; 「Reading the Mutual Fund Prospectus」; 「What Is a Mutual 
Fund?」 To receive a copy of any of these brochures, write to the ICI at P.O. Box 66140, 
Washington, DC 20035-6140. 

Mutual Fund Education Alliance (100 N.W. Englewood Rd., Suite 130, Kansas City, 
MO 64118; 816-454-9422; www.mfea.com). An educational group composed mostly 
of no-load mutual funds. Some of its members charge low loads, back-end loads or 
12b-1 fees. Upon request, the Alliance will send you free the following brochures: 「A 
Guide to Mutual Funds」 and 「A Guide to Mutual Fund Investing.」 

National Investment Company Services Association (850 Boylston St., Suite 437, 
Chestnut Hill, MA 02167; 617-277-1855). The trade group specializing in mutual fund 
service issues. 

100% No-Load Mutual Fund Council (1501 Broadway, Suite 1809, New York, 
NY 10036; 212-768-2477). Represents mutual funds that charge no sales commissions 
of any type. Upon request, it will send you a free copy of the 「100% No-Load Mutual 
Fund Council Investment Guide and Member Directory.」 

Society of Asset Allocators and Fund Timers (165 S. Union Blvd., Suite 415, 
Lakewood, CO 80228; 313-642-6640). A group of investment professionals who manage 
mutual fund assets for their clients through the use of dynamic asset allocation and 
market-timing strategies. 


CHAPTER 5 
All about Bonds 


When you invest in a bond, you are loaning the issuer of that bond your 
money in return for a fixed rate of interest for a specific amount of time. Normally, 
you receive interest payments every six months, and when the bond matures, you 
receive your original principal, no matter how much the price of the bond fluctuated 
since it was issued. 

Investing in Bonds 

Bonds are one of the key investment vehicles available for your use in achieving 
your financial goals. They allow you to lock in a set rate of income for a long 
period of time, which can give your financial plan a rock-solid foundation. In addition, 
if you want to trade bonds more actively, you can earn capital gains by buying 
them when their prices fall and selling them when their prices rise, just as you 
can do with stocks. 

For many decades, bonds were quite simple. For years, interest rates remained 
remarkably stable at about 1 percent or 2 percent because inflation was low. Few, 
if any, bonds defaulted, which happens when bond issuers fail to honor their pledge 
to pay interest or principal on time. Bond prices hardly budged. 

But starting in the mid-1970s, when the Arab oil embargo and soaring government 
budget deficits ignited inflation, all of that changed. Interest rates jumped 
from 4 percent to 5 percent in the early 1970s to more than 20 percent in the early 
1980s, giving rise to tremendous volatility in the bond market. Even as rates fell 
back from those heights during the 1980s and 1990s, bond yields remained higher 
than they had been in the 1950s, and bond prices continued to jump around. On top 
of gyrating rates, the number of bond defaults increased dramatically, as many 
companies, and a few municipalities, were unable to handle the increased interest 
payments required from higher yielding bonds. 


PART ONE: Maximizing Your Investment Options 

The bond market was changed not only by increased volatility of interest rates, 
prices, and defaults but also by an explosion in the variety of new bond types. For 
decades, the major issuers of bonds had been the federal government and its agencies, 
state and local governments and related agencies, foreign governments, and 
blue chip corporations. Starting in the 1980s, billions of dollars』 worth of junk 
bonds were issued by small and risky growth companies or by raiders, who used 
the money to take over major corporations. Another new class of bond called 
asset-backed securities, which back the promise to repay the bond with interest 
from assets like mortgages, credit cards, and auto loans, was created and took in 
hundreds of billions of dollars. 

Also, the bond market, which had formerly been the preserve of the rich, was 
democratized by the introduction of the bond mutual fund. Like stock funds, bond 
funds allowed average people access to the huge and complicated world of investing 
for a small amount of money and reasonable fees. Bond funds became the 
haven for millions of income-oriented investors who had always kept their money 
in bank products like CDs and money-market funds. 

With all these recent developments in the world of bonds, there is much to 
learn about the opportunities and pitfalls of today』s bond market. Chances are that 
fixed-income securities will play an important role in your financial plan at some 
stage in your life. 

The Basics of Holding Bonds 

When you buy bonds issued by a government agency or a company, you become 
a lender to that entity. This is very different from being a stockholder, which 
you become when you buy a company』s stock. As a bondholder, you are entitled to 
receive the bond』s stated interest rate when interest is due and your principal when 
the bond matures—nothing more. You will not receive quarterly or annual reports. 
You will not be invited to a firm』s annual meeting. You will not earn dividends. If 
a company』s earnings soar, you will not participate in that success. 

On the other hand, the yield you will receive from the bond will typically be 
higher than the stock dividend yield because bondholders must be compensated 
for reduced purchasing power in the future because of inflation. (Of course, there 
is no way to buy stock in most government agencies—although you can buy 
stock in some, as noted later—so bonds are the only way to participate in the 
government.) 

As with stocks, the money that you pay to buy bonds goes to the issuers only 
when the bonds are first sold to the public. After that, you buy bonds from the 
existing owners, or you sell bonds to other investors. Most bond trading is done 
automatically in a computer-driven system without specialists or dealers. In addition, 
bonds are bought and sold through competing dealers, who communicate 
with each other by computer and telephone. 


CHAPTER 5: All about Bonds 

Bonds are normally quoted on a price scale of 0 to 200, with 100 being the 
price at which the bond was issued, or what is known as par. Because bonds are 
sold in minimum denominations of $1,000, a price of 100 means that the bond is 
trading at $1,000 per bond. If the bond』s price rises to 110, your holdings are now 
worth $1,100. 

Unlike stock transactions, bond buy-and-sell transactions normally occur 
without a separate commission charge. Instead, a broker makes money from a 
transaction by taking a piece of the spread between the buying and selling prices. 
For example, if a broker buys you a bond at a price of 100, he or she might charge 
you 102 for it and keep the two points as his or her commission. If you try to sell 
the bond for a price of 100, you might get only 98 for it. Because the bond market 
is generally dominated by large institutions that trade millions of dollars』 worth of 
bonds, you will pay a wider spread if you buy only a small number of bonds. Many 
bond dealers won』t even execute a trade for fewer than 25 bonds, or $25,000, 
though some might go as low as five bonds, or $5,000. Because it is a competitive 
market, you should shop around among brokers to get the best deal. 

The only way you can avoid paying a large spread for small purchases, other 
than to buy bonds through a mutual fund, is to buy government bonds directly from 
the Treasury. You can buy bills, notes, and bonds whenever the Treasury auctions 
new issues. You can also buy U.S. savings bonds for only $25 through any bank 
or by payroll deduction. (Government bonds will be discussed in more detail later 
in this chapter.) 

For decades, bondholders received fancy bond certificates with attached coupons 
entitling the coupon owners to the cash interest payment on the date due. 
These were known as bearer bonds because whoever bore a bond coupon would 
be paid the interest. Bearer bonds have not been issued since 1982; therefore, for 
the most part, the days of bearer bond certificates are long gone. Instead, bonds are 
now issued in either registered or book entry form. Registered bonds still have 
certificates, and the owner of the bond is named on the back of the certificate. To 
sell a registered bond, the owner must endorse it and have his or her name changed 
to the new owner』s name in the issuer』s records. The more common form of bond 
issued today, however, is the book entry bond, for which interest payments are 
tracked by computers. If you hold a bond in a brokerage account, interest and 
principal payments will be made automatically. Book entry bonds provide no 
certificate you can hold in your hands; the record exists only in the computer data 
banks of your brokerage firm. Because the bond is electronic, however, it is much 
easier to trade because no endorsement is needed for the bond to change hands. 

HOW BOND PRICES MOVE 

When you consider investing in bonds, you should understand that one cardinal 
rule about the movement of bond prices: Bond prices move in the opposite 
direction of interest rates. Normally, you might think that rising interest rates 


PART ONE: Maximizing Your Investment Options 

would be good for your bond, but nothing could be further from the truth. Even 
though it may sound illogical at first, it is true that when interest rates rise, bond 
prices fall. When interest rates fall, bond prices rise. The following example 
explains why. 

Say you buy a bond yielding 10 percent at a price of 100 (the par price). If 
interest rates plummet to 5 percent over the next several years, your 10 percent 
bond would become very valuable, indeed. Its price would soar—maybe to a dollar 
value of 150—because people would be willing to pay a big premium to get their 
hands on a 10 percent bond in an environment where bonds pay only 5 percent. 
Notice that as interest rates fell, your bond』s value rose. 

Now let』s take the opposite situation. You buy your 10 percent bond at 100, 
and instead of dropping, interest rates soar to 15 percent. Your bond won』t be 
popular now because people would rather buy a new bond paying 15 percent than 
your old bond paying 10 percent. Therefore, if you want to sell your bond to buy 
a newer one at the higher current rate, you would suffer a loss. The price of your 
bond might drop to half, from 100 to 50. Notice that as interest rates rose, your 
bond』s value fell. 

Bond prices move seemingly so perversely because bonds are a fixed-rate instrument. 
Because the bond』s rate is locked in at whatever level it was when the 
bond was first issued, the bond becomes more or less valuable as interest rates fall 
or rise. Figure 5.1 might help you better understand the inverse relationship between 
interest rates and bond prices. 

The longer the maturity of your bond, the more its price will react to the ups and 
downs of interest rates. A bond that locks in a high interest rate for 20 or 30 years 
is much more valuable to an investor if interest rates have fallen than a bond that 
matures in a year or two. Conversely, if interest rates have risen, the investor would 
rather get his or her money back quickly so he or she can reinvest at higher rates. 

When calculating the effect of interest rates on an investor』s holdings, analysts 
usually look at the total return—that is, the price change of the bond added to the 
income it is paying. Figure 5.2 shows how an interest rate increase of from one to 
four percentage points over one year would affect the total returns of several bond 
maturities, from 6 years to 30 years. This table assumes that 6-year bonds yield 
6 percent, 10- and 20-year bonds yield 7 percent, and 30-year bonds yield 8 
percent. Notice that the longer the bond maturity, the more the bond loses value 
as rates rise. 

Figure 5.3 shows how much total returns on different bond maturities rise as 
interest rates fall over one year. 

This bond volatility should always factor into your decision to buy bonds. 

WHY INTEREST RATES FLUCTUATE 

Many factors influence interest rate movements. In the long term, the outlook 
for inflation is the most important determinant of interest rates. If inflation is high 


CHAPTER 5: All about Bonds 

Figure 5.1 Relationship between Bond Funds and Interest Rates 

When interest rates move up or down, the price of a bond usually moves in the 
opposite direction. 

 
Interest Rates 
 
Prices 
Prices 
 
Interest Rates 
 
Short-term bonds (bonds that are close to maturity) are usually less affected by 
changes in interest rates than long-term bonds. 

and rising, investors demand a higher yield to protect the value of their money from 
erosion. If inflation is low and declining, investors settle for a lower yield because 
they are not as threatened by the loss of purchasing power. One way to measure 
investors』 fear of inflation is to subtract the current inflation rate from a bond』s 
yield. This produces what is known as the real interest rate. For example: 

Current interest rate 10% 
Consumer price index inflation rate .6 
Real interest rate 4% 

Figure 5.2 Percentage Points Rate Increase in a Year 
Maturity Unchanged +1% +2% +3% +4% 
6 years +6% +2% .2% .5% .9% 
10 years +7 +1 .5 .10 .15 
20 years +7 +1 .7 .13 .19 
30 years +8 .3 .11 .19 .25 

Source: Reprinted by permission of The Leuthold Group, an investment advisory firm in Minneapolis, Minnesota. 


PART ONE: Maximizing Your Investment Options 274 
Figure 5.3 Percentage Points Rate Decrease in a Year 
Maturity Unchanged .1% .2% .3% .4% 
6 years +6% +10% +15% +20% +25% 
10 years +7 +13 +20 +28 +37 
20 years +7 +18 +28 +42 +57 
30 years +8 +20 +35 +51 +69 

Source: Reprinted by permission of The Leuthold Group, an investment advisory firm in Minneapolis, Minnesota. 

If the resulting number is positive, it is known as a positive real interest rate. 
In the example, bondholders receive four percentage points more than the current 
inflation rate. Historically, positive real rates usually average around 3 percent, but 
they have stretched to 5 percent or 6 percent at times. 

If bond rates are lower than inflation, it is known as a negative interest rate. 

For example: 
Current interest rate 
Consumer price index inflation rate 
Real interest rate 
10% 
. 13 
. 3% 

In the example, a likely scenario during the late 1970s, bond investors actually 
lose money because their 10 percent rate is adjusted for rampant inflation. 

Because the 1970s lesson was so painful to bond investors, real interest rates 
have stayed positive since then and are likely to continue to do so because investors 
want a protective cushion over the current inflation rate. Still, there is no guarantee 
that yields won』t shoot up sharply again in the future and investors will be stuck 
earning negative real interest rates again. 

In addition to the outlook for inflation, supply and demand influence interest 
rates. If you think of an interest rate as the price of money, you will understand that 
as demand for money increases and supply decreases, the price, or interest rate, goes 
up. This situation might occur when the economy is picking up and businesses and 
consumers want to borrow money to expand and spend, while lenders—including 
banks and bond buyers—are reluctant to lend because they fear higher interest rates. 

Interest rates tend to fall when the economy is declining or in recession 
because there is little demand for borrowing, businesses are retrenching, and 
consumers are more interested in paying off existing debts than in taking on new 
loans. At the same time, a larger supply of money is available to lend because 
bond buyers want to lock in high interest rates. 

Over the past two decades, a new factor has grown in influence on the interest 
rate level: the federal budget deficit. When the difference between what the 
government received in taxes and what it spent for programs each year was 
modest—less than $50 billion—the deficit was easy to cover with national savings. 


CHAPTER 5: All about Bonds 

But as the size of the annual deficit grew—first to $100 billion, then to $200 
billion, then to a staggering $300 billion—the government consumed more and 
more of the supply of capital available in the United States. This enormous demand 
for money by the government as it sells billions of dollars』 worth of new bonds, 
compounded by the fear of an ever rising national debt, has kept interest rates 
much higher than they normally would have been if the deficit had been controlled. 
By the late 1990s and 2000s, those huge federal budget deficits had disappeared 
and been replaced by growing budget surpluses. The Treasury started buying government 
bonds back and reducing the amount of national debt outstanding, bringing 
interest rates down sharply. 

While these broad factors influence the general level of interest rates, more 
specific supply and demand issues affect the interest rates and prices of individual 
bonds. Whether a bond is issued by a corporation or a municipal agency, investors 
evaluate it by the strength of its financial condition. The better its financial shape, 
the more confident investors are that their interest and principal will be repaid on 
time and, therefore, the lower the bond』s interest rate will be. One major factor 
influencing investors』 perceptions of the bond is the rating it receives from one of 
the three big bond-rating agencies: Standard & Poor』s, Moody』s, and Fitch. Analysts 
at these agencies, using detailed financial information and judgment based on 
years of experience, assign a rating to each bond issuer. The ratings scales of the 
three services appear in Figure 5.4. 

Figure 5.4 Bond Rating Services』 Rating System 
Rating Service 
Explanation of Bond Rating Standard & Poor』s Moody』s Fitch 
Highest quality AAA Aaa AAA 
Very High quality AA Aa AA 
High quality A A A 
Medium quality BBB Baa BBB 
Predominantly speculative BB Ba BB 
Speculative, low grade B B B 
Poor to default CCC Caa CCC 
Highest speculation CC Ca CC 
Lowest quality, not paying interest C C C 
In default, in arrears, of questionable value D DDD 
DD 
D 

Source: Reprinted by permission of Standard & Poor』s Corporation, Moody』s Investors Service, and Fitch Investors Service, Inc. 


PART ONE: Maximizing Your Investment Options 

In addition to regular letter grades, Fitch and Standard & Poor』s modify ratings 
with + or . signs. A corporate bond may be rated AA. or BBB+, for instance. 
Moody』s uses numbers from 1 to 3 to signify gradations. The same corporate 
bonds might have a Moody』s rating of Aa2 or Baa1, for example. 

Although ratings agencies do not always agree on the risk of default by a 
particular issuer, their assessments are usually fairly similar. Therefore, such 
ratings, as well as the prospect for upgradings or downgradings in those ratings, 
can significantly affect a bond』s interest rate and price. 

THE MEANING OF YIELD 

While a bond has only one interest rate, there are four ways to calculate its 
yield—that is, your return at the bond』s current price. They are as follows: 

1. 
Coupon rate. The coupon rate is the interest the bond pays. It may equal 
the bond』s yield when it is trading at its issue price of 100, or its $1,000 
face value. A bond with a 10 percent coupon therefore would pay $100 
a year in interest. 
2. 
Current yield. This yield adjusts the bond』s coupon rate for the bond』s 
current price to determine what percentage you would receive if you 
bought the bond at its current price. In the example above, if the bond 
dropped in price from 100 to 90, for instance, the bond』s value would fall 
from $1,000 to $900. At that price, the current yield would rise to 11.1 
percent. Current yield is calculated as follows: 
$100 Annual interest payment of the bond 

= 11.1% Current yield

$900 Current market price of the bond 

Remember that rising interest rates cause bond prices to fall. Therefore, in 
the example, if the bond』s price rose from 100 to 110, the bond』s value 
would rise from $1,000 to $1,100. Current yield is calculated as follows: 

$100 Annual interest payment of the bond 

= 9.09% Current yield 

$1,100 Current market price of the bond 

Don』t worry about having to calculate the yield of every bond you consider 
buying. Current yields are displayed on your broker』s computer 
screen and also in any newspaper』s bond listings. (For more on this, see 
「Reading the Bond Tables in Newspapers」 later in this chapter.) 

3. 
Yield to maturity. This yield takes into account the bond』s coupon rate, 
its current price, and the years remaining until the bond matures. It is a 
more complicated calculation, but your broker should be able to tell you 
the yield to maturity on any bond you are considering. You can also 
consult a book with yield-to-maturity tables or figure it using a programmable 
calculator. If you want only to approximate the yield to maturity, 

CHAPTER 5: All about Bonds 

you can use the following calculations. This example will use a bond with 
a 10 percent coupon (paying $100 a year) trading at a price of 85 (now 
worth $850) with ten years before it matures. 

First, subtract the current bond value (in this case, $850) from par 

($1,000) to arrive at the discount. 
Par $1,000 
Current bond value . 850 
Discount $ 150 

Divide the discount ($150) by the number of years remaining until the 
bond matures (10) to calculate the annual gain in the bond』s price as it 
moves from $850 currently to $1,000 at maturity. 

$150 Discount 

= $15 Annual gain 

10 Years to maturity 
Combine the annual gain ($15) with the bond』s annual interest ($100) to 
get the bond』s yearly total gain. 
$ 15 Annual gain 

+ 
100 Annual interest 
$115 Yearly total gain 
Divide the yearly total gain ($115) by the bond』s current price ($850) to 
calculate the yield to maturity. 

$115 Yearly total gain 

= 13.5% Yield to maturity 

$850 Current price of the bond 

4. 
Yield to call. This is the yield up to the first potential date at which the 
issuer can call, or redeem, the bond—usually several years before the bond 
is scheduled to mature. You calculate the yield to call exactly the same way 
you calculate the yield to maturity, except that you replace the number of 
years to maturity with the number of years to the first call date. 
You should always assume that a corporate or municipality will put its 
shareholders』 or constituents』 interest ahead of bondholders』. Therefore, if 
interest rates have fallen sharply from the time the bond was issued to the 
first date that the bond can be called, you should assume the bond will be 
redeemed. The yield to call is the most realistic yield you can calculate for 
a bond because you can never assume the bond will remain outstanding 
between its first call date and its stated maturity. 

EARLY REDEMPTION 

A bond can be redeemed before it is scheduled to mature. That sounds illegal. 
But it isn』t—as long as the issuer』s ability to redeem the bond is written into the 


PART ONE: Maximizing Your Investment Options 

thick legal document that accompanies the original bond issue. In that document, 
called the indenture, bondholders are guaranteed a certain number of years before 
which the bond cannot be redeemed. This can be as little as 5 years or as many as 
15 to 20 years, although a 10-year call protection is more typical. 

When the first date of a potential call arrives, the issuer decides whether it 
makes more sense to continue to pay interest on the bond or to pay off the bond 
and issue another one at a lower interest rate. For example, if the bond was issued 
at 10 percent and rates have dropped to 7 percent over the past few years, the issuer 
would probably refinance. If rates have dropped only to 9 percent, though, refinancing 
might not be worthwhile. In many cases, bondholders whose bonds are 
called before maturity will receive a slight premium over par for the bonds. Therefore, 
they might receive 102 per bond, or $1,020, at redemption. Otherwise, they 
would receive only par, or $1,000, per bond. 

Whenever you consider buying a bond, find out how many years of call 
protection you have. The more years you know your bond will pay interest, the 
better. 

THE YIELD CURVE 

Because bonds mature at some point in the future, the amount of time between 
now and that maturity point is key in determining the bond』s yield and price. In 
general, the further off an event will occur, the less sure you are about exactly what 
will happen in the meantime. You might have a pretty good idea of what the next 
five minutes hold, but you』re sure to be a lot fuzzier about what will happen 20 
years from now. This uncertainty about the future, and the related risk, are normally 
built into bond prices. 

As we discussed earlier, the longer the maturity of a bond, the more its price 
fluctuates with any movement in interest rates. For example, if yields on 30-year 
Treasuries are 7.5 percent, a 1 percentage point rise in interest rates to 8.5 percent 
might make a 1-year bond』s price fall by 5 percent, while a 30-year bond』s price 
might plunge 30 percent. Conversely, a 1 percent drop in interest rates would translate 
into a 5 percent rise in a 1-year bond』s price but a 40 percent rise in the price 
of a 30-year issue. Keep this extra volatility in mind if you plan to buy a longer-
term bond. While you usually receive a higher yield, it comes at the price of much 
more price fluctuation over the life of the bond. 

The yield curve is a convenient chart allowing you to compare the current 
yields of short-term, medium-term, and long-term bonds. Though there are yield 
curves for many different kinds of bonds, the curve you will see most often is for 
Treasury securities. The Treasury curve is printed daily in The Wall Street Journal 
and other newspapers and also appears in financial magazines. A typical yield 
curve looks like Figure 5.5. 

Across the bottom of the chart are the various bond maturities, from the 
shortest maturity of three months to the longest maturity of 30 years. Down the 


CHAPTER 5: All about Bonds 

Figure 5.5 Sample Treasury Yield Curve 


Source: Reprinted by permission of The Wall Street Journal, . 2001Dow Jones & Company, Inc. All Rights Reserved Worldwide. 

side of the chart are the various yields on Treasury securities. This particular chart 
shows potential yields ranging from a high of 7.5 percent to a low 2.5 percent yield. 
The curve illustrates how much more interest a bond with a longer maturity earns. In 
this case, for instance, a 30-year bond pays nearly 7 percent, while a three-month bill 
pays only about 3.25 percent. The difference between the long and the short maturity—
in this case, 4.25 percentage points—is the premium investors currently demand 
for committing their money for a long time. When long-term interest rates are 
much higher than short-term rates, as in this case, bond experts call the resulting 
curve a steeply sloped positive yield curve (see Figure 5.6). 

At other times, the difference between short- and long-maturity bonds can be 
very slight, producing a yield curve that looks like Figure 5.7. Here, there is virtually 
no difference between 3-month Treasury bills and 20-year bonds; both yield 
about 7 percent. This is known as a flat yield curve. 

An abnormal yield curve occurs when short-term rates are actually higher than 
long-term rates, usually when the economy is about to head into a recession. In this 
case, yields on three-month bills are 9.2 percent, while yields on 20-year bonds 
are 5 percent. This is known as a negative, or an inverted, yield curve (see Figure 
5.8). An inverted curve occurred in the early 1980s and the early 2000s, for instance, 
when the Federal Reserve pushed up interest rates sharply to combat inflation, 
while long-term rates rose more gradually. 


PART ONE: Maximizing Your Investment Options 

Figure 5.6 Sample Positive Yield Curve 


Figure 5.7 Sample Flat Yield Curve 



CHAPTER 5: All about Bonds 

When choosing the maturity of a bond, you might look for the 「sweet spot」 on 
the yield curve. This is the maturity at which you receive the highest possible yield 
for the lowest possible risk. No definitive sweet spot exists; it varies according to 
the shape of the yield curve and your view of the direction of interest rates. 

READING THE BOND TABLES IN NEWSPAPERS 

Corporate bonds. The most complete corporate bond listings, which cover 
the most actively traded bonds, appear in The Wall Street Journal, Investor』s Business 
Daily, and other financial newspapers though your local newspaper may feature 
limited bond listings as well. Even the most complete listings, however, 
highlight just a fraction of the outstanding bonds traded every day. The following 
is an example of the form most corporate bond tables take, along with an explanation 
of each column: 

Sample Corporate Bond Table 
Bonds1 Current Yield2 Volume3 Close4 Net Change5 
ATT 71.2 06 
General Electric 81.2 03 
7.0 
7.7 
272 
100 
106 
111 
+2 
.1.2 

1. 
Column 1 lists the issuer of the corporate bond. The corporate name is 
abbreviated, sometimes differently than you see in stock tables. After the 
company name are the coupon rate of the bond and the final two numbers 
of the year the bond is scheduled to mature. In the example, the first bond 
is issued by AT&T, has a 7 percent coupon rate, and is scheduled to mature 
in 2006. The second bond is issued by General Electric, carries an 81.
2 

percent coupon rate and is scheduled to mature in 2003. 

2. 
The current yield column shows the annual interest payment as a percentage 
of the current bond price. You would receive this effective yield 
if you bought the bond at the current price. This column allows you to 
compare one bond』s yield with those of competing issues. In the example, 
the AT&T bond yields 7 percent, while the General Electric bond pays 7.7 
percent. 
3. 
Volume means the number of trades in the bond in yesterday』s trading. It 
is expressed in sales of $1,000 bonds. The trading volume will tell you 
how actively traded the bond is. In the example, 272 AT&T bonds traded 
yesterday, and 100 General Electric bonds changed hands. 
4. 
Close means the closing price for the bond in yesterday』s trading. The 
number is quoted in $100 units, so to calculate the value of the bond, 

PART ONE: Maximizing Your Investment Options 

Figure 5.8 Sample Inverted Yield Curve 


multiply by ten. In the example, the AT&T bond, now selling at $106, 
would bring $1,060. The General Electric bond, trading at $111, would 
cost $1,110. 

5. 
The net change column indicates whether the bond』s price rose or fell 
from the previous day』s closing price. In the example, the AT&T bond 
rose 2 in yesterday』s trading, or $20 per bond. The General Electric 
bond fell 1.2, or $5 per bond. As the price on the AT&T bond rose, its current 
yield fell. As the price on the General Electric bond fell, its yield rose. 
Corporate bond tables also contain various footnotes. 
cf—certificates, meaning the bond comes with certificates 
cld—called, meaning the bond is in the process of being redeemed 
cv—convertible, allowing the bond』s owner to convert it into common 

shares at some point in the future 

dc—deep discount, signifying the bond is selling far below its par value 
of 100. A deep discount bond may be selling at 20, for instance. 
ec—denominated in European currency units, not dollars 
f—flat, signifying the bond is not paying interest. A bond that has de


faulted is flat, for instance. 


CHAPTER 5: All about Bonds 

m—matured, meaning it has limited trading potential because it is in the 
process of being paid off 
na—no accrual, signifying the bond is not accruing interest 

r—registered, meaning the bond has a registration certificate 
t—floating rate, signifying the bond』s rate is tied to some index that 
changes over time, unlike most bonds, which are fixed at a certain rate 
when they are issued 

vj—an issuer currently in bankruptcy or receivership. In many cases this 

means the bond is not currently paying interest. 
wd—when distributed, indicating the bond has not actually been distributed 
to investors yet 

ww—with warrants, meaning that when you buy this bond, you also get 

warrants (or rights) to buy more bonds 
x—ex-interest, meaning the bond just made its interest payment. If you 
buy it now, you will receive the next interest payment, probably in six 
months. 

xw—without warrants attached 
zr—zero-coupon, meaning the bond has a coupon of 0 but is sold at a 
deep discount. The bond gains value each year until it matures at a par 
price of 100. 

Treasury bonds. Depending on how many years remain to maturity, federal 
government fixed-income securities are called bills (up to one year to maturity), 
notes (one to ten years), or bonds (ten years or more). Because Treasury bills are 
considered an alternative to cash investments like CDs and money-market funds, 
they are covered in Chapter 2 on cash instruments. 

Treasury note and bond prices are listed in the same tables in The Wall Street 
Journal, Investor』s Business Daily, and other financial newspapers. The tables 
present a long list of bonds in order of maturity, from the closest to maturity to the 
furthest from maturity. If there is a normal yield curve, you will notice that the 
yields rise as you look down the column because longer maturity bonds tend to pay 
higher yields. 

Because the government bond market is run by dealers trading with each other 
and not by an exchange like the New York Stock Exchange, the prices you see in 
Treasury bond tables are the prices at which dealers are willing to buy and sell 
those maturity bonds on that particular day. The government bond market also uses 
denominations of 32nds rather than 100ths, so the decimal points do not mean 
what you might think. A price of 101.01 means 1011.32, for example. 

Following is a typical Treasury bond table, plus an explanation of each 
column: 


PART ONE: Maximizing Your Investment Options 284 
Sample Treasury Bond Table 
Rate1 Month/Year2 Bid3 Asked4 Change5 Asked Yield6 
51.2 Feb 02 99:24 99:26 .1 5.66 
61.4 Feb 07 102:01 102:03 .6 5.77 
81.8 May 22 125:10 125:16 .25 6.07 

1. 
The first column notes the bond』s coupon rate. In the example, the first 
bond has a coupon of 51.2 percent; the second, 61.4 percent; and the third, 
81.8 percent. 
2. 
Column 2 lists the month and year the bond is scheduled to mature. The 
month is abbreviated, and only the final two numbers of the year are 
shown. In the example, the bonds listed will mature in February 2002, 
February 2007, and May 2022. 
3. 
The bid price is the dollar amount dealers will pay for the bond. The 
decimal point refers to 32nds, not 10ths or 100ths. Each 32nd is worth 
311.4 cents. In the example, the 99:24 price of the first bond equals 99 and 
24.32nds. If 24.32nds amounts to $7.68, the bond is worth $997.68. The price 
of the second bond, at 102:01, amounts to $1,020.311.4. The price of the 
third bond, at 125:10, equals $1,253.121.
2. 
4. 
The asked price is the dollar amount for which dealers will sell the bond. 
The method of showing prices is exactly the same as in column 3. Note 
that the asked price is slightly higher than the bid price. The difference is 
the dealers』 profit, or spread. 
5. 
Column 5 notes the change in the bond』s price from the previous day』s 
closing price, based on the bid price. 
6. 
Asked yield means the bond』s yield to maturity. This yield combines the 
bond』s current yield and the difference between the current price and the 
bond』s value when it is redeemed. 
Major newspapers like The Wall Street Journal will also list prices of government 
agency bonds, such as those issued by the Federal National Mortgage Association 
(Fannie Mae), the Federal Home Loan Bank (FHLB), and the Student 
Loan Marketing Association (Sallie Mae). The newspapers use exactly the same 
listing format as they do for Treasury bonds. 

Municipal bond prices are generally not quoted in newspapers because thousands 
of such bonds exist, and many trade infrequently. The best way to obtain 
municipal bond prices is to contact a dealer, who can bring up current quotes on a 
computer. You can also look up prices of most actively traded municipals online at 
 and on the Web sites of many online brokerage firms. 


CHAPTER 5: All about Bonds 

Types of Bonds: Choosing the Best for You 

Now that you understand the basics of bonds, it is time to discuss the advantages 
and disadvantages of the many kinds of bonds that exist. Selecting the best 
bond for you depends on the size of your assets, your financial goals, your risk 
tolerance, your tax situation, and your knowledge level. The following sections 
touch on each kind of bond, starting with the most conservative (Treasuries) and 
ending with the most speculative (junk bonds). 

TREASURY BONDS 

Bonds issued by the U.S. government are considered the safest around because 
Uncle Sam has a weapon to back these bonds that no other entity has: the printing 
press. If the government does not have enough funds to honor its debts, it can 
always print more money. When Congress raises the national debt ceiling every 
year or two, the government is, in effect, giving itself permission to borrow more 
money. This is known as the full faith and credit of the U.S. government, and it 
backs every Treasury security. 

From a bond investor』s point of view, Treasury bonds trade as though they are 
free from the risk of default. No one can even envision a default on Treasury bonds; 
the government must borrow money constantly in order to operate. It would be 
totally against the government』s interest to default because the government would 
never again be able to sell bonds in the market, thus ensuring the government』s 
instant collapse. 

Because Treasuries are considered immune from default, they are the benchmark 
against which all other bonds are compared. Treasuries are to the bond world 
what diamonds are to the precious gem world: nothing is more secure than a 
Treasury, and no stone is harder than a diamond. Whenever you investigate another 
bond』s default risk, yield, after-tax return, and ease of trading, compare it to what 
a Treasury offers. Treasury notes work just like bonds except that notes are shorter 
maturities. 

Treasury bonds are issued in minimum denominations of $1,000 and also in 
$5,000, $10,000, $100,000, and $1 million sizes. To invest in Treasury bonds, you 
put up your $1,000 (or more) and receive interest checks every six months. Under 
a program called Treasury Direct, you can have your interest checks deposited 
electronically in any bank or financial institution you choose. 

Treasury bills, discussed in more detail in Chapter 2 on page 88, mature in a 
year or less and come in minimum denominations of $10,000. To invest in Treasury 
bills, you pay less than the $10,000 face amount but receive $10,000 when 
the bill matures. So, for example, you might pay $9,500 for a three-month Treasury 
bill, and in three months, you get $10,000. The $500 in interest you received means 
the bill yielded 5.26 percent. To calculate your yield on a Treasury bill, divide the 
interest by the amount you invested (see page 89 for more explanation). 


PART ONE: Maximizing Your Investment Options 

$500 Interest earned 

= 5.26% Yield on Treasury bill 

$9,500 Capital invested 

If you buy Treasury securities directly from a Federal Reserve bank or branch 
(a list of them appears in the 「Resources」 section) or the Bureau of Public Debt 
(1300 C St., S.W., Washington, DC 20239), you do not have to pay any fees. The 
easiest way to buy directly is to put in a so-called noncompetitive bid at one of the 
Treasury』s quarterly auctions, which usually occur in February, May, August, and 
November. Entering such a bid means you will accept whatever average rate emerges 
for the securities you want to buy. If you buy a Treasury security through a regular 
bank or brokerage firm, it will charge a modest fee of between $50 and $60. 

Because literally trillions of dollars』 worth of outstanding Treasury securities 
exist, the market for them is huge, and it is extremely easy to buy or sell them. But 
remember, just because Treasuries are free from default risk does not mean you 
can』t lose money on them. If you buy when rates are low and sell after rates have 
risen, the value of your Treasury bond will fall. On the other hand, if you buy when 
rates are high and sell after rates have fallen, you can capture a capital gain, on 
which you must pay a capital gains tax. 

Treasuries have another feature quite unique in the bond world. Almost all Treasury 
bonds are noncallable. That means the Treasury cannot redeem them before maturity, 
as many corporations and municipalities can do with their bonds. In some rare 
cases, Treasuries may be redeemed early, but for the most part, you are able to lock 
in the current rate on a Treasury for much longer than you are with any other bond. 
Just ask any of those happy investors who, in the early 1980s, bought 30-year Treasury 
bonds with 13 percent yields. Despite the decade-long plunge in rates that followed, 
they are still collecting their 13 percent interest every six months. 

U.S. government bonds have another advantage that many people do not 
realize: All the interest you earn is exempt from state and local taxes. As part of 
the U.S. Constitution, a separation of federal and state powers was set up so that 
states cannot tax federal securities. In addition, the federal government cannot tax 
state and local securities (for more information, see page 295). This is why, for 
residents of the issuing state, municipal bonds are exempt from federal taxes. By 
avoiding state and local taxes on Treasury securities, your effective after-tax yield 
is actually a bit higher than you might think, particularly if you live in a high-tax 
city or state. For example, say you own a Treasury bond worth $10,000 that is 
yielding 10 percent, or $1,000, a year. If your combined city and state tax rate is 
10 percent, you have avoided paying the $100 in local taxes that would have been 
due if Treasury interest were not exempt. You still must pay federal income tax on 
your Treasury bond interest, of course. 
Treasuries have all these wonderful features, but what is their disadvantage? 
In return for the safety, liquidity, and tax advantages, you receive a lower yield than 
is available from other bonds. How much lower depends on the current market 


CHAPTER 5: All about Bonds 

conditions and the bonds to which you compare Treasuries. But for conservative 
income-oriented investors, there』s no match for Treasuries. 

U.S. SAVINGS BONDS 
Even though savings bonds are another form of Treasury security, they have 
several features that are worth discussing separately. Like other Treasuries, savings 
bonds have the backing of the full faith and credit of the U.S. government (see Figure 
5.9), and the interest they pay is free from state and local taxes. Unlike other 
Treasuries, though, savings bonds have the following features. 

. 
They are available in much smaller denominations. You can buy a savings 
bond at any bank, or through your company by payroll deduction, for as little 
as $25 apiece. They also come in denominations of $50, $75, $100, 
$200, $500, $1,000, $5,000, and $10,000. The government limits you to 
investing a maximum of $15,000 a year in savings bonds. 
. 
Series EE savings bonds are issued at half their face value. When you buy 
a $50 bond, for example, you pay $25 for it. They have no set maturity date 
and pay no current interest, but you can redeem them any time—from within 
six months of buying them to as long as 30 years later, according to a 
redemption schedule published by the Treasury Department. Depending on 
when the bond was issued, it has a different original maturity date, which is 
the maximum amount of time it takes for the bond to reach face value. This 
table shows the original term for Series EE bonds issued since 1980: 
Issue Date Original Term 

1/80–10/80 11 years 
11/80–4/81 9 years 
5/81–10/82 8 years 
11/82–10/86 10 years 
11/86–2/93 12 years 
3/93–4/95 18 years 
5/95–Present 17 years 

After a savings bond reaches its original maturity, it automatically enters one 
or more extension periods, usually of ten years duration. For bonds issued 
before May 1995, the interest is either based on a guaranteed yield or a 
market-based rate. If a guaranteed rate applies, it is the one in effect at the 
time the bond entered the extension period. If the bond was issued after April 
1995, there is no guaranteed minimum yield, but instead a market rate of 
interest based on the rules applying to savings bonds at the time they enter 
the extension period. 

Savings bonds stop earning interest when they reach final maturity. For 
Series EE bonds, that is 30 years, and for Series HH bonds, it is 20 years. 


PART ONE: Maximizing Your Investment Options 

Figure 5.9 Savings Bond 


Source: Courtesy of the United States Savings Bonds Division, Department of the Treasury. 


CHAPTER 5: All about Bonds 

. 
Savings bond interest is exempt from state and local income and personal 
property tax. You owe federal income tax on the interest earned when you 
redeem the bonds. When you cash in a savings bond at a bank, you will 
receive a Form 1099 INT from the bank telling you how much interest to 
report on your federal income tax return. Savings bond principal and 
interest are also subject to gift, estate, inheritance, and other federal and 
state excise taxes. 
. 
You can swap noninterest-bearing Series EE bonds for a minimum of $500 
worth of Series HH bonds, which pay cash interest at a 4 percent rate. You 
must pay taxes on the cash interest for the tax year in which you receive the 
checks. But when you swap, you do not have to pay taxes on all the interest 
your EEs accumulated until you redeem the HHs. Series HH bonds mature 
in ten years. 
. 
Yields on U.S. savings bonds are not fixed. Instead, for bonds issued May 
1997 or later, they earn interest based on 90 percent of the average yields of 
five-year Treasury securities for the preceding six months. These bonds increase 
in value every month, and interest is compounded semiannually. The 
new rate is announced each May 1 and November 1. Series EE bonds issued 
from May 1995 through April 1997 earn short-term market-based 
rates during their first five years and long-term based rates from 5 through 
17 years. The rate this bond earns is adjusted to market-based rates every 
six months. Series EE bonds issued before May 1995 earn market-based 
yields based on 85 percent of the average five-year Treasury yields, if 
you』ve held them for at least five years, as long as this rate is higher than 
the guaranteed minimum yields available at that time. 
. 
The government no longer guarantees a minimum yield. For many years, 
the Treasury guaranteed that you would earn a minimum of 6 percent if you 
held a savings bond for at least five years. In 1993, the minimum was lowered 
to 4 percent, and in 1995, the minimum was dropped altogether for all 
newly issued savings bonds. 
. 
A new savings bond known as an I bond was introduced in September 
1998. This bond was designed for investors seeking to protect the purchasing 
power of their investment and earn a guaranteed real rate of return. I 
bonds are an accrual-type security, meaning the interest is added to the 
bond monthly and paid when the bond is cashed. I bonds are sold at face 
value—you pay $50 for a $50 bond—and grow in value with inflation-
indexed earnings for up to 30 years. 
. 
If your modified adjusted gross income is between $55,750 and $70,750 for 
individuals or $83,650 and $113,650 for couples married filing jointly at 

PART ONE: Maximizing Your Investment Options 

the time you redeem your savings bonds (this amount is adjusted slightly 
upward for inflation every year), the interest you earn from the bonds is 
either fully or partially tax exempt if you use it for college tuition for either 
yourself, your spouse, or your children. This version of savings bonds is 
called an Education Bond, and it can apply to any bond purchased after 
Dec. 31, 1989. Make sure to keep the savings bonds in your own name if 
you plan on using the proceeds for educational expenses. 

As you can see, savings bonds have a lot going for them. If you sign up to 
receive them as part of a payroll savings plan, you receive an added benefit: you 
build capital automatically, which will come in handy if you need quick cash for an 
emergency or when you need capital to live on in retirement. 

To find out more about how savings bonds work, you can contact any Federal 
Reserve Bank (see the list at the end of this chapter), or write the Savings Bond Office 
at the U.S. Treasury, 999 E St., N.W., Washington DC 20239. You can call that 
office at 202-447-1775 or find the latest savings bond rates at 800-872-6637. Another 
good source of information is the Treasury』s Web site , which answers frequently asked questions and includes a Savings Bond 
Earnings Report telling you what your bonds are earning. The site also includes a 
Savings Bond Wizard, which displays the current value and interest earned for each 
of your bonds and the total of all your bonds, and allows you to change the redemption 
date so you can see what the bond』s value will be on the new redemption 
date. 

Another source of information about savings bonds is the Savings Bond Informer 
(P.O. Box 09249, Detroit, MI 48209; 313-843-1910; 800-927-1901). This 
private-sector service will help you figure how much your savings bonds are 
worth, when the best time to redeem them arrives, and whether you have bonds that 
have stopped earning interest. 

GOVERNMENT AGENCY SECURITIES 

One notch more risky than Treasuries and savings bonds are the securities 
issued by a plethora of federal-government-backed agencies. Though they do not 
have the full faith and credit of the U.S. government behind them, you can be 
certain Congress would find a way to make sure these agencies don』t default on 
their debt. Take the savings and loan crisis, for example. Congress appropriated a 
few hundred billion dollars to make sure depositors covered by the Federal Savings 
and Loan Insurance Corporation (FSLIC) would not lose their money. Though the 
specific laws backing each agency are different, the effect is the same: A default 
is almost unthinkable. 

Because agency securities are not considered as completely risk free as Treasury 
securities, they pay slightly higher yields. If a Treasury bond yields 8 percent, 
a federal agency security of the same maturity might pay from 8.25 percent to 9 


CHAPTER 5: All about Bonds 

percent, for instance. Like interest from Treasuries, interest from agency securities 
is usually taxable at the federal level but exempt from state and local taxes. As with 
any bond, you must pay a capital gains tax if you sell a federal agency bond for a 
profit. The two major exceptions to this rule are mortgage-backed securities of the 
Federal National Mortgage Association (Fannie Mae) and the Government National 
Mortgage Association (Ginnie Mae). (The next section discusses mortgage-backed 
securities in more detail.) 

Unlike Treasuries, federal agency securities are not auctioned directly to the 
public; they are sold by a network of bond dealers and banks. Nonetheless, they 
are easy to buy through any brokerage firm. The dealer usually does not charge an 
explicit commission on agency securities (or on most other bonds), but he or she 
marks up the bonds and earns a profit on the spread between the price the dealer 
paid for them and the price at which he or she sells them. Depending on the agency, 
the bonds come in minimum denominations of $1,000 to $25,000. 

The agencies that issue securities to the public are numerous and varied in their 
public purpose. The following is a list of the biggest issuers of government-backed 
paper, with their acronyms or nicknames, where applicable: 

Asian Development Bank 

College Construction Loan Insurance Corporation (Connie Lee) 

Export-Import Bank of the United States 

Farmers Home Administration (FmHA) 

Federal Agricultural Mortgage Corporation (Farmer Mac) 

Federal Farm Credit System 

Federal Home Loan Bank System (FHLB) 

Federal Home Loan Mortgage Corporation (Freddie Mac) 

Federal Housing Administration (FHA) 

Federal National Mortgage Association (Fannie Mae) 

Government National Mortgage Association (Ginnie Mae) 

International Bank for Reconstruction and Development (World Bank) 

Resolution Funding Corporation (Refcorp) 

Small Business Administration (SBA) 

Student Loan Marketing Association (Sallie Mae) 

Tennessee Valley Authority (TVA) 

United States Postal Service 

Some of these agencies are fully owned by the government; therefore, their 
securities are considered nearly as safe as Treasuries. Such agencies include the 
Export-Import Bank, the Farmers Home Administration, the FHA, Ginnie Mae, 
the TVA, and the Postal Service. Many of the agencies that are fully owned by the 
government issue securities through the Federal Financing Bank, established in 
1974 as a central clearinghouse for federal agencies to issue debt. 


PART ONE: Maximizing Your Investment Options 

Most of the other agencies listed were originally fully owned by the government 
but have since been transferred either to public ownership or to ownership 
by the organizations that benefit from the agency』s services. For example, Fannie 
Mae, Freddie Mac, and Sallie Mae are all publicly traded corporations, with their 
stocks trading on the NYSE. The FHLB is owned by its member banks. 

Whether a federal agency bond is right for you depends on its current yield and 
whether you feel comfortable with the slightly greater risk involved in owning one. 
For most conservative income-oriented investors, it can be a fine choice. 

MORTGAGE-BACKED SECURITIES 

You may not realize it, but when you take out a mortgage from your local bank 
or savings and loan, your monthly mortgage payments are probably funneled by 
the bank or S&L through a federally designed system to investors who buy 
mortgage-backed securities. These securities, which go by the names of the agencies 
that guarantee timely payment of the securities』 interest and principal, such 
as Ginnie Mae, Fannie Mae, and Freddie Mac, offer higher yields than Treasury 
bonds at slightly higher levels of risk. 

A mortgage-backed security works as follows: Soon after a bank or savings 
and loan issues a mortgage to a homeowner, the loan is sold along with thousands 
of other loans to a federal agency, which repackages them in the form of a 
mortgage-backed security. The federal agency then guarantees it will pay investors 
interest and principal as they come due, even if a homeowner is late with his or 
her mortgage payments or defaults on the mortgage. The homeowner continues to 
make payments to the local bank, which collects a fee from the agency for providing 
this go-between service. Once the bank receives this money, it can make 
another mortgage loan and start the process again. 

From the investors point of view, a mortgage-backed security provides regular 
monthly interest as it is paid by homeowners. In addition, each month, a certain 
amount of the mortgage principal is repaid, and that money is also passed through 
to the investor. The investor』s brokerage statement will distinguish the two types 
of income he or she receives from the security each month. 

The mortgage-backed securities market, which began in 1970 when Ginnie 
Mae introduced the concept, has mushroomed. Hundreds of billions of dollars』 
worth of outstanding mortgage-backed securities now exist, and billions of dollars』 
worth more are created every year. These securities are actively traded, and plenty 
of such bonds are always available from any major brokerage firm. 

However, several problems exist for small investors buying individual 
mortgage-backed securities. First, the minimum denomination is $25,000 though 
some older issues trading at lower prices may require less than that. Second, the 
timing of interest and principal payments is not totally predictable. This is the 
biggest difference between a mortgage-backed security and a Treasury bond, 
which pays interest every six months and is not callable for years. 


CHAPTER 5: All about Bonds 

The interest and principal repayment schedule is uncertain because the homeowners 
making the payments can be unpredictable. If mortgage rates fall enough 
to make it worthwhile, they will refinance their higher interest mortgages. On the 
other hand, if mortgage rates rise, homeowners will hold onto their mortgages for 
dear life. And if a homeowner sells the residence, he or she may have to pay off 
the mortgage and take out another loan for his or her new home. Because the 
mortgage-backed security is a conduit through which homeowner payments pass, 
all of this activity greatly affects the cash flow received by investors. 

In certain situations, the investors in a mortgage-backed security lose whichever 
way interest rates go. For instance, say an investor buys a Ginnie Mae filled 
with 10 percent mortgages, and mortgage rates drop over the next few years to 7 
percent. Many of the homeowners in that Ginnie Mae pool will refinance their 
mortgages to lock in 7 percent, causing the investor to receive a flood of principal 
at a time when interest rates have fallen and it is impossible to replicate that 10 
percent yield. In another scenario, if interest rates soar from 10 percent to 13 
percent, exactly the reverse would happen. Few, if any, homeowners would refinance 
their mortgages at higher rates, so the investor would receive only a small 
amount of principal. With rates at 13 percent, though, the investor would love to 
receive principal so he or she could reinvest it at the higher rates. 

As the mortgage-backed securities market has matured over the past two 
decades, these problems have become well recognized. The mortgage-backed 
securities industry has reacted in two ways: by raising yields and by creating new 
forms of mortgage-backed paper. To compensate investors for the uncertainty 
about the pace of repayment, mortgage-backed securities now pay between 1 and 
2 percentage points more than Treasury securities of similar maturities. So, if a 
10-year Treasury is paying 8 percent, you might be able to earn as much as 10 
percent from a Ginnie Mae or Fannie Mae. 

As though regular mortgage-backed securities were not complicated enough, 
a newer and even more complex version called a collateralized mortgage obligation 
(CMO) or a real estate mortgage investment conduit (REMIC), has been 
invented to ease the prepayment worry. In theory, a CMO or REMIC works by 
slicing a mortgage-backed securities pool into tranches (the French word for slice). 
All prepayments from underlying mortgages are applied to the first tranche until 
it is paid off. Then prepayments are applied to the next tranche until it is redeemed, 
and so on, until all the tranches are eventually retired. The idea behind this 
slice-and-dice routine is that investors will be able to choose a tranche that most 
closely meets their maturity needs and will have a better chance that the security 
will last that long. Yet because tranches still do not guarantee prepayment schedules, 
investors receive a yield that is 1 to 3 percentage points higher than they 
would earn on similar maturity Treasuries. 

Even though all this sounds extremely complicated, billions of dollars flow into 
mortgage-backed securities, CMOs, and REMICs these days, as people search out 


PART ONE: Maximizing Your Investment Options 

Figure 5.10 Sample CMO (Collateralized Mortgage 
Obligation) Brochures 


Source: Reprinted by permission of LaSalle National Bank, Broker/Dealer Services Division. 


CHAPTER 5: All about Bonds 

higher yields than are available from bank CDs and money-market funds. Realizing 
this, brokers market CMOs aggressively. (See Figure 5.10.) Mortgage-backed securities 
may be right for you, as long as you understand what you are getting into. 

In addition to mortgage-backed securities, there exist several new classes of 
securities backed by other types of loans. These work exactly like mortgage-
backed paper. The latest forms of asset-backed securities include pools of credit 
card loans, car loans, mobile home loans, and college loans. If you consider buying 
into one of these innovative loan pools, apply the same criteria you used 
with mortgage-backed securities. 

MUNICIPAL BONDS 

Though riskier than Treasury or agency securities, municipal bonds (munis) 
are extremely popular. These bonds, issued by states, cities, counties, towns, 
villages, and taxing authorities of many types, have one feature that separates them 
from all other securities: The interest they pay is totally free from federal taxes. 
In most cases, bondholders who are also residents of the states issuing the bonds 
do not have to pay state or local taxes on the interest either. (For a list of which 
states tax bonds and which do not, see the end of this section.) Bonds not taxable 
by the resident state are known as double-tax-free bonds, and those also not taxable 
by a locality are called triple-tax-free issues. The exemption from federal taxation 
is based on the 1895 Supreme Court case of Pollock v. Farmers』 Loan and Trust 
Company, which applied the constitutional doctrine of 「intergovernmental tax 
immunity.」 The High Court ruled that this doctrine means that states are immune 
from federal interference with their ability to borrow money. 

The fact that the interest from municipal bonds is federally tax free allows 
issuers to float bonds with yields lower than taxable government and corporate 
bond issuers must pay. Investors are satisfied to earn 6 percent tax free, compared 
to 8 percent on a Treasury, on which federal taxes are due. The higher an investor』s 
federal, state, and local tax bracket, the more attractive munis become because they 
permit the investor to escape more taxes. At the same time, the lower yields that 
municipalities pay make it affordable for them to build roads, schools, sewer 
systems, hospitals, and other public facilities. 

The market for municipal bonds is huge: well over a trillion dollars』 worth of 
bonds are outstanding, and billions of dollars』 worth of new bonds are issued every 
year. While there exist millions of bonds and thousands of issuers, no centralized 
marketplace trades munis as it does stocks. Instead, municipal bonds are bought 
and sold by the many brokerage firms and banks that specialize in them. These 
dealers communicate with each other through a telephone and computer network. 
To buy municipal bonds, you must go through a broker or bank that can plug into 
this complex system of competing dealers. As with other bonds, brokers usually do 
not charge a separate commission to buy or sell your municipal issue. Instead, they 
make their money by marking up the bond from their cost by about 2 percent. 


PART ONE: Maximizing Your Investment Options 

Municipal bonds are usually issued in minimum denominations of $5,000, 
though some are issued in lots as small as $1,000. Brokers usually require a minimum 
order of $5,000, but they prefer dealing in blocks of five bonds, or $25,000. 
Small orders invariably are hit with markups as high as 5 percent. Depending on 
the dollar volume of the bonds when they are issued, trading can be very active or 
almost nonexistent. Many municipalities have issued only a few bonds during their 
history, so the bonds are hard to buy or sell. If you plan to buy a bond and hold it 
until maturity, the fact that little trading activity occurs should be of little concern 
to you. When shopping for a municipal bond, ask how many years of protection 
against early redemption you will receive. Many municipal bond investors have 
been shocked in recent years when they received their principal back much sooner 
than they expected it. 

Two main types of municipal bonds exist: general obligation and revenue 
bonds. General obligation bonds (GOs) are issued by a state or local entity and are 
backed by the taxing power of that state, city, or town. In general, the proceeds 
from these issues are used to finance general capital expenditures, as well as 
ongoing municipal operations. Revenue bonds, on the other hand, finance specific 
revenue-producing projects, such as toll roads, bridges, tunnels, sewer systems, or 
airports. The interest and principal paid by the bonds comes from the economic 
activity generated by the bonds. For instance, a revenue bond might be floated to 
finance a new highway. The proceeds of the issue will be spent to build the road, 
and tolls collected on the road for the next several years will pay the interest and 
principal on the bonds. You can buy many other forms of revenue bonds, some 
riskier than others. For example, so-called private purpose bonds can be issued on 
behalf of hospitals, universities, or other nonprofit organizations. Industrial revenue 
bonds are sponsored by municipalities to finance construction of factories 
or industrial parks that will bring jobs into a district. 

Aside from different kinds of general obligation and revenue bonds, some 
municipal issues can be taxable under certain circumstances. For example, some 
bonds are issued to be subject to federal income tax but exempt from state and local 
taxes to in-state residents who buy them. Other bonds, known as alternative 
minimum tax (AMT) bonds, can be taxed if the holder falls into the alternative 
minimum tax trap, which is designed to keep wealthy people from avoiding federal 
taxes altogether. If the holder will not be hit by the AMT, these bonds, which pay 
a slightly higher yield than regular munis, would provide totally tax-free income. 

Debates rage among bond analysts over whether general obligation or revenue 
bonds are safer for investors. To some extent, the safety of the bond depends on the 
financial situation of the issuing entity and the revenue potential of the project the 
issue funds. Though defaults by states and cities are exceedingly rare, they can happen 
if political gridlock occurs in a state or city where expenses are soaring, revenues 
are falling and residents are moving out. Revenue projects normally are a safe bet as 
well, but they can be disrupted if an economic contraction (the area』s economy takes 


CHAPTER 5: All about Bonds 

a downturn) in the area of the project causes revenues to come in under projections. 
The best way to judge the safety of any particular issue is to look at the bond』s safety 
rating by Standard & Poor』s, Moody』s, or Fitch. (For more on ratings, see page 275). 

If you would rather not worry at all about safety, a conservative alternative 
called municipal bond insurance is available on about half of all newly issued 
bonds today. You cannot buy insurance on your bonds individually, but you can 
purchase bonds that already have insurance attached to them. The municipal bond 
insurers, such as the Municipal Bond Investors Assurance Corporation (MBIA), 
the American Municipal Bond Assurance Corporation (AMBAC), and several others, 
guarantee that you will receive timely payments of interest and principal for 
the life of the bond if the issuer defaults. (A list of the top nine bond insurance 
companies appears at the end of this chapter.) Insured bonds usually trade as 
though they have an AAA rating because no risk of default exists. However, the 
cost of the insurance is passed on to the investor; insured bonds usually yield a little 
less than similar noninsured bonds. 

Determining your taxable equivalent yield. To calculate whether a municipal 
bond makes sense for you, compare its yield with taxable alternatives to see 
which bond leaves you the most money after taxes. The following exercise helps 
you determine the taxable equivalent yield of your muni. 

First, deduct your federal tax bracket from 100. (This example uses a 31 
percent tax bracket.) The result is known as the reciprocal of your tax bracket. 

100 
Tax bracket .31 
Reciprocal of tax bracket 69 

Divide the tax-free yield on the municipal bond you are considering by the 
reciprocal of your tax bracket. (In this case, assume the bond pays a 7 percent 
tax-free yield.) 

7% Municipal bond yield 

= 10.14% Taxable equivalent yield 

69 Reciprocal of tax bracket 
The above calculation means you would have to buy a taxable bond paying 

10.14 percent to end up with the same dollar amount after taxes that the 7 percent 
muni will pay. To earn that high a yield, you would normally have to take on far 
more risk than a municipal bond entails. 
To make munis look even more attractive, go through the same exercise adding 
in your state and local tax brackets. For example, if your combined federal, state, 
and local tax brackets total 40 percent, the taxable equivalent yield of a 7 percent 
muni would be an astounding 11.6 percent! You can see why munis are so popular. 

The following table will give you a few taxable equivalent yields for various 
tax-free muni yields. As you can see, the higher the tax bracket, the more you 
would have to earn in a taxable bond to end up with the same after-tax return. 


PART ONE: Maximizing Your Investment Options 

Federal 
Tax Bracket 4% 5% 
Tax-Exempt Yield 
6% 7% 8% 
15 % 4.71% 5.88% 7.05% 8.23% 9.41% 
28 5.56 6.94 8.33 9.72 11.11 
31 5.80 7.25 8.70 10.14 11.59 
36 6.25 7.81 9.37 10.93 12.50 
39.6 6.62 8.27 9.93 11.58 13.24 

Which states tax which bonds. In almost every state, interest from bonds 
issued by that state is tax free to state residents. The only exceptions are Illinois, 
Iowa, Kansas, Oklahoma, and Wisconsin. For residents of those states, interest 
from some, but not all, in-state bonds is tax exempt. 

The following states never impose state taxes on interest earned by residents 
who buy bonds issued by other states: Alaska, the District of Columbia, Indiana, 
Nevada, South Dakota, Texas, Utah, Washington, and Wyoming. 

The following states do impose state taxes on interest earned by residents who 

buy bonds issued by other states: 
Alabama Mississippi 
Arizona Missouri 
Arkansas Montana 
California Nebraska 
Colorado New Hampshire 
Connecticut New Jersey 
Delaware New Mexico 
Florida New York 
Georgia North Carolina 
Hawaii North Dakota 
Idaho Ohio 
Illinois Oklahoma 
Iowa Oregon 
Kansas Pennsylvania 
Kentucky Rhode Island 
Louisiana South Carolina 
Maine Tennessee 
Maryland Vermont 
Massachusetts Virginia 
Michigan West Virginia 
Minnesota Wisconsin 


CHAPTER 5: All about Bonds 

Keep these taxation rules in mind when you are deciding whether it makes 
more sense to buy an in-state bond or an out-of-state bond. Your return will depend 
on whether the out-of-state bond is taxable and on your state tax rates. 

Clearly, if you are in a high enough tax bracket, it could be quite worthwhile 
to investigate municipal bonds. They are not only safe; their after-tax yields can 
often beat any other taxable alternative. 

CORPORATE BONDS 

The next rung down the ladder of bond risk are bonds issued by corporations. 
While the U.S. government and its agencies, states, and municipalities are not 
going to disappear, corporations may not be around forever. Thousands of companies 
go bankrupt each year. Firms thrive or crash based on their success in the 
marketplace, and that is never ensured. Because corporations, no matter how solid 
financially, are thus perceived as vulnerable to changes in the business environment, 
the bonds they issue are considered riskier than government issues and therefore 
always pay a higher yield than government issues of the same maturity. 

Still, only a tiny percentage of corporate bonds—typically less than 1 percent 
—ever default. Thousands of perfectly solid issues are outstanding, and many 
more come to market every year. Even in the worst-case scenario of a company 
going bankrupt, bondholders』 claims are settled before stockholders receive any 
compensation. 

As an individual investor, you have many opportunities to increase your 
income by holding corporate bonds. Most bonds pay interest semiannually and use 
the electronic book-entry system, so interest payments can be sent automatically 
to your brokerage account. Depending on the financial creditworthiness of the 
issuing company, a corporate bond can yield from 2 to 6 percentage points more 
than Treasuries of the same maturity. 

As with all bonds, you can profit by buying them when interest rates are high 
and selling them after rates have fallen and bond prices have climbed. Corporate 
bond prices react to general fluctuations in interest rates, as well as the financial 
fortunes (or misfortunes) of the issuing companies. For example, a bond』s price 
will rise if the company』s finances improve because investors anticipate that the 
bond』s safety rating from agencies like Standard & Poor』s might be upgraded. On 
the other hand, a series of financial setbacks will cause the bond』s price to sink, 
as investors fear a rating downgrade. If the situation deteriorates enough, the 
bond』s price might plummet to very low levels because investors think the firm 
might declare bankruptcy and default on its bond payments. 

Corporate bonds typically are issued in denominations of $1,000 and quoted 
in units of $100, like Treasury bonds. (Refer back to the discussion on page 281 
about reading corporate bond tables.) Most bond dealers don』t like trading in lots 
of fewer than five bonds, or less than $5,000. For smaller lots, brokers』 markups 


PART ONE: Maximizing Your Investment Options 

can be quite high. In some cases, brokers will charge a minimum per-bond 
commission of as much as $20. 

Many of the thousands of outstanding corporate bonds trade quite actively and are 
therefore easy to buy and sell. Some smaller issues may not trade as frequently, which 
means there will be a wider spread between the buying price and the selling price. 

As with municipal bonds, you must research your protection against premature 
calls carefully. Many corporate bonds offer ten years guaranteed against early 
redemption though call protection varies widely. Among the most frustrating 
experiences for investors is to have a high-yield corporate bond plucked from their 
grasp after interest rates have fallen sharply. Corporate treasurers will always do 
whatever is in the best interest of their stockholders—which is to refinance high-
yield debt at the first possible moment. 

Most corporate bonds are unsecured, meaning they are backed only by the 
companies』 general ability to repay them out of cash flow and profits. Such 
unsecured bonds are generally called debentures. Other corporate bonds are 
secured by a particular asset, which becomes the property of bondholders if a 
company defaults. Examples of secured corporate bonds include mortgage bonds, 
backed by real estate, and equipment trust certificates, backed by equipment such 
as airplanes or railroad cars. 

While most corporate bonds are fairly conservative, junk bonds allow riskier 
investment. (An upcoming section describes junk bonds in more detail.) 

FOREIGN BONDS 

You need not restrict your search for solid, income-producing bonds to U.S. 
securities. There』s a big world beyond our shores, and it is filled with opportunities 
in highly rated, high-yielding bonds issued by foreign governments and foreign-
based corporations. 

Foreign government bonds, like U.S. Treasuries, are backed by the full faith 
and credit of the issuing countries. While that sounds comforting, the guarantee 
has more weight coming from an industrialized country like Germany or France 
than from a developing country like Kenya or Costa Rica. In some places where 
political turbulence seems to be a local tradition, like Argentina or Haiti, protecting 
the interests of bondholders is not usually high on the latest ruler』s priority list. 
Because most investors do not want to have to worry about receiving their interest 
and principal, the foreign government bonds that trade most actively in the United 
States are issued by industrialized countries. 

Most U.S. brokers can sell foreign government bonds, though the easiest ones 
to trade are so-called Yankee bonds, which are issued in the United States by 
foreign governments and are denominated in dollars. It is probably not worth the 
hassle of buying a bond denominated in a foreign currency and having to convert 
interest payments in francs, pounds, or deutsche marks into dollars. Most foreign 
bonds, even Yankee bonds, come in minimum denominations much higher than the 


CHAPTER 5: All about Bonds 

denominations of domestic issues. Depending on the country, you might have to 
invest at least $25,000 to buy one German or French bond, for instance. 

Foreign corporate bonds have drawbacks similar to foreign government bonds. 
The bonds that are most actively traded are those issued by large, well-known 
foreign-based corporations like Sony in Japan, Barclays Bank in the United Kingdom, 
Michelin in France, or Siemens in Germany. In many cases, you can find a 
Yankee bond that pays interest in U.S. dollars. Minimum investments still tend to 
be higher than they are for domestic bonds, often running in the $25,000 range. 

Foreign bonds might make sense for you for two reasons. First, the yields on 
foreign bonds can be significantly higher than those on similar domestic issues. 
Other governments may have large budget deficits, or their central banks want to 
slow their economies to stop inflation, causing high yields. 

The other reason foreign bonds can be profitable is that their value to U.S. investors 
can rise if the U.S. dollar falls against the foreign currencies. So, in the best 
of all worlds, your foreign bond can give you not only a high yield but capital gains 
as well. 

When you buy a foreign bond, you are, in effect, converting your dollars into 
the bond』s foreign currency. If that currency appreciates against the dollar, you will 
have earned a profit when you convert the bond back into dollars. To take a highly 
exaggerated example, say you buy a $1,000 bond denominated in British pounds 
when you get two pounds for one U.S. dollar. If, over the next few years, the 
British pound appreciates so you get one pound for each dollar, you will double 
your money from $1,000 to $2,000. The following breaks down this exaggerated 
example to determine your potential gain (this example is for illustration only; the 
dollar-pound relationship does not fluctuate this widely). 

When buying the bond: 

$1,000 = 2,000 pounds, with an exchange rate of 1 dollar for 2 pounds 

When selling the bond: 

2,000 pounds = $2,000, with an exchange rate of 1 dollar for 1 pound 

Profit: $1,000, or 100% 

Of course, if the value of the dollar appreciates against the foreign currency, you 
will lose money when you translate the bond back into dollars. Therefore, when you 
consider buying a foreign bond, evaluate whether the dollar seems to be getting 
stronger or weaker. It』s best to wait until you think the dollar is getting weaker. 

Despite the potential high yields and profits from foreign bonds, most individuals 
play this market by buying mutual funds that specialize in foreign bonds. 
Funds allow investors to avoid the complexities and high cost of buying individual 
foreign bonds, yet they offer high yields and the play on the U.S. dollar. (For more 
on global bond funds, see page 314 later in this chapter.) 


PART ONE: Maximizing Your Investment Options 

ZERO-COUPON BONDS 

Zero-coupon bonds—called zeros for short—can, paradoxically, be the safest 
of all investments or the riskiest. It all depends on how you use them. 

A zero-coupon bond gets its name from the fact that the bond is issued with 
a 0 percent coupon rate. Because people buy bonds to collect interest at the coupon 
rate, who would ever be interested in a bond that pays no interest? Plenty of people, 
and here』s why: Instead of making regular interest payments, a zero is issued at a 
deep discount from its face value of 100, or $5,000. The return on a zero comes 
from the gradual increase in the bond』s price from the discount to face value, 
which it reaches at maturity. 

This slow but steady rise in value yields three benefits: 

1. 
You know exactly how much money you will receive when the bond 
matures. 
2. 
You know exactly when you will receive that money. 
3. 
You do not have to worry about reinvesting the small amounts of interest 
regular full-coupon bonds pay. 
Very few investments can guarantee you will receive a specific dollar amount 
years from now. Because zeros have a specific schedule of appreciation, you can 
use a zero as an integral part of a financial plan to fund specific expenses years 
in advance. For example, if you are the parent of a newborn, you know to the 
month when his or her first college tuition payment will be due. Therefore, you 
can buy a zero maturing in 18 years. Or, if you are a 40-year-old who plans to retire 
at age 65, you can buy a 25-year zero that will mature on the day your company 
gives you the gold watch. 

When you contact a broker about buying a zero, he or she will usually quote 
the current price of a bond that will mature at a face value of $1,000 a number of 
years in the future (one advantage is that you can buy almost any amount, not a 
minimum of $5,000), and he or she will tell you what yield you are locking in at 
that price. The broker』s quote will include the markup, so you do not have to figure 
in an additional commission. Markups can vary widely from broker to broker, 
so it is important that you shop around. Get at least three quotes, asking for: 

. 
the amount of money you must invest now, including all fees and 
commissions; 
. 
the amount of money you will receive when the zero matures on the date 
you choose; and 
. 
the yield to maturity you will be locking in for the years you hold the zero. 
Once you have the data for various zeros, choose the bond selling for the 
lowest price and boasting the highest yield to maturity for the date you want. 


CHAPTER 5: All about Bonds 

For example, if you want to have a lump sum of $10,000 available to you at 
various times in the future, the following is a table typical of one a broker might 
give you. It outlines your bond options and lays out the prices and yields you might 
achieve. 

Current Price Cost in Dollars Yield 
5-year zero 
10-year zero 
15-year zero 
20-year zero 
25-year zero 
$71.80 
48.12 
31.61 
20.86 
14.28 
$7,180 
4,812 
3,161 
2,086 
1,428 
6.05% 
7.05 
7.54 
7.77 
7.76 

Notice that the longer in the future you want your money back, the fewer dollars 
you must pay now because you are allowing more time for the zero to compound. 

The other attraction of a zero is that your interest is reinvested automatically 
at the zero』s yield. This can be a particularly significant advantage if you lock in 
a high interest rate. With a regular interest-paying bond, you receive interest 
checks every six months, which can be helpful if you need the money for living 
expenses. But if you would rather reinvest the interest to make your capital grow, 
prevailing interest rates constantly rise and fall, making it impossible to lock in a 
constant rate of reinvestment. Also, the dollar amount of your interest payment 
may be so small that you would not be able to afford the minimum needed to buy 
another bond. 

Many issuers of zero-coupon bonds exist, but most investors buy zeros based 
on Treasury bonds. These zeros are commonly known as STRIPS, which stands for 
separate trading of registered interest and principal of securities. Like any other 
Treasury, they are backed by the full faith and credit of the U.S. government and 
are noncallable. Some brokerage firms have launched their own versions of 
STRIPS, with names like Salomon Brothers』 CATS (certificates of accrual on Treasury 
securities) and Merrill Lynch』s TIGRs (Treasury investment growth receipts). 
In a sense, U.S. savings bonds are also zeros; they work exactly the same way but 
are issued in much smaller denominations. Also, several large corporations issue 
zero-coupon bonds that allow you to lock in higher yields than do government issues. 
For the most part, though, it is best to invest in STRIPS because you do not 
want to wait 20 years with no payoff, only to discover that the issuing corporation 
went bankrupt recently. 

If you want a diversified portfolio of zeros, you can buy shares in a zero-coupon 
bond mutual fund for a minimum of $1,000. The largest fund company offering 
zero-coupon funds is American Century Investments (P.O. Box 419200, Kansas 


PART ONE: Maximizing Your Investment Options 

City, MO 64141; 800-345-2021; www.americancentury.com). The company offers 
no-load funds called Benham Target Maturities Trusts that are set to mature every 
five years (such as 2005, 2010, 2015, 2020, and 2025). You pay annual expenses of 
.62 percent of your assets. You can avoid these expenses by buying STRIPS directly. 
But the fund does offer you a more diversified portfolio, and it is easy to buy and 
sell without having to pay the large spread some brokers charge. 

Taxable zero-coupon bonds have one major pitfall. The Internal Revenue Service 
(IRS) has ruled that the scheduled yearly growth in the value of a zero-coupon 
bond (the IRS calls it the bond』s accretion) must be considered interest income in 
the year it is earned, even though you do not receive any cash interest payments. The 
IRS publishes an accretion table, telling you how much 「imputed」 interest you must 
report each year. This rule can take much of the zip out of zeros because every year, 
you must pay taxes on interest without having received the interest to pay the taxes. 

You have two ways to get around this dilemma: buying zeros only in tax-
sheltered accounts or buying tax-free municipal zero-coupon bonds. If you buy a 
zero through an individual retirement account (IRA), a Keogh account, an annuity, 
a salary reduction plan, or some other vehicle that allows you to defer tax liability 
until you withdraw money from the account, the IRS accretion rules do not affect 
you. The zero compounds year after year, untouched by taxes. You pay taxes on the 
increased value only when you withdraw the money, usually at retirement. 

Because you never owe taxes on the interest paid by municipal bonds, the same 
holds true for muni zeros. You can therefore buy muni zeros in your regular account 
and watch them compound tax free until they mature. The fact that muni zeros offer 
such superb benefits makes them extremely popular, which often means they sell 
out soon after they are issued. Therefore, if you think a muni zero is right for you, 
contact your broker before a new bond is issued so he or she can prepare to grab a 
few bonds while they last. When shopping for muni zeros, look carefully at the call 
provisions of the issues because many allow issuers to redeem them before their 
scheduled maturity, which could defeat your whole purpose in buying them. Figure 

5.11 is an illustration of how a municipal zero would grow from $5,000 when you 
bought it to $20,000 in 20 years. 
The risky side of zeros. So far, we have described zeros as the safest and surest 
way to fund a distant financial goal, despite one major pitfall. However, another far 
more volatile side to zeros exists if you use zeros to earn capital gains. 

Because zeros lock in a fixed reinvestment rate of interest for a long time, their 
prices react to fluctuations in interest rates far more than does any other type of bond. 
For every one-point drop in interest rates over a year, for example, a normal 30-year 
coupon bond paying 8 percent would produce a total return (price change plus income) 
of 20 percent, while a 30-year zero with an 8 percent reinvestment rate would 
soar by 42 percent. Conversely, if interest rates rose by one percentage point over a 
year, the full-coupon bond would suffer a negative total return of 3 percent, while the 


CHAPTER 5: All about Bonds 

Figure 5.11 The Growth of a 20-Year Municipal 
Zero-Coupon Bond Yielding 7% 


Source: Adapted with permission by Bond Market Association. 


PART ONE: Maximizing Your Investment Options 

zero would plunge by 19 percent. The fact that the zero compounds its yield automatically 
for many years magnifies the impact of interest rate changes. 

Figure 5.12 shows how the total return of a 30-year zero-coupon Treasury 
bond with an 8 percent reinvestment rate is affected by interest rate changes of one 
percentage point upward and downward over a year, compared to the effect on a 
30-year full-coupon bond paying 8 percent. 

Notice that the effect of a one-percentage-point change is not symmetrical. A 
one-point drop yields a 43 percent gain on a zero, while a one-point rise yields 
an 18 percent loss. 

Figure 5.12 Zeros versus Full-Coupon Bonds 
Percentage Point Change in a Year 
+4 +3 +2 +1 Unchanged .1 .2 .3 .4 
30-year zero .64% 
30-year 
full-coupon .24 
.53% 
.18 
.38% 
.11 
.18% 
.2 
+8% 
+8 
+43% 
+20 
+89% 
+35 
+139% 
+54 
+220% 
+76 

Source: Courtesy of Ryan Labs, Inc., a bond research firm in New York, New York. 

The effect of interest rate changes on zeros is lessened if the zeros are of a 
shorter maturity. This is obvious in Figure 5.13, which illustrates the effect of 
interest rate changes of one percentage point upward and downward on 5-, 10-, 20-, 
and 30-year zeros. (The table assumes 30-year Treasury rates are at 8 percent.) 

Figure 5.13 5-, 10-, 20-, and 30-year Zeros 
Responding to Rate Changes 
Percentage Point Change in a Year 
+4 +3 +2 +1 Unchanged .1 .2 .3 .4 
30-year zero 
20-year zero 
10-year zero 
5-year zero 
.64% 
.47 
.23 
.7 
.53% 
.37 
.16 
.4 
.38% 
.25 
.9 
0 
.18% 
.10 
0 
+4 
+8% 
+8 
+8 
+8 
+43% 
+30 
+18 
+12 
+89% 
+56 
+29 
+17 
+139% 
+88 
+40 
+21 
+220% 
+117 
+53 
+26 

Source: Courtesy of Ryan Labs, Inc., New York, New York. 

Notice that if interest rates drop by four percentage points, the 30-year zero 
would soar 220 percent, while the 5-year zero would rise only 26 percent. On the 
other extreme, if rates shoot up by four percentage points, the 30-year bond would 


CHAPTER 5: All about Bonds 

plummet 64 percent, while the 5-year zero would fall only 7 percent. This dramatically 
illustrates that the longer the maturity of the zero, the more volatile its price 
will be. 

As a result of zeros』 volatility, they are the favorite weapon for speculators 
who want to bet that interest rates will fall. This is a game for serious investors, 
however, because if interest rates raise instead of fall, they can lose big. For most 
investors, though, zeros are far from a speculative investment. 

CONVERTIBLE BONDS 

Convertible bonds are hybrids—one part bond and the other part stock. In their 
role as bonds, they offer regular fixed income though usually at a yield lower than 
straight bonds of the same issuer. In their role as stocks, convertibles offer significant 
appreciation potential and a way to benefit from the issuing companies』 
financial success. However, owners of convertibles will not benefit as much as 
common stockholders if the companies』 fortunes soar. To some investors, convertibles 
offer the best of both worlds—high income and appreciation potential. To 
others, convertibles offer the worst of both worlds—lower income than bonds yield 
and less appreciation potential than common stock offers. Whichever way you 
view them, convertibles can make a solid contribution to your investment portfolio. 

Convertibles come in two forms: preferred stock and debentures, which are 
unsecured bonds. Both pay a fixed rate of interest and are convertible into common 
stock of the issuer when the common stock reaches a certain price, known as the 
conversion price. That conversion price is always set at a level higher than the 
common stock』s price at the time the convertible is first issued. It can be as low 
as 15 percent above the common price or as high as 50 percent above. When the 
underlying stock hits the conversion price, the convertible bond can be changed 
into a specified number of shares at what is called the conversion ratio. For 
example, ABC Corporation may issue a convertible that allows its holders to 
convert each bond into 50 shares of ABC common when ABC hits $100 a share. 

Convertible bond prices are influenced by several factors. Because they are 
bonds, they are affected by the general ups and downs of interest rates. Also, the 
market evaluates convertibles as straight fixed-income securities. This gives them 
their investment value. The market also evaluates convertibles based on their 
underlying common stock. This gives them their conversion value. When the 
market takes a dim view of an underlying company, the convertible』s investment 
value is more important than it would be otherwise. If the underlying company is 
a hot growth stock, however, the convertible will trade more on its conversion 
value because investors expect the common stock price to rise, and the convertible 
will eventually be changed into common shares. 

You can judge what kind of growth potential the market expects of a convertible 
by looking at what is known as the premium over conversion value. As the underlying 
common stock rises in value, the convertible is viewed increasingly as a common 


PART ONE: Maximizing Your Investment Options 

stock. At a certain point, usually when the dividend on the underlying common stock 
is more valuable than the interest return from the convertible, it makes sense to 
convert into common shares. The price of the common shares will rise beyond the 
convertible price when this happens, signaling that it is time to convert. 

The higher the conversion premium, the riskier the bond, however, because the 
premium can shrink quickly if the hot growth company stumbles. Any premium of 
more than 20 percent to 25 percent should be seen as a warning sign of increased 
risk. One way to protect yourself from paying too high a premium is to determine 
how long it will take to earn back that premium. The following example—in which 
the conversion premium is 20 percent, the underlying common stock yields 2 
percent, and the convertible yields 7 percent—shows you how to do this. 

First, subtract the common stock yield from the convertible yield. 

Convertible yield 7% 
Common stock yield . 2 
Yield difference 5% 

Then divide the premium by the yield difference. 

20%  5% = 4 Years 

The answer indicates how long it would take to recover your conversion premium 
if all else stayed the same. In this case, it would take four years. 

Convertible prices tend to fall less than stock prices when the stock market 
declines because convertibles offer a higher level of income than most stocks, 
which tends to cushion the convertibles』 descent. On the other hand, when the 
stock market surges, convertibles tend to rise less than stocks. 

Convertible bonds are usually denominated in minimums of $1,000 though 
most brokers like to trade at least ten bonds, or $10,000 worth, at a time. Smaller 
trades will subject you to larger dealer markups. Depending on the size of the 
convertible issue, the stature of the issuer, and the credit rating of the bond from the 
ratings agencies, trading may be very active or inactive. As with other bonds, you 
must determine how much call protection the convertible offers. You don』t want 
the bond redeemed quickly if interest rates fall and the issuer decides to refinance 
at a lower rate. 

Convertibles offer no special tax breaks. All interest paid is fully taxable at the 
federal, state, and local levels. Although no taxes are due when you convert from a 
bond to common stock, you must pay all the normal taxes on the stock dividends. 
As with any other security, you must pay capital gains taxes if you sell a convertible 
for a profit. 

Before you buy any convertible, decide whether you want to own the issuer』s 
common stock. If you think the underlying company has a bright future, the convertible 
can be an excellent choice to improve your current income and profit from 
the firm』s success. However, if you are considering the convertible only for the 


CHAPTER 5: All about Bonds 

income, and you would not want to be caught holding the underlying stock, move 
on to another option. Despite all the bells and whistles of convertibles, they are 
ultimately just another way to invest in a company』s prospects. 

If you want the benefits of convertibles without the complications discussed 
here, you can invest in a convertible bond mutual fund. It offers a high yield and 
appreciation potential, and the fund manager is an expert in picking through the 
somewhat bewildering world of convertibles. 

For those seeking more information about convertibles, many brokerage firms 
publish research reports on widely traded issues. The best newsletter that tracks the 
field is the Value Line Convertibles (220 E. 42nd St., New York, NY 10017; 800535-
8760). 

JUNK BONDS 

The riskiest type of bond is known in the brokerage industry as high-yield 
bonds, but colloquially they are known as junk bonds. These bonds barely existed 
before the 1980s takeover, leveraged buyout, and junk bond boom made them 
famous—or infamous, depending on your experience with them. 

Junk bonds are issued by corporations that have less than an investment-grade 
rating. That means Standard & Poor』s and Fitch rate them below BBB, and 
Moody』s rates them below Baa. Companies earn such low ratings for two reasons: 
They are either on their way up or on their way down, financially speaking. The 
up-and-comers are companies that do not have the long track record of sales and 
earnings that the ratings agencies require to merit an investment-grade rating. Just 
because they do not have a top rating, however, does not make them bad companies; 
it just means they need more seasoning before their rating rises from the 
BB into the BBB or level A category. 

The companies on their way down, often called fallen angels, are a different 
story. These corporations attained an investment-grade rating in years past by 
diligently increasing sales and profits. But some event or series of events changed 
all that, causing the ratings agencies to downgrade the firms』 bonds. Possible 
events include a takeover financed with millions of dollars in new debt, a failed 
market strategy that saddles a firm with operating losses instead of profits, or a 
general downturn in the economy that undermines a firm』s profitability so severely 
that the ratings agencies doubt its ability to pay interest on its outstanding bonds. 

While a low safety rating might be bad news for a company, it is good news for 
investors because it means that the firm』s bonds will pay a substantially higher yield 
than will securities issued by blue chip corporations. How much more depends on 
which issuers you compare, but decent-quality junk bonds often yield between two 
and five percentage points more than investment-grade issues. That can translate into 
yields of 9 percent to 15 percent. Lower-quality junk issues can pay up to 20 percent. 

Think you』ve found your dream investment? Well, hold onto your money because 
those higher yields obviously come with higher risks. The chief risks follow: 


PART ONE: Maximizing Your Investment Options 

. 
The company can default. The higher the yield, in fact, the more likely it is 
that the bond』s interest rate will drop suddenly one day, from high double 
digits to zero, as the high cost of servicing the debt becomes too much for 
the company to handle. When a company seeks protection from creditors in 
bankruptcy, interest payments to bondholders often cease. Default rates on 
junk bonds vary and, to a large degree, depend on the overall health of the 
economy. A vibrant economy will allow companies to earn the profits they 
need to meet their interest costs, meaning only 1 percent or 2 percent of all 
junk bonds might default in a year. But in a recession, junk bond default 
rates can soar to 8 percent or 10 percent if reduced sales and profits make 
it impossible to pay bond interest. 
. 
The company』s bonds can be downgraded further. Though not as serious as 
outright default, a junk bond with a BB rating can be downgraded to a B or 
even into the Cs, which would pummel the bond』s price. 
. 
Interest rates can rise. While that hurts the value of all bonds, it can be particularly 
harmful to companies already in a weakened financial condition. 
. 
The stock market can fall. Because a junk bond』s price is tied closely to the 
fate of the underlying company, a general drop in stock prices can spill over 
to the company』s stock price, which will affect its bond price negatively. 
. 
There can be an imbalance of supply and demand. In the 1980s, when 
billions of dollars』 worth of new junk bonds were brought to market every 
year, the supply eventually outran the demand, causing bond prices to decline 
sharply. In addition, because of junk-bond-related scandals and losses 
suffered by junk bond holders, Congress forced savings and loans to sell their 
junk bonds. Insurance companies were later ordered to liquidate their portfolios 
for the same reasons. And many other large institutions, such as pension 
funds, were also banned from buying junk bonds. All of this reduced demand 
for junk bonds even further. The main buyers of junk bonds now are individual 
and mutual funds that raise money from individuals. 
. 
The liquidity of junk bond trading can dry up. If bad news hits the market, 
such as an unexpected default, it can become very difficult to buy or sell 
bonds at a reasonable price. Dealers will execute trades only at enormous 
spreads that make it unattractive for investors to complete transactions. 
. 
Junk bonds can be called. Companies do not voluntarily pay double-digit 
yields on their bonds; they are forced to do so. If their financial fortunes improve, 
or if interest rates fall, they will refinance those high-yielding bonds 
with lower yielding bonds at the first possible opportunity. 
Despite the risks, junk bonds can provide very high returns if they are chosen 
well. In selecting a high-yield bond, look for a company with improving finances 
rather than worsening finances that you hope will turn around someday. 


CHAPTER 5: All about Bonds 

Most junk bonds come in minimum denominations of $1,000, but if they are 
depressed, they may sell for far less than that. Brokers normally like to sell bonds 
in lots of at least five, or $5,000. They will charge a wide spread or a steep commission 
on smaller orders. 

The interest you receive from a junk bond is fully taxable at the federal, state, 
and local levels. If you sell the bond for a gain, you must pay capital gains tax. 
If the company defaults on its bonds and ultimately liquidates, you can use the 
bond certificates to wallpaper your living room (unless you would rather not be 
reminded of your investment). You can also write off your losses against other 
capital gains and $3,000 of ordinary income. 

If you feel skittish about buying individual junk bonds (and you should), a 
safer alternative is to buy a mutual fund that purchases a widely diversified portfolio 
of the toxic issues. That way, you have a professional manager picking 
through the junk for you. 

Whether you invest in junk bonds depends on your ability to tolerate high risk 
in return for high yields and some potentially large capital gains. However, don』t 
put too much of your money into junk bonds. The risk is just not worth the angst. 

Bond Mutual Funds 

If the process of choosing individual bonds seems too complicated, bond 
mutual funds might be right for you. For a fuller discussion of the benefits of 
mutual funds in general, refer back to Chapter 4, 「Selecting Mutual Funds.」 

Mutual funds offer several advantages to bond investors. For the most part, the 
bond market is designed for large institutional players that buy blocks of bonds, 
millions of dollars at a time, rather than small investors who buy a few thousand 
dollars』 worth of securities. Bonds can be difficult to trade in small lots, so funds 
offer much better liquidity than do individual bonds. Plus, you can buy or sell a 
mutual fund at that day』s net asset value (NAV) and not have to worry about taking 
a bad price on a solo bond. By having a professional mutual fund manager on your 
side, you also pay much less in commission costs than you would as an individual 
investor. And it is difficult to obtain good research on some bond types, particularly 
municipal, convertible, and junk bonds. Professionals will always have access to 
more detailed and timely information than you could get on your own. 

Bond mutual funds offer other advantages. If you are an income-oriented 
investor, a bond fund portfolio can send you a monthly dividend check that will 
smooth out your cash flow. Individual bonds usually pay every six months, so you 
may receive a large amount of interest, then have to wait several months before the 
next payment. If you do not need the cash, bond funds offer automatic dividend 
reinvestment, which makes it far easier to buy more bonds than waiting for interest 
to accumulate until you meet the minimum for individual bonds. Finally, a bond 
fund is made up of tens, if not hundreds, of bonds, diversified by maturity, issuer, 


PART ONE: Maximizing Your Investment Options 

and quality. By spreading the risk around, you soften considerably the impact of 
a negative development on any particular bond. You could not afford such a 
diversified portfolio on your own, and you are exposed to serious loss if a problem 
develops with an individual bond. 

One disadvantage of bond funds compared to individual bonds is that bond 
funds (except for zero-coupon bond funds) never mature. Bonds within a portfolio 
might mature, but the fund is constantly reinvesting the proceeds of matured or 
sold bonds back into more bonds. This means you have no guarantee that a bond 
fund will ever return to the price you purchased it at originally. For example, if you 
buy a fund when interest rates are low and then they rise a great deal, you might 
have to wait a long time for your principal value to return to where you started. 
With individual bonds, you can count on a fixed maturity date at which you will 
receive your original principal. The bond』s price will bounce around while it is 
outstanding, but you can be assured that, in the end, you will get your money 
back—as long as the issuer does not default. 

As with all individual bond prices, bond fund prices move inversely to interest 
rates. If rates rise, bond fund shares decline in price. As rates fall, bond fund prices 
rise. If you sell bond fund shares for more than you paid for them, you must pay 
capital gains tax on the difference. The income you receive from a bond fund is 
taxable if the fund buys taxable bonds, and it is tax free if the fund invests in municipal 
securities. To allow bond fund shareholders to keep the taxation of dividends 
straight, the same bond fund does not buy both taxable and tax-exempt bonds. 

As with other kinds of mutual funds, you can choose between no-load bond 
funds you buy directly from a fund company, or load funds you buy indirectly 
through a broker or financial planner. Loads can have an even bigger effect on your 
bond fund』s return than on a stock fund』s return because if the commission is taken 
off the top, you will have less money earning interest. 12b-1 fees, which take .5 
percent to 1.5 percent of your assets annually, are used for promotional expenses 
by the fund in order to increase fund assets. Expenses, such as management fees 
and 12b-1 charges, also have a direct impact on your bond fund』s yield. The higher 
the expenses, the lower the yield. So, as you shop around among bond funds, 
compare not only the yields but also the effect fees and expense levels will have on 
your return over time. 

Types of Bond Funds: Choosing the Best for You 

Over the past several years, the number and variety of bond funds have 
mushroomed, as has the amount of money invested in them. Hundreds of funds 
now compete for your attention—plus the hundreds of billions of dollars in current 
total bond fund assets and the billions of dollars more that pour into bond funds 
each year. And bond fund companies continue to introduce new features already 
tested on other types of funds. 


CHAPTER 5: All about Bonds 

Two factors distinguish funds: the kinds of securities they buy and the average 
maturity of the bonds in their portfolios. In general, the longer the fund』s portfolio 
maturity, the higher its yield, and the higher its risk. The following list describes 
different kinds of bond funds in terms of these two factors. 

They have been separated according to the levels of the investment pyramid, 
from the most conservative to the most aggressive. For the names, addresses, and 
telephone numbers of the mutual fund companies offering these funds, refer to the 
list on page 229 in Chapter 4. For a fuller discussion of the risks and rewards of 
different types of bonds, see the sections on those bonds earlier in this chapter. 

As with any investment, you should review your financial goals, your risk 
tolerance level, and the other lessons covered in the first chapter of this book before 
you buy any bond fund. 

LOW-RISK SECTOR 

Government bond funds. Government bond funds invest exclusively in securities 
issued by the U.S. government or its agencies. No risk of default exists in 
any of the underlying securities; therefore, these are the safest bonds around. Long-
term bond funds do carry substantial risk due to interest rate volatility, however. 

Municipal bond funds. These funds invest solely in tax-exempt bonds, so all 
the dividends they pay are not subject to federal income tax. Depending on your 
tax bracket, these funds might allow you to keep more interest than you could earn 
on a higher yielding but taxable bond fund. Three kinds of muni bond funds are 
available: 

1. 
National funds buy bonds from municipalities across the country. In a few 
cases, interest from a state』s bonds is taxable to out-of-state residents, so 
national bond funds will tell shareholders at the end of the year what 
percentage of the income they received came from such a state. 
2. 
State-specific funds are designed by states for residents of those states 
who want to avoid both federal and state taxation. Large, high-tax states, 
such as New York, California, Pennsylvania, and Michigan, offer many 
single-state funds because so much demand for them exists. 
3. 
Local muni funds buy bonds only from a locality that levies an income tax, 
such as New York City. These bonds are therefore triple-tax-free because 
they allow residents to sidestep federal, state, and local income taxes. 
Municipal bond funds also are sold with portfolios composed totally of insured 
bonds. This insurance protects investors against the possibility of default by any 
issue a fund holds. 

While state and local bond funds offer beneficial tax shelter, they are riskier 
than national funds because they are not diversified geographically. If a particular 
state or locality suffers a sharp downturn in its economy, the entity』s bonds will 


PART ONE: Maximizing Your Investment Options 

probably be downgraded, which could cause shareholders in funds holding those 
bonds to suffer losses. Still, municipal bond funds, as a whole, are extremely safe; 
very few defaults have occurred. 

Short- and intermediate-term bond funds. Such funds, which come in both 
taxable and tax-free varieties, buy bonds with maturities no longer than ten years, 
and usually as short as five years. Because short-term bonds fluctuate in price far less 
than long-term bonds during the same interest rate volatility, these funds』 prices remain 
quite stable. Many short-term funds offer check-writing privileges; therefore, 
many people use them as higher yielding alternatives to money-market funds. In 
cases where there exists a significant difference between money-market and 
medium-term rates, intermediate-term bond funds can offer yields four or five 
percentage points higher than money funds. Unlike money funds, however, these 
funds』 net asset values (NAVs) fluctuate and will fall if interest rates rise sharply. 

MODERATE-RISK SECTOR 

Convertible bond funds. Convertible bond funds buy convertible debentures 
and convertible preferred stocks. Though convertible yields are lower than those 
on straight corporate bonds, convertible bond funds offer more appreciation potential. 
These funds will provide their highest returns when the stock market is rising. 
The convertible market can be particularly confusing, and a good fund manager』s 
expertise can be well worth the management fee. 

High-grade corporate bond funds. Such funds buy bonds issued by investment-
grade corporations, or those with ratings of BBB or higher. The funds will pay 
yields of one or two percentage points higher than will government funds of similar 
maturities. Yet they remain quite safe because they buy top-quality bonds and 
diversify widely among hundreds of issues. 

Mortgage-backed securities funds. These funds invest in mortgage-backed 
securities issued by quasi-governmental agencies, such as Ginnie Mae, Fannie 
Mae, and Freddie Mac. The securities they buy are guaranteed against default by 
those agencies but not against price fluctuations caused by interest rate movements. 
The other uncertainty that plagues mortgage-backed securities—the early 
prepayment of mortgage principal by homeowners—is taken care of by the fund 
manager, who automatically reinvests principal payments back into more securities. 
This is a big advantage over holding individual Ginnie Maes or Freddie Macs 
because it is often difficult to reinvest the small amount of principal paid each 
month. Mortgage-backed securities funds tend to pay yields of one to three percentage 
points higher than similar maturity Treasury funds. Some mortgage-
backed funds even permit check writing. 

HIGH-RISK APEX 

Global bond funds. Global bond funds purchase bonds issued by governments 
and corporations from around the world. When interest rates are higher in countries 


CHAPTER 5: All about Bonds 

other than the United States, these funds can pay yields two or three percentage 
points higher than similar domestic funds. What makes them a higher risk is that currency 
fluctuations can create large swings in the value of fund shares. Because you 
are, in effect, putting your money in foreign currencies when you buy one of these 
funds, you will profit if the U.S. dollar falls in value against other currencies. But if 
the greenback rises in value, you can suffer losses. Some funds try to use complicated 
futures and options strategies to hedge against currency swings, but the hedges do not 
always work, and they can be expensive, cutting the funds』 yields. The bonds these 
funds purchase are typically from top-rated governments and corporations, so there 
is little, if any, default risk. Global bond funds also come in short-term and long-term 
varieties. Short-term funds usually are less sensitive to currency swings, while long-
term funds react more sharply both to interest rate movements and to changes in currency 
values. 

High-yield junk bond funds. Junk bond funds buy bonds of corporations 
that are below investment grade, meaning they have ratings of less than BBB. The 
companies backing these bonds are financially weaker than top-rated blue chip 
corporations; therefore, the bonds pay higher yields to compensate investors for 
the increased risk of default. Junk bond funds can pay yields four to six percentage 
points higher than government or high-grade corporate bond funds of similar 
maturities. High-yield fund prices are much more volatile than more conservative 
bond funds because of rapidly changing values of the bonds they hold. In general, 
junk bond funds perform well when the stock market rises because junk bonds 
mirror the performance of their issuers』 stocks. 

Zero-coupon bond funds. Such funds buy portfolios of zero-coupon bonds, 
which are issued at a deep discount to face value and mature at a specific time in the 
future. These funds should be considered very conservative if they are held until they 
liquidate, which occurs when the bonds mature. However, because zero-coupon 
bonds are the most volatile of all bonds, these funds fluctuate more dramatically than 
any other kind of bond fund while the bonds are outstanding. Zero-coupon bond 
funds, which pay no dividends, soar in price when interest rates fall and plunge in 
price when interest rates rise. If you time your purchases and sales correctly, you can 
make a lot of money. But if you buy when rates are low and then rates surge, you 
must hold the funds to maturity to get back your principal. 

Closed-End Bond Funds 

All of the funds described above are open-end funds, meaning that they continually 
offer new shares to the public as new money flows into the funds. You 
should also consider shares in closed-end bond funds, which issue a limited 
number of shares and trade on the NYSE, AMEX, and the Nasdaq NMS. (For a 
more detailed discussion of how closed-end funds work, as well as their advantages 
and disadvantages, see 「Closed-End Mutual Funds」 in Chapter 4.) 


PART ONE: Maximizing Your Investment Options 

Closed-end bond funds, like all closed-end funds, sell at either a premium or 
a discount to the current value of their bond portfolios. They typically sell at a 
premium to, or for more than, the portfolios』 value when interest rates decline and 
investors scramble into closed-end bond funds in search of higher yields. But when 
interest rates rise, fund prices tend to shrink to a discount. 

A good strategy is to buy closed-end bond funds when they are at a discount 
because this will boost your yield. To calculate your effective yield, divide the 
annual dividend by the current price of the fund. For example, assume that a bond 
fund pays a $.70 annual dividend, and the NAV of the fund』s portfolio—or the 
exact worth of its portfolio—is $10 per share. If the fund is selling at its NAV, its 
effective yield is 7 percent. 

$.70 Annual dividend 

= 7% Effective yield 

$10 Current price of the fund 

If investors temporarily lose confidence in the fund and its price falls to $9, 
it is selling at a 10 percent discount. Because the annual dividend remains at $.70, 
the effective yield will rise to 7.77 percent. 

$.70 Annual dividend 

= 7.77% Effective yield 

$9 Current price of the fund 

If investors become enthusiastic about the fund again and its price rises to $11, 
it is selling at a 10 percent premium. Therefore, the effective yield will fall to 6.36 
percent. 

$.70 Annual dividend 

= 6.36% Effective yield 

$11 Current price of the fund 

While it is easy enough to calculate the effective yields of closed-end funds, 
you can also look up these payouts in financial newspapers like The Wall Street 
Journal (on Mondays) and Barron』s. They will list each bond fund』s current price, 
NAV, and effective yield. You can also find the price and yield in NYSE, AMEX, 
and Nasdaq NMS tables because closed-end funds trade through these systems. 

Closed-end bond funds, like their open-end cousins, come in both general and 
specialized categories. General funds can invest in any kind of bond that the fund』s 
manager thinks will produce capital gains and income. These funds might have a 
combination of government, municipal, corporate, foreign, convertible, junk, and 
zero-coupon bonds as well as mortgage-backed securities in their portfolios. Their 
wide diversification makes them less risky than specialized funds, which buy only 
one type of those bonds listed above. Still, a specialized fund might yield higher 
income if it invests only in tax-free municipal bonds or in high-yielding junk 
bonds, for example. 


CHAPTER 5: All about Bonds 

You have several ways to follow the action in closed-end bond funds. Some 
brokerage house analysts issue research reports on the funds. Also, you will occasionally 
spot stories about the funds in financial newspapers and magazines. And 
for more in-depth coverage, consult the books and newsletters listed in the 「Resources」 
section at the end of this chapter. 

Unit Investment Trusts 

Instead of buying an open-end or a closed-end bond fund, you have another 
alternative if you are income-oriented. Unit investment trusts (UITs), sometimes 
called defined asset trusts, buy a fixed portfolio of bonds and hold them to maturity. 
These contrast with bond funds, which constantly buy and sell bonds and 
never mature. 

You can buy a UIT from any broker for a minimum of $1,000. You usually pay 
a sales charge of about 4 percent or 5 percent when you buy it, then minimal 
management expenses thereafter of .15 percent per year. The underwriter of the 
portfolio also profits by marking up the bonds it buys for the portfolio. Over the 
long term, though, these fees are less than the typical annual management fees of 
1 percent or more on more actively managed bond funds. A few large brokerage 
firms, including Merrill Lynch, Nuveen, and Van Kampen Merritt, dominate the 
UIT business. The trusts are usually sold through syndicates of brokerage firms 
that unite to sell one trust after another. 

UITs offer several advantages: 

. 
You buy into a widely diversified, professionally selected portfolio that 
would be impossible to replicate on your own. 
. 
You know exactly what assets the trust contains before you buy it. That is 
why they are called defined asset trusts. 
. 
You receive fixed monthly income checks, as opposed to payments every 
six months from individual bonds. 
. 
If you need access to your capital, you can sell your units back to the 
sponsoring company, though you might have to sell at a discount. 
. 
You receive your principal back when the portfolio of bonds matures 
(usually in about 20 years) unlike a bond fund, which never matures. 
. 
You can choose a UIT that fits your income needs. Many trusts specialize 
in municipal bonds and therefore pay tax-free interest. Within that category, 
some trusts buy only bonds from a particular state, yielding doubletax-
free income. For investors who want extra security, other municipal 
trusts buy only insured bonds. In addition to municipal bonds, UITs buy 
mortgage-backed securities, high-quality corporate bonds, foreign bonds, 
and even junk bonds. 

PART ONE: Maximizing Your Investment Options 

Because they own fixed portfolios of bonds, UITs can get hurt if there is a 
problem with some of the bonds in their portfolios. For example, in the early 
1980s, a consortium of municipalities that had banded together to build nuclear 
power plants in Washington state (called the Washington Public Power Supply 
System and commonly known as WHOOPS) defaulted on billions of dollars in 
bonds, many of which were held in UIT portfolios. While some of the bonds were 
insured, leaving trustholders unaffected, others were not. Thus, many UITs suffered 
losses and had to reduce monthly payouts. In extreme cases, UIT managers 
can sell bonds if they sense trouble coming, but such active management is the 
exception. When bonds are sold, however, the principal is returned to UIT holders 
because UITs are not allowed to add new bonds to a portfolio once it has been sold. 

When shopping for a UIT, look carefully at the prospectus describing the 
portfolio. Notice the average maturity of the bonds, which may range from 10 
years to as many as 30 years. Inspect the bonds』 safety ratings, making sure that 
they fall in the A category if you want to depend on the trust for income for many 
years. Determine what kind of call protection comes with the bonds in the portfolio. 
Ideally, you would like at least ten years before the bonds can be redeemed. 

With a little homework, you may find a UIT that meets your needs for 
dependable monthly income. You can request a free guide to UITs called 「An 
Overture to Our Investment Strategy,」 by calling 877-DEFINED, 877-333-4633, 
ext. 3199. This guide is published by Merrill Lynch, Pierce, Fenner & Smith Inc. 

Resources 

To learn more about bonds, read financial newspapers like The Wall Street 
Journal and Barron』s, as well as personal finance magazines like Money, which 
feature articles about bonds regularly. For more in-depth information on bonds, 
consult the following books, newsletters, and trade associations. 

BOOKS 

All about Bonds and Bond Mutual Funds: The Easy Way to Get Started, by Esme 
Faerber (McGraw-Hill, P.O. Box 548, Blacklick, OH 43003; 800-634-3961; www. 
mcgraw-hill.com). Simple, comprehensive book about bonds and bond funds. Includes 
new material on bond mutual funds, tax-free municipal bonds, international bonds, and 
bond funds. 

All about Bonds from the Inside Out, by Esme Faerber (McGraw-Hill, P.O. Box 
543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Explains the basics 
of bonds, including the different types of bonds, varying levels of risk, how to spot 
undervalued and overvalued bonds, how to read yield curves, and calculations for interest 
rates and returns. 


CHAPTER 5: All about Bonds 

The Almanac of Online Trading: The Indispensable Reference Guide for Trading 
Stocks, Bonds, and Futures Online, by Terry Wooten (McGraw-Hill, P.O. Box 548, 
Blacklick, OH 43004; 800-634-3691; www.mcgraw-hill.com). Provides a nuts-andbolts 
look at online trading and describes the tools and resources available online. 

An Introduction to Bond Markets (The Reuters Financial Training Series) (John 
Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875-1272; 212-850-6000; 800-225-5945; 
www.wiley.com). Examines key debt market players, bond characteristics and valuations, 
credit agencies, ratings, and regulations. 

Beating the Dow with Bonds, by Michael O』Higgins (HarperBusiness, P.O. Box 
588, Dunmore, PA 18512; 212-207-7000; 800-331-3761; www.harpercollins.com). 

The Bond Bible, by Marilyn Cohen and Nick Watson (New York Institute of Finance, 
2 World Trade Center, 17th Floor, New York, NY 10048; 212-390-5000; 800227-
6943; www.nyif.com). Explains everything from income streams and the Treasury 
yield curve to the advantages of federal agency bonds and the dangers of high-yield issues. 
Also addresses strategies, such as leveraging, credit rating agencies, insurance, 
bond funds, and unit trusts. 

The Bond Book, by Annette Thau (McGraw-Hill, P.O. Box 548, Blacklick, OH 
43004; 800-634-3691; www.mcgraw-hill.com). Explains how to assess the risks and 
opportunities of individual bonds; shows investors where to get good information on 
the bond market. Covers bond market basics, Treasury securities, municipal bonds, 
corporate bonds, mortgage-backed securities, and bond mutual funds. 

Bond Market Rules: 50 Investing Axioms to Master Bonds for Income or Trading, 
by Michael D. Sheimo (McGraw-Hill, P.O. Box 548, Blacklick, OH 43004; 800-6343961; 
www.mcgraw-hill.com). Covers the basic nature and structure of bonds, how 
bond investing functions, the importance of interest rates and risk, and risk analysis. 

Bond Markets, by Patrick J. Brown and Patrick J. Ryan (AMACOM, 1601 Broadway, 
New York, NY 10019; 212-586-8100; 800-262-9699; www.amanet.org). This 
book addresses how different bond instruments are normally quoted, how much accrued 
interest is payable by buyer in addition to traded price, the cost of a bond if 
quoted on a yield basis, normal settlement periods, how yields are quoted and calculated, 
and other related bond issues. Not for a beginner. 

Bond Markets: Analysis and Strategies, by Frank Fabozzi (Prentice Hall, One 
Lake St., Upper Saddle River, NJ 07458; 201-236-7156; 800-382-3419; www. 
prenticehall.com). Offers more sophisticated bond market strategies. 

Bonds and Bond Derivatives, by Miles Livingston (Blackwell Publications, 350 
Main St., Malden, MA 02148; 781-388-8200). A good review of bonds and derivatives 
for a beginner. 


PART ONE: Maximizing Your Investment Options 

The Fixed-Income Alamanac: The Bond Investor』s Compendium of Key Market, 
Product and Performance Data, by Livingston G. Douglas (McGraw-Hill, P.O. Box 
543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Provides years of 
performance data for the bond markets, including yield levels, measures of bond 
volatility, information on ratings upgrades and downgrades, and levels of new bond 
issuance. 

Fundamentals of Municipal Bonds (The Bond Market Association, Publications 
Dept., P.O. Box 325, Congers, NY 10920; 212-440-9430; www.psa.com). An excellent 
overview of everything you need to know about municipal bonds. 

Getting Started in Bonds, by Sharon Saltzgiver Wright (John Wiley & Sons, 1 
Wiley Dr., Somerset, NJ 08875-1272; 212-850-6000; 800-225-5945; www.wiley. 
com). Guide for the novice bond investor. Covers basic concepts as well as explains the 
broader factors that affect bond prices; well organized with solid fundamental bond 
information. 

The Guide to Investing in Bonds, by David Logan Scott (Globe Pequot Press, 246 
Goose Ln., Suite 200, P.O. Box 480, Guilford, CT 06437; 203-458-4500; 888-2497586; 
www.globe-pequot.com). An overview of bond investments and what factors to 
consider when planning investments. 

The Handbook of Fixed-Income Securities, by Frank Fabozzi (McGraw-Hill, 

P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www. mcgraw-hill.com). A 
complete guide to the bond market, with great detail on every aspect of the subject. 
The Thomas J. Herzfeld Encyclopedia of Closed-End Funds (Thomas J. Herzfeld 
Advisors, P.O. Box 161465, Miami, FL 33116; 305-271-1900). Self-published encyclopedia 
of closed-end funds. Includes data on all funds and methods for choosing the 
best funds. 

High Yield Bonds: Market Structure, Valuation, and Portfolio Strategies, by 
Theodore M. Barnhill, William Maxwell, and Mark R. Shenkman (McGraw Hill, P.O. 
Box 548, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Provides 
state-of-the-art research, strategies, and tools alongside the expert analysis of respected 
authorities to help you truly understand todays high-yield market. 

How Municipal Bonds Work, by Robert Zipf (Prentice Hall Press, One Lake St., 
Upper Saddle River, NJ 07458; 201-236-7156; 800-382-3419; www.prenticehall. 
com). Concise, readable, and offers a good understanding of municipal bonds. 

How the Bond Market Works, by Robert Zipf (Prentice Hall Press, One Lake St., 
Upper Saddle River, NJ 07458; 201-236-7156; 800-382-3419; www.prenticehall. 
com). An explanation of the ins and outs of the bond market. 


CHAPTER 5: All about Bonds 

Investing in Closed-End Funds: Finding Value and Building Wealth, by Albert 
Freedman and George Cole Scott (Prentice Hall Press, One Lake St., Upper Saddle 
River, NJ 07458; 201-236-7156; 800-382-3419; www.prenticehall.com). Provides 
strategies for picking the best closed-end funds. 

The Mortgage-Backed Securities: Workbook: Hands-on Analysis, Valuation, and 
Strategies for Investment Decision Making, by Andrew S. Davidson and Michael D. 
Herskovitz (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www. 
mcgraw-hill.com). Explains the complex world of mortgage-backed securities, including 
how to calculate prepayment risk and find the highest yields with the least 
risk. 

Mortgage Securities: The High-Yield Alternative to CDs, the Low-Risk Alternative 
to Stocks, by Daniel R. Amerman (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 
800-634-3961; www.mcgraw-hill.com). Explains how to invest in mortgage securities, 
which are the highest yielding of all government-insured securities. Explains mortgage-
backed securities mutual funds, how to buy and sell individual mortgage-backed 
bonds, how prepayment risk is factored into bond prices, and the difference between 
Ginnie Mae, Fannie Mae, and other issuers of mortgage-backed securities. 

Savings Bonds: When to Hold, When to Fold, and Everything In-Between, by 
Daniel J. Pederson (The Savings Bond Informer, P.O. Box 9249, Detroit, MI 48209; 
800-927-1901; www.bondinformer.com). Offers a full understanding of savings 
bonds, tips on the best time to redeem your bonds, details on swapping EE bonds for 
HH bonds, and tax aspects of bonds. 

Yield Curve Analysis: The Fundamentals of Risk and Return, by Livingston 
Douglas (New York Institute of Finance, 2 World Trade Center, 17th Floor, New York, 
NY 10068; 212-390-5000; 800-227-6943; www.nyif.com). An explanation of how investing 
in different bond maturities can bring high returns and high risks. 

NEWSLETTERS 

Bondweek (Institutional Investor, 488 Madison Ave., 12th Floor, New York, NY 
10022; 212-224-3800; www.bondweek.com). Covers the bond market and is aimed 
at professional bond investors and bond dealers. 

Closed-End Country Fund Report (Suite 501, 725 15th St., N.W., Washington, DC 
20005; 202-783-7051). Recommends favorite closed-end funds and provides up-todate 
performance data on the funds. 

Closed-End Fund Digest (1224 Coast Village Circle, Suite 11, Santa Barbara, CA 
93108; 800-282-2335). Recommends favorite closed-end funds and provides up-todate 
performance data on the funds. 


PART ONE: Maximizing Your Investment Options 

Defaulted Bonds Newsletter (Bond Investors Association, P.O. Box 4427, Miami 
Lakes, FL 33014; 305-557-1832; www.bia.int.com). Advises individual investors 
about opportunities in the riskiest of all bonds—those that have already defaulted. 

Grant』s Interest Rate Observer (30 Wall St., 6th Floor, New York, NY 100052201; 
212-809-7994; www.grantspub.com). A witty and provocative look at the bond 
markets and interest rates from well-known bond analyst James Grant. 

Income Fund Outlook (Institute for Econometric Research, 2200 S.W. 10th St., 
Deerfield Beach, FL 33442; 800-442-9000). 

Investor』s Guide to Closed-End Funds (Thomas J. Herzfeld Advisors, P.O. Box 
161465, Miami, FL 33116; 305-271-1900; www.herzfeld.com). Chooses best closed-
end funds and provides up-do-date performance data on the funds. 

Lynch Municipal Bond Advisory (P.O. Box 20476, New York, NY 10025; 212663-
5552). Aimed at individual investors wanting to select high-quality municipal 
bonds or bond funds. 

Moody』s Bond Survey (99 Church St., New York, NY 10007; 212-553-0300; 
www.moodys.com/fis). Provides data and commentary on the economy and fixed-
income markets. Includes calendars of recent offerings and Moody』s commodity and 
scrap metal price indexes, yield averages, and market commentaries. 

Public Investor (Government Finance Officers Association, 180 N. Michigan 
Ave., Suite 800, Chicago, IL 60601-7476; 312-977-9700; www.gfoa.org). Tracks developments 
in the municipal bond market and is aimed at public investors. 

Standard & Poor』s (55 Water St., New York, NY 10041; 212-438-2000; www. 
standardandpoors.com) publishes several newsletters about the bond market. They include 
Blue List, which lists upcoming municipal bond offerings; Bond Guide, which 
lists corporate bonds; Creditweek, which analyzes the overall bond market, as well as 
specific bond issues; Municipal Ratings Handbook, which lists municipal bonds; and 
Unit Investment Trusts, which tracks UITs. 

Value Line Convertibles (220 E. 42nd St., New York, NY 10017; 800-634-3583). 
Recommends the convertible bonds that Value Line (a bond-rating service) likes best. 

NEWSPAPER 

The Bond Buyer (One State Street Plaza, 27th Floor, New York, NY 10004; 800982-
0633; www.bondbuyer.com). A trade newspaper that covers the municipal bond 
business. Also available online. 


CHAPTER 5: All about Bonds 

PAMPHLET 

「Investing in Municipal Bonds」 (North American Securities Administrators Association, 
10 『G』 St., N.E., Suite 710, Washington, DC 20002; 202-737-0900; 
www.nasaa.org). Explains the basics of the municipal bond market. 

TRADE ASSOCIATIONS 

Association of Financial Guaranty Insurors (139 Lancaster St., Albany, NY 
12210; 518-449-4698; www.afgi.org). The trade group representing the insurance 
companies that insure municipal bonds against default. The following articles are 
available on their Web site: 「Municipal Bonds—The Basics,」 「Insured Municipal 
Bonds,」 「Structured Asset Backed Securities,」 and 「International Securities.」 

Bond Investors Association (P.O. Box 4427, 6175 N.W. 153rd St., Suite 221, Miami 
Lakes, FL 33014; 305-557-1832; 800-472-2680; www.biainc.com). A nonprofit group 
that educates the public about bonds and keeps statistics on defaulted bonds. Offers a 
pamphlet about the association entitled 「Staying Informed on Your Bond Investments in 
the 90』s.」 Also offers subscriptions to three newsletters: Bond Investors Association 
Newsletter, Defaulted Bonds Newsletter, and High-Yield Securities Journal. 

The Bond Market Association (40 Broad St., 12th Floor, New York, NY 100042373; 
212-440-9400; bondmarkets.com and investinginbonds.com). The industry 
group representing brokerage firms, dealers, and banks that trade government, municipal, 
and mortgage-backed securities. Offers the following guides on its Web site, or 
they can be obtained as pamphlets or small books for a nominal charge: 「Investor』s 
Guide to Bond Basics,」 「Bond Swapping,」 「CMOs,」 「Corporate Bonds,」 「High Yield 
Bonds,」 「Insured Municipal Bonds,」 「Mortgage Securities,」 「Municipal Bonds,」 「The 
Bond Markets,」 「Unit Investment Trusts,」 and 「Zero Coupon Municipal Bonds.」 Also 
published a book called A Guide to Certificates of Participation (COPs). 

WEB SITES 

The Blue List. Standard & Poor』s offers daily updates on all municipal and corporate 
bonds coming to market. The site also provides commentary on the bond market 
and individual bonds.  

The Bond Market Association. Offers a number of publications with extensive information 
on all types of bonds both online and as brochures, which can be ordered online. 
 

BondResources. Education about bonds, lots of expert opinion about bonds and 
the bond market, and a database of more than 20,000 types of bonds. The site also has 
links to brokers.  


PART ONE: Maximizing Your Investment Options 

Bonds Online. Lots of bond news and views. Connections to the best bond information 
available. Covers all types of bonds. You can get real-time prices for over 
15,000 current bond offerings.  

Bondtrac.com. This is a Web-based fixed-income information system that provides 
quick and easy access to an expansive database of corporate, agency, and municipal bond 
offerings from the bond inventories of hundreds of firms.  

Bureau of Public Debt—Treasury Bills, Bonds, and Notes. The complete source 
for information about Treasury securities. You will be able to find out about upcoming 
Treasury auctions, and how the Treasury Direct program works. The site also answers 
frequently asked questions about Treasury bills, notes, bonds, and inflation-indexed 
securities.  

Bureau of Public Debt—Savings Bond Division. The complete source for information 
about savings bonds. The site explains all the rules affecting savings bonds, 
including how to buy and redeem them and how to calculate their value. It also features 
the Savings Bond Wizard, which calculates the current redemption value of your 
savings bond holdings.  

Convertbond.com. This site offers terms, analysis, news, and pricing relating to 
around 800 convertible securities that can be found in the U.S. convertible market. 
 

Defined Asset Funds. Offers unit investment trusts and a full family of stock and 
bond portfolios. Sponsored by Merrill Lynch, Salomon Smith Barney, PaineWebber, 
and Morgan Stanley Dean Witter. Funds available for income, growth, value, or total 
return.  

eBondTrade. Provides access to a complete inventory of municipal bonds with 
clearly displayed bid and offer pricing. Register as an eBondTrader, log on to the Web 
site, and trade in bonds.  

Emuni.com. Electronic Municipal Statistics (E-Muni) provides documents, news, 
developments, and financial information about the municipal bond market. 
 

Fitch Credit Rating Company. A Web site to look up the credit ratings of most corporate 
debt. Fitch is a major rating agency of corporate debt, and this site will let you 
find the ratings for American and international companies for bonds and preferred 
stock. It lists Fitch, Moody』s, and Standard & Poor』s ratings. You will also find ratings 
changes within the past 90 days and a list of companies on ratings watch, meaning that 
their ratings may be upgraded or downgraded soon.  

Investing in Bonds. You can learn about all kinds of bonds and calculate your personal 
taxable-equivalent muni yields.  


CHAPTER 5: All about Bonds 

InvestorGuide. This site has a bond section that explains the different types of 
bonds and has links to other bond quote services.  

Money.com. Research individual bond funds on this site and use their Portfolio 
Forecaster to see how they work with your portfolio.  

Moodys.com. Moody』s maintains over 68,000 ratings on 16,000 municipal bond 
issuers, including the general obligations of governments, revenue bonds, and other 
municipal instruments.  

MorningStar.com. This is probably the most comprehensive bond information site 
available. You can get bond news, bond analysis, description of all the types of bonds 
available, and the performance of all bonds out there.  

Municipal Securities Rulemaking Board. Makes rules that govern the municipal 
bond business. They provide information to investors about investing in muni bonds. 
 

Standard & Poor』s Rating Services. The largest rating service for corporate, 
municipal, and government bonds provides extensive listings in its Web site. S&P not 
only provides the ratings, but also why an issuer』s rating has risen or fallen. You also 
can look at the Credit Wire for recent ratings changes.  

FEDERAL RESERVE BANKS AND BRANCHES 

For more information about government bonds, write the Consumer Information 
Center (Pueblo, CO 81009) for the following pamphlets: 「Get the Facts on Saving 
and Investing,」 「I Bonds Investor』s Guide,」 and 「U.S. Savings Bonds Investor Information.」 
To purchase Treasury securities, visit the bank nearest you. You can use the 
telephone numbers and addresses below either to call or visit the Federal Reserve department 
to get information on buying Treasury bills, notes, and bonds directly. 

Alabama: 1801 5th Ave., North, Birmingham 35203; 205-731-8500 

Arkansas: 325 W. Capitol Ave., Little Rock 72201; 501-324-8300 

California: 950 S. Grand Ave., Los Angeles 90015; 213-683-2300; 101 Market St., 
San Francisco 94105, 415-974-2000 

Colorado: P.O. Box 5228, Denver 80217-5228; 303-572-2300 

District of Columbia: 20th St. and C St., N.W. 20551; 202-452-3000 

Florida: P.O. Box 929, Jacksonville 32231-0044, 904-632-1000 

Georgia: 104 Marietta St., N.W., Atlanta 30303; 404-521-8500 

Illinois: 230 S. LaSalle St., Chicago 60604; 312-322-5322 

Kentucky: P.O. Box 32710, Louisville 40232; 502-568-9236 

Louisiana: P.O. Box 61630, New Orleans 70161; 504-593-3200 


PART ONE: Maximizing Your Investment Options 

Maryland: 502 S. Sharp St., Baltimore 21203; 410-576-3300 

Massachusetts: 600 Atlantic Ave., Boston 02106; 617-973-3000 

Michigan: 160 W. Fort St., Detroit 48226; 313-961-6880 

Minnesota: P.O. Box 291, Minneapolis 55401; 612-204-5000 

Missouri: 925 Grand Blvd., Kansas City 64198, 816-881-2000; 411 Locust St., 
St. Louis 63102-2034; 314-444-8444 

Montana: 100 Neill Ave., Helena 59601; 406-447-3800 

Nebraska: 2201 Farnam, Omaha 68102; 402-221-5500 

New York: 160 Delaware Ave., Buffalo 14202, 716-849-5046; 33 Liberty Pl., New 
York 10038, 212-720-5000 

North Carolina: 530 E. Trade St., Charlotte 28202; 704-358-2100 

Ohio: P.O. Box 999, Cincinnati 45201, 800-432-1343; P.O. Box 6387, Cleveland 
44101, 888-333-2538; P.O. Box 16542, Columbus 43216 

Oklahoma: 226 Dean McGee Ave., Oklahoma City 73125; 405-270-8652 

Oregon: 915 S.W. Stark St., Portland 97208; 503-221-5900 

Pennsylvania: Ten Independence Mall, Philadelphia 19106, 215-574-6680; P.O. 
Box 687, Pittsburgh 15230, 888-333-7488 

Tennessee: 200 N. Main St., Memphis 38103, 901-523-7171; 301 8th Ave. North, 
Nashville 37203-4407, 615-251-7100 

Texas: 2200 N. Pearl St., Dallas 75201, 214-922-6000; 301 E. Main St., El Paso 
79901, 915-544-4730; 1701 San Jacinto St., Houston 77001, 713-659-4433; 126 E. 
Nueva St., San Antonio 78204, 210-978-1200 

Utah: 120 S. State St., Salt Lake City 84111; 801-322-7900 

Virginia: 701 E. Byrd St., Richmond 23219; 804-697-8000 

Washington: 1015 2nd Ave., Seattle 98124; 206-343-3600 

MUNICIPAL BOND INSURANCE COMPANIES 

The following insurance companies insure municipal bonds against default: 

ACA Financial Guaranty Corporation (140 Broadway, 47th Floor, New York, NY 
10005; 212-375-2000; www.aca-insurance.com) 

ACE GuarantyRe (1325 Avenue of the Americas, New York, NY 10019; 212-9740100; 
www.acelimited.com) 

AMBAC Assurance Corporation (One State Street Plaza, 17th Floor, New York, 
NY 10004; 212-208-3333; www.ambac.com) 

Enhance Reinsurance Company (335 Madison Ave., 25th Floor, New York, NY 
10017; 212-984-9259; www.efsgroup.com) 

Financial Guaranty Insurance Company (115 Broadway, New York, NY 10006; 
212-312-3000; 800-352-0001) 


CHAPTER 5: All about Bonds 

Financial Security Assurance (350 Park Ave., 13th Floor, New York, NY 10022; 
212-339-3424) 

FSA (One Market Plaza, Steuart Tower, 22nd Floor, San Francisco, CA 94105; 
415-995-8020) 

Municipal Bond Investors Assurance Corporation (113 King St., Armonk, NY 
10504; 914-273-4545; www.mbia.com) 


CHAPTER 6 
Speculating with 
Futures and Options 


If taking my advice in this book has left you in such good financial shape that 
you have a few thousand dollars left over with which to take risk, you might want 
to learn more about futures and options. Otherwise, you should probably not even 
be tempted by these high-stakes games in which you can make or lose thousands 
of dollars in days, hours, or even minutes. If you are like the typical small investor 
who gets lured into speculative futures and options trading, you will end up losing 
some or all of your invested capital by the time you throw in the towel. So, if you 
have built up only a modest pool of capital, it』s not normally worth assuming the 
enormous risks inherent in these markets. In the investment pyramid described in 
Chapter 1, futures and options trading would be at the top of the high-risk apex. 

The Basics of Futures Trading 

Despite the enormous risks of futures trading, the tremendous potential for 
quick profits attracts thousands of new investors to the markets every year. 

A futures contract is an obligation to buy or sell a specific quantity of a 
commodity, financial instrument, or stock index at a fixed price at a particular date 
in the future. Buying a contract obligating you to take delivery of the underlying 
commodity is known as taking a long position. For example, you might buy a 
futures contract obligating you to accept delivery of 100 troy ounces of gold for 
$350 on June 20. This particular contract is available on the Chicago Board of 
Trade (CBOT). If you were to follow through on the contract and buy all the gold, 
it would cost you $35,000 ($350 × 100 ounces). 

The profit potential—and danger—of futures trading stem from the fact that 
you must put up only a small percentage, usually between 5 percent and 10 


CHAPTER 6: Speculating with Futures and Options 

percent, of the contract』s value to play the game. This money, a form of good faith 
deposit, is known as margin. In the example, if you had to put up 5 percent, it 
would cost you $1,750 to control the $35,000 contract. 

As the price of the underlying commodity rises or falls, the worth of your contract 
surges or plunges. For example, if the price of gold rises from $350 to $400, the 
value of the underlying contract would soar to $40,000. Your profit would be $5,000 
because the contract you bought that was worth $35,000 is now worth $40,000. Of 
course, if you had bought ten contracts, you would have earned a $50,000 profit. 

On the other hand, if gold fell from $350 to $332.50, you would have lost all 
your $1,750 deposit money. If gold prices dropped from $332.50 to a lower price, 
your broker would send you a margin call (i.e., more money to cover your additional 
losses above and beyond your original $1,750 deposit). If gold dropped to $300, you 
would need an additional $3,250 to maintain your market position. If you don』t meet 
the margin call, the contract would be liquidated immediately. If you do meet the 
margin call, you would maintain your position in the futures contract. When the delivery 
date arrives, you would have to buy $35,000 worth of gold, which would then 
be worth only $30,000, thus saddling you with a $5,000 loss per contract. If you were 
the seller of this contract, you would not have to worry about losing money if the 
buyer cuts his or her losses and runs—or even skips town. The commodity brokerage 
firm and, ultimately, the commodity exchange on which the trade was made guarantee 
that the buyer』s obligations will be met. 

If you believe that the price of the underlying commodity will fall, you can sell 
a futures contract short, or take a short position. The previous example would then 
work in reverse:You would profit if the price of the commodity fell and lose money 
if the commodity』s price rose. 

Another more conservative way to play futures is to buy or sell what is known 
as a spread. Instead of taking a pure bet that a commodity』s price will rise if you 
are a buyer or fall if you are a seller, you can play both sides of a trade and profit 
by the spread widening or narrowing. For example, you might buy a long gold contract 
for one month and sell short another gold contract for another month. The 
spread between the price from one month to another would widen or narrow over 
time, giving you the chance to profit. Or you can spread one commodity against a 
similar one and hope to profit from the differential. For instance, you might buy a 
gold contract for one month and sell a silver contract for the same month, trying to 
profit from a change in the relationship between gold and silver. 

While, in theory, you could actually accept delivery of the underlying commodity 
by taking possession of the 100 troy ounces of gold (to use the previous example), 
almost no one does. Only about 1 percent of futures contracts trades are 
settled by delivery, and that is done at a designated warehouse designed to transfer 
ownership of commodities. Most contracts are liquidated long before they expire. 
To cancel a contract, you would close out your position by taking the opposite side, 


PART ONE: Maximizing Your Investment Options 

netting you either a profit or a loss. In the earlier example, if you had gone long 
by buying a contract for gold, you could close out your position by selling the 
contract. Investing in futures is known as a zero-sum game because for every 
contract that profits, someone holds an offsetting contract that loses. 

READING THE FUTURES TABLES IN NEWSPAPERS 

Because so much rides on your futures positions, you must keep up with 
what happens in the futures markets. While you would need a computer to track 
moment-to-moment price changes, you can get a sense of the action from the daily 
listings in The Wall Street Journal, Investor』s Business Daily, and other financial 
newspapers. 

Futures are grouped in the newspaper by broad categories, such as agricultural 
products (grains, oils, sugar, etc.), metals (copper, gold, silver, platinum, etc.), 
industrial goods (lumber, cotton, heating oil, etc.), and financial products (foreign 
currencies, stock market indexes, Treasury securities, etc.). Following is a typical 
listing for a futures contract—in this case, gold futures traded on the COMEX— 
along with an explanation of each column: 

Gold (100 troy ounces; dollars per troy ounce) 

Season』s Daily or Weekly 
Net Open 
High1 Low2 High4 Low5 Close6 Change7 Interest8 

404.20 326.30 Feb.3 330.40 326.90 328.60 +1.60 42,183 
330.10 328.40 Mar. 330.10 329.00 329.10 +1.60 30,012 
410.00 327.00 Apr. 331.30 328.00 329.40 +1.40 21,350 
418.50 328.00 June 332.60 329.10 330.50 +1.40 16,533 
383.00 333.40 Dec. 336.50 334.00 334.70 +1.20 7,550 
9 Est. sales 20,151, Tuesday』s sales 19,164 
10 Total open interest 117,628 +4,471 

Above the table is a brief description of the contract and how prices are quoted. 
The example is a contract for gold, and prices are quoted in dollars per troy ounce. 

1. 
The first column notes the highest price the contract has reached so far 
during its life. 
2. 
The second column notes the lowest price the contract has reached so far 
during its life. The February contract, for example, has swung between a 
high of $404.20 and a low of $326.30, for example. 
3. 
Column 3 indicates the different maturity months for the gold contracts 
—in this case, from February through December. 

CHAPTER 6: Speculating with Futures and Options 

4. 
Column 4 records the highest price the contract sold for during the day』s 
or week』s trading. 
5. 
Column 5 records the lowest price the contract sold for during the day』s 
or week』s trading. For example, during the last week, the February contract 
traded between a high of 330.40 and a low of 326.90. 
6. 
Column 6 indicates the closing price of the contract at the end of the trading 
day or week. In the example, the February contract closed the week 
at 328.60. 
7. 
The net change is how much the contract rose or fell in price during the 
trading day or week. The February contract, for instance, rose $1.60 last 
week. 
8. 
Open interest is the number of contracts that are still being traded and 
have not been closed by delivery of the commodity or offsetting contracts. 
In the example, 42,183 contracts remain open on the February 
future. Note that the nearer the month of maturity, the more open interest 
there tends to be. This is because you incur less risk in committing your 
money for a shorter time than a longer time, and most people want to 
limit their risk by trading in the most actively traded 「near month.」 
9. 
Line 9 estimates the total number of contracts traded today (in the 
example, 20,151) and the actual numbers for the previous day (19,164). 
10. 
The final line estimates the total number of contracts still trading in the 
previous sessions (in the example 117,628) and whether that number has 
risen or fallen (risen by 4,471). 
Largest futures exchanges. While all futures contracts work the same way, 
you have many options as to which commodity, financial instrument, or stock index 
to speculate on and which futures exchange will execute your trade. Each exchange 
sets different margin requirements, minimum and maximum amounts that a contract 
can move, expiration dates, and trading hours for each contract. Following are 
the largest futures exchanges and the most popular contracts traded on each. 

Chicago Board of Trade: corn, Dow Jones Composite Average Index, Dow 
Jones Industrial Average Index, Dow Jones Transportation Average Index, gold, 
Municipal Bond Index, oats, rough rice, silver, soybeans, soybean meal, soybean 
oil, 10-year agency, 30-Day Federal funds, U.S. Treasury bonds, U.S. Treasury 
notes, wheat. 

Chicago Mercantile Exchange: Australian dollar, beef, Brady bonds, Brazilian 
Real, British pound, butter, Canadian dollar, cattle, cheddar cheese, deutsche mark, 
dry whey, EuroCanada, Eurodollar, Euroyen (LIBOR), Euroyen (TIBOR), Federal 
funds, Fortune e-50 Index, French franc, hogs, Japanese government bond, Japanese 
yen, Lumber, LIBOR one-month rate, Mexican IPC, Mexican peso, Milk, Nasdaq 
100 Index, New Zealand dollar, Nikkei 225 Index, Nonfat dry milk, pork 


PART ONE: Maximizing Your Investment Options 

bellies, pork cutout, quarterly bankruptcy index, Russell 2000 Index, Russian 

ruble, S&P 500 Index, S&P 400 Index, South African rand, Swiss franc, weather. 

Kansas City Board of Trade: ISDEX, natural gas, Value Line Index, wheat. 

MidAmerica Commodity Exchange: Australian dollar, British pound, Canadian 
dollar, cattle, corn, deutsche marks, Eurocurrency, Eurodollars, 5-year Treasury 
notes, gold, lean hogs, oats, platinum, silver, soybeans, soybean meal, soybean oil, 
10-year Treasury notes, U.S. Treasury bills, U.S. Treasury bonds, wheat. 

Minneapolis Grain Exchange: Black Tiger Shrimp, durum wheat, spring 
wheat, TC electricity, white shrimp, white wheat. 

New York Board of Trade: Australian dollar, British pound, Canadian dollar, 
cocoa, coffee, cotton, CRB/Bridge Index, euro, 5-year Treasury note, 5-year U.S. 
Agency note, Japanese yen, Milk, New York Stock Exchange Composite Index, 
New York Stock Exchange Large Composite Index, New York Stock Exchange 
Small Composite Index, New Zealand dollar, Norwegian krone, PSE Tech 100, 
Russell 1000, South African rand, sugar, Swedish krona, Swiss franc, 10-year 
Treasury note, 10-year U.S. Agency note, 30-year Treasury note, 2-year Treasury 
note, U.S. dollar. 

New York Mercantile Exchange: Aluminum, California Oregon Border electricity, 
Cinergy electricity, copper, gasoline/crude oil crack, gold, heating/crude oil 
crack, Entergy electricity, FTSE Eurotop 100, FTSE Eurotop 300, heating oil, 
Henry Hub natural gas, light sweet crude oil, New York Harbor unleaded gasoline, 
palladium, Palo Verde electricity, platinum, propane, PJM electricity, silver. 

If you are thinking of playing the futures game, keep these guidelines in mind: 

. 
Play only with money you can afford to lose. Don』t speculate with money you 
need to rely on to cover your mortgage payment or your child』s tuition. 
. 
Figure out in advance at what level you would promise yourself to take a 
profit or at what price you would promise to cut your losses. This is 
important because the futures game can get you so entangled psychologically 
that you lose all perspective. Many people have seen profits slip from 
their grasp as they became greedy to earn even more. Others have stubbornly 
refused to cut their mushrooming losses on the foolish conviction 
that 「the market will come around to my way of thinking.」 One way to 
impose this discipline on yourself is to set an automatic level at which you 
sell to capture a profit and an automatic stop-loss level at which your losses 
will be limited to a predetermined amount. 
. 
Don』t assume you will win with every trade. If you continue to cut your 
losses so they do not get out of hand, you will be in a position to let your 
profits run when you hit a big winner. 
. 
Figure in the costs of brokerage commissions in assessing your chances for 
profits or losses. Brokers love futures trading because it involves so many 

CHAPTER 6: Speculating with Futures and Options 

transactions, each of which generates a commission. The costs of overtrading 
have sunk many investors. 

. 
Leave a cash cushion in your futures account so that if the market goes 
against you, you do not have to scramble to come up with cash to meet a 
margin call. 
. 
Understand what you are getting into before you invest any money. Work 
with an experienced broker, and study the factors that influence a particular 
market and what has happened in that market recently. You might do this 
by subscribing to one of the newsletters listed at the end of this chapter. 
Also, before you actually invest money, you could try some hypothetical 
trading. However you learn about futures, don』t hurry to get into futures 
trading; the markets will be there whenever you decide you』re ready. 
Futures Pools and Discretionary Accounts 

If you』re not able to devote the time and emotional energy involved in trading 
futures (that includes most investors!), you have two ways to let professional 
futures traders do the work for you. First, you can invest in a futures pool, which 
is similar to a mutual fund. Investors pool millions of dollars with an established 
futures money management firm, which then buys and sells contracts in many 
different markets simultaneously, including agricultural, financial, industrial, 
metal, and foreign currency futures. 

Two advantages of participating in these pools are that you have a professional 
money manager watching your positions at all times, and you will never be subject 
to a margin call. If the manager runs into a serious losing streak, the pool may be 
dissolved earlier than anticipated, and you may get back only part of your principal. 
If everything goes well, on the other hand, the pool will be liquidated in five 
or ten years, and all profits will be distributed to pool participants, minus the fees 
that have been deducted every year. These fees, which amount to as much as 6 
percent of managed assets each year, are charged on top of brokerage commissions 
of as much as 10 percent of your capital. In addition, the management company 
may take up to a 30 percent incentive fee from the fund』s new profits. Unlike stock 
and bond mutual funds, it is not easy to get out of a futures pool once you have 
invested in one. Most brokerage firms require you to keep your capital in the pool 
at least three and usually six months. 

The performance of these pools varies widely from pool to pool and year to 
year. They do best when the markets move sharply upward or downward and the 
pools are invested on the correct side of the move. They tend to do little when the 
markets are placid. And if they are on the wrong side of a market move, they can 
lose a lot of money in a hurry. Most brokerage firms sell participations in futures 
pools. You can size up an offering by looking at the futures manager』s track record; 


PART ONE: Maximizing Your Investment Options 

however, that is no guarantee of future performance. Brokers want to sell to managers 
with hot records, and what worked before may not work again as the fast-
moving markets change. 

The best way to follow the performance of different money managers and the 
pools they manage is to subscribe to Managed Account Reports (220 5th Ave., 
19th Floor, New York, NY 10001; 212-213-6202). This rating service provides 
monthly updates and industry averages for futures pools. In addition, several firms 
track the performance of futures money managers and will place your money with 
the top managers. 

The second way to let professional futures traders invest your money for you 
is to sign up for a discretionary account with a futures trading advisor. Such an 
account gives a professional trader full discretion to buy and sell futures contracts 
without your prior authorization. The advisor receives an annual management fee 
of about 2 percent of your capital. In many cases, the trading advisor will also take 
an annual percentage—up to about 20 percent—of any profits he or she generates. 
You must be extremely careful in signing up for such an account, no matter how 
brilliant the track record of the trading advisor. Once he or she has your money and 
your signature on the dotted line, you have no power to stop the advisor』s trading 
activity unless you revoke the agreement altogether. 

Many brokerage firms will recommend futures trading advisors with good 
records. 

The Basics of Options Trading 

Though they are also speculative, options have one advantage over futures: 
When you buy an option contract, the amount of money you can lose is limited to 
the amount of money you invested in the option. In futures, remember, you can actually 
lose more than you invest if you are hit with a margin call. While this limited-
loss feature of options may provide some comfort, it doesn』t change the fact that 
you can lose every penny of your investment. 

Options come in two varieties: a call and a put. You buy a call when you think 
the underlying stock, stock index, or futures contract will rise in value, and you buy 
a put when you think the underlying investment will fall in value. Following is an 
explanation of how each works. These examples do not include commissions and 
fees brokers charge to execute the trades, which could significantly affect how 
much money you end up making or losing. 

Calls. When you buy a call option, you receive the right but not the obligation 
to buy a stock, an index, or a futures contract at a set price for a particular period 
of time, usually a few months. For example, you might purchase the right to buy 
General Motors stock at $35 a share from now until February 20, which, let us say, 
is about a month from now. The person who sells you the option, known as the option 
writer, receives in return a nonrefundable payment called a premium. In this 


CHAPTER 6: Speculating with Futures and Options 

case, the premium might be $4 a share, or $400 total, because one option contract 
typcially covers 100 shares of stock. 

Assume that when you buy the call, GM stock is trading at $38 a share. You 
are about even because your option gives you the right to buy at $35, and you paid 
$4 for the option. If GM stock shoots up from $38 to $45, or about 18 percent, in 
the next month, your option』s price will rocket from $4 to $10—a 150 percent gain. 
You could now do one of two things. First, you could exercise your right to buy 100 
shares of GM stock at $35 a share for $3,500, then sell it in the open market for $45 
a share, or $4,500 total, pocketing a $10-per-share, or $1,000, gain. Alternatively, 
you could sell the option for $10 per contract, or $1,000 total, taking home a $600 
gain ($1,000 minus the original $400 you paid for the premium). Most of the time, 
investors sell the option for a profit and do not actually exercise their right to buy 
the underlying shares. 

If, instead of shooting up to $45 per share, however, GM stock either remains 
the same at $38, your option would have an intrinsic value of $3 when it expires, 
giving you a $1 loss per contract, or a total of $100. If GM stock fell to $35 or 
below on February 20, your option would expire worthless and you would lose 
your entire $400 premium. 

Puts. When you buy a put, you want the underlying investment to fall in 
price—exactly the opposite of what you want to happen when you buy a call. A 
put gives you the right but not the obligation to sell a stock, an index, or a futures 
contract at a set price for a particular period of time, usually a few months. If you 
think General Motors stock is about to fall in price, for instance, you could buy a 
General Motors put giving you the right to sell General Motors stock at $35 a share 
any time over the next month to February 20. With GM stock at $38, that right 
might cost you a premium of only 1.4 of a point, or $25 (100 shares time .25). 

If GM stock plummets from $38 to $30 over the next month, a 21 percent decline, 
your put would soar in value from 1.4 to $5, or 19 times your premium 
investment. You could now do one of two things. You could exercise your option 
by selling General Motors stock at $35 per share for $3,500, then buy it back on 
the open market for $30 a share, or $3,000 total, and pocket the $500 difference. 
Or you could sell your option for $5 per share, or $500 total, and walk off with a 
$475 profit ($500 minus your $25 premium). 

On the other hand, if GM stock either remains the same or rises in price before 
February 20, your put would expire worthless. You would lose your $25 premium. 

As you can see, profits or losses in options can be significant and achieved in 
a short amount of time. If you buy a call or a put, the underlying investment must 
move up or down far enough and fast enough for you to make a profit. If you buy 
a call and the stock moves up, but not before your option expires, you still lose. 

A key factor in whether you profit in options is the price of the premium. This 
price is determined by several factors, including the general direction of the 


PART ONE: Maximizing Your Investment Options 

underlying investment, the volatility level of the underlying investment, the relationship 
between the market price of the underlying stock and the strike price of 
the option, the time remaining before the option expires, the level of current interest 
rates, and the amount of cash dividends paid by the underlying stock, if any. 
Options are known as wasting assets, meaning that they waste away as time goes 
on. If you buy an option, time is your enemy because the option is worth less and 
less each day. If you sell an option, time is your friend because you want the option 
to expire without being exercised. 

As with futures, you can hedge your bets with options by buying combinations 
of options called spreads or straddles. A spread involves buying only puts or only 
calls with different strike prices or dates. A straddle involves buying puts and calls 
on the same underlying investment, like a particular stock or stock index, with various 
strike prices or expiration dates. If you buy a spread or a straddle, you will 
profit only if the underlying security moves in price sharply enough up or down before 
the options expire to allow you to sell your options for more than the cost of 
the premiums you had to pay to buy those option contracts. For example, you can 
buy a call option with one date, like February, and a put option with another date, 
like April, and hope to profit from the change in the relationship between the two. 
Or you could buy a call on gold that will expire in April and a put on gold that expires 
at the same time, and hope to profit as the difference between the two options 
widens or narrows. 

Another option strategy is to sell them on your existing holdings instead of 
buying them on investments you don』t own. This is known as writing covered call 
options. For example, say you own 100 shares of General Motors stock. If you 
write, or sell, a $35 strike price call option when the stock is at $38 a share, you 
will receive $4 a share, or $400 total, in premium, which is yours to keep no matter 
what happens to GM』s stock price. (The $4 a share is a function of the bullish-
ness or bearishness of the marketplace, time remaining in the option』s life, as 
well as several other factors.) If the price goes up enough, you might have to sell 
your stock to the option buyer because that is a right you grant when you sell the 
option. If, on the other hand, GM stock doesn』t move or even goes down, you keep 
your stock and the $400 premium. Therefore, writing covered calls can be a conservative 
strategy to potentially boost the income you receive from a stock in addition 
to its dividends. 

As long as you own the underlying shares and are able to deliver them if the 
option is exercised, selling options is a rather conservative strategy because you 
know in advance the worst that can happen: You would have to sell your shares 
to the option buyer at the predetermined price. In the previous example, that means 
you would receive a $400 premium and $35 a share, or $3,500, for your stock. You 
would not feel too happy, however, if the shares rose to $45 or more because you 
would no longer own the stock. 


CHAPTER 6: Speculating with Futures and Options 

Daredevils in the options market sell options without owning the underlying 
shares, a strategy known as 「naked」 call option writing. If the stock』s price remains 
fixed or falls, someone who has sold a call for a $400 premium can keep the cash 
without having invested any money. However, if the stock price shoots up, and the 
option is exercised, the investor must buy shares in the market at the higher price to 
be able to deliver shares to the option buyer. Therefore, your risk of loss is unlimited, 
since the shares can rise an unlimited amount. Most investors shouldn』t try naked options 
writing until they are quite knowledgeable about the options market—and 
probably not even then. 

READING THE OPTIONS TABLES IN NEWSPAPERS 

If you buy or sell options, you should track your positions closely. The following 
listing is typical of those published in most major financial newspapers, such 
as The Wall Street Journal and Investor』s Business Daily, along with an explanation 
of each column: 

Listed Options Quotations 
Option1 
Strike 
Price2 Volume3 Last4 
Net 
Change5 Close6 
Open 
Interest7 
General Motors 
General Motors 
Feb35 
Feb35p 
8221 
2315 
4 
1.4 
+1 
.1.2 
38 
38 
6212 
1656 

1. 
Column 1 names the underlying investment on which the option is written. 
In the example, that is General Motors stock. 
2. 
The second column notes the date on which the option expires and the 
price at which the option can be exercised (the strike price). In the example, 
both options expire in February at a price of $35 per share. A p 
following the strike price means the option is a put option; no notation 
means the option is a call. 
3. 
Volume refers to the volume of trading in the last day or week. In the 
example, the GM call traded 8,221 contracts, and the GM put option 
traded 2,315 contracts. 
4. 
Last is the closing price for the option, or the premium per contract (minimum 
100 shares), you must pay to buy the contract. The price of the GM 
call is $4 a share, or $400 total, and the price of the put is 1.4 a share, or 
$25 total. 
5. 
Net change refers to the change in the option』s price, or the previous day』s 
closing price. In the example, the General Motors call option shows a +1. 

PART ONE: Maximizing Your Investment Options 

6. 
Close is the closing price for the underlying investment. In the example, 
General Motors stock closed at $38 a share. 
7. 
Open interest is the total number of options of that series still outstanding. 
In the example, 6,212 call options remain outstanding, and 1,656 put options 
have not yet expired. 
Most important option exchanges. In addition to trading options on individual 
stocks like General Motors, you can trade options on stock indexes like the Standard 
& Poor』s (S&P) 500 Index and on many futures contracts. Securities exchanges like 
the American Stock Exchange, Pacific Stock Exchange, and Philadelphia Stock Exchange 
are regulated by the Securities and Exchange Commission (SEC), while futures 
markets are regulated by the Commodity Futures Trading Commission 
(CFTC). Following is a list of the most important exchanges that trade options and 
some of the investments on which you can trade options contracts. 

American Stock Exchange: Biotechnology Index, CSFB Technology Index, 
Deutsche Bank Energy Index, Disk Drive Index, equity options, LEAPS options, 
HOLDRS options, FLEX options, Index Shares Options, stock index options including: 
Airline Index, Computer Technology Index, Eurotop Index, Hong Kong 
Option Index, Institutional Index, Inter@active Week Internet Index, Japan Index, 
Major Market Index, Morgan Stanley Commodity Related Equity Index, Morgan 
Stanley Consumer Index, Morgan Stanley Cyclical Index, Morgan Stanley High 
Technology 35 Index, Morgan Stanley Internet Index, Natural Gas Index, Oil 
Index, Pharmaceutical Index, S&P MidCap Index, Securities Broker/Dealer Index, 
TheStreet.com, E-commerce Index. 

Chicago Board of Trade: corn, 5-year Treasury notes, Municipal Bond Index, 
oats, rough rice, silver, soybeans, soybean oil, soybean meal, 10-year Treasury 
notes, 30-year Treasury notes, 2-year Treasury notes, wheat. 

Chicago Board Options Exchange: CBOE Mini-NDX Index, CBOE Mini-
NDX long-dated options, Dow Jones Equity REIT Index, Dow Jones Industrial 
Average, Dow Jones Internet Commerce Index, Dow Jones 10 Index, Dow Jones 
Transportation Average, Dow Jones Utility Average, Gold Index, GSTI Composite 
Index, GSTI Hardware Index, GSTI Internet Index, GSTI Multimedia Networking 
Index, GSTI Semiconductor Index, GSTI Software Index, GSTI Services Index, 
GSTI Composite Index, Interest rate, Internet Index, LEAPS, Mexico Index, Nasdaq 
100 Index, NYSE Composite Index, Oil Index, Russell 2000 Index, S&P 
Banks Index, S&P Chemical Index, S&P 500 Index, S&P Health Care Index, S&P 
Insurance Index, S&P 100 Index, S&P Retail Index, S&P Transportation Index, 
Technology Index. 

Chicago Mercantile Exchange: options on future contracts for Brady bonds, 
Brazilian Real, butter, Canadian dollar, cheddar cheese, dry whey, E-Mini-S&P 
500, EuroCanada, Eurodollar, Euroyen (TIBOR), feeder cattle, fresh pork bellies, 


CHAPTER 6: Speculating with Futures and Options 

frozen pork bellies, GSCI, lean hog, lean hog index, live cattle, lumber, Mexican 
IPC, Mexican peso, milk, midsize milk, mini milk, Nasdaq 100, Nikkei 225, Nonfat 
dry milk, Oriented strand board, pork cutout, quarterly bankruptcy index, Russell 
2000, Russian ruble, S&P 400 (midcap), S&P 500 products, South African 
rand, stocker cattle, weather. 

Kansas City Board of Trade: ISDEX, Value Line, wheat. 

MidAmerica Commodities Exchange: corn, gold, soybeans, soybean oil, U.S. 
Treasury bonds, wheat. 

Minneapolis Grain Exchange: black tiger shrimp, durum wheat, spring wheat, 
TC electricity, white shrimp, white wheat. 

New York Board of Trade: options on futures contracts for Australian dollar, 
British pound, Canadian dollar, cocoa, coffee, cotton, CRB/Bridge index, euro, 
FCOJ, Japanese yen, milk, New Zealand dollar, Norwegian krone, NYSE Composite, 
PSE Tech 100, Russell 1000, South African rand, sugar, Swedish krona, 
Swiss franc, U.S. dollar. 

New York Mercantile Exchange: aluminum, California Oregon border electricity, 
Cinergy electricity, copper, FTSE Eurotop 100, gasoline/crude oil crack, 
gold, heating/crude oil crack, Entergy electricity, heating oil, Henry Hub natural 
gas, light sweet crude oil, New York harbor unleaded gasoline, Palo Verde electricity, 
palladium, platinum, propane, PJM electricity, silver. 

Pacific Stock Exchange: options on equities. 

Philadelphia Stock Exchange: equity options; FLEX options; options on the foreign 
currencies of Australian dollars, British pounds, Canadian dollars, deutsche 
marks, French francs, Japanese yen, and Swiss francs; LEAPS; sectors index options 
for computer box maker sector; forest and paper products sector; gold/silver sector; 
KBW bank sector; national over-the-counter sector; oil service sector; OTC prime 
sector; semiconductor sector; TheStreet.com sector; utility sector. 

Using Your Computer to Trade Futures and Options 

The fast-moving world of futures and options almost necessitates the use of a 
computer and online services if you want to have a chance of profiting. Prices change 
so fast based on the latest news or market sentiment shifts, that you will likely be left 
behind if you trade based on yesterday』s newspaper reports. There are many computerized 
technical trading systems designed to spot trends in both the futures and 
options markets that will crunch data for you. However, it is ultimately up to you to 
decide which system is most understandable to you and has a good track record. To 
get your feet wet, you might want to subscribe to some of the newsletters or magazines 
listed in the 「Resources」 section of this chapter and also log on to their Web 
sites. Most brokers specializing in futures and options also offer helpful advice on 
their sites. If you have become more sophisticated, you might try some of the pri



PART ONE: Maximizing Your Investment Options 

vate trading-oriented Web sites listed in the 「Resources」 section of this chapter. 
There is also a wealth of information on trading strategies and current market trends 
on the Web sites of the Futures and Options Exchanges themselves, also listed at the 
end of this chapter. 

You can pursue many strategies in the options market, from the very conservative 
to the extremely aggressive. As in futures, the excitement of potential profits 
can lure you into taking more risk than you probably should. Therefore, study the 
options market carefully before you invest. For more information, consult the 
books and newsletters listed in the following 「Resources」 section. Exchanges that 
trade options also will send helpful explanatory brochures. 

Resources 

BOOKS 

All about Options from the Inside Out, by Thomas A. McCafferty and Russell R. 
Wasendorf (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; 
www.mcgraw-hill.com). Aimed at beginning investors who want to learn more about 
stock options and options on futures. Describes various high-return, low-risk strategies 
and how to hedge a stock portfolio against loss. 

All about Options: The Easy Way to Get Started, by Thomas A. McCafferty (McGraw-
Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). In-
depth coverage of the basics of options and options trading; suitable for beginners and 
traders. 

The Beginners Guide to Becoming a Complete Trader—Trading Stock Options, by 
Bill Brock, Suzanne Robke-Brock, and William D. Brock, Sr. (CompleteTrader.com, 
Inc.; 800-775-2299; www.completetrader.com). Teaches the beginning investor the basics 
of trading stock options. 

The Business One Irwin Guide to the Futures Markets, by Stanley Kroll and 
Michael J. Paulenoff (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-6343961; 
www.mcgraw-hill.com). Combination of basic information and sophisticated 
strategies needed to succeed in a leverage financial environment. This guide shows investors 
how to deal successfully in the futures markets. 

Buying and Selling Volatility, by Kevin B. Connolly (John Wiley & Sons, 1 Wiley 
Dr., Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). Explains 
the connection between volatility and options. Contains risk management software 
(CD-ROM). 


CHAPTER 6: Speculating with Futures and Options 

A Complete Guide to the Futures Markets: Fundamental Analysis, Technical 
Analysis, Trading, Spreads, and Options, by Jack Schwager (John Wiley & Sons, 1 
Wiley Dr., Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). A 
guide for sophisticated investors in the futures markets. 

The Complete Option Player, by Kenneth R. Trester (BookWorld Press, 1933 
Whitfield Park Loop, Sarasota, FL 34243; 941-758-8094; 800-444-2524; www. 
bookworld.com). Explains trading methods and things to avoid in options. 

Complex Derivatives: Understanding and Managing the Risks of Exotic Options, 
Complex Swaps, Warrants, and Other Synthetic Derivatives, by Erik Banks (Probus 
Publishing Co.). Provides the tools to measure the risks and benefits of these high-tech 
products. 

The Conservative Investor』s Guide to Trading Options, by Leroy Gross and Larry 
McMillan (John Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875; 212-850-6000; 800225-
5945; www.wiley.com). Explores various options strategies most frequently used 
with individual stocks, looks at risk factors, and offers a perspective on how to use options 
as a hedging tool. 

Day Trade Futures Online, by Larry Williams (John Wiley & Sons, 1 Wiley Dr., 
Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). Provides a 
practical overview of online futures trading. Offers guidance on how to use the Internet 
to mine and exploit key news sources and price information. 

The Day Trader』s Manual: Theory Art and Science of Profitable Short-Term Investing, 
by William F. Eng (John Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875; 212850-
6000; 800-225-5945; www.wiley.com). The most comprehensive book on 
techniques used to time entry and exit points on various markets. Contains a good section 
on options spreading. 

Derivatives and Equity Portfolio Management, by Bruce M. Collins and Frank J. 
Fabozzi (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www. 
mcgraw-hill.com). An overview of listed and OTC equity derivatives with the basics, 
applications, and actual examples. 

The Electronic Trading of Options: Maximizing Online Profits, by Howard Abell 
(Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-2452665; 
www.dearborntrade.com). Offers a close look at the current and soon-to-bereleased 
trading platforms, systems, and software. Includes discussions of online 
trading and its impact on the options industry and explanations of electronic day 
trading of options. 

The Futures Game: Who Wins, Who Loses, and Why, by Frank J. Jones, Ben Warwick, 
and Richard Jack Teweles (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 


PART ONE: Maximizing Your Investment Options 

800-634-3961; www.mcgraw-hill.com). Walks the reader through the universe of futures 
trading possibilities and opportunities, starting with an in-depth discussion of 
market basics that includes the nature of the contract, the organized markets for those 
contracts, and the relationship between cash and futures prices. 

Getting Started in Futures, by Todd Lofton (John Wiley & Sons, 1 Wiley Dr., 
Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). Explains in 
plain simple terms how margins are set, how an order is handled in the trading pit, the 
steps required to hedge a cash commodity, and how to use the futures markets for your 
own personal advantage. 

Getting Started in Options, 3rd Edition, by Michael Thomsett (John Wiley & 
Sons, 1 Wiley Dr., Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley. 
com). Introduces the complex world of options. 

The Handbook of Equity Derivatives, by Jack Clark Francis, William W. Toy, and 

J. Gregg (John Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875; 212-850-6000; 800225-
5945; www.wiley.com). Clearly written essays on the multiple and intelligent 
methods of using derivatives in varying investment environments. 
How the Options Markets Work, by Joseph A. Walker (Prentice Hall Press, One 
Lake St., Upper Saddle River, NJ 07458; 201-236-7156; 800-382-3419; www. 
prenticehall.com). Introductory book with plenty of examples. Many different options 
trading techniques are discussed, including the issue of risk. 

How to Make Money with Stock Options: A Basic Guide for the Conservative Investor, 
by Mervyn L. Hecht (Vantage Press, 516 W. 34th St., New York, NY 10001; 
212-736-1767; www.vantagepress.com). A simplified, step-by-step explanation of 
stock option strategies appropriate for use by an investor interested in the protection of 
assets and in increased income. 

Inside the Financial Futures Market, by Mark J. Powers (John Wiley & Sons, 1 
Wiley Dr., Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). Explains 
how the financial futures markets work and how you can profit by investing in 
them. Designed for sophisticated investors. 

LEAPS (Long-Term Equity Anticipation Securities): What They Are and How to 
Use Them for Profit and Protection, by Harrison Roth (McGraw-Hill, P.O. Box 543, 
Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Explains LEAPS, or 
long-term options, which mature in a few years and differ from short-term options, 
which mature in a few months. Discusses different strategies for each. 

Mastering Commodity Futures and Options: The Secrets of Successful Trading, by 
George Kleinman (Prentice Hall Press, One Lake St., Upper Saddle River, NJ 07458; 
201-236-7156; 800-382-3419; www.prenticehall.com). Detailed treatment of funda



CHAPTER 6: Speculating with Futures and Options 

mental analysis, technical analysis, and moving average systems. Lots of detailed information 
needed to trade in commodities. 

The New Options Market, by Max G. Ansbacher (John Wiley & Sons, 1 Wiley 
Dr., Somerset, NJ 08875-1272; 212-850-6000; 800-225-5945; www.wiley.com). The 
classic work explaining how to invest in the options market for profit. 

Options: A Personal Seminar, by Scott H. Fullman (Prentice Hall Press, One Lake 
St., Upper Saddle River, NJ 07458; 201-236-7156; 800-382-3419; www.prenticehall. 
com). Detailed descriptions of options strategies and concepts from the simple to the 
complex. 

Options: Essential Concepts and Trading Strategies, by The Options Institute 
(McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgrawhill.
com). Fundamentals of options pricing theory and its relationship to market prediction, 
stock selection, and risk management. Volatility is explained; covers options 
industry history, including LEAPS and index options. 

Options for the Stock Investor: How Any Investor Can Use Options to Enhance 
and Protect Their Return, by James B. Bittman (McGraw-Hill, P.O. Box 543, Black-
lick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Thoroughly explains how to 
use stock options safely and effectively. Explains how to integrate options into a long-
term investment program. 

The Options Manual, by Gary G. Gastineau (McGraw-Hill, P.O. Box 543, Black-
lick, OH 43004; 800-634-3961; www. mcgraw-hill.com). A comprehensive guide explaining 
the ins and outs of the complex options market. 

Options on Futures: A Hands-On Workbook of Real World Trading Simulations 
and Money-Making Strategies, by Ronald J. Frost (McGraw-Hill, P.O. Box 543, 
Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Covers getting started, 
factors affecting price, and major strategies. Includes market simulations that demonstrate 
the interactions of risk, reward, and breakeven points. 

The Options Workbook: Proven Strategies from a Market Wizard, by Anthony J. 
Saliba (Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800245-
2665; www.dearborntrade.com). Explains the basics of options trading and offers 
specific trading tactics and hands-on tools within the book and online. 

Starting Out in Futures Trading, by Mark J. Powers (McGraw-Hill, P.O. Box 543, 
Blacklick, OH 43004; 800-634-3961; www. mcgraw-hill.com). Primer to the futures 
market for beginning investors. Explains how orders are sent to the trading floor and 
how to develop a trading plan by limiting your risks. Provides trading exercises you 
can try before you start trading. 


PART ONE: Maximizing Your Investment Options 

Stock Index Futures and Options: The Ins and Outs of Trading Any Index, Anywhere, 
by Susan Abbott Gidel (John Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875; 
212-850-6000; 800-225-5945; www.wiley.com). Comprehensive overview of everything 
investors need to know about the different types of stock indexes and how they 
are traded. Included are complete details on using stock index futures and options, including 
pricing, technical analysis, market indicators, circuit breakers, etc. 

Strategies for the Electronic Futures Trader, by Jacob Bernstein (McGraw-Hill, 

P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Introduces 
a wide range of trading strategies designed especially for electronically trading 
the futures markets. 
Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading 
Methods and Applications, by John J. Murphy (Prentice Hall Press, One Lake St., 
Upper Saddle River, NJ 07458; 201-236-7156; 800-382-3419; www.prenticehall. 
com). Starts with a history of the futures markets and leads into charting, patterns, 
trendlines, and other technical indicators. Clear and easy to read, this book gives advice 
on how to manage options investments. 

The Technical Analysis of Stocks, Options, and Futures, by William F. Eng 
(McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgrawhill.
com). Explains the technical analysis techniques thoroughly. Includes sections on 
how and why the indicator should be used. 

Trade Options Online, by George A. Fontanills (John Wiley & Sons, 1 Wiley Dr., 
Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). Introduces options 
basic online strategies. Rates and ranks brokers and includes a great deal of information 
about trading online. 

Trading in Options on Futures, by James T. Colburn (Prentice Hall Press, One 
Lake St., Upper Saddle River, NJ 07458; 201-236-7156; 800-382-3419; www. 
prenticehall.com). Sophisticated strategies for using the options on futures markets. 

Trading Rules: Strategies for Success, by William F. Eng (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Presents 50 proven principles for traders. 

Winning in the Futures Markets, by George Angell (McGraw-Hill, P.O. Box 543, 
Blacklick, OH 43004; 800-634-3961; www. mcgraw-hill.com). Provides in-depth coverage 
of the market mechanics of futures. Also explains how to set up a trading plan and 
what strategies you can use to profit from futures. 

Winning in the Futures Markets: A Money-Making Guide to Trading, Hedging, and 
Speculating, by George Angell (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 
800-634-3961; www.mcgraw-hill.com). Explores all aspects of the futures markets 


CHAPTER 6: Speculating with Futures and Options 

and teaches the investor how to build a trading plan, charting techniques, contrary 
opinion trading, hedging, and Gann methods. 

MAGAZINES AND NEWSLETTERS 

Pro Farmer (Pro Farmer, 6612 Chancellor Dr., Suite 300, Cedar Falls, IA 50613; 
800-772-0023; 800-635-3936) 

Commodity Futures Forecast (Commodex, Mall at the Galaxy, 7000 Boulevard 
East, Guttenberg, NY 07093; 201-868-2600; www.commodex.com) 

Commodity Traders Consumer Report (P.O. Box 7603, New York, NY 101507603; 
212-822-8868; 800-832-6065; www.ctcr@investors.net) 

CRB Futures Perspective (30 S. Wacker Dr., Suite 1810, Chicago, IL 60606; 
800-621-5271; www.crbindex.com) 

Futures Charts (Commodity Trend Service, P.O. Box 32309, Palm Beach Gardens, 
FL 33420; 407-694-0960; 800-331-1069; www.tradeworld2000.com) 

The Futures Industry (Futures Industry Association, 2001 Pennsylvania Ave., N.W., 
Suite 600, Washington, DC 20006; 202-466-5460; www.fiafii.org) 

Futures Magazine (Financial Communications Company, 250 S. Wacker Dr., 
Suite 1150, Chicago, IL 60606; 312-977-0999; 800-635-3936; www.futuresmag. 
com). A comprehensive look at the futures industry, including market news and articles 
from past issues, available on the Web site. 

Gann Angles (495 Trinity Ave., Suite A, Seaside, CA 93955; 831-899-9112; 
www.gannangles.com) 

Managed Account Reports (220 5th Ave., 19th Floor, New York, NY 10001; 
212-213-6202; 800-638-2525; www.marhedge.com) 

Technical Analysis of Stocks and Commodities Magazine (4757 California Ave., 
S.W., Seattle, WA 98116; 206-938-0570; 800-832-4642; www.traders.com) 

Tomorrow』s Commodities, Tomorrow』s Options, Tomorrow』s Stocks (Techno-
Fundamental Investments, P.O. Box 14111, Scottsdale, AZ 85267-1411; 602-996-2908) 

WEB SITES 

Commodity Traders Advice. This site provides investment research and information. 
The service gives you access to end-of-day updated quotes and charts on all futures and 
options commodities traded on U.S. markets, futures market analysis, and specific daily 
trading recommendation 「buy,」 「sell,」 or 「stay away.」  


PART ONE: Maximizing Your Investment Options 

EzTrade. A sophisticated EZAnalyser program looks at all the activity in the futures, 
index options, and stock markets to propose trades with the best chances for success and 
the lowest risk. The site also keeps prices of futures and options positions up-to-date and 
produces illustrative graphs showing price trends. Beginners will find several tutorials to 
help them learn the ropes of options and futures trading.  

Futures Guide. This site offers futures charts, market updates, futures and options 
quotes, financial news, commodity charts, and a commodity trading calendar. Includes 
an options glossary. Membership is required.  

Futures.net. Offers futures and options news and opinion, a trading calendar, a 
trading contest, with links to market snapshots, and quotes and data. Membership required, 
which is free.  

Grants Pass Futures and Options. Offers futures and options news, an introduction 
to options, a free starter kit, a margin sheet, and a trading calendar. Included are futures 
and options tables for any commodity, many currencies, indexes, and bonds. 
 

INO Global Markets. One of the most complete Web sites around, INO gives you 
price updates, charts and graphs, news summaries affecting all markets, and links to 
most industry associations and exchanges. There are several online newsletters, loaded 
with advice on specific trades and trading techniques.  

Monthly Profits. A site covering options call-writing strategies. It gives you a manual 
describing how the system works and recommends specific trades.  

Optionetics. For free registration, this site offers options analysis, options, stock, 
and mutual fund data. Included are options articles, education about options, and a 
setup portfolio with tracking.  

Optionfind.com. Offers end of day options trading data. Search engine allows you 
to screen for stock options (calls or puts) or covered call option plays. Has a tutorial to 
learn about option hedging and a discussion forum. Free membership required. 
 

SchaeffersResearch.com. Options quotes, charts, calendar, and calculator are 
available on this site. Also offers most active options, market data, and a 「sentiment 
snapshot.」 Registration is required; however, all of these services are free.  

TradeWorld2000. This is a subscription site that specializes in futures and options 
trading techniques. You can set up a futures and options portfolio on this site and track 
it.  


CHAPTER 6: Speculating with Futures and Options 

Webtrading Commodity Futures Club. Full of trading information and articles on 
commodity trading, equity markets, options, and stock market trading. The site operates 
open member forums and, if you give permission, may use your forum input for 
later publication.  

XYZ for Commodities. An artificial intelligence Web site aiming to catch potentially 
profitable trends in many futures and options markets.  

TRADE ASSOCIATIONS 

Futures Industry Association (2001 Pennsylvania Ave., N.W., Suite 600, Washington, 
DC 20006; 202-223-1528; www.fiafii.org). Represents brokers in the futures and 
options business and lobbies on issues affecting the futures and options industry. Also 
educates the public about investing in futures and options. 

Managed Futures Association of Trading Advisors (2025 『M』 St., Suite 800, Washington, 
DC 20036; 202-367-0140; 202-828-6040; www.mfainfo.org). Represents 
commodity futures trading advisors in lobbying before government agencies. 

National Futures Association (200 W. Madison St., Suite 1600, Chicago, IL 60606; 
312-781-1410; 800-621-3570; www.nfa.futures.org). Represents firms dealing in futures 
trading. Will resolve any dispute with a member firm. Offers the following free 
publications: 「NFA Arbitration: Resolving Customer Disputes」; 「Buying Options on 
Futures Contracts: A Guide to Their Uses and Risks」; 「Glossary of Futures Terms」; 
「Investment Swindles: How They Work and How to Avoid Them」; 「Investor Protection 
Through Market Integrity」; 「Investor』s Bill of Rights」; 「Swindlers Are Calling」; 
「A Guide to Understanding Opportunities and Risks in Futures Trading.」 

The Options Industry Council (440 S. LaSalle St., Suite 2400, Chicago, IL 60605; 
800-566-9642; 888-OPTIONS; www.optionscentral.com). The Options Industry 
Council provides educational material about trading in the options market. They offer 
several free publications, including 「Characteristics and Risks of Standardized Options,」 
「Understanding Stock Options,」 「Directory of Exchange Listed Options,」 
「Taxes and Investing,」 and 「Blueprint.」 Their Web site offers price quotes, answers to 
frequently asked questions about options, and a list of educational resources such as 
books and software. There is also a Strategy of the Month, which describes how a particular 
options strategy works. 

FEDERAL GOVERNMENT REGULATORS 

Commodity Futures Trading Commission (1155 21st St., N.W., Washington, DC 
20581; 202-418-5000; www.cftc.gov). The federal regulator of all futures and options 
markets in the United States. Investigates charges of fraud against dealers and approves 
all new contracts before they begin trading. Answers questions about the 
futures and options markets and takes complaints against futures brokers. Offers the 


PART ONE: Maximizing Your Investment Options 

following free brochures: 「Before Trading, Get the Facts」; 「The CFTC」; 「Economic 
Purposes of Futures Trading」; 「CFTC Glossary.」 The CFTC also offers a Web site 
with online editions of CFTC literature, statistical data, details of enforcement actions 
against futures brokers, and information on how to file claims against brokers. 

FUTURES AND OPTIONS EXCHANGES 

American Stock Exchange (AMEX, 86 Trinity Pl., New York, NY 10006; 212306-
1000; www.amex.com) 

Chicago Board of Trade (CBOT, 141 W. Jackson Blvd., Chicago, IL 60604; 312435-
3500; www.cbot.com) 

Chicago Board Options Exchange (CBOE, 400 S. LaSalle St. at Van Buren, 
Chicago, IL 60605; 312-786-5600; www.cboe.com) 

Chicago Mercantile Exchange (CME), Index and Options Market (IOM), and International 
Monetary Market (IMM) (30 S. Wacker Dr., Chicago, IL 60606; 312-9301000; 
www.cme.com) 

Chicago Rice and Cotton Exchange (CRCE, 141 W. Jackson Blvd., Chicago, IL 
60604; 312-341-3078; www.cbot.com) 

Chicago Stock Exchange (CHX, 440 S. LaSalle St., Chicago, IL 60605-1070; 
312-663-2222; www.chicagostockex.com) 

Coffee, Sugar, and Cocoa Exchange (CSCE, Four World Trade Center, New York, 
NY 10048; 212-742-6000; www.ino.com/gen/csce.html) 

Commodity Exchange (COMEX, Four World Trade Center, New York, NY 
10048; 212-390-1420) 

Kansas City Board of Trade (KCBT, 4800 Main St., Suite 303, Kansas City, MO 
64112; 816-753-7500; 800-821-5228; www.kcbt.com) 

MidAmerica Commodity Exchange (MIDAM, 141 W. Jackson Blvd., Chicago, IL 
60604; 312-341-3000; www.cbot.com) 

Minneapolis Grain Exchange (MGE, 400 S. 4th St., Suite 130, Minneapolis, MN 
55415; 612-321-7101; 800-827-4746; www.mgex.com) 

New York Board of Trade, (NYBOT, 4 World Trade Center, New York, NY 10048; 
212-742-6000; www.nybot.com) 


CHAPTER 6: Speculating with Futures and Options 

New York Futures Exchange (NYFE, Four World Trade Center, New York, NY 
10048; 800-THE-NYFE; www.nybot.com) 

New York Mercantile Exchange (NYMEX, One North End Ave., World Financial 
Center, New York, NY 10282-1101; 212-299-2000; www.nymex.com) 

New York Stock Exchange (NYSE, 11 Wall St., New York, NY 10005; 212-6563000; 
www.nyse.com) 

Pacific Stock Exchange (PSE, 301 Pine St., San Francisco, CA 94104; 415-3934000; 
www.pacificex.com) 

Philadelphia Stock Exchange (PSE) and Philadelphia Board of Trade (PBOT) 
(1900 Market St., Philadelphia, PA 19103; 215-496-5460; 800-THE-PHLX; www. 
phlx.com) 


CHAPTER 7 
Investing in Gold 
and Collectibles 


Since 3000 B.C., gold has been recognized as the ultimate medium of exchange. 
Because gold is rare, in continuous demand, and portable, it is considered 
the supreme store of value. In contrast, paper money, printed by governments, can 
be eroded by inflation or the collapse of those governments. Gold is an asset in its 
own right; it does not require a government, a corporation, or any other entity to 
validate it. For example, when Vietnam was falling to the Communists in 1975, 
Vietnamese refugees weren』t interested in escaping with South Vietnamese currency; 
it would be worthless. They fled with gold coins and bars, which they knew 
would have value wherever they ended up. 

Is there a place for gold in your investment portfolio? The answer depends on 
your outlook for inflation and the total mix of your portfolio. 

Gold and Other Precious Metals 

Gold is an investment that prospers when the economy suffers. The last great 
increase in gold prices occurred during the late 1970s, when interest rates and 
inflation soared into double digits, tension between the United States and the Soviet 
Union mounted over the Soviet invasion of Afghanistan, Iran held Americans 
hostage, and Arab oil embargoes caused oil prices to skyrocket. Gold had been 
fixed at $35 an ounce in 1934, and it was declared illegal for individuals to own 
gold bullion. These restrictions were removed in late 1974, after which gold eventually 
shot up in price to a peak of $875 per ounce in January 1980. However, as 
inflation and interest rates plunged to low single digits, the Soviet Union disintegrated, 
oil prices fell to stable levels, and the economy rebounded in the 1990s 
and 2000s, an ounce of gold dropped back to the $250 to $400 range. 


CHAPTER 7: Investing in Gold and Collectibles 

Traditionally, gold has been seen as a hedge not only against high inflation but 
also against high international tension. This was certainly true during the 1970s, 
when gold shot up dramatically in a day based on the latest rumors of war in the Middle 
East or in some other part of the world. But over the past few years, gold seems 
to have lost its appeal even during times of turmoil. Despite such dramatic events in 
the 1990s and 2000s as the collapse of Communism and the related outbreaks of ethnic 
tension throughout the former Soviet empire; the Persian Gulf War; the war in 
Bosnia, Kosovo, and other parts of Yugoslavia; Middle East tensions; the meltdown 
on many Asian economics and currencies; and the introduction and subsequent 
weakness of the Euro currency, gold fell from about $400 an ounce to below $300. 
This was because inflation remained well under control, and investors did not feel the 
need to hedge themselves against rising prices as they had in the late 1970s. 

Though it seems unlikely that a repeat of the 1970s inflation and gold price surge 
will occur, gold may still have a role to play in your investment portfolio. Studies 
show that over the long term, portfolios containing gold are more stable and have 
higher returns than gold-free portfolios, because gold tends to move in the opposite 
direction of paper assets, such as stocks and bonds. This counterweight effect— 
again, over the long term—provides protection against unforeseen events, even 
though in the short term gold holdings may severely underperform stocks and bonds. 

All this holds true for other precious metals as well, though to a lesser degree. 
Silver and platinum are also used by investors as inflation hedges, but they are not 
seen as the ultimate store of value, as is gold. Gold is used in the jewelry, dentistry, 
and electronics industries; however, its price is determined mainly by the supply 
from gold mines and by investment demand, not as much by industrial factors. The 
other precious metals have wider industrial uses—silver in photography, electrical, 
and electronics, jewelry and silverware; diamonds in jewelry, and as cutting tools; 
and platinum and palladium in jewelry and catalytic converters for automobiles. 
These metals tend to fluctuate in price based more on industrial supply and demand 
than on investment demand (see Figure 7.1). 

Investing in precious metals is, by its nature, risky. Most forms of metals 
investing do not provide income, so you depend totally on an increase in the metal』s 
price in order to profit. While profits can be enormous at certain times in the economic 
cycle, metals prices may remain depressed for several years in a row and yield 
little or no return. Because metals investing is so risky, it should be placed in the 
high-risk apex of the investment pyramid described in Chapter 1. Most investment 
advisors recommend that you invest between 5 percent and 10 percent of your portfolio 
in one form of gold, silver, or platinum to serve as a long-term hedge. 

Investors looking to hedge their portfolios with gold and other precious metals 
have five principal ways of participating in the markets: coins and bars; certificates; 
shares in precious-metals-mining companies; mutual funds that buy precious-
metals-mining stocks; and futures and options on gold, silver, and platinum. 


PART ONE: Maximizing Your Investment Options 

Figure 7.1 Platinum Typically Trades at a Premium to Gold 


Source: Reprinted by permission of Platinum Guild International (USA) Inc. (Nearby Nymex Contract; Avg. Monthly Close— 
3rd Quarter, 2000) 

Coins and Bars 

The most convenient and direct way to invest in the precious-metals markets 
is to buy coins and bars that have been minted specifically for investors. Coins fall 
into two categories: bullion and numismatic. Bars are always bullion. Bullion coins 
and bars are pure or near-pure gold, silver, or platinum and therefore trade almost 
solely on their metal content. Numismatic coins are minted in limited quantities, 
sometimes for a specific event, like the Olympics or the coronation of a king. They 
trade on supply and demand for the specific coin and on the artistic traits and 
condition of the coin. 

THE CASE FOR BULLION 

For investment purposes, you should stick with bullion coins and bars. They 
trade for a small markup of from 1 percent to 15 percent more than the price of the 
underlying metal. Gold coins and bars come in many sizes, from a one-gram bar or 
a 1.25-ounce coin to a one-ounce coin (a one-kilo coin by the Australian mint is the exception) 
to a 400-ounce bar. Don』t expect to find one of these large bars, which 
would be worth $120,000 if gold were $300 an ounce, in your local coin dealer』s 
front window, however. They are normally used by central banks and governments to 


CHAPTER 7: Investing in Gold and Collectibles 

settle debts. If you』re interested, you can see several hundred of them in the vault at 
the Federal Reserve in New York City or at Fort Knox, Kentucky. 

The best size coin to purchase is the one-ounce variety because it is easiest to 
buy and sell. Many countries produce one-ounce gold coins, but the most popular 
(in alphabetical order by country) are the Australian Nugget, the Austrian Phil-
harmonica, the British Britannia, the Canadian Maple Leaf, the Mexican Peso, the 
South African Kruggerand, and the U.S. Gold Eagle. As part of the now lifted 
apartheid-related ban on South African products, no new Kruggerands were imported 
into the United States for years, though an active secondary market in 
Kruggerands still exists worldwide. 

Among one-ounce silver coins, the most popular are the Australian Kookaburra, 
the Canadian Silver Maple Leaf, and the U.S. Silver Eagle. Silver can also 
be purchased in bags of coins worth about $1,000 per bag and bars of many sizes 
ranging from 1 ounce to 1,000 ounces. Silver usually sells for far less per ounce 
than gold and might therefore be more affordable for starting bullion investors. 

Platinum coins usually sell for more than either gold or silver because platinum 
is rarer. The most popular one-ounce platinum coin is the United States Platinum 
Eagle. Other choices include the Australian Koala Bear, the Canadian 
Platinum Maple Leaf, and the Isle of Man Noble. So few palladium coins circulate 
that they are not worth buying for investment purposes. 

When buying bullion coins, you should shop around among coin dealers, 
banks, and brokerage houses because they all charge slightly different markups or 
sales charges. Because many fly-by-night coin dealers charge excessive markups, 
it is best to associate with a dealer who is a member of the Professional Numismatists 
Guild (3950 Concordia Ln., Fallbrook, CA 92028; 760-728-1300; www. 
pngdealers.com), which holds its members to high ethical standards. Be particularly 
wary of dealers who solicit you over the phone but have no office nearby. 
Many stories circulate about firms that set up shop, deliver high-pressure sales 
pitches promising huge instant profits, collect investors』 money, then disappear as 
quickly as they appeared. Another safe way to buy coins is through coin conventions 
or shows, where you haggle with other investors over prices. You can find out 
about such shows from the American Numismatic Association (818 N. Cascade 
Ave., Colorado Springs, CO 80903; 719-632-2646). 

If you build up a sizable collection of bullion coins, keep them in a secure 
place, preferably a safe-deposit box, even though this adds to your cost of owning 
the coins. You might also consider a rider on your home insurance policy to cover 
theft of your coins if you insist on keeping them at home. 

If you want to buy bars instead of coins, you can choose among more than 19 
sizes and weights, from the tiny one-gram to the one-ounce, five-ounce, ten-ounce, 
and kilo bar, which equals 32.15 troy ounces. Bars are usually engraved with the 
name of the company that created them. When you buy, look for the most recognized 
names: Englehard Metals, Johnson Matthey, and Credit Suisse. Bars are generally 


PART ONE: Maximizing Your Investment Options 

sealed in a plastic container to protect them from scratching and chipping. If your 
bars have been removed from their plastic, or they are marked with an unfamiliar 
company name, the dealer you want to sell them to may require that the bars be 
assayed, or weighed and inspected, to make sure they are acceptable. This process 
will cost you up to 1 percent of the bars』 price, which will cut into your return. 

THE INS AND OUTS OF NUMISMATICS 

While bullion coins and bars are priced solely on the value of the metal, 
numismatic coins are much trickier to price because they are subject to the 
condition of the coins, their scarcity, and their popularity. The price of a sought-
after numismatic coin will be much higher than its gold content—in some cases, 
double or more. 

To make money in numismatics, you must spend time studying the market. By 
consulting numismatic magazines and newsletters (listed at the end of this chapter), 
attending coin conventions and swap meets, and getting to know your local 
coin dealer, you will be able to determine which coin has appreciation potential 
and which is merely a flash in the pan. Don』t expect to get rich quickly with 
numismatics; those who do almost always lose money. 

Among gold coins, two of the most popular—and therefore easy-to-trade— 
coins are the U.S. $20 Liberty piece, issued from 1850 through 1907, and the 
follow-up coin, the $20 U.S. St. Gaudens, produced from 1907 through 1932. Also 
frequently traded are the $1, $21.2, $3, $5, and $10 U.S. gold pieces. The United 
States resumed minting one-ounce and smaller gold coins in 1986. 

Among silver numismatics, the U.S. Morgan dollar, issued from 1878 through 
1921, and the U.S. Peace dollar, dating from 1921 through 1935, are the most 
popular. 

The wide variation in prices for the same pieces results from competition in 
the marketplace and the grade of the coin. Knowing your coin』s grade will largely 
determine whether you receive a fair price for it. The market is flooded with 
counterfeit coins and coins being passed off as a higher grade than they really are. 
Even one grade can make a significant difference in the price of a coin. For example, 
an MS-63 $20 gold piece might sell for between $500 and $550, while an 
MS-64 might sell for more than $700. (Ratings are explained below.) As the coin 
size gets smaller, the spread between grades grows dramatically. For example, a 
small $5 Indian coin with an MS-63 grade might sell for $2,800, while an MS-64 
might fetch $5,500. 

The only sure way to protect yourself when buying a coin is to buy one that 
is already certified to be a particular grade or to get the coin certified before you 
buy it. Three professional services grade coins: Professional Coin Grading Service 
(PCGS), Numismatic Guaranty Corporation of America (NGC), and American 
Numismatic Association Certification Service (ANACS). (The addresses and 
phone numbers of all three are listed in the 「Resources」 section of this chapter.) 


CHAPTER 7: Investing in Gold and Collectibles 

These services will certify any coin you send them for $11 plus postage. They will 
ascertain its correct grade and mail it back to you in a hard plastic holder known 
as a slab. The services will guarantee the authenticity of the coin』s grade as long as 
the slab remains unopened. (Opening the slab trips its security device, automatically 
voiding the guarantee.) Having your coin professionally graded is inexpensive 
insurance for an expensive item, and the slab will protect the coin from 
mishandling and atmospheric conditions, which could slash your coin』s value. 

The following is a brief rundown, supplied by the American Numismatic Association, 
of the different quality grades assigned to coins, from the top grade to 
the bottom.* 

Proof. A specially made coin distinguished by sharpness of detail and usually 
with a brilliant mirrorlike surface. 「Proof」 refers to the method of manufacture 
and not to a condition, but normally the term implies perfect mint state unless 
otherwise noted and graded. 

Mint state (MS). A term used interchangeably with 「uncirculated (Unc.)」 to 
describe coins showing no trace of wear. Such coins may vary to some degree 
because of blemishes, toning, or slight imperfections, as described in the following 
subdivisions. 

Perfect uncirculated (MS-70). Perfect new condition, showing no trace of 
wear; the finest quality possible, with no evidence of scratches, handling, or contact 
with other coins. Very few regular issue coins achieve this grade. 

Gem uncirculated (MS-65). An above-average uncirculated coin that may 
be brilliant or lightly toned and that has very few contact marks on the surface or 
rim. MS-69 thru MS-61 indicates a slightly higher or lower grade of preservation, 
respectively. 

Uncirculated (MS-60). No trace of wear but may show a number of contact 
marks. Surface may be spotted or lack some luster. 

Choice about uncirculated (AU-55). Barest evidence of light wear on only 
the highest points of the design. Most of the mint luster remains. 

About uncirculated (AU-50). Traces of light wear on many of the high 
points of the design. At least half of the mint luster is still present. 

Choice extremely fine (EF-45). Light overall wear on the highest points of 
the design. All design details are very sharp. Some of the mint luster is evident. 

Extremely fine (EF-40). Design lightly worn throughout but all features 
sharp and well defined. Traces of luster may show. 

Choice very fine (VF-30). Light, even wear on the surface and highest part of 
the design. All lettering and major features are sharp. 

Very fine (VF-20). Moderate wear on the high points of the design. All major 
details are clear. 

*Source: Used with permission of the American Numismatic Association. 


PART ONE: Maximizing Your Investment Options 

Fine (F-12). Moderate, considerable, even wear. The entire design is bold, 
with an overall pleasing appearance. 

Very good (VG-8). Well worn with the main features clear and bold although 
rather flat. 

Good (G-4). Heavily worn, with the design visible but faint in areas. Many 
details are flat. 

About good (AG-3). Very heavily worn, with portions of the lettering, date, 
and legends worn smooth. The date may be barely readable. 

Clearly, the condition of a numismatic coin will have an enormous impact on 
the price at which you buy or sell it. Take good care of it and enjoy it—but don』t 
count on profiting from it. 

Certificates 

If you want to invest in precious metals for profit and don』t care about holding 
the metal itself, a certificate may be the best thing to buy. A gold, silver, platinum, 
or palladium certificate represents ownership of a particular amount of metal, 
which is stored in a bank vault. Certificates are sold in minimum lots of $1,000 
by banks, brokerage firms, and coin dealers at commissions ranging from 1 percent 
to 3 percent of the purchase price, depending on the size of the order. When you 
cash in your certificate, the bank or broker will usually charge a 1 percent sales 
commission. In addition, the bank holding the metal will charge an annual storage 
and insurance fee of up to another percentage point of the certificate』s value. But 
make sure that you deal only with reputable companies. 

Precious-Metals Stocks 

An even more volatile way to ride the ups and downs of the gold, silver, and 
platinum markets is to invest in publicly traded mining companies. Their stocks, 
like all stocks, rise and fall based on investors』 expectations of future profits. This 
means that investors』 projections of higher or lower gold and silver prices, or hopes 
that a new 「mother lode」 gold mine will be found, can cause sharp increases or 
decreases in a mining company』s stock price. Gold mining shares usually shoot up 
faster and fall more sharply than gold bullion prices. 

Two kinds of gold-mining shares exist: North American-Australian mine 
issues and South African mine issues. North American-Australian mines tend to 
pay lower dividends than South African mines and are influenced more by developments 
at the company. South African issues are frequently affected by 
political turmoil and labor strikes in South Africa, as well as by fluctuations in 
the value of the South African rand against the U.S. dollar. It might be possible, 
for instance, that strife in South Africa that threatens to shut down gold mines 


CHAPTER 7: Investing in Gold and Collectibles 

would cause the price of gold to soar because the markets fear a gold shortage, 
while South African gold-mining shares would plunge because of the mines』 lost 
production. 

North American-Australian mining shares, on the other hand, can rise in price 
even if the price of gold is stagnant or falling slightly. Improved technology often 
allows some companies to extract more gold from their mines, so the firms』 profits 
will rise because of increased output. You have plenty of solid, well-known North 
American mining companies to choose from, such as American Barrick Resources, 
Newmont Mining, and Homestake Mining, all traded on the New York Stock Exchange 
(NYSE). Don』t be tempted by small, penny-stock firms that hope to strike 
it rich someday. They are far too risky an investment for your hard-earned capital. 

If you want to invest in even riskier platinum and palladium, you can buy 
shares in two South African companies—Rustenberg Platinum and Impala Mines, 
both available in the form of American depositary receipts (ADRs). Remember, 
though, that these shares are subject to the volatility of the South African political 
situation. 

Precious-Metals Mutual Funds 

A safer way to invest in gold- and silver-mining stocks is to buy shares in one 
of the many open-ended mutual funds that specialize in precious metals. Because 
they invest in mining stocks, the funds tend to be more volatile than the price of 
bullion, but because they are diversified, the funds are safer than investing all your 
money in one stock. Like all mutual funds, precious-metals funds are run by a professional 
manager who dedicates all his or her time to analyzing mining stocks. 
Some funds specifically avoid South African gold-mining companies, while others 
mix South African, North American, and Australian shares. These mutual funds 
pay dividends, which can easily be reinvested in more shares. 

The following are the largest precious-metals mutual funds, with their toll-free 
numbers, supplied courtesy of the Morningstar Mutual Fund Data Service of 
Chicago: 

American Century Global Gold Fund; 800-345-2021 

AXP Precious Metals A Fund; 800-328-8300 

Evergreen Precious Metals A Fund; 800-343-2898 

Fidelity Select Gold Fund; 800-544-8888 

First Eagle SoGen Gold Fund; 800-451-3623 

Franklin Gold & Precious Metals A Fund; 800-342-5236 

Gabelli Gold Fund; 800-422-3554 

INVESCO Gold Fund; 800-525-8085 

Lexington Gold Fund; 800-526-0056 

Lexington Silver Fund; 800-526-0056 


PART ONE: Maximizing Your Investment Options 

Mercury Gold & Mining A Fund; 888-763-2260 

Midas Fund; 800-400-6432 

Monterey OCM Gold Fund; 800-251-1970 

Oppenheimer Gold & Special Minerals Fund; 800-525-7048 

Rydex Special Metals Fund; 800-820-0888 

Scudder Gold Fund; 800-225-2470 

Tocqueville Gold Fund; 800-697-3863 

U.S. Global Investors Gold Shares Fund; 800-873-8637 
U.S. Global Investors World Gold Fund; 800-873-8637 
USAA Gold Fund; 800-382-8722 
Van Eck International Investors Gold Fund; 800-826-1115 
Van Eck Natural Resources A Fund; 800-826-1115 
Vanguard Gold & Precious Metals Fund; 800-662-7447 
You have two options among closed-end funds for investing in gold and silver. 
One is called the Central Fund of Canada (P.O. Box 7319, Ancaster, Ontario, 
Canada L9G 3N6; 416-648-7878), and it trades on the American Stock Exchange 
(AMEX). The fund owns a large cache of gold and silver bullion, which it keeps 
in a bank vault. This fund therefore offers no risk of exploration or production of 
gold. It is as pure an investment in bullion as you can get without holding the metal 
in your hands. 

The other closed-end fund is ASA Limited (ASA LTD, P.O. Box 269, Florham 
Park, NJ 07932; 201-377-3535). This fund invests almost exclusively in shares of 
South African mining companies and is therefore subject to all the ups and downs 
of the South African market and the fluctuations of the South African rand against 
the U.S. dollar. 

Precious-Metals Futures and Options 

If all of the vehicles for investing in precious metals discussed so far are too 
tame for your taste, you might try a foray into the extremely speculative world of 
gold, silver, platinum, and palladium futures and options. (For a more detailed 
discussion of how futures and options work, see Chapter 6, 「Speculating with Futures 
and Options.」) 

Profits and losses are magnified when you use futures or options to speculate— 
and that is what you are doing—on short-term price swings in precious metals. 
With futures, you invest only a small amount, perhaps 5 percent to 10 percent, of 
what the futures contract is worth. This investment is known as the margin (a kind 
of good-faith deposit). You can bet that the price will rise, called a long position, or 
you can speculate that the price will fall, called a short position. If you guess 
correctly, you stand to make a great deal of money. If you guess incorrectly, your 
margin will be wiped out, and you will be subject to a margin call, meaning that 
you must put up more cash or lose the money you have invested so far. 


CHAPTER 7: Investing in Gold and Collectibles 

If that sounds like fun, you may like options on futures even more. With 
options, you not only bet on the direction of gold, silver, platinum, or palladium 
prices; you also speculate on what will happen to the price of the futures contract 
on each metal. It』s like doubling your bet at the blackjack table in Las Vegas. To 
win at options on futures, you must guess correctly what will happen to the crowd 
psychology in the metals markets. Because the futures markets are incredibly 
volatile in the first place, trying to predict how people will speculate on futures is 
an even more daunting challenge. You might see or hear pitches on television, on 
the radio, or in the mail for options claiming. 「All you can lose is your original 
investment.」 That』s true, and you should plan on doing just that. If you are lucky 
enough to guess correctly the direction of the underlying futures, you can make a 
quick fortune. But if you get the direction wrong, or even if you get the direction 
right and your timing is off, you can easily lose every cent you put into the option. 

One other way to speculate with options is to buy contracts on indexes of gold-
and silver-mining stocks. The Philadelphia Stock Exchange offers trading in a gold 
and silver index option based on the movement of seven gold- and silver-mining 
stocks. With an index option, you invest a certain amount of money, called a premium, 
which grows or shrinks in value as the index you are betting on rises or falls. 
If you don』t sell before your index option expires, you end up with either a profit 
or nothing at all. 

Trading in futures, options, and index options on precious metals ranks at the 
top of the high-risk apex of the investment pyramid discussed in Chapter 1. In fact, 
it might be outside the pyramid altogether! However, if you are determined to try 
futures and options on precious metals, the following list notes the exchanges on 
which various contracts are traded. Consult the list of futures and options exchange 
addresses and telephone numbers following Chapter 6 if you need to contact an 
exchange for further information about any of these contracts. 

GOLD 

Futures: Chicago Board of Trade (CBOT); 

Commodity Exchange (COMEX) in New York; 

MidAmerica Commodity Exchange (MIDAM) in Chicago 

Options on futures: Commodity Exchange (COMEX) in New York; 

MidAmerica Commodity Exchange (MIDAM) in Chicago 

Index options: gold/silver index of seven stocks on the Philadelphia Stock 

Exchange (PSE) 

SILVER 

Futures: Chicago Board of Trade (CBOT); 

Commodity Exchange (COMEX) in New York; 

MidAmerica Commodity Exchange (MIDAM) in Chicago 


PART ONE: Maximizing Your Investment Options 

Options on futures: Chicago Board of Trade (CBOT); 

Commodity Exchange (COMEX) in New York 

Index options: gold/silver index of seven stocks on the Philadelphia Stock 

Exchange (PSE) 

PLATINUM 

Futures: MidAmerica Commodity Exchange (MIDAM) in Chicago; 

New York Mercantile Exchange (NYMEX) 

Options on futures: New York Mercantile Exchange (NYMEX) 

PALLADIUM 

Futures: New York Mercantile Exchange (NYMEX) 

Antiques and Collectibles 

Stocks, bonds, cash instruments, mutual funds, futures, and options play an important 
role in your investment portfolio. However, while you might take personal 
satisfaction in how well your portfolio performs, you cannot bring home any of these 
traditional investments to impress friends and family and to look at whenever you 
choose. That』s the fun of antiques collectibles: You get to buy a physical object that 
you think is aesthetically pleasing and keep it around the house as long as you like. 
In addition to the pleasure you get from seeing and touching your collectibles, you 
may earn a profit—if you learn enough about the collectible to buy when prices are 
low and sell after they』re risen. Because they do not produce current income, the only 
way you can earn a return from antiques and collectibles is to buy and sell them. 

Buying collectibles primarily for investment purposes is treacherous. Many 
factors affect the prices of collectibles, and it is difficult, if not impossible, to predict 
which particular collectible will get hot. A trend that you think is making 
your collectible increasingly popular may, in fact, be petering out just as you learn 
enough about the collectible to start trading. To a great extent, overall interest in 
collectibles is related to inflation expectations. When inflation roars, as it did in the 
United States in the late 1970s, people flee 「paper」 investments like stocks and 
bonds in favor of 「hard」 assets like real estate, gold, and collectibles. Investors feel 
that hard assets will retain their value better than paper money when inflation 
erodes the worth of currency. In the extreme case of hyperinflation, whether it be 
in Argentina, in Russia, or anywhere else, the paper currency becomes nearly 
worthless, and everyone flocks to the security of physical assets, including antiques 
and collectibles, which can rise in value as fast as the currency depreciates. 

Since inflation in the United States peaked in the late 1970s and early 1980s, 
prices of many collectibles have slumped because inflation hedges are no longer 
as necessary. In the Carter and early Reagan years, fevered investment-oriented 


CHAPTER 7: Investing in Gold and Collectibles 

collectors pushed up the prices of everything from Chinese porcelains to comic 
books to astronomical heights. As inflation subsided throughout the 1980s and into 
the 1990s, the prices of almost all collectibles settled down to more reasonable 
levels, as most fast-buck artists left the game to people who enjoy collecting for its 
own sake. Unless inflation returns with a vengeance, the antiques and collectibles 
market will probably remain rational. 

Just because the collectibles market will not likely be hit with another speculative 
binge any time soon does not mean you cannot make money at this game, 
however. Following are key factors you should keep in mind to profit from buying 
and selling collectibles. 

Available supply. Determine the available supply of the collectible that holds 
your interest. Clearly, the fewer the existing stamps, paintings, baseball cards, or 
other collectibles, the more rarity value they have. Also, the more historical significance 
an item has, the higher its value. 

Most experienced collectors and dealers have a good idea of how many of each 
item were originally produced. In some cases, that is easy to determine. For instance, 
the U.S. mint knows how many of a particular issue of stamps it printed, 
and art dealers know how many pictures Van Gogh painted. 

In most cases, however, the supply of an item is unclear, and this tends to hurt 
the value of all existing collectibles in that field. For example, you might think you 
have a valuable set of Roman coins until an archeological dig in Tunisia uncovers 
several thousand coins just like yours. Or your set of George Washington autographs 
from his days at Valley Forge can suddenly plummet in value if hundreds 
of such papers turn up in someone』s attic near Philadelphia. 

Current demand. Get a sense of the current demand for the collectible. This 
is always tricky to ascertain because something in hot demand this year can fall 
from favor the next year. Still, you can get a sense of demand by watching prices 
at auctions, flea markets, and galleries and in catalogs and collector publications. 

It is important to determine not only how much demand exists for a collectible 
but, if possible, who the investors are. For example, when Japanese investors became 
infatuated with Impressionist paintings in the mid-1980s, prices soared beyond 
all reason for a few years. Once the Japanese economy started to contract, the 
prices of Impressionist paintings slid sharply because the Japanese demand for 
them evaporated. If you see demand for some collectible from investors who have 
not normally been interested in it, be careful. It』s fine to ride the wave of increased 
demand, but be sure to get out before the hot investors move on to the next trend. 

Condition. The condition of antiques and collectibles is crucial. In general, 
try to buy a collectible in the best condition possible, because it will invariably 
hold its value better than the same object in poorer shape. From an investment 
point of view, you will be better served by fewer objects of higher quality than by 
many objects of fair-to-low quality. 

Also, do what you can to protect your object from wear and from damages 
caused by carelessness, fire, or theft. For example, keep coins in protective plastic 


PART ONE: Maximizing Your Investment Options 

cases; put stamps in books that will keep them flat; polish brass objects; and don』t 
subject antique furniture to heavy use. 

Authenticity. Make sure the object you buy is authentic. The rise of collectible 
prices has, unfortunately, spawned an industry of unmarked reproductions and 
counterfeit artists who try to sell their fakes at the original』s price. Some collectibles, 
such as coins, use an official grading system to ensure that you know 
what you are buying. But most collectibles have no such system of authentication. 
If you deal with a reputable dealer or auction house, your chances of obtaining a 
reproduction or counterfeit are greatly reduced though not eliminated. You can also 
have an object appraised by a professional, who should be able to spot a phony 
before you buy it. 

Educating yourself. Spend time learning about the type of collectibles in 
which you are interested. Before you buy anything, get a sense of the marketplace 
by visiting a few auctions, antique shows, and flea markets. Subscribe to collector』s 
periodicals and buy a few books on the subject. You can probably locate collector』s 
clubs or trade shows in your home town. There may even be courses on 
collecting antiques or other collectibles at a local school. The more you know 
about the history of the object, the less chance that you have of paying too 
much—the beginner』s most common mistake. 

Appraisal. Use an appraiser if you need an expert opinion. Unless you have 
specialized in one aspect of collectibles for a long time, you should not expect to 
know the value or authenticity of an object you plan to buy or sell. Contact the Appraisers 
Association of America (AAA) or the International Society of Appraisers 
(ISA) for a referral of member appraisers near your home. Members of the AAA 
have completed a voluntary certification program and members of both associations 
pledge to abide by a strict code of ethics. All full members of the ISA have 
completed the CAPP program, which makes them Certified Appraisers of Personal 
Property in their chosen specialty area. 

Ask any potential appraiser for his or her qualifications, how long he or she 
has worked in the field, whether he or she will supply references, and whether he 
or she uses a network of specialists to appraise objects out of his or her area of 
expertise. You should obtain a written, signed appraisal report describing the 
property and specifying the reasons for the value the appraiser has assigned. This 
appraisal can be used not only for investment purposes but also to prove your 
cost basis to the IRS when you report a profit from the purchase or sale of a collectible. 
However, different purposes require different appraisals. Don』t assume 
that an appraisal done for investment purposes can also be used for IRS donation 
purposes. Appraisers normally charge an hourly rate or a present price, plus expenses. 
If an appraiser gives you an accurate idea of what your object is worth, 
his or her opinion can be well worth the expense. 

Prices. When buying or selling, be prepared to dicker over prices. Because no 
central exchange sets prices, each transaction results in a different price. You may 
buy or sell an object for one price while—at exactly the same time in a different 


CHAPTER 7: Investing in Gold and Collectibles 

place—someone else buys or sells the same object at another price. Your ability to 
discern value, acquired through your self-education process, should enable you to 
buy objects for prices less than you have seen elsewhere. To get a higher price 
when you sell, you must find buyers who are passionate about your object. When 
buying through a dealer, expect to pay a little more than if you were to buy at a 
flea market because the dealer must cover his or her overhead. For the same reason, 
expect to receive a bit less if you sell to a dealer. 

Illiquid markets. Some collectibles markets are very illiquid, which means 
that it can take a long time to find a buyer or seller. For example, if you want to buy 
one of the 50 copies of a particular Chagall print, you might have to wait a while before 
an owner decides to sell. On the other hand, if you own a rare teddy bear or Batman 
comic book, it might be difficult to find a buyer interested in what you』ve got at 
a price you think is fair. It』s much easier to get an appraiser to give you an estimate 
of an object』s worth than it is to find a buyer who agrees with that appraisal. You can 
try to locate buyers through collector』s clubs, specialized journals, and advertisements 
in mass-market antiques and collectibles newspapers. 

The easiest way to buy or sell collectibles is through a widely advertised 
auction. General merchandise auctions are held frequently. However, specialty 
auctions usually are held by category, so you must wait for your category of 
collectibles to come up, which may be once or twice a year. An auction』s wide 
exposure comes at a price. Sellers must pay an auctioneer』s commission of as 
much as 25 percent of the object』s selling price. The seller』s commission is almost 
always negotiable, especially for big-ticket items. Always ask for the lowest sales 
commission. Some auction houses will also tack on a 10 percent commission that 
buyers must pay. 

When you purchase through a dealer, you must pay retail prices. When you 
sell to a dealer, you must accept wholesale prices, which are usually 50 to 60 cents 
on the dollar. Therefore, the object must appreciate significantly just to cover the 
spread between wholesale and retail prices, which can be as much as 100 percent 
of the collectible』s worth. The illiquidity of most collectibles as investments can 
be a drawback if you ever need to get at your money quickly. 

Reporting gain. If you sell collectibles at a profit, you must report the gain 
to the IRS on your tax return and pay capital gains taxes on the profit. You should 
always hold onto documents showing the price you paid for an item so you can 
verify your gain when you sell it. 

If you can prove that you invest in collectibles as a profession, many of your 
expenses for buying and selling objects would be tax deductible. Such expenses 
might include appraisal fees, insurance premiums, travel expenses to auctions or 
trades shows, and subscriptions to journals. You can deduct these expenses only to 
offset your gross profit and not against other sources of income. Be cautious, 
however, because collectibles deductions are vulnerable to IRS audit. If the IRS 
determines that you engage in a hobby instead of a bona fide business, it will deny 
your deductions and impose severe tax penalties. 


PART ONE: Maximizing Your Investment Options 

With these general principles in mind, you may want to investigate specific 
types of collectibles. The best book on the subject of collectibles—providing lists 
of periodicals, auction houses, and other resources—is Maloney』s Antiques & 
Collectibles Resource Directory. Following this chapter is an extensive list of 
resources for many kinds of collectibles, as well as the addresses and phone numbers 
of all publications mentioned in the proceeding paragraphs. You will also find 
a list of auction houses. 

Antiques include aged furniture, pottery, porcelain, glass, dinnerware, and 
many other objects. Within the furniture category, several different periods of 
specialization exist, including French, Continental, English, Early American, Art 
Nouveau, Art Deco, and Modern. If you collect furniture as an investment, using 
it extensively will harm its value. With glass and figurine antiques, invest in well-
known brand names such as Royal Doulton, Lalique, Steuben, or Tiffany. A few of 
the publications that follow antiques include Antique & Collectables, Antiques and 
the Arts Weekly, Antique Week, and Maine Antique Digest. 

Art encompasses painting, prints, posters, and sculpture. You have many 
schools of art to choose from, including old masters, impressionist, cubist, surrealist, 
and modern. Some collectors specialize in the work of one country, such as 
England, France, Italy, or Japan. Others specialize in individual artists with well-
known names like Picasso, Lichtenstein, or Warhol. The work of new and unknown 
artists also can rise in value quickly if their work becomes popular, though 
buying art of an unknown artist is quite risky. The value of any particular piece 
of art depends on its aesthetic qualities, the level of collector interest in that genre 
of art, who owned the work previously (at least, if he or she was famous), and how 
many renditions of the work exist. 

Prints typically are produced in limited editions. The fewer copies made, the 
more valuable each print. Numbered prints tell you the placement of your copy 
in the full print run. For example, 115/250 means that the print is the 115th copy out 
of a total print run of 250. Signed prints are always worth more than unsigned works. 

Sculpture is usually one of a kind and therefore more valuable and expensive. 
Make sure you』ve thought about where to put that huge statue or where you will 
hang that mobile before you bid for it at auction. 

A few of the more important publications covering art include Art/Antiques Investment 
Report, Art in America, ARTnews, and Leonard』s Annual Price Index of 
Art Auctions. 

Autographs are worth collecting for investment purposes only if the people who 
signed them were or are (if currently living) famous and didn』t sign too many autographs. 
Serious autograph collectors are more interested in complete signed documents, 
letters, or manuscripts written by a particular famous person than they are in 
merely a clipped signature. The more significant the document』s historical value, the 
more money it will bring in the marketplace. Signatures from political figures like 
George Washington, Abraham Lincoln, and Franklin Roosevelt usually bring much 


CHAPTER 7: Investing in Gold and Collectibles 

higher prices than those of entertainment or sports stars whose celebrity status may be 
fleeting. (Be careful not to buy the signature of a recent president written by autopen!) 
Because it is relatively easy to forge a signature, you should authenticate an autograph 
before you buy it. A few publications that focus on autographs are Autograph Collector, 
Autograph Quarterly & Buyers Guide, and The Autograph Review Newsletter. 

Cars, particularly classic roadsters, were among the hottest collectibles in the 
1980s. Car buyers, perhaps trying to relive their teenage years, paid outlandish 
prices for chrome-laden classics of the 1950s. Some top-of-the-line Rolls Royces, 
Bentleys, and Dusenbergs from the 1930s fetched more than $100,000. That is just 
the tip of the iceberg, however, as much more modest cars also trade actively at car 
shows and auctions. If you want to buy such a car, check out its mechanical condition 
closely in advance of the sale. If you』re not mechanically inclined, bring your 
mechanic. A few of the publications that follow this market include Deals on 
Wheels, Hemmings Motor News, and Old Cars. 

Comic books have become enormously popular collectibles. Books chronicling 
the adventures of Batman, Spiderman, Superman, Captain America, Thor, 
Popeye, and Zorro have appreciated significantly, depending on the print run for 
each title. You can buy and sell comic books through hundreds of dealers and fairs 
around the country. The best comic book reference guide is the Overstreet Comic 
Book Price Guide, and the best periodicals are the Comic Buyer』s Guide and 
Overstreet』s Comic Book Monthly. 

Dolls of every type, including Kewpie dolls, Shirley Temple dolls, Barbies, 
and even teddy bears, have become popular collectibles. The best periodicals covering 
dolls include Dolls—The Collector』s Magazine and National Doll & Teddy 
Bear Collector. 

Gems are treacherous investments because a small difference in grading can 
have a major effect on a gem』s worth. Gem prices fluctuate widely and can fall 
sharply if a new source of gems is found. The most commonly collected gems are 
rubies, emeralds, sapphires, and semiprecious stones, including tourmalines, aquamarines, 
topazes, and garnets. 

Related to gem investing is the field of antique and costume jewelry collecting. 
As is true of other collectibles, the condition and design of old brooches, pins, or 
watches are key to their value. For costume jewelry, the designer』s name is also an 
important factor. One notable publication in this field is Jewelry Price Report, 
which reports on auction sales of antique and period jewelry. 

Hollywood memorabilia provides an outlet for movie buffs who collect 
movie posters, magazines, autographs, silent and talking pictures, theater advertising, 
and cartoon cells. As with all collectibles, prices are driven by the scarcity and 
condition of the material and the level of investor interest. The best periodical following 
this field is Movie Collector』s World. 

Fine Oriental rugs can be traded as investments if they are in good condition. 
A huge supply of modern rugs from India, Iran, Turkey, Afghanistan, Pakistan, and 


PART ONE: Maximizing Your Investment Options 

China in recent years has limited appreciation. Authenticate any rug before you 
purchase it because it is easy to overpay if you don』t know exactly what you are 
buying. In general, the older the rug, the more valuable it is for investment purposes, 
as long as it is in top condition. You can follow the rug market by subscribing 
to Oriental Rug Review or Rug News. 

Photographs by renowned photographers like Ansel Adams, Edward Steichen, 
Alfred Stieglitz, and Edward Weston have become extremely popular as collectibles. 
Prices rise when a print is of top quality, is aesthetically pleasing, and is rare. Experts 
in the field tend to know how many prints a photographer made of a particular picture; 
the fewer produced, the more each is worth. Be careful with color photos because colors 
can fade if you hang a photo in sunlight, and this will, of course, cut the picture』s 
value. The periodical Photograph Collector will help you keep up with this field. 

Quilts have come a long way since they were turned out by the local quilting 
bee in the Wild West. They have taken off as hot collectibles for lovers of Americana. 
Because each quilt is handmade, they are all unique and therefore provide 
good scarcity value. Still, choose a design you like because you might have to keep 
it several years before you can sell it at a profit. For more on quilts, consult the 
Quilters Newsletter or the Quilt Price Guide, published as part of the Confident 
Collector Series by Avon. 

Rare books have been collected since the Gutenberg Bible came off the first 
press in the 15th century. The rarest books, such as those written by medieval monks, 
William Shakespeare, or Martin Luther, can sell for hundreds of thousands of dollars. 
Still, plenty of more inexpensive books exist that are rare enough to have some investment 
value. Collectors tend to specialize in certain types of books, like children』s 
books, military history volumes, or James Bond adventure stories. In general, the 
earlier the book』s printing, the higher its value. If you find a rare book autographed 
by the author, grab it because it is worth more than one without such a signature. One 
periodical will help you collect rare books: Book Source Monthly. 

Sports collectibles have become an enormous business because of the popularity 
of college and professional sports. This field includes trading cards, uniforms, 
baseball bats and gloves, footballs and baseballs, programs from historic 
games, golf clubs, and autographs of sports stars, as well as other memorabilia. As 
with other collectibles, rarity and condition are key to determining an object』s 
value. The most valuable sports cards are the rookie cards of athletes who go on to 
become stars—for example, a Mickey Mantle or Reggie Jackson first-year card. If 
you want to get your children interested in collectibles, sports memorabilia is often 
a good place to start. The three best periodicals in this field are Baseball Hobby 
News, Sports Cards, and Sports Collectors Digest. 

Stamps are one of the most established ways of participating in collectibles. 
Usually, dealers know precisely how many stamps are printed, which gives each 
issue some scarcity value. Prices are determined by the forces of supply and 
demand, but many catalogs and price guides can help ensure that you don』t pay 


CHAPTER 7: Investing in Gold and Collectibles 

too much for your stamps or sell them for too little. For example, stamps printed 
with errors, such as an upside down airplane, are particularly rare and valuable. 
You can trade at stamp shows or with local stamp dealers. It is important to keep 
stamps as close to their original condition as possible, which means that you 
should not put hinges on stamps to attach them to an album page because hinges 
remove some of their glue. The American Stamp Dealers Association attaches a 
certificate of authenticity to every stamp of great value to prevent forgeries. The 
best publications in this field include Linn』s Stamp News, Mekeel』s Weekly Stamp 
News, Scott』s Stamp Monthly, Stamp Auction News, and Stamps. 

Collecting stock and bond certificates is known as scripophily. Before most 
trading of stocks and bonds was handled electronically, companies issued beautiful 
certificates to stock- and bondholders. The certificates currently most valuable 
are those issued by famous companies, like John D. Rockefeller』s Standard Oil, or 
American Express shares signed by Henry Wells and William Fargo of Wells-
Fargo fame. If you locate some old certificates of companies no longer around, 
you might inquire of a firm like R. M. Smythe (26 Broadway, New York, NY 
10004; 800-622-1880; www.rm-smythe.com) or Stock Search International 
(4761 W. Waterbuck Dr., Tucson, AZ 85742; 800-537-4523; www.stocksearchintl. 
com) to determine their worth. Smythe and other companies run scripophily auctions 
regularly. Collectors in this field also trade bank notes, checks, and paper 
money from the United States and foreign countries. Followers of scripophily 
may be interested in the Friends of Financial History and Bank Note Reporter 
newsletters. 

Toys have also become popular as collectibles. We』re not talking about recently 
mass-produced GI Joes here but, instead, the handcrafted tinplate toys, 
trains, model soldiers, robots, piggybanks, and wind-up toys that were made in 
limited quantity. Condition and scarcity dictate prices, as does the interest among 
toy collectors. To follow the toy market, you might want to subscribe to Model & 
Toy Collector or Collectible Toys & Values. 

Vintage wines have even become hot collectibles. Because the quantity of 
wine produced by a vineyard in a particular year is well known, scarcity value is 
preserved. Ancient bottles—for example, wines from French chateux in the 18th 
century—may sell for more than $100,000, but many more modestly priced 
vintages exist that are suitable for investment. The most actively traded wines are 
French Bordeaux, including such famous labels as Lafite-Rothschild, Cheval 
Blanc, and Latour. Wine connoisseurs may end up drinking some of their investment 
and selling some of it. It is hoped that the profits from the sales would cover 
the cost of imbibing so valuable a commodity. Those who want to follow the 
vintage wine market can consult the periodical Wine Price File. 

In the end, collect any of the objects discussed here or the many other collectibles 
available because you enjoy having them around. This way, even if you 
are not able to sell a collectible for a profit, you will have made a good investment. 


PART ONE: Maximizing Your Investment Options 

Resources 

BOOKS,BOOK SERIES, AND BOOK PUBLISHERS 

ADEC/International Art Price Annual (www.artprice.com). The ADEC price 
guide is probably the most complete listing of fine arts auction prices available. 

American Guide to U.S. Coins, by Charles F. French (Simon & Schuster, 100 Front 
St., Riverside, NJ 08075; 212-698-7000; 800-223-2348; www.simonandschuster. 
com). Up-to-date, comprehensive, illustrated information and price guide to American 
coins. 

Antique Trader』s Antiques & Collectibles Price Guide, by Kyle Husfloen (Krause 
Publications, 700 E. State St., Iola, WI 54990; 715-445-2214; 800-258-0673; www. 
krause.com). Reference for investors, appraisers, insurance adjusters, auctioneers, and 
novice collectors. 

Best Buys in Rare Coins: What Expert Dealers and Collectors Advise, by Donn 
Pearlman (Bonus Books, 160 E. Illinois St., Chicago, IL 60611; 312-467-0580; 800225-
3775; www.bonus-books.com). A basic guide to the different types of rare coins 
and investing in them. Devotes chapters to the main kinds of rare coins, including U.S. 
silver commemorative coins, Morgan dollars, buffalo nickels, mercury dimes, Saint-
Gaudens double eagles, ancient Greek and Roman coins, Indian head cents, European 
coinage, and other coins. 

Blue Book of Dolls and Values, by Jan Foulke and Howard Foulke (Hobby House 
Press, One Corporate Dr., Grantsville, MD 21536; 800-554-1447; www.hobbyhouse. 
com). Lots of information for collectors. A reference guide to prices and identification. 

Catalogue of Errors on U.S. Postage Stamps, by Stephen R. Datz (Krause Publications, 
700 State St., Iola, WI 54990; 715-445-2214; 800-258-0673; www.krause.com). 

Confident Collector Series, by Susan Theran (Avon Books, Hearst Corporation, 
1350 Avenue of the Americas, New York, NY 10019; 800-238-0658; www.avonbooks. 
com). A series of books that help you identify and price collectibles. Books in the series 
include Fine Art: Identification and Price Guide, Original Comic Art Guide, by Jerry 
Weist; Overstreet』s Comic Book Price and Grading Guides, by Robert M. Overstreet, 
and Quilts: Identification and Price Guide, by Liz Greenbacker and Kathleen Barach. 

Fun and Profit in Stamp Collecting, by Herman Herst, Jr. (Linn』s Stamp News, 

P.O. Box 29, Sidney, OH 45365; 800-831-3158; www.linns.com). Gives advice on collecting 
stamps, the stamp market, and how prices are affected by various events. 
The Gold Companion, by Timothy Green (The Gold and Silver Institutes, 1112 
16th St., N.W., Suite 240, Washington, DC 20036; 202-835-0185; www.goldinstitute. 
com). Published by the trade group for gold- and silver-mining companies. Describes 
the different ways to invest in gold and silver. 


CHAPTER 7: Investing in Gold and Collectibles 

Gold: Myth and Realty (Swiss Bank Corporation, 10 E. 50th St., New York, NY 
10022; 212-574-3000; www.swissbank.ch; www.sbcwarburg.com). Looks at gold 
throughout history and explains the current ways to invest in it. 

High Profits from Rare Coins Investment, by Q. David Bowers (Bowers and Merena 
Galleries, P.O. Box 1224, Wolfeboro, NH 03894; 603-569-5095; www.bowersandmerena. 
com). The classic book describing the intricacies of investing in rare coins. 

Hobby House Press (One Corporate Dr., Grantsville, MD 21536; 800-554-1447). A 
publishing company that produces many books and price guides to dolls, teddy bears, and 
crafts. For example, Hobby House publishes the annual Blue Book of Dolls & Values. 

How to Profit from the Coming Boom in Gold, by Jeffrey A. Nichols (McGraw-
Hill, Order Dept., 860 Taylor Station Rd., Blacklick, OH 43004; 800-722-4726; 
www.mcgraw-hill.com). A complete guide to the many ways of investing in gold, 
including coins, bars, gold-mining shares, mutual funds, futures, and options on gold 
futures. Provides technical analysis that can be applied to all these ways of buying 
gold. Also covers how to set up a gold portfolio. Makes a bullish case for gold prices 
in the 1990s, based on supply and demand. 

The Insider』s Guide to U.S. Coin Values, by Scott A. Travers (Bantam Books-Random 
House, 400 Hahn Rd., Westminster, MD 21157; 800-733-3000; www.randomhouse. 
com). Lots of information for beginning and experienced coin collectors. Has actual 
table values for all U.S. coins, in addition to explanation of coin collecting terms and 
basic information about coin collecting. 

The International Directory for Collectors by Art & Auction Magazine (440 
Park Ave., South, 14th Floor, New York, NY 10016; 800-777-8718). A complete list of 
reputable art dealers throughout the United States and the world. 

The International Encyclopaedic Dictionary of Philatelics, by R. Scott Carlton 
(Krause Publications, 700 E. State St., Iola, WI 54990; 715-445-2214; 800-258-0673; 
www.krause.com). Lots of philatelic information throughout. Translations in back, 
philatelic terms are translated into German, Spanish, Italian, French, Japanese, Chinese, 
Hebrew, Russian, Polish, and Greek. Good for figuring out what stamp inscriptions 
mean. 

Kovels』 Antiques & Collectibles Price List, by Ralph Kovel and Terry Kovel (Random 
House, 400 Hahn Rd., Westminster, MD 21157; 800-733-3000; www.randomhouse. 
com). Features 50,000 prices gathered from shows, sales, and auctions nationwide. 

Leonard』s Annual Price Index of Art Auctions (Auction Index, Inc., 30 Valentine 
Park, Newton, MA 02165; 617-964-2876). Provides a complete picture of auction 
results for paintings, drawings, and sculpture. Lists prices for every artist who has sold 
work in the United States, whether or not the artist is American. For each work sold, 
provides its selling price, whether it is signed and dated, its dimensions, and the birth 


PART ONE: Maximizing Your Investment Options 

date, death date, and nationality of the artist. Auction Index also publishes a separate 

Leonard』s Annual Price Index of Prints, Posters, and Photography. 

Linn』s Stamp News (P.O. Box 29, Sidney, OH 45365; 513-498-0801; 800-8313158). 
Linn』s publishes many books about stamp collecting, including Classic United 
States Imperforate Stamps; Fun and Profit in Stamp Collecting; An Introduction to 
Stamp Collecting; Philatelic Forgers; Stamp Club Handbook; Stamp Collecting 
Made Easy; U.S. Postal History Sampler; and Who』s Who on U.S. Stamps. 

Maloney』s Antiques & Collectibles Resource Directory (Collector』s Information 
Clearinghouse, P.O. Box 2049, Frederick, MD 21702-1049; 301-695-8544; 800-8362403). 
The most complete guide in existence for resources on every kind of antique and 
collectible. Provides nearly 10,000 resources on 2,600 categories of collectibles, from 
A&P items to zeppelins. Lists appraisers, auction houses, buyers, clubs, collectors, 
dealers, experts, matching services, museums, periodicals, restorers, and much more. 

More Money from Antiques, by Milan G. Vesely (Krause Publications, 700 E. State 
St., Iola, WI 54990; 715-445-2214; 800-258-0673; www.krause.com). A guide to making 
more money in the antiques business by using the Internet. 

North American Coins & Prices: A Guide to U.S., Canadian, and Mexican Coins, 
by David C. Harper (Krause Publications, 700 E. State St., Iola, WI 54990; 715-4452214; 
800-258-0673; www.krause.com). Comprehensive source of information on 
coin prices. Offers information on coin background. Contains more than 45,000 updated 
values, more than 1,500 photos, guidelines, and tips to help distinguish true values 
from average worth. 

One-Minute Coin Expert, by Scott A. Travers (Random House, Order Dept., 400 
Hahn Rd., Westminster, MD 21157; 800-733-3000; www.randomhouse.com). Learn 
how to start your own coin collection, ensure that you are buying and selling your coins 
at market value, and chart the coin market and discover the best times to buy and sell. 

Price Guide to Antique Clocks, by Robert W. Swedberg and Harriett W. Swedberg 
(Krause Publications, 700 E. State St., Iola, WI 54990; 715-445-2214; 800-258-0673; 
www.krause.com). Features more than 600 photos of antique clocks with current values. 

Scott Standard Postage Stamp Catalogue (Scott Publishing, 911 Vandemark Rd., 

P.O. Box 828, Sidney, OH 45365; 513-498-0802; 800-5-SCOTT-5; www.amospress. 
com). The most widely used annual catalog of stamp prices. Scott』s Amos Press Division 
also distributes Fun and Profit in Stamp Collecting, by Herman Herst, Jr. 
Stamp Collector Books (700 E. State St., Iola, WI 54990; 715-445-2214; www. 
krause.com). The publisher of the Stamp Collector Newspaper. Also sells books on 
stamp collecting, including Basic Philately; How to Detect Damaged, Altered, and 
Repaired Stamps; On the Road; Stamp Collecting Is Fun; This Is Philately; Top Dollar 
Paid!; U.S. Errors; Where in the World: Unique Stamp Atlas; and The Wild Side. 


CHAPTER 7: Investing in Gold and Collectibles 

Stamp Investing, by Stephen R. Datz (General Trade Corporation). A helpful guide 
for investing in stamps. 

Today』s Hottest Collectibles, by the publishers of Toy Shop and Warman』s Toady 
Collector and Mike Jacquart (Krause Publications, 700 E. State St., Iola, WI 54990; 
715-445-2214; 800-258-0673; www.krause.com). More than 1,300 photos and 10,000 
values. 

Top Dollar Paid: The Complete Guide to Selling Your Stamps, by Stephen R. Datz 
(General Trade Corporation). 

Warman』s Antiques and Collectibles Price Guide, by Ellen Schroy (Krause Publications, 
700 E. State St., Iola, WI 54990; 715-445-2214; 800-258-0673; www. 
krause.com). Definitive general price guide to antiques and collectibles; offers over 
500 categories. 

Warman』s Antiques and Their Prices (Wallace-Homestead Book Company, 201 
King of Prussia, Radnor, PA 19089; 800-695-1214). For nearly half a century, Warman』s 
has maintained a distinctive margin of superiority over its competition and 
imitators—more than 50,000 fresh items in each edition, hundreds of photographs 
and factory marks to aid in identification, annual state of the market report, reproduction 
alerts, collector』s clubs, sources, historical background, museums. Wallace-
Homestead Book Co. publishes a complete line of antiques reference books covering 
collectibles, country, furniture, glass, jewelry and precious metals, paper ephemera, 
pottery, and porcelain. 

Warman』s Encyclopedia of Antiques & Collectibles Series (Wallace-Homestead 
Book Company, 700 E. State St., Iola, WI 54990; 715-445-2214; www.krause.com). 
These books help you identify and price several categories of antiques and collectibles. 
Included in this series are Country Antiques & Collectibles, Furniture, English & 
Continental Pottery & Porcelain, Oriental Antiques, Americana & Collectibles, 
and Glass. 

Wine Price File (P.O. Box 1007, Darien, CT 06820; 203-655-0566). Annually 
published book covers the vintage-wine-collecting industry. 

MAGAZINES 

American Ceramics (9 E. 45th St., New York, NY 10017; 212-309-6886). Provides 
information about trading in ceramic art. 

Antiques and the Arts Weekly Magazine (Bee Publishing, 5 Churchill Rd., Newtown, 
CT 06470; 203-426-3141; www.thebee.com). The most comprehensive weekly 
guide to the arts and antiques trade. A tabloid-sized journal, discusses auctions, antique 
shows, and flea markets for every kind of collectible. 


PART ONE: Maximizing Your Investment Options 

Art & Auction (P.O. Box 11344, Des Moines, IA 50340; 800-777-8718; editorial 
office: 250 W. 57th St., New York, NY 10107). Updates the international art and 
auction scene. 

Art in America (P.O. Box 11292, Des Moines, IA 50340; 800-925-8059). Focuses 
mostly on contemporary art. 

ARTnews (48 W. 38th St., 9th Floor, New York, NY 10018; 212-398-1690; 800284-
4625). The bible of the art-collecting world. Covers exhibitions, openings, new 
and old painters, and art collectors. 

Autograph Collector (510-A South Corona Mall, Corona, CA 91719; 909-7349636; 
www.odyssey.com). Covers autograph and historical document collecting in 
such fields as entertainment, politics, and sports. 

Bank Note Reporter (Krause Publications, 700 E. State St., Iola, WI 54990; 715445-
2214; 800-258-0929; www.krause.com). Covers the marketplace for collectors of 

U.S. and foreign paper money, notes, checks, and other financially oriented paper. 
Baseball Hobby News (4540 Kearny Villa Rd., San Diego, CA 92123; 619-5652848). 
A monthly magazine with news of auctions and fairs trading baseball memorabilia. 
Issues and annual price guide for baseball-related items. 

Big Reel (Krause Publications, 700 E. State St., Iola, WI 54990; 715-445-2214; 
800-258-0929; www.krause.com). Focuses on movie, video, and Hollywood collectibles 
and has thousands of items for sale. 

Book Source Monthly (P.O. Box 567, Cazenovia, NY 13035; 315-655-8499). 
Serves both members of the antiquarian book trade as well as private investors. 

CameraShopper (P.O. Box 1086, New Canaan, CT 06840; 203-972-5700; www. 
camera-shopper.com). Covers the vintage photograph and antique camera markets. 

Card Trade Magazine (Krause Publications, 700 E. State St., Iola, WI 54990; 715445-
2214; 800-258-0929; www.krause.com). Full of information about sports cards, 
memorabilia, and collectibles with lots of advertisements related to sports cards. 

Ceramic Bulletin (The American Ceramic Society, P.O. Box 6136, Westerville, 
OH 43086-6136; 614-890-4700; www.acers.org) 

Ceramics Monthly (The American Ceramics Society, P.O. 6136, Westerville, OH 
43086-6136; 614-890-4700; www.acers.org) 

COINage Magazine (James Miller Publications, 4880 Market St., Ventura, CA 
93003; 805-644-3824) 

Coin Prices (Krause Publications, 700 E. State St., Iola, WI 54990; 715-445-2214; 
800-258-0929; www.krause.com). Guide to retail coin prices. 

Coins (700 E. State St., Iola, WI 54990; 715-445-2214; www.krause.com) 


CHAPTER 7: Investing in Gold and Collectibles 

Collectible Toys & Values (15 Danbury Rd., Ridgefield, CT 06877; 203-438-9652; 
members.aol.com/AlexMalloy/agmalloy.htm). A monthly price guide with articles, 
tips, and book reviews. 

Collector Editions (Collector Communications, 1107 Broadway, Suite 1210N, 
New York, NY 10010; 800-588-1692) 

Collector Magazine and Price Guide (Krause Publications, 700 E. State St., Iola, 
WI 54990; 715-445-2214; 800-258-0929; www.krause.com). Has feature stories, articles, 
special directories, and pricing information on antiques and collectibles. 

Collector』s Mart Magazine (Krause Publications, 700 E. State St., Iola, WI 54990; 
715-445-2214; 800-258-0929; www.krause.com). Includes new releases and current 
prices for collectibles traded on the secondary market and information on bestselling 
collectibles compiled through exclusive surveys. Columns include 「Doll Collecting 
Today,」 「Ornaments,」 and 「Plates Today.」 

Deals on Wheels Magazine (Deals on Wheels, P.O. Box 205, Sioux Falls, SD 57101; 
605-338-7666; 800-334-1886; www.dealsonwheels.com). Provides listings of antique 
cars for sale nationwide. 

Discoveries (Discoveries, 100 Bryant St., P.O. Box 1050, Dubuque, IA 52004; 
800-531-0880; www.collect.com). Resource for buying, selling, pricing, and learning 
about your records, CDs, and other music collectibles. 

Doll Reader (P.O. Box 420235, Palm Coast, FL 32142-0235; 717-540-6640). 
Gives both the beginner and advanced collector information on antique, collectible, 
and modern dolls. 

Dolls—Collector Communications (170 5th Ave., New York, NY 10010; 212-9898700; 
800-588-1691). Full-color magazine covering antique and contemporary dolls. 

Dolls World (306 East Parr Rd., Burn, IN 46711; 219-589-8741; 800-829-5865). 
Provides information about doll collecting, including doll history, and interviews with 
doll artists. Also produces an annual Doll Collector』s Price Guide. 

Friends of Financial History (American Financial History, 26 Broadway, Suite 
200, New York, NY 10004; 212-908-4110; www.mash.org). Gives background on 
collecting stock and bond certificates. Smythe is in the business of valuing old certificates, 
and it runs auctions for buying and selling them. 

Hemmings Motor News (P.O. Box 100, Bennington, VT 05201; 802-442-3101; 
www.hmm.com). For antique and special-car enthusiasts. Lists upcoming auctions and 
sources of services—such as restoration and insurance—for old cars. 

Linn』s Stamp News (P.O. Box 29, Sidney, OH 45365; 513-498-0801). The sister 
publication of Scott』s Stamp Monthly; the standard reference for stamp collectors following 
stamp prices and new stamp releases. 


PART ONE: Maximizing Your Investment Options 

The Magazine Antiques (Brant Publications, 575 Broadway, New York, NY 
10012; 212-941-2800; 800-925-9271). A top-of-the-line, slick magazine covering all 
aspects of antiques collecting, including arts and crafts, auctions, dolls, folk art, 
furniture, games, paintings, porcelain, and toys. Advertisers include the finest antique 
dealers in the country. 

McCall』s Quilting (P.O. Box 56730, Boulder, CO 80322; 800-944-0736; www. 
quiltersvillage.com) 

Movie Collector』s World (P.O. Box 309, Fraser, MI 48026; 810-774-4311; www. 
mcwonline.com). Covers the Hollywood memorabilia market of posters, videos, stills, 
and other star-struck objects. 

Old Cars Weekly (Krause Publications, 700 E. State St., Iola, WI 54990; 800-2580929; 
www.krause.com). Features news about antique cars, car shows, auctions, and 
swap meets. 

Oriental Rug Review (P.O. Box 709, Meredith, NH 03253; 603-744-9191; www. 
rugreview.com). An online journal focusing on aged rugs. Carries news of auctions and 
reviews about Oriental rugs. 

Overstreet』s Comic Book Monthly (801 20th St. N.W., Suite 3, Cleveland, TN 
37311; 615-472-4135). Monthly comic book price guide. 

Photograph Collector (301 Hill Ave., Langhorne, PA 19047; 215-757-8921). 
Covers the photography market. Also publishes an annual compilation of photo auction 
prices. 

Postcard Collector (Postcard Collector, 100 Bryant St., P.O. Box 1050, Dubuque, 
IA 52004; 800-531-0880; www.collect.com). Covers postcard and paper collecting. 
Has mail auctions, classified ads, sales, and display ads. 

Quiltmaker (P.O. Box 58360, Boulder, CO 80322; www.quiltersvillage.com) 

Rare Coin Review (Bowers and Merena, Box 1224, Wolfeboro, NH 03894; 603569-
5095; 800-458-4646; www.bowersandmerena.com). Offers market news and listings 
of individual coins for sale. 

Rug News (Museum Books, 90 John St., New York, NY 10038; 212-587-1340; 
www.rugnews.com). Covers the oriental rug market and the machine-made rug market, 
including news of auctions and rug shows. 

Scott』s Stamp Monthly Magazine (P.O. Box 828, 911 Vandemark Rd., Sidney, OH 
45365; 800-5-SCOTT-5; 800-488-5351). The principal magazine covering developments 
in the stamp collector』s market. Gives notice of upcoming stamp issues from the 

U.S. Postal Service. 
Scrye Magazine (Krause Publications, 700 E. State St., Iola, WI 54990; 715-4452214; 
800-258-0929; www.krause.com). Price guide for collectible card games. 


CHAPTER 7: Investing in Gold and Collectibles 

Silver Magazine (P.O. Box 1243, Whittier, CA 90609; 310-696-6738) 

Sports Cards (Krause Publications, 700 E. State St., Iola, WI 54990; 715-4452214; 
800-258-0929; www.krause.com). Full-color magazine featuring baseball, basketball, 
hockey, and football cards from all eras. 

Sports Collectors Digest (Krause Publications, 700 E. State St., Iola, WI 54990; 
715-445-2214; 800-258-0929; www.krause.com). A weekly news magazine with information 
about all aspects of sports memorabilia. 

Teddy Bear Review (Collector Communications, 1107 Broadway, Suite 1210N, 
New York, NY 10010; 800-728-2729) 

Toy Shop (Krause Publications, 700 E. State St., Iola, WI 54990; 715-445-2214; 
800-258-0929; www.krause.com). Ads, sales, and information on vintage, baby 
boomer, and new collectible toys. 

Warman』s Today』s Collector (Krause Publications, 700 E. State St., Iola, WI 
54990; 715-445-2214; 800-258-0929; www.krause.com). Covers everything from art 
glass and pottery to radio premiums and toys. Columns include auction reports and 
questions and answers about collectibles. Includes a classified advertising section. 

NEWSLETTERS 

Art/Antiques Investment Report (100 Wall St., New York, NY 10005; 212-7479500; 
www.twist.com). A biweekly newsletter about the art market for the art connoisseur, 
collector, curator, and dealer. Features interviews with prominent dealers and 
publishes the latest prices for fine objects. 

Art Newsletter (48 W. 38th St., 9th Floor, New York, NY 10018; 212-398-1690; 
800-284-4625). A biweekly newsletter containing the latest news on auctions and 
trends in the art markets. 

Autograph Review (305 Carlton Rd., Syracuse, NY 13207; 315-474-3516). For 
the serious autograph collector. 

Coin Dealer Newsletter and Certified Coin Dealer Newsletter (P.O. Box 7939, 
Torrance, CA 90504; 310-515-7369; www.graysheet.com) 

Coin World (911 Vandemark Rd., Sidney, OH 45365; 937-498-0800; www. 
collect.com/coinworld) 

Dines Letter (P.O. Box 22, Belvedere, CA 94920) 

Free Market Gold & Money Report (P.O. Box 4634, Greenwich, CT 06830) 

Gold & Money: A Commentary on Precious Metals and Monetary Matters (P.O. 
Box 4634, Greenwich, CT 06830; 203-661-5474; www.goldmoney.com) 


PART ONE: Maximizing Your Investment Options 

Gold Monitor (M. Murenbeeld & Associates, P.O. Box 6187, Victoria, British Columbia, 
Canada V8P 5L5; 604-477-7579) 

Gold Newsletter (1112 16th St., N.W., Suite 240, Washington, DC 20036; 202835-
0185; www.goldinstitute.com) 

Gold Newsletter (Jefferson Financial, 2400 Jefferson Hwy., Suite 600, Jefferson, 
LA 70121; 800-877-8847) 

J. Taylor Gold and Gold Stocks (P.O. Box 770871, Woodside, NY 11377; 718457-
1426) 
Moneypower (4257 46th Ave., North, Suite 207, Minneapolis, MN 55422; 612537-
8096) 

Numismatic News (Krause Publications, 700 E. State St., Iola, WI 54990; 715445-
2214; www.krause.com) 

Powell Gold Industry Guide and International Mining Analyst (Reserve Research, 
181 State St., Portland, ME 04101; 207-774-4971) 

Quilters Newsletter (P.O. Box 4101, Golden, CO 80402; 800-477-6089). Covers 
the quilt market. 

Red Book (Western Publishing, 1220 Mound Ave., Racine, WI 53404; 414-6332431; 
www.goldenbks.com). Provides prices from coin auctions. 

Ruff Times (757 S. Main, Springville, UT 84663; 801-489-8681; www.rufftimes. 
com) 

Silver and Gold Report (4176 Burns Rd., Palm Beach Gardens, FL 33410; 800289-
9222; www.weissinc.com) 

Silver News (1112 16th St., N.W., Suite 240, Washington, DC 20036; 202-8350185; 
www.goldinstitute.com) 

Winning Edge (Ellesmere Numismatics, P.O. Box 402, Brookfield, CT 06804; 
800-426-3343) 

World Coin News (Krause Publications, 700 E. State St., Iola, WI 54990; 715445-
2214; www.krause.com) 

NEWSPAPERS 

Antiques & Collectables (P.O. Box 1565, El Cajon, CA 92022; 619-593-2933; 
619-593-2925). Follows several collectibles markets, including dolls, toys, and teddy 
bears. Reports auction results and publishes trade show dates and events. Available by 
subscription or through many antique stores. 


CHAPTER 7: Investing in Gold and Collectibles 

Antique Week (Mayhill Publications, P.O. Box 90, Knightstown, IN 46148; 800876-
5133; www.antiqueweek.com). A leading weekly newspaper containing feature 
articles, auction results, genealogy section, reproduction column, and buy/sell ads. 

Buyer』s Guide for Comic Fandom (15800 Route 84 North, East Moline, IL 61244; 
309-496-2353). A weekly newspaper covering the comic book industry. 

Comic Buyer』s Guide (Krause Publications, 700 E. State St., Iola, WI 54990; 
715-445-2214; 800-258-0929; www.krause.com). A weekly newspaper serving comics 
fans and collectors, with news of upcoming comic book events. Publisher also produces 
a quarterly price guide. 

Maine Antique Digest (P.O. Box 1429, Waldoboro, ME 04572-1429; 207-8325745; 
800-752-8521; www.maineantiquedigest.com). A monthly tabloid filled with 
information about the antiques market. Articles and advertising feature furniture, 
pewter, paintings, porcelain, quilts, weathervanes, clocks, maps, and much more. Also 
publishes a calendar of upcoming antique shows and auctions. 

Mekeel』s Weekly & STAMPS (P.O. Box 5050, White Plains, NY 10602; 914-9977261; 
800-635-3351). Features news and articles for the active adult stamp collector. 
Covers auctions, new stamp issues, and trading in classic stamps. 

National Doll & Teddy Bear Collector (P.O. Box 4032, Portland, OR 97208; 
503-771-1490). A monthly newspaper for doll, kewpie doll, and teddy bear collectors. 

Stamp Collector (700 E. State St., Iola, WI 54990; 715-445-2214; 800-258-0929). 
A weekly newspaper for both beginning and expert collectors. Provides how-to articles, 
release dates for new stamps around the world, schedules of stamp shows, buying and 
selling prices, and a question-and-answer column. Van Dahl also publishes The Stamp 
Wholesaler, a biweekly newspaper for stamp dealers. 

Stamps (HL Lindquist Publications, 85 Canisteo St., Hornell, NY 14843; 607324-
2212). Provides the latest news about stamp collecting, including auction results, 
upcoming stamp shows, and new editions of stamps. Lindquist also publishes the 
monthly journal Stamps Auction News, which tracks auction prices. 

TRADE ASSOCIATIONS 

American Numismatic Association (818 N. Cascade Ave., Colorado Springs, CO 
80903-3279; 719-632-2646; 800-367-9723; www.money.org). Chartered by Congress 
to educate collectors of coins, paper money, tokens, and metals. Publishes the monthly 
The Numismatist magazine. Offers free pamphlet entitled 「Faces of Time: Coin Collecting 
with the ANA.」 

American Stamp Dealers Association (3 School St., Glen Cove, NY 11542; 
516-759-7000; www.exposonline.com/asda). Represents stamp dealers. Issues free 
lists of dealers in various local areas and by areas of interest. Sponsors national and 
regional stamp shows, as well as educational programs, throughout the United States. 


PART ONE: Maximizing Your Investment Options 

Offers the following free brochures: 「Expertizing Philatelic Materials」; 「Getting 
Started in Stamp Collecting」; 「Selling a Stamp Collection . . . What You Need To 
Know!」; and 「The Stamp Dealer』s Obligations and Responsibilities When Selling 
Stamps as an Investment.」 

Appraisers Association of America (60 E. 42nd St., Suite 2505, New York, NY 
10165; 212-867-9775). The professional association of appraisers that sets standards 
for appraisers of personal property. Offers a membership directory, a free referral to 
three members near your home, and a free copy of 「Elements of a Correctly Prepared 
Appraisal」 and 「Frequently Asked Questions of Appraisers.」 

Gold and Silver Institutes (1112 16th St., N.W., Suite 240, Washington, DC 
20036; 202-835-0185; www.goldinstitute.com). Composed of gold- and silver-mining 
companies, refiners, traders, and wholesalers. Lobbies on issues affecting the gold and 
silver industries and publishes research on gold and silver mining and the metals 
markets. Offers several publications, including brochures entitled 「Your Guide to Investing 
in Gold」 and 「Your Guide to Investing in Silver.」 

Industry Council for Tangible Assets (P.O. Box 1365, Severna Park, MD 
21146-8365; 410-626-7005). Tracks regulations and legislation that affect the rare-
coin and precious-metals industry. Publishes a quarterly newsletter called the 
Washington Wire. 

International Precious Metals Institute (4905 Tilghman St., Suite 160, Allentown, 
PA 18104; 215-395-9700). An international association of producers, refiners, fabricators, 
scientists, users, merchants, private and public sector groups, and the general 
precious-metals community. Encourages the exchange of information and technology; 
seeks and promotes efficient and environmentally acceptable uses of precious metals; 
conducts educational meetings and courses; and serves as a primary resource for factual 
information for industry and government agencies worldwide. 

International Society of Appraisers (500 N. Michigan Ave., Suite 1400, Chicago, 
IL 60611-3796; 312-661-1700). This is a not-for-profit member-driven personal property 
appraisal society of more than 1,400 appraisers in antiques and residential contents, 
fine art, gems and jewelry, and machinery and equipment. ISA』s Professional 
Development Program educates appraisers in appraisal theory, principles, and standards 
to attain the Accredited Appraiser of Personal Property and Certified Appraiser 
of Personal Property designations. Contact ISA for the following free brochures: 「Be 
Certain of Its Value,」 「Care Course in Appraisal Studies,」 and 「Appraisal Report Writing 
Standard.」 

National Antique and Art Dealers Association of America (12 E. 56th St., New 
York, NY 10022; 212-826-9707). Represents art and antique dealers. Sponsors antique 
and art exhibitions, including the International Antique Dealers Show every October in 
New York City. Also promotes ethical trade practices among its members. Offers a free 
copy of its membership directory, which lists about 50 reputable dealers, as well as fine 


CHAPTER 7: Investing in Gold and Collectibles 

museums, areas of dealer specialization (including furniture, ceramics, folk art, glass, 
paintings, and tapestries), and U.S. stylistic periods from pilgrim to mission. 

Platinum Guild International (675 Third Ave., Suite 1600, New York, NY 10017; 
212-661-1188; www.researchmag.com/platinum). Represents producers and marketers 
of platinum and palladium. Publishes Platinum Investor Update, a regular newsletter 
on trends in the platinum industry. Offers free brochures titled 「Platinum: The 
Strategic Precious Metals Investment」 and 「Platinum: Today and Tomorrow.」 

Professional Numismatists Guild (3950 Concordia Ln., Fallbrook CA 92028; 760728-
1300; www.pngdealers.com). The organization of professional coin dealers. Offers 
binding arbitration on consumer disputes with any PNG member and maintains 
strict standards for coin dealer members. Offers a free book entitled The Pleasure of 
Coin Collecting and a free brochure entitled 「What You Should Know before You Buy 
Rare Coins for Investment!」 Provides a fax hot-line number (760-728-8507) for 
complaints against dealers or questions about investing in rare coins. 

World Gold Council (900 Third Ave., 26th Floor, New York, NY 10022; 212-6880005; 
www.gold.org). Represents gold-mining companies and offers information 
about investing in gold. Publishes a quarterly report entitled Gold Demand Trends, 
which tracks demand for physical gold around the world. 

FEDERAL GOVERNMENT REGULATORS 

Federal Trade Commission (6th St. and Pennsylvania Ave., N.W., Washington, 
DC 20580; 202-326-2000; www.ftc.gov). Protects consumers from scams, including 
precious-metals scams. Has jurisdiction over art dealers. Offers free brochures entitled 
「Investing in Rare Coins」 and 「Art Fraud.」 

North American Securities Administrators Association (One Massachusetts Ave., 
N.W., Suite 310, Washington, DC 20001; 202-737-0900; www.nasaa.org). Represents 
state securities administration associations. Protects the public against scams, many of 
them precious-metals fraud. Offers the free publications 「Investing in Coins」 and 
「Precious Metals Bank Financing.」 

COIN-GRADING ORGANIZATIONS 

The following organizations will issue a grade for a coin and guarantee its 
authenticity. 

ANACS (P.O. Box 182141, Columbus, OH 43218-2141; 800-888-1861; www. 
anacs.com) 

Numismatic Guaranty Corporation of America (NGC, P.O. Box 1776, Parsippany, 
NJ 07054; 201-984-6222; www.numismatists.com/ngc.html) 

Professional Coin Grading Service (PCGS, P.O. Box 9458, Newport Beach, CA 
92658; 800-447-8848; www.pcgs.com) 


PART ONE: Maximizing Your Investment Options 

AUCTION HOUSES 

The following are the leading auction houses in the United States. Upon 
request, each will send a schedule of upcoming auctions. 

Alderfer Auction Company (501 Fairground Rd., Hatfield, PA 19440; 215-3685477; 
www.alderfercompany.com) 

Arman Absentee Auctions (P.O. Box 4037, Middletown, RI 02840; 401-847-7453; 
www.antiquechina.com) 

F.O. Bailey Antiquanans (137-141 Middle St., Portland, ME 04101; 207-774-1479) 
Berman』s Auction Gallery (33 W. Blackwell St., Dover, NJ 07081; 201-361-3110) 
Butterfield & Butterfield (7601 Sunset Blvd., Los Angeles, CA 90046; 213-8507500; 
www.butterfield&butterfield.com) 

Christie』s Inc. (502 Park Ave., NewYork, NY 10022; 212-546-1000; www.christies. 
com) 

Collectors Auction Services (R.D. 1, P.O. Box 431, Oakwood Rd., Oil City, PA 

16301; 814-677-6070) 

Jim Depew Galleries (1860 Piedmont Rd., N.E., Atlanta, GA 30324; 404-874-2286) 

Douglas Auctioneers (Route 5, South Deerfield, MA 01373; 413-665-3530) 

Doyle Auctioneers (109 Osborne Hill Rd., Fishkill, NY 12524; 914-896-9492; 

www.auctionweb.com/aar-ny) 

William Doyle Galleries (175 E. 87th St., New York, NY 10128; 212-427-2730; 
www.doylegalleries.com) 

Dumouchelle Art Galleries (409 E. Jefferson Ave., Detroit, MI 48226; 313-9636255; 
www.dumouchelles.com) 

Dunning』s Auction Service (755 Church Rd., Elgin, IL 60123; 847-741-3483; 
www.dunnings.com) 

Freeman/Fine Arts of Philadelphia (1808 Chestnut St., Philadelphia, PA 19103; 

215-563-9275) 

Garth』s Auctions (2690 Stratford Rd., Delaware, OH 43105; 614-362-4771) 

Chase Gilmore Art Galleries (724 W. Washington St., Chicago, IL 60606; 312


648-1690) 
Guernsey』s Auction (1081.2 E. 73rd St., New York, NY 10021; 212-794-2280) 
Hanzel Galleries (1120 S. Michigan Ave., Chicago, IL 60605; 312-922-6234) 
Harris Auction Galleries (875 N. Howard St., Baltimore, MD 21201; 410-728-7040) 


CHAPTER 7: Investing in Gold and Collectibles 

Leslie Hindman Auctioneers (215 W. Ohio St., Chicago, Il 60610; 312-670-0010) 

F.B. Hubley & Co., Inc. (364 Broadway, Cambridge, MA 02139; 617-876-2030) 
Iroquois Auction Gallery (P.O. Box 736, Brewerton, NY 13029; 315-668-2346) 
Bob Koty Professional Auctioneers (P.O. Box 625, Freehold, NJ 07728; 908-7801265) 
Lubin Galleries (110 W. 25th St., New York, NY 10001; 212-929-0909) 
Manion』s Auction House (P.O. Box 12214, Kansas City, KS 66112; 913-299


6692; www.manions.com) 
Mapes Auction Gallery (1729 Vestal Pkwy., West, Vestal, NY 13850; 607-754


9193; www.mapesauction.baka.com) 
Marc J. Matz Gallery (3661.2 Broadway, Cambridge, MA 02139; 617-661-6200) 
Mid-Hudson Auction Galleries (1 Idlewild Ave., Cornwall-on-Hudson, NY 12520; 

914-534-7828) 
Charles Moore Americana (32 E. 57th St., New York, NY 10022; 212-751-1900) 
Northeast Auctions (694 Lafayette Rd., Hampton, NH 03842; 603-926-9800) 
Richard Opfer Auctioneering (1919 Greenspring Dr., Timonium, MD 21093; 

410-252-5035) 
Pettigrew Auction Company (1645 S. Tejon St., Colorado Springs, CO 80906; 
719-633-7963) 
Pioneer Auction of Amherst (P.O. Box 9593, North Amherst, MA 01059; 413


253-9914; www.pioneerauction.com) 
Savoia Auction, Inc. (Route 23, South Cairo, NY 12482; 518-622-8000) 
Skinner, Inc. (357 Main St., Bolton, MA 01740; 508-779-6241) 

C.G. Sloan & Co., Inc. (4920 Wyaconda Rd., Rockville, MD 20852; 301-4684911; 
www.sloanesauction.com) 
Sotheby』s (1334 York Ave., New York, NY 10021; 212-606-7000; www.sothebys. 
com) 
South Bay Auctions, Inc. (P.O. Box 303, East Moriches, NY 11940; 516-878-2909) 
Swann Galleries, Inc. (104 E. 25th St., New York, NY 10010; 212-254-4710) 
Weschler』s (909 E St., N.W., Washington, DC 20004; 202-628-1281) 
Gustave White Auctioneers (P.O. Box 59, Newport, RI 02840; 401-847-4250) 



PART ONE: Maximizing Your Investment Options 

Willis Henry Auctions, Inc. (22 Main St., Marshfield, MA 020509; 617-834-7774; 
www.willishenry.com) 

Winter Associates, Inc. (P.O. Box 823, Plainville, CT 06062; 203-793-0288) 

Wolf』s Fine Arts Auctioneers (1239 W. 6th St., Cleveland, OH 44113; 216-5759653; 
www.wolfs-auctions.com) 

Woody Auction Company (P.O. Box 618, Douglass, KS 67039; 316-747-2694) 

WEB SITES 

Several Web sites allowing you to buy and sell collectibles through online auctions 
have started to spring up. A few examples you may want to try out include: 

Antique-Shop.Com  

Early American History Auctions  

Golden Age Antiques and Collectibles  

Internet Antique Shop  

Up4Sale  

Here are some Web sites of collectibles appraisers: 

Appraisers Association of America  

American Society of Appraisers  

Eppraisals  

International Society of Appraisers  

Here are some other useful Web sites: 

American Philatelic Society  

Delphi』s Stamps, Coins & Postal Forum  

Net Collection  

Stampfinder.com  

Stampworld  


CHAPTER 8 
Inside Real Estate 


Purchasing a home is probably the single biggest investment you will ever make. 
The entire process of finding, financing, and maintaining a home is fraught with 
complexities, both financial and emotional. Despite the difficulties and high cost of 
home ownership, it remains the ultimate American dream for most people. Home 
ownership provides several major benefits, including tax breaks, appreciation potential, 
and the pride of controlling the place where you live. In addition, if you pay 
off your mortgage by the time you retire, you will be able to live free and clear of 
mortgage payments. In contrast, renters often feel that they throw their money 
away each month because they do not build any equity in the place they live. Once 
they retire, their rent continues unabated. 

Throughout the 1970s and early 1980s, real estate was the sure-fire way to accumulate 
wealth. The combination of a housing shortage, a surging number of baby 
boomers entering the real estate market, generous tax advantages, and high inflation 
expectations resulted in startling gains in home prices. That bubble burst in the mid1980s 
and into the 1990s, however, as most housing markets became overbuilt, fewer 
baby boomers could afford homes, tax breaks were curtailed, and inflation plunged. 
By the end of the 1990s and 2000s, real estate prices shot up again, only to soften 
with the slowdown of 2001. The real estate landscape is therefore much more treacherous 
now, particularly if you purchase a home as an investment rather than just a 
nice place to live. 

Many people who bought homes at inflated prices now feel burdened by huge 
mortgage payments on property that has fallen sharply in value. Such a homeowner 
often rationalizes his or her purchase by saying, 「I couldn』t stand not earning any 
mortgage interest deductions to lower my taxes」 or 「I had to buy before prices got 
out of reach.」 In retrospect, however, these buyers』 total financial situation might 
have been improved had they rented for less than their current monthly mortgage 
payment, owed a bit more in taxes, and invested the difference between their rent and 


PART ONE: Maximizing Your Investment Options 

their mortgage in the surging stock and bond markets. The economic boom of the late 
1990s and early 2000s brought some relief to these people in certain areas of the 
country where housing prices recovered substantially, offering another opportunity 
to real estate investors to jump on and ride up another real estate boom. 

Buying versus Renting 

The first question you must ask yourself in deciding where to live is whether 
to buy or rent. The following factors will help you make your decision. 

ADVANTAGES OF BUYING 

. 
You build up equity, or ownership, in your home over time as you pay off 
your mortgage, as long as your home is appreciating in value. Having to 
make those payments becomes a form of forced savings. 
. 
If you buy right and your home is well maintained and in a good location, 
you have a good chance of substantial capital appreciation over time. 
Homes provide one of the best hedges against inflation. 
. 
You can remodel your home to suit your needs and tastes. You are unlikely 
to do so for rental property. 
. 
Owning your home gives you a deeper sense of commitment to your community. 
Homeowners, wanting to maintain property values, tend to take care 
of their homes better than renters. They also tend to be more involved in 
civic issues, such as education and neighborhood improvement. 
. 
As a homeowner, you qualify for several significant tax advantages. First, all 
mortgage interest you pay up to $1 million qualifies as a deduction, reducing 
both your federal and state income tax burdens. In addition, you can deduct 
any interest charged on home equity loans of up to $100,000 taken out 
against the value of your home. Local property taxes are also deductible 
from your federal income tax. If you sell your home, you do not have to pay 
any capital gains tax as long as you have lived in the home as your principal 
residence for two of the previous five years, and your profit does not exceed 
$500,000 if you are a married couple filing taxes jointly, or $250,000 
if you are filing taxes as a single. 
. 
Your home can be a source of cash in the future. Whether you borrow 
against it through a second mortgage or a home equity loan, or pull out the 
cash slowly through a reverse annuity mortgage (explained in more detail 
later in this chapter), you can put your equity to work for you when you 
need it most. 

CHAPTER 8: Inside Real Estate 

ADVANTAGES OF RENTING 

. 
The costs of home ownership, from the down payment to the monthly 
mortgage and maintenance costs, may take a large bite out of your household 
budget. Many people sacrifice their entire lifestyle by sinking 50 percent 
or more of their income into home ownership costs. If you can rent 
for 30 percent or less of your income, you may live a less stressful life. 
. 
Prices of homes may fall in your neighborhood. By renting, you will not be 
hurt by eroding real estate prices. Once you think a market has bottomed out, 
you can get a good deal on a house. The fact that you will not have to sell 
your rental property to do so is an added bonus. 
. 
You can invest the money you save by renting in stocks, bonds, and mutual 
funds, which may rise in value faster than home prices. This is particularly 
true if you are lucky enough to pay below-market rent or live in a rent-
controlled apartment. If you have the discipline to follow through with this 
strategy, you may be able to build up much more equity over time by renting, 
then funneling the money you would be paying in mortgage payments and 
maintenance costs into a diversified portfolio of securities. Stocks, bonds, 
and mutual funds are much more liquid than real estate, allowing you to buy 
and sell easily to take advantage of the latest trends. Also, securities, unlike 
a home, generate regular income, which you can reinvest. 
. 
Homeowners with adjustable-rate mortgages risk higher mortgage payments 
if interest rates rise. Depending on the strength of your local rental market, 
you may be able to avoid rent increases or even pay below-market rent. 
. 
If you already know that you may relocate several times during your career, 
it may make more sense to rent than to buy or sell a home each time you 
move. Unless your local real estate market is extremely active, you probably 
cannot expect enough appreciation in a year or two to compensate for 
the significant costs of buying and selling a home. 
. 
You may be at a life stage that sees many changes in a relatively short time, 
meaning your housing needs may be different several years from now. For 
example, if you are young and single, it might make more sense to rent a 
small apartment if you anticipate getting married and having children in 
a few years. And those going through a divorce may be too unsettled to purchase 
a home. 
The buy-versus-rent decision should therefore not be based only on finances 
but also on expectations for future lifestyle. To calculate the purely financial 
trade-offs, however, you might try one of the real estate software packages on the 
market, such as Buying Your Home or Buy or Rent (information for which can be 
found in the 「Resources」 section). They will help you sort through the true value 


PART ONE: Maximizing Your Investment Options 

of housing tax benefits, the realistic costs of buying and maintaining a home, the 
alternative returns on your money if you rent, the number of years you must stay in 
a house for it to pay off, and other complex factors you should consider. 

If You Decide to Rent 

When you』ve completed the buy-versus-rent analysis, you may conclude that 
it makes more sense to rent your housing and invest your money in securities that 
may grow faster than property values over time. If you plan to rent, the following 
tips can help you get the most for your money: 

. 
Before beginning your search for an apartment or a home to rent, refer 
back to the budget exercise in Chapter 1 to determine how much rent you 
can afford. You should be able to meet comfortably your rent plus all your 
other expenses—which include saving and investing. Remember, one of 
the main advantages of renting is that it should leave you with enough cash 
to invest about 10 percent of your gross income. Clearly, that won』t happen 
if you saddle yourself with too high a rent. Ideally, your rent (including 
utilities) should absorb no more than 30 percent of your gross income or 25 
percent of your net income. 
. 
Next, hone in on a good location. The best is usually close to your job or 
provides convenient transportation options to get there. The neighborhood 
you choose should also offer quality stores, schools, parks, and other 
recreational facilities; and it should feel safe. Before you settle on a neighborhood, 
tour it extensively during the day and at night, on weekdays and 
weekends, to get a feel for it. 
. 
Once you』ve decided on a location, look for rental homes or apartments 
advertised in newspapers, at REALTORS.』 offices, and on billboards in local 
supermarkets, schools, and bank lobbies. Depending on the strength of the 
market, you or the landlord will have to pay a fee if you find your apartment 
or rental home through a real estate agent. If there are few rentals in the local 
market, the renter usually pays the fee; if there are many apartments for rent, 
the landlord tends to pay the fee. However, you can avoid that cost if you deal 
directly with a landlord or with a renter who offers a sublease. 
. 
Don』t rent the first home or apartment you see. The more time you take, the 
better the deal you will find. 
. 
When looking at apartments or rental homes, check everything carefully. 
Run all the appliances and facilities, including the dishwasher, washing 
machine, toilet, shower, sink, stove, and waste disposal system. Also, 
make sure the refrigerator is in good condition and that heating and air-
conditioning systems work well. Inquire about parking facilities, security 

CHAPTER 8: Inside Real Estate 

procedures, pest control, and grounds maintenance, if applicable. Determine 
which utility costs are included in and excluded from your rent. Finally, 
visit the property both in the day and at night to see—and even chat 
with—your potential neighbors and to determine the property』s or neighborhood』s 
noise level. 

. 
Once you』ve found a place that meets your needs, lock in as low a rent as 
possible. You will have much more leverage if a surplus of rentals exists in 
the area, of course. Your landlord will probably ask for references from 
your employer or past landlords. Have them ready, in writing, in advance. 
Landlords will also require at least a month』s security deposit and maybe 
two months』 rent. In many states, landlords are required to put that money 
in an escrow bank account and credit you with any interest it earns. 
. 
If you plan on staying in the apartment or rental home at least a year, insist 
on getting a year-long lease. Otherwise, you will rent under a tenant-at-will 
agreement, which means that you can leave whenever you want, but the 
landlord can evict you at will. If you plan to stay awhile, you should sign a 
renewable lease. In addition to allowing you to extend your rental, the lease 
gives you the right to have the landlord maintain the basic facilities in your 
apartment at an acceptable level. Ask the landlord whether your lease 
grants you the right to sublease to another renter and under what conditions 
you can get out of your lease before it officially terminates. 
. 
If you like your apartment or rental home so much that you may want to 
own it someday, ask the landlord whether he or she would apply your rent 
toward a down payment on the purchase of the property. Rent-to-own 
agreements are gaining popularity and may work to your advantage if you 
can lock in a price now that may be profitable if real estate prices rise later. 
Most rent-to-own agreements do not obligate you to buy, however, so you 
can walk away from the purchase if your situation changes or real estate 
values fall. 
If You Decide to Buy 

If you conclude from the buy-versus-rent analysis that you should buy a home, 
you have a much more complex task ahead of you than if you decide to rent. You 
now must determine how much house you can afford, what kind of house to buy, 
where you want to live, how to find the best deal, how to make an offer that is 
accepted, and how to finance your home with a mortgage. After you』ve done all 
of this, you must maintain the home and possibly remodel it to fit your needs. 

The first step to take before you house hunt is to determine how much of a 
mortgage you can afford. To qualify for a home loan, you must pass certain tests 
that all banks will impose. Therefore, you might as well apply those tests yourself 


PART ONE: Maximizing Your Investment Options 

before you ever meet with a banker. In summary, if you make a 10 percent down 
payment on a home, banks will approve a loan only if your monthly real estate 
obligation—which includes mortgage principal and interest payments, real estate 
taxes, homeowners insurance, and maintenance costs (for a cooperative or 
condominium)—is 28 percent or less of your gross monthly income. In addition, 
all of your debt—including payments on credit cards, car loans, student loans, and 
revolving lines of credit, as well as mortgage debt—should not total more than 36 
percent of your gross monthly income. 

The Monthly Mortgage Worksheet in Figure 8.1 will help you determine how 
much of a mortgage you can afford using these rules. The worksheet includes sample 
figures. To determine how much money you can borrow for the purchase of a 
home, you must assume an interest rate and a mortgage term. Figure 8.2 lists factors 
for the two most popular term loans, 15 years and 30 years, at various interest rates, 
from 7 percent to 13 percent. When you have located the proper factor, multiply the 
loan amount by this factor to arrive at a monthly payment. For example, a 
$200,000, 30-year loan at 8 percent interest would require a $1,468 monthly payment 
($200,000 × .00734 = $1,468). If item 10 on your Monthly Mortgage 
Worksheet is greater than this monthly payment, you can afford the mortgage. 

Using these factors, you can try different combinations of terms and interest 
rates to see how much money you can borrow. To do this, divide item 10 from the 
Monthly Mortgage Worksheet by various factors to produce different loan 
amounts. Some examples follow: 

Rate/Term Item 10 Factor Loan Amount 
7%/30 years 
10%/30 years 
13%/30 years 
$1,500 
1,500 
1,500 
.00666 
.00878 
.01107 
$225,225 
170,843 
135,501 
7%/15 years 
10%/15 years 
13%/15 years 
1,500 
1,500 
1,500 
.00899 
.01075 
.01266 
166,852 
139,535 
118,483 

Notice that the longer the loan term and the lower the mortgage interest rate, 
the higher the loan amount you can afford. 

The following table will also help you determine how large a mortgage you 
can afford. It cites monthly payments at different interest rates and mortgage 
amounts. All these payments are calculated for a 30-year, fixed-rate mortgage and 
include both principal and interest repayment. 

Armed with the knowledge of how large a mortgage you can afford and how 
much you must pay each month toward that mortgage, you can now determine 
what price you can pay for a home. It is safe to assume that closing costs, which 


CHAPTER 8: Inside Real Estate 

Interest Rates 
Mortgage 
Amount 7.5% 8% 8.5% 9% 9.5% 10% 10.5% 11% 11.5% 12% 
$50,000 $350 $367 $384 $402 $420 $439 $457 $476 $495 $514 
60,000 420 441 461 483 505 527 549 571 594 617 
70,000 490 514 538 563 589 614 640 667 693 720 
80,000 560 587 615 644 673 702 732 762 792 823 
90,000 630 661 692 724 757 790 823 857 891 926 
100,000 700 734 769 805 841 878 915 952 990 1,029 

Figure 8.1 The Monthly Mortgage Worksheet 
Example 
1. Percentage of monthly income 
available for total mortgage 
payment, including principal, 
interest, real estate taxes, and 
homeowners insurance 28% 
2. Percentage of monthly income 
available for real estate taxes and 
homeowners insurance 4% 
3. Percentage of monthly income 
available for mortgage principal 
and interest payments 24% 
4. Gross monthly income $6,250 
5. Multiply item 3 by item 4 $1,500 
6. Percentage of monthly income 
available for principal, interest, 
real estate taxes, and homeowners 
insurance, plus other debts 
(subtract item 2 from 36%) 32% 
7. Amount of monthly income 
available for principal and interest, 
plus other debts (multiply item 6 
by item 4) $2,000 
8. Amount of monthly income 
available for other debts $ 450 
9. Subtract item 8 from item 7 $1,550 
10. Enter either item 5 or item 9, 
whichever is less $1,500 
Your Loan 


PART ONE: Maximizing Your Investment Options 390 
Figure 8.2 Monthly Payment Factors 
Interest Rate 
Percentage 30-Year Loan 15-Year Loan 

7 % .00666 .00899 
7.5 .00700 .00928 
8 .00734 .00956 
8.5 .00769 .00985 
9 .00805 .01015 

9.5 .00841 .01045 
10 .00878 .01075 
10.5 .00915 .01106 
11 .00953 .01137 
11.5 .00991 .01169 
12 .01029 .01201 
12.5 .01068 .01233 
13 .01107 .01266 
include points (prepaid interest charged by the lender—one point is 1 percent of 
the loan amount), legal fees, title searches, transfer taxes, and other charges, will 
amount to about 2 to 4 percent of your mortgage amount. You should deduct all of 
these closing costs from the cash you have available for a down payment. 

Most sellers and lenders require at least a 10 percent down payment, though 
some will accept 5 percent. If you can make a down payment of 20 percent or more 
of the home』s purchase price, you will save thousands of dollars of interest over the 
mortgage』s life, you can avoid the cost of private mortgage insurance (known as 
PMI), and your loan will be approved much more readily. 

If you plan to make a traditional 10 percent down payment, the Purchase Cost 
Worksheet in Figure 8.3 will help you determine how much home you can afford. 
Sample numbers are provided. 

ASSEMBLING A DOWN PAYMENT 

Buying a home depends on your ability to put together a down payment. The 
inability to do so is the single most common reason that many people are shut out 
of the housing market. Many people have enough income to make mortgage 
payments but are never able to assemble that up-front lump sum. If this is your 
dilemma, the following suggestions may help: 

. 
Borrow the money from your parents or other relatives. If they are in better 
financial shape than you, Mom and Dad or another family member might 
lend you the down payment, which you should repay as you pay off your 
mortgage. 

CHAPTER 8: Inside Real Estate 

Figure 8.3 Purchase Cost Worksheet 
Example 
Start with the mortgage amount 
qualified for (assuming $700/mo., 
7.5%, 30 yr.) $100,000 
Add down payment cash 11,000 
Total price of home 111,000 
Add closing costs 
(at 4% of loan amount) 4,440 
Total Purchase Cost $115,440 
Your Purchase 
$ 
$ 

. 
Put securities or bank deposits in escrow to act as your down payment. For 
example, in the Merrill Lynch Mortgage 100 program (800-854-7154), if 
you can place a bit over 30 percent of the home』s purchase price in escrow 
in the form of stocks, bonds, mutual funds, and certificates of deposit, Merrill 
will lend you 100 percent of your home』s purchase price. One advantage 
of this system is that you do not have to sell securities and pay capital 
gains taxes on any realized gains to assemble your down payment. Over 
time, as you pay down the principal of your mortgage or the value of your 
home increases, you will be able to take securities out of escrow, because 
you will have built up enough home equity. If you do not have enough securities 
to participate in the Mortgage 100 program, Merrill also offers the 
Parent Power Program, which permits parents to fund the escrow account 
with their securities or bank deposits, allowing their children to get 100 percent 
financing for their home. As the children pay down the mortgage or as 
the value of the home increases, the parents』 securities can be released 
from the escrow account. 
. 
Take out a loan against your equity in your employer』s profit-sharing, thrift, 
or 401(k) plan. Most firms allow you to borrow at the prime rate or at a 
little more than prime and pay the loan back through payroll deduction. 
. 
Make saving a priority. The sooner you start putting money aside and investing 
it for growth, the sooner you will accumulate the down payment 
you need now or in the future. (One path to increased savings is decreased 
spending, particularly frivolous spending on disposable items. Think of all 
those Chinese dinners you pick up on the way home from work instead of 
cooking and those spur-of-the-moment vacations as assaults on your down 
payment fund.) 
. 
Get a Federal Housing Administration (FHA) or Department of Veterans 
Affairs (VA) loan, both of which require lower or, in some cases, no down 

PART ONE: Maximizing Your Investment Options 

payments. Although maximum FHA loan amounts vary depending on the 
area, they range between $100,000 and $115,000 for a single-family house. 
VA loans are given to members of the armed forces, veterans, and widows 
of veterans. 

. 
Obtain private mortgage insurance with your lender. If your creditworthiness 
qualifies you to receive it, you will be able to reduce the size of your 
down payment because your lender is now protected against your default. 
. 
Buy a foreclosed home. Local lenders, as well as the FHA and VA, will 
usually accept low down payments to induce buyers to buy homes on 
which the lenders have foreclosed. You might have to fix up the property 
and it might not be located in a prime area, but the investment can get you 
into the housing market. 
Finding the Right Home 

Once you have determined how large a mortgage you can afford, what price 
you will pay for a home and how you will assemble a down payment, it』s time to 
establish what kind of housing will best serve your needs, both today and in the 
future. 

THE BEST LOCATION 

Before you explore the different homes available, determine where you want 
to live. For example, are you most comfortable in the city, country, or suburbs? Examine 
the trade-offs between different locations. Would you exchange a quick trip 
to the office, for instance, for acres of trees and grass many miles away? Do a 
short trip to work and nearby cultural opportunities outweigh a shortage of parking? 
Also, evaluate available shopping, public and private schools, recreational and 
cultural facilities, and transportation options, as well as the composition of the 
local population and the cost of living in the area. Lifestyle considerations often 
outweigh financial ones when choosing a place to live. 

In addition to choosing where to live, you must decide how to live. What size 
home suits your present and future needs? First, determine how long you plan to 
stay in the home you are about to buy. A young, childless couple might need only 
a small condominium now but a larger house in five years when they begin a family. 
On the other hand, an empty-nester couple nearing retirement might find a 
large home a burden to maintain. Next, establish realistically how much space you 
need, both now and in the future. If you plan to move in a few years, it might not 
make sense to buy more house than you need now because it may strain your budget. 
Conversely, a house in which you plan to live for the rest of your life shouldn』t 
be too small if it will seem cramped as your children grow or when you add a new 
member to the family. 


CHAPTER 8: Inside Real Estate 

A HOME FOR YOUR LIFESTYLE 

Next, assess what type of home best suits your lifestyle. For instance, would 
you rather own a new structure, which may offer many modern conveniences, or 
an older home, which you may find more charming, though less energy efficient 
and more in need of repair? You might prefer the traditional American dream 
home—a single-family detached house, which gives you much privacy. Or you 
may favor buying a multifamily house or small apartment building, which earns 
rental income that offsets your mortgage and maintenance costs. 

Finally, you may like the idea of purchasing an apartment in a cooperative or 
condominium building. In a cooperative, you actually buy shares in the entire 
property, which grants you a proprietary lease to occupy an apartment. Condominiums 
allow you to buy the property outright. In many cases, the cooperative or 
condominium board of directors must approve anyone to whom you want to sell 
the apartment, which can make the property difficult to sell. Both coops and condos 
assess a monthly maintenance charge to pay for such shared costs as the property』s 
underlying mortgage, heat, elevators, electricity, grounds maintenance, 
security, and recreational facilities, such as swimming pools or tennis courts. If the 
coop or condo must undertake a particularly large repair job, like replacing a roof 
or boiler, you may have to pay an extra assessment to cover your share of the bill. 
Living in a well-run coop or condo can liberate you from much of the maintenance 
of a single-family home. On the other hand, you must make sure that the board of 
directors runs the organization well. If the board continually defers essential maintenance, 
for example, the value of your unit could erode. 

CONDUCTING THE SEARCH 

Once you have zeroed in on the location, size, and style of the home that best 
suits your needs, you may begin your search. You have many ways to find your 
dream home. 

. 
Tell friends and neighbors you』re in the market for a home. They might 
know of a good deal. 
. 
Contact a real estate agent. Unless you hire a broker who represents the 
buyer, you will deal with an agent whose job it is to represent the seller. 
Agents and brokers can be extremely helpful in showing you homes that fit 
your housing and budgetary needs, but always remember that the seller 
pays their commission, which is based on their getting as high a price for 
the property as possible. (See 「Real Estate Brokers」 in Chapter 17 for more 
information about selecting a real estate broker.) 
. 
Read classified ads in newspapers. With practice, you will learn to scan the 
thousands of listings with an eye for a bargain. Your best chance to buy a 

PART ONE: Maximizing Your Investment Options 

great home at a good price occurs when the seller is under pressure to sell. 
She might be going through a divorce. He may be on the verge of foreclosure. 
She may have taken a job in another city. Whatever the reason, 
look for what real estate professionals call motivated sellers. You might not 
only get a good price but also induce the seller to offer attractive financing. 
Also notice whether a newspaper ad has been placed directly by the homeowner, 
which would allow you to sidestep an agent』s commission, or by an 
agency. Even though the seller pays the broker』s fee of up to 7 percent, that 
fee is built into the price you pay. 

. 
Place a classified ad. If you can』t find a home you like through the newspapers, 
you can place an ad explaining what you are looking for. You may 
hear from a seller or real estate agent who can tell you about a property that 
you don』t know about. 
. 
Look for vacant homes. By driving or walking through the neighborhood 
you are interested in, you may spot a vacant home with an overgrown lawn, 
peeling paint, and a lot of junk mail in the mailbox. A For Sale sign may or 
may not be posted on the property. To determine who owns the home, look 
up records at City Hall, question the neighbors, or ask the post office 
whether it has a forwarding address. The home may be owned by a motivated 
seller who would be overjoyed to receive your bid. 
. 
Purchase real estate about to be or already foreclosed upon. The ultimate 
motivated seller is the person about to lose property to the bank because he 
or she has not kept up with the payments. You can buy from the owner before 
foreclosure, from the trustee at foreclosure, or from the bank that holds 
the property after foreclosure. If the FHA or VA insured the loan, it may 
also be involved in the foreclosure. Foreclosed-upon properties are frequently 
offered at auctions; however, you will probably do better if you can 
buy the property directly from the owner before it gets to auction. 
. 
Use a buyer』s broker. If you』ve never searched for a house before, it may be 
useful to have a buyer』s broker on your side. These brokers are unlike traditional 
brokers whose job it is to get the highest price for the homeseller. 
They work exclusively to get you, the homebuyer, the best possible deal. 
Buyer』s brokers are fully licensed real estate professionals, with total access 
to all multiple listed, unlisted, and 「for sale by owner」 properties. 
They assist you with the entire homebuying process, from helping you 
define your wants and needs to making price comparisons and offering 
strategies. They will help you objectively look at a property』s strengths and 
weaknesses. During negotiations with the seller or the seller』s agent, the 
buyer』s broker will do his or her best to help you get the best price and 
terms. One strategy that can save you thousands of dollars is not to disclose 
your highest price intentions, or how motivated you are to buy the house. 

CHAPTER 8: Inside Real Estate 

Buyer』s brokers can help you by acting as an intermediary with the seller, 
only divulging the information that is needed to seal the deal. A buyer』s 
broker usually gets paid on a normal commission structure—make sure 
you know how much your broker gets before you agree to use their services. 
To find a buyer』s broker near you, look in the Yellow Pages, or you 
can contact the national Buyer』s Homefinding Network at 800-500-3569 
for a local referral. 

As you evaluate various properties, write in a notebook the location, layout, 
features, and financial details—such as price, taxes, and maintenance costs—of 
each home you consider. When you look at many homes, you may have difficulty 
keeping all these details straight. 

ARRANGING AN INSPECTION 

Once you have found the home, including condominiums, that meets your 
housing and financial needs, you should have it professionally inspected to detect 
any problems with the property. You can find a professional inspector through one 
of the following: the American Society of Home Inspectors (932 Lee St., Des 
Plaines, IL 60016-6546; 847-290-1959; 800-743-2744) or the National Association 
of Property Inspectors (303 W. Cypress, San Antonio, TX 78212-0528; 800486-
3676). A qualified home inspector will be impartial, will have years of 
experience and a good reputation in the community, and will stand behind his or 
her inspection. Some companies will even offer a one-year warranty on their inspections 
that covers any defect not detected during the inspection. 

The following is a brief rundown of things your inspector should check: 

. 
Structural components, including foundations, floors, walls, columns, ceilings, 
and roofs 
. 
Exterior conditions, including wall flashings and trim, doors, windows, 
chimneys, decks, balconies, stoops, steps, porches, eaves, vegetation, grading, 
drainage, driveways, patios, and walkways 
. 
Plumbing systems, including pipes, drains, and traps, and the operation of 
showers, toilets, and faucets 
. 
Electrical systems, including wiring, grounding equipment, amperage and 
voltage ratings, circuit breakers, lighting fixtures, and receptacles 
. 
Heating systems, including boilers, thermostats, heat pumps, insulation, radiators, 
and automatic safety controls 
. 
Air-conditioning systems, including central controls and distribution systems 
such as fans, pumps, ducts, and air filters 
. 
Interiors, including walls, ceilings, floors, cabinets, doors, windows, and 
stairs 

PART ONE: Maximizing Your Investment Options 

In general, the inspector assesses the structural and mechanical components of 
the home. Features the inspector will usually not examine include paint, wallpaper, 
carpeting, household appliances, and draperies. He or she also will not look for 
termites, fleas, rodents, or other pests. It is your task to scrutinize the aspects of the 
home the inspector does not. You should also learn about the state of the local 
environment. You don』t want to pay for damages caused by leakage of toxic or 
hazardous wastes that have been buried on the land. 

OBTAINING AN APPRAISAL 

If the home passes both your inspection and examination by a professional inspector, 
you should obtain an independent appraisal to make sure you don』t pay too 
much for the property. Your lender may select an appraiser for you, whose fees you 
will probably pay. But if you want your own appraisal as well, you can find a professional 
appraiser through the National Association of Master Appraisers (P.O. 
Box 12617, 303 W. Cypress St., San Antonio, TX 78212-0617; 800-229-NAMA; 
www.masterappraisers.org) or the Appraisal Institute (875 N. Michigan Ave., Suite 
2400, Chicago, IL 60611-1980; 312-335-4100; www.appraisalinstitute.org). If the 
appraisal indicates a lesser amount than the seller is asking, you may be able to use 
it as a bargaining chip to get a better price. The appraisal will also be useful in the 
mortgage application process because banks lend only a certain percentage of a 
home』s appraised value. 

NEGOTIATING THE PRICE 

With your inspection and appraisal in hand, you can now set the lowest possible 
price to which the seller will agree. Whether you deal directly with the seller or 
bargain through a real estate agent, you should know how much you can afford to 
bid, based on your budget and the mortgage for which you can qualify. You should 
also determine whether you or the seller has a stronger bargaining position. If the 
local market is active and many other buyers have expressed interest in the home, 
the seller will likely be inflexible. On the other hand, if the market is glutted and 
the seller desperate to move, you can expect to receive much better terms. 

Using your inspection report, you can point out defects in the home, estimate 
how much it will cost to fix them, and ask that this amount be deducted from the 
property』s price. You can also negotiate what fixtures, appliances, and draperies 
will remain in the home and, if the seller offers you financing, what interest rate he 
or she will charge. The entire negotiation process can be unnerving and intimidating; 
however, you should stand firm because thousands of dollars are at stake. 

THE SALES CONTRACT 

When you come to an agreement with the seller, note all terms in the sales 
contract. These terms should include the following: 


CHAPTER 8: Inside Real Estate 

. 
Sales price 
. 
Address and legal description of the property 
. 
Amount of your earnest money deposit, which reserves the house for you 
while the contract is prepared and executed 
. 
Amount of the down payment—perhaps 5 percent or 10 percent of the sales 
price—which holds the house for you while you apply for a mortgage 
. 
Terms of your mortgage, allowing you to withdraw from the sales contract 
if you cannot qualify for a mortgage or if interest rates rise so much that 
you can no longer afford to buy the home 
. 
Terms of assuming the seller』s mortgage, if applicable, which may allow 
you to obtain a lower rate than is currently available in the market 
. 
Details of owner financing, if applicable, which should include repayment 
terms, interest rates, and down payments. (The contract should not impose 
a prepayment penalty.) 
. 
Closing details, such as when and where the closing will take place 
. 
Date of occupancy so that it is clear when you can move into your new 
home 
. 
Type of deed required to be transferred from the seller to the buyer at closing 
. 
Personal property and fixtures included with the house, such as appliances, 
carpeting, draperies, and lighting fixtures. (The contract can define something 
as a fixture or as personal property, which thus establishes what goes 
with the property and what does not.) 
. 
Repairs the seller agrees to make, including necessary inspections for such 
problems as termites. (This list should also include any required inspections 
by the city or county to ensure that the building has no code violations and 
has a valid certificate of occupancy.) 
. 
Explanation of easement rights, which give someone else—such as a 
utility—the legal right to use your land 
. 
Amount of the real estate broker』s fee, if any, and who will pay it (usually 
the seller, but this should be spelled out in the contract) 
. 
Account where your earnest money and down payment will be kept, usually 
in escrow in a special bank account. (Another clause should explain the 
conditions under which you can receive a refund.) 
. 
Proration of home ownership costs, specifying how property taxes, utility 
bills, and rent from tenants will be split during the period between the signing 
of the contract and the time you take possession of the home 
. 
Provisions about title insurance, specifying which title insurance company 
will issue a policy. (Title insurance protects the buyer in case someone later 

PART ONE: Maximizing Your Investment Options 

challenges the seller』s right to sell the property in the first place. If the title 
is unclear, the home cannot be sold easily. The contract should also specify 
who must pay for the title search—usually the seller although in some areas 
of the country it is the buyer.) 

. 
Warranty against liens, stating that all renovation or repair bills and taxes 
have been paid. (You don』t want to take possession, then have to deal with 
a contractor trying to collect an unpaid bill dated several months or years 
ago.) 
. 
Financing arrangements, specifying that you will apply for a mortgage 
loan. (The entire sale will usually be contingent on your obtaining financing. 
There should be a clause in the contract stating that if you can』t get a 
mortgage, the contract is void. If the seller provides financing, the terms 
should be included in the sales contract. The seller has the right to run a 
credit check on you to ensure that you are creditworthy.) 
To make sure all of these provisions are handled correctly, it is best to have an 
experienced real estate lawyer represent you in the sales contract process. 

CLOSING THE SALE 

The last step in buying your dream home is the closing, where the many 
players involved in the transaction come together and checks for thousands of 
dollars are distributed. You should enter the final leg of this house-buying marathon 
knowing who will be present, what legal documents you must bring, and how 
much money you must hand over to finish the deal. 

Generally, the cast of characters attending a closing include the buyer, the 
seller, a real estate attorney for both parties, a representative of the bank making 
the mortgage, an escrow agent from the bank holding your down payment and 
earnest money, a representative of the title insurance company, and the real estate 
broker for both parties. 

The entire settlement procedure is covered by a federal law called the Real Estate 
Settlement Procedures Act (RESPA) that helps you anticipate the costs of closing. 
Settlement services often arrange the details of a closing, and if you use such 
a service, you should shop around to get the best price on a closing cost package. 
Your real estate agent may have a suggestion. 

The following list names the most common closing costs: 

. 
First mortgage payment 
. 
Mortgage application fees 
. 
Loan origination fees (fees the bank charges to process your loan) 
. 
Points, or prepaid interest, charged by the lender. (One point equals 1 percent 
of the loan amount. You may have to pay between 1 and 3 points.) 

CHAPTER 8: Inside Real Estate 

. 
Loan assumption fee (if you are assuming the seller』s mortgage) 
. 
Mortgage insurance premiums. (This insurance covers the lender』s risk if 
the buyer fails to make loan payments.) 
. 
Credit report fees 
. 
Survey, inspection, and appraisal fees 
. 
Recording deed fee 
. 
Homeowners insurance premiums for the first year 
. 
Escrow account reserves that the lender might require to cover insurance or 
property taxes over the coming year 
. 
Property tax payments for the first year (prorated to the closing date) 
. 
Legal fees for your lawyer and the bank』s attorney 
. 
Settlement company』s fees 
. 
Title search fees and title insurance premiums (usually paid by the seller) 
. 
Down payment (which should include the earnest money you have already 
set aside) 
Depending on the price of your home and the price you get for all these items, 
your closing costs may amount to between 2 percent and 4 percent of the cost of 
your home. 

Choosing the Best Mortgage 

The entire process of uncovering and qualifying for a mortgage is crucial to 
making the most of your real estate dollar. You must pay off this debt for years; 
therefore, to find the best possible deal, you should understand the various sources 
and types of loans available. 

LOAN SOURCES 

The first step in shopping for a mortgage is to identify loan sources. The following 
are the most likely lenders: 

. 
Savings and loans (S&Ls) are the largest traditional lender to the home 
mortgage market. Despite the thrift crisis and subsequent bailout in the late 
1980s and early 1990s, the S&Ls that survived are strongly committed to 
originating mortgages. They have great expertise in this area and frequently 
offer the lowest rates. 
. 
Savings banks, largely the same as S&Ls, are found mostly on the East 
Coast and specialize in mortgage lending. 
. 
In recent years, commercial banks have been aggressively pursuing the 
S&L』s bread-and-butter business of making mortgage loans. They may 

PART ONE: Maximizing Your Investment Options 

offer the best deal around, particularly if you combine your mortgage with 
your checking, savings, and investment accounts at the bank. 

. 
Members of credit unions may be able to get the best mortgage terms from 
this nonprofit organization designed to serve its participants. 
. 
Mortgage bankers borrow money from banks or investors, make mortgage 
loans, and resell the loans to investors at a profit. They may be able to tap 
into mortgage pools created by insurance companies, pension funds, and 
other institutional lenders you would not normally have access to on your 
own. Frequently, mortgage bankers will collect both your monthly payments 
and a fee from the lender for providing this service. You can find a 
mortgage banker through a local real estate agent, the Yellow Pages, or the 
Mortgage Bankers Association of America (1919 Pennsylvania Ave., N.W., 
Washington, DC 20006; 202-557-2700; www.mbaa.org). 
. 
Mortgage brokers find the best loans for homebuyers for a fee paid by the 
lender. They get these good deals because they bring in many loans to a 
particular lender and therefore can obtain better terms than you, individually, 
could from the same lender. In addition to the loan fee, you normally 
must pay the mortgage broker an application fee. Generally, mortgage 
brokers do not lend any of their own money. You can locate a broker 
through a local real estate agent, the Yellow Pages, or the National Association 
of Mortgage Brokers (8201 Greensboro Dr., Suite 300, McLean, VA 
22102; 703-610-9009; www.namb.org). 
. 
Sellers may offer the best financing option if you are not able to qualify 
with another lender and the seller is desperate to move. The amount of 
seller financing rises sharply when interest rates at traditional lenders 
shoot up. 
In addition to traditional home loans, most of these lenders will make loans 
guaranteed by the FHA or VA. These agencies set certain standards for the kinds 
and sizes of loans and borrower qualifications to qualify for their guarantees. For 
example, many VA loans require little or no down payment for qualified veterans. 
Many states also sponsor housing finance agencies that offer below-market mortgages 
for low- or moderate-income homebuyers. These agencies usually raise the 
money for such loans by issuing municipal bonds backed by the home loans. 

When you shop for a mortgage, compare not only the interest rate but also the 
closing costs (points and other fees), which can add to your total cost significantly. A 
few services—such as the Home Buyer』s Mortgage Kit run by HSH Associates (1200 
Route 23N, Butler, NJ 07405; 800-873-2837; www.hsh.com)—can give you, for a 
small fee, a current comparison of rates and terms for lenders in your area. 

In today』s mortgage market, many lenders do not retain the loans they make. 
They sell the loans in the multi-billion-dollar secondary market to such quasi



CHAPTER 8: Inside Real Estate 

governmental agencies as Ginnie Mae (Government National Mortgage Association), 
Fannie Mae (Federal National Mortgage Association), and Freddie Mac 
(Federal Home Loan Mortgage Corporation). Ginnie, Fannie, and Freddie then 
package these loans, guarantee them against homeowner default, and sell them as 
mortgage-backed securities. This secondary market continually brings in new 
dollars to the mortgage market for lending at the local level. So even though you 
continue to send your mortgage payments to the lender that financed your loan, 
your payments may very well be passed on to holders of mortgage-backed securities 
across the country. 

KINDS OF MORTGAGES 

Most lenders offer several types of mortgages. The most common options 
follow. 

Fixed-rate. The traditional 30-year fixed-rate mortgage is still the industry 
standard because it offers long-term predictability. Your total payments are spread 
over so many years that your monthly payments are lower than they would be on a 
shorter term loan. In the long run, however, you will pay thousands of dollars more 
in interest on a 30-year loan than on a less extended obligation. This interest is 
usually tax deductible, though, which lowers your actual after-tax cost of paying it. 

Lately, 15-year loans have become particularly popular. They usually offer 
slightly lower interest rates than 30-year loans, but you must make substantially 
larger monthly payments. If you want to prepay your mortgage on such a faster 
schedule, contact your lender to arrange a prepayment schedule, and make sure 
that you will not be assessed any prepayment penalties. Because you pay off the 
loan balance faster, a smaller portion of your monthly payment goes for interest. 
This means that you will deduct less on your tax return but own your home sooner 
than you would with a 30-year loan. Making biweekly payments on a 30-year loan 
rivals making monthly payments on a 15-year mortgage. 

In the early years of either a 30-year or a 15-year fixed-rate loan, you pay 
mostly interest. By the end of the loan, you pay almost all principal. Therefore, 
over time, ownership in your home gradually shifts from the lender to you. 

Adjustable-rate. Instead of offering an interest rate fixed for the life of the loan, 
an adjustable-rate mortgage (ARM) features an interest rate that moves up and down 
with prevailing rates. Early in the ARM』s term, its rate will almost always be less 
than that on a fixed-rate loan. Because the borrower agrees to risk fluctuating rates 
over the life of the loan, he or she is rewarded with a low initial rate. 

ARMs come in many varieties. Some adjust their rates every year, while others 
alter them every three or five years. Loan rates are tied to a number of interest rate 
indexes. A bank will charge a margin, or spread, over the underlying index of up 
to two or four percentage points. The most popular loan rates include the national 
average mortgage rate as calculated by the Federal Home Loan Bank 
(FHLB) Board; U.S. Treasury bill rates; one-year constant maturity Treasury rates; 


PART ONE: Maximizing Your Investment Options 

the prime lending rate; and the 11th District cost of funds index rate (known as a 
COFI loan), which is the average cost that S&Ls must pay depositors for their 
money. You can learn these rates from most lenders, from publications like The 
Wall Street Journal or from Web sites such as . 

In general, the more short term the index that your ARM is tied to, the more 
volatile your payments will be. That』s good if interest rates fall but can cause 
trouble if interest rates rise. Rates on T-bills and one-year Treasuries and the prime 
rate will fluctuate much faster than the cost of funds rate or the national average 
mortgage rate. If you hesitate to take the risk of short-term rates, consider an ARM 
tied to the more slowly moving indexes. 

Most ARMs offer two built-in caps to protect you from enormous increases in 
monthly payments. A periodic rate cap limits how much your payment can rise at 
any one time. For example, your loan agreement might stipulate that your rate cannot 
go up more than two percentage points a year. An aggregate, or a lifetime, cap 
limits how much the rate can rise over the life of the loan. The same loan that limits 
increases to 2 percent a year may also impose a 6 percent cap for the duration 
of the loan. Such caps can also apply to rate decreases. Therefore, the example loan 
may not fall more than two percentage points in one year or six points during its 
lifetime. 

In addition to rate caps, many ARMs feature payment caps, which limit the 
amount your payment can rise over the life of the loan. Therefore, if the underlying 
index shoots up, your payment would increase only to the limit of the payment cap. 
Even though you do not pay the difference now, however, you owe it to the lender 
over the long term. When your mortgage payment does not cover the full interest 
and principal due, this is called negative amortization. The lender will apply more, 
and possibly all, of your payment to interest, which means that your home equity 
will grow more slowly or, in the extreme case, will actually shrink. 

Automatic rate cut (ARC). A variation on the adjustable-rate mortgage is 
called the ARC loan. The rate starts off a bit higher than current mortgage rates, but 
every time mortgage rates fall by a quarter point or more, the rate automatically adjusts 
downwards with no closing costs, points, or fees for the borrower. These adjustments 
can occur as frequently as every 90 days. The best part is that the rate never 
rises after it has fallen. It』s a one-way street in your favor! For more information 
about ARC loans, called 888-ARCLOAN or log on to . 

Convertible. A convertible mortgage is an ARM that can be changed to a 
fixed-rate mortgage at a specified rate. You may have one chance or several to 
make the switch. The conversion feature gives you the opportunity to start with a 
low adjustable rate, then lock into a low fixed rate for a long time. 

Balloon. A balloon mortgage requires a series of equal payments, then a large 
payment (balloon) at the loan』s termination. The mortgage term may be from three 
to ten years. Usually, balloon mortgages are offered at fixed rates, though some 


CHAPTER 8: Inside Real Estate 

adjustable-rate balloons are also available. The payments on a balloon mortgage 
generally cover interest only, so you do not build equity in the home over time. If 
you take on such a loan, you should know what you will do when the balloon 
arrives. Most homeowners refinance the payment. Some lenders will promise to 
refinance the loan when the balloon comes due, though they will not lock in an 
interest rate in advance. In many cases, homesellers offer buyers balloon mortgage 
options to help the deals go through. 

Growing equity. A growing equity mortgage (GEM), often known as a rapid 
payoff loan, offers a fixed rate and a changing monthly payment. Formally, the 
loan is for 30 years but, in fact, may be paid off in 15 years or less because your 
payments reduce the outstanding principal quickly. Your payment amount is usually 
tied to some index, such as the Commerce Department』s per capita income 
index. In this case, as income rises, your payments increase. You can also create 
your own GEM by sending in extra principal payments or by paying your mortgage 
biweekly instead of monthly. All of these methods of payment will help you 
build equity faster and pay off your mortgage sooner. 

Shared appreciation. If you are willing to surrender to your lender some of 
your home』s appreciation potential, you may want to opt for a shared appreciation 
mortgage (SAM). With this loan, you pay a below-market interest rate on your 
mortgage and, in return, offer the lender between 30 percent and 50 percent of the 
increased value of your home when you sell it in a specified number of years. If 
that day comes and you do not want to sell, you must pay the lender its share of 
the property』s appreciation. If you don』t have the cash to do so, you might have to 
sell the property anyway. On the other hand, if the property has not appreciated or 
has, in fact, decreased in value, you will owe nothing. SAMs were much more popular 
in the 1970s and 1980s, when housing appreciation was more assured. They 
are far trickier in the 1990s for both lenders and borrowers because of the unsettled 
real estate market. 

Buy-down. If you buy a home from a developer, it may offer a buy-down, or 
mortgage subsidy, to help you afford the property. For example, to help you qualify, 
the developer may cut the interest rate on your mortgage by two or three percentage 
points for the first three years of your loan. While this may help you obtain 
the mortgage, you may not be able to afford the payments when the subsidy lapses. 
If you count on a higher income in the future to help you meet those higher payments, 
you could be in trouble if your income does not rise sufficiently. 

Choosing the best mortgage for you is a matter of weighing the pros and cons 
of each. For example, you might treasure the security of a fixed-rate mortgage, 
particularly if you lock in a favorable rate for a long time. However, the higher 
interest rate attached to a fixed loan can be a significant price to pay for that sense 
of security. 


PART ONE: Maximizing Your Investment Options 

On the other hand, you might be better off taking the risk of an ARM and 
investing the difference between an ARM payment and a fixed loan payment. If 
you put the money in a few top-performing stocks, bonds, or mutual funds, your 
financial picture might improve far more with the adjustable mortgage, even if 
interest rates rise over time. 

The other types of loans discussed here—convertibles, balloons, graduated 
payment loans, growing equity mortgages, shared appreciation loans, and buydowns—
all have their place, depending on your situation. As with adjustable-rate 
and fixed-rate loans, weigh the disadvantages against the advantages of each. 

REFINANCING YOUR MORTGAGE 

If you locked yourself into what you thought was a good fixed-rate mortgage 
and rates have since dropped, you may want to consider refinancing your loan to 
save what could total thousands of dollars over the long term. 

The rule of thumb in the industry used to be that your new mortgage had to be at 
least two percentage points less than your existing mortgage for the transaction to be 
worthwhile. Recently, however, the competition among lenders has shaved closing 
costs significantly, and in many cases, it might pay off to refinance if the difference 
is one percentage point or possibly even less. It all depends on how much the new 
bank charges in closing costs, and how long you plan to stay in your home. 

In order for you to refinance, your home must have enough value to justify a 
new loan. Many people who bought homes at peak prices in the late 1980s were 
disappointed to learn that they could not refinance their homes in the 1990s when 
mortgage rates dropped so sharply because the worth of their homes had plunged 
as well. 

Most lenders will make you go through the same application process when you 
refinance as you did when you applied for your original mortgage. Even though it 
doesn』t seem fair or necessary, you must again pay loan origination fees, credit 
report charges, appraisal charges, inspection fees, points, mortgage recording taxes, 
title insurance, and legal fees. Also, determine whether your current loan imposes 
prepayment penalties. If so, refinancing can be significantly more expensive. 

To determine whether you should refinance your current mortgage, calculate 
your refinancing costs, then complete the Refinancing Worksheet in Figure 8.4. 
Sample figures are provided. 

In the example in Figure 8.4, it would take the borrower ten months of lower 
payments to recover the $3,000 in up-front refinancing costs. Therefore, the 
borrower should plan to stay in his or her home at least ten months after the refinancing. 
In other cases, the savings would be less and the payback period would 
be longer. Again, it is worthwhile to refinance only if you live in your house for a 
significant amount of time after you refinance. 

When you refinance, you will pay less interest on the new loan. That saves you 
money but means that you will receive fewer mortgage interest deductions to lower 


CHAPTER 8: Inside Real Estate 

Figure 8.4 Refinancing Worksheet 
1. Present monthly mortgage 
payment 
2. Mortgage payment after 
refinancing 
3. Monthly savings (subtract item 2 
from item 1) 
4. Total fees, closing costs, and 
prepayment penalities 
5. Time needed to break even 
(divide item 4 by item 3) 
Example 
$1,000 
$ 700 
$ 300 
$3,000 
10 months 
Your 
Mortgage 

your tax bill. Also, any points you pay on the new mortgage can be deducted only 
over the life of the loan, not up front in a lump sum. 

While most people refinance a fixed-rate loan with another such loan, you can 
also exchange a fixed-rate loan for an ARM or an ARM for a fixed-rate loan. When 
you convert a fixed-rate mortgage to an ARM, you should invest your savings in 
stocks, bonds, or mutual funds that will give you long-term capital appreciation. 
Then, if interest rates on the ARM rise, you will have accumulated capital on 
which to draw to make the higher payments. One of the worst moves you can make 
is to convert from a fixed- to an adjustable-rate mortgage and spend the difference 
on a more extravagant lifestyle. 

If rates drop low enough, it may make sense to exchange an ARM for a fixed-
rate loan. Just realize that you are increasing your monthly mortgage payment in 
order to gain peace of mind. If you can live with a little more uncertainty, invest the 
money you save on an ARM in top-quality securities. 

Another way to refinance is to convert a long-term loan, such as a 30-year 
mortgage, to a shorter term loan, such as a 15-year mortgage. You might find that 
your monthly payment stays about the same, but you will pay off your mortgage 
much faster. 

A good way to determine whether refinancing makes sense and what refinancing 
options are best for you is to analyze your situation using calculators available 
on numerous Web sites listed at the end of this chapter, including Quicken』s Mortgage 
Tools at , and Microsoft』s 
MSN Home Advisor at . 

If the math indicates refinancing, try your existing lender first. In order to keep 
your business, it will probably give you the best deal and might even waive certain 


PART ONE: Maximizing Your Investment Options 

procedures or fees, such as the appraisal or prepayment charges. Your lender 
should be particularly accommodating if you have made all your mortgage payments 
on time, your new payments are not more than 15 percent higher than your 
old payments, and you make at least the income you earned when you took out the 
original loan. Still, before you recommit to your lender, shop around to several 
other lenders to see whether you can obtain an even better deal. 

HOME EQUITY LOANS 

Once you have built up equity in your home, you have the privilege of 
arranging a home equity line of credit, which allows you to borrow against that 
equity inexpensively and conveniently. Most financial institutions—banks, savings 
and loans, brokerage firms, finance companies, credit unions, and others—have 
entered the home equity market, so you have plenty of options when you shop for 
the best loan. 

In effect, a home equity loan is a second mortgage on your home. You usually 
get a line of credit up to 70 percent or 80 percent of the appraised value of your 
home, minus whatever you still owe on your first mortgage. For example, if your 
home is worth $100,000 and you owe $20,000 on your mortgage, you might 
receive a home equity line of credit for $60,000 as your lender subtracts your 
$20,000 owed on the first mortgage from your $80,000 worth of equity. You will 
qualify for a loan not only on the value of your home but also on your creditworthiness. 
For instance, you must prove that you have a regular source of income 
to repay a home equity loan. Because only the first $100,000 of home equity debt 
creates deductible interest, many people limit themselves to that amount although 
banks will loan much more if you qualify. 

Like other mortgages, the home equity loan requires you to go through an 
elaborate process to qualify for and open a line of credit. You will usually need a 
home appraisal and must pay legal and application fees and closing costs. Many 
banks also charge loan origination fees or points. In addition, they may collect an 
annual fee of up to $50 to maintain the account. 

Because a home equity loan is backed by your home as collateral, it is considered 
more secure by lenders than unsecured debt, such as on credit cards. And 
because the loans are less risky for banks, you benefit by paying a much lower 
interest rate than you would on credit cards or most other kinds of loans. Typically, 
home equity credit lines charge a variable rate one to three percentage points more 
than the prime lending rate. In many cases, home equity lenders will start you off 
with an introductory rate of one-half to one percentage point below the prime rate 
for six months to as long as a year. Home equity loans can therefore offer extremely 
attractive rates when the prime is low but subject you to much higher interest 
costs if the prime shoots up. You can tap the credit line simply by writing a 
check, and you can pay back the loan as quickly or as slowly as you like, as long 
as you meet the minimum payment each month. In theory, you must repay out



CHAPTER 8: Inside Real Estate 

standing balances in five or ten years in one balloon payment. In practice, the 
bank will probably not require the balloon as long as you pay your minimum. 

Home equity loans have become popular because they are flexible and offer 
attractive rates and tax deductions. However, you should be careful about how you 
spend the proceeds from your home equity loan. It is best if you use the money for 
major capital expenditures on which you might earn a return instead of on impulse 
items. For example, you might use home equity money to renovate your home, 
finance your children』s tuition, buy a car or furniture, or pay off high-cost, nondeductible 
credit card debt. Don』t, however, tap the credit line for a Caribbean 
vacation or a spin of the roulette wheel in Las Vegas. Remember, your home is on 
the line. If you spend the money frivolously and don』t repay the loan, you』ll lose 
your home quickly. If you know that you will be tempted to spend the money 
unwisely, it』s best not to open a home equity credit line. 

REVERSE MORTGAGES 

Another way to tap the equity in your home, particularly if you are retired 
and own your home free and clear, is to assume a reverse mortgage. Instead of 
borrowing against your equity and paying interest, you contract with a bank to 
convert some of your home equity to cash while you retain ownership. These are 
called reverse mortgages because they are the opposite of traditional mortgages 
—the bank makes payments to you. You can use the money for anything you 
want though it is prudent to use it for living expenses such as taxes, insurance, 
heat, or food. 

With a reverse mortgage you can take your proceeds in a lump sum, in monthly 
checks, or through a line of credit you can tap whenever you want. The amount you 
can borrow depends on your age, the value of the equity in your home, and the 
interest rate charged by the lender. Some loans charge a fixed rate of interest, while 
others charge a variable rate. When obtaining a reverse mortgage, you normally 
must pay closing costs and insurance premiums and sometimes a monthly service 
fee. The reverse mortgage comes due when you die, sell the home, or move permanently. 
At that point, you or your heirs must pay off the loan, or the bank will 
take title to your home. 

Reverse mortgages increase the amount of interest you owe every month. Over 
time, the interest owed can become considerable, and your equity stake can shrink 
dramatically. However, a reverse mortgage can be a good way to use the equity in 
your home if you do not mind leaving your heirs a far smaller estate when you die. 

All payments you receive from a reverse mortgage (technically, they are loan 
advances) are considered nontaxable income. Therefore, they do not lower your 
Social Security or Medicare benefits. On the other hand, the interest you pay on 
reverse mortgages is not tax deductible until you pay off all or part of your total 
reverse mortgage debt. 

You have three basic types of reverse mortgages from which to choose. 


PART ONE: Maximizing Your Investment Options 

FHA-insured. You need not pay off an FHA-insured reverse mortgage as 
long as you live in your home. You can change your payment options from 
monthly advances to a line of credit at any time at little or no cost. The FHA 
guarantees your payments even if the lender defaults. 

Lender-insured. A lender-insured plan generally offers a heftier line of credit 
or larger monthly payments than an FHA-insured plan. Also, you do not have to 
borrow against the full equity in your home, as you do with an FHA-insured loan. 
Often, however, a lender-insured loan imposes a number of higher costs, which 
means that your loan balance will grow quickly, leaving you with less equity. 

Uninsured. An uninsured plan pays a fixed monthly payment for a certain 
number of years—which you choose when you open the line—then terminates. At 
that point, the loan balance comes due, and the lender may take title to your home. 
An uninsured plan usually charges a fixed interest rate and requires no mortgage 
insurance. The plan can work well if you know how long you will need payments. 
But if you run through the equity in your home and still need more money, you will 
likely lose your home to an uninsured lender. 

A related technique to tap your home』s equity when you retire is to assume a 
reverse annuity mortgage (RAM). With this plan, you use the proceeds generated 
by a mortgage on your home to buy an annuity from an insurance company. The 
insurer pays the interest on your mortgage and sends the rest of the money to you 
in monthly installments. Upon your death, the insurer usually sells your home and 
repays the mortgage balance. Remaining funds are passed on to your heirs through 
your estate. 

The amount of monthly income you receive from a RAM depends on the 
interest rate the insurer pays, your life expectancy, and the equity you have accumulated 
in your home. Because the insurance company risks that you will live 
longer than its actuarial tables predict, the insurer makes smaller monthly payments 
than you might receive through a traditional reverse mortgage. 

For more detailed information on how reverse mortgages work and which institutions 
currently grant them, contact the National Center for Home Equity Conversion 
(360 N. Robert, Suite 403, St. Paul, MN 55101; 651-222-6775; www. 
reverse.org). It publishes a book titled Retirement Income on the House: Cashing 
In on Your Home with a 「Reverse」 Mortgage, which describes how reverse mortgages 
work. The book includes a 「Reverse Mortgage Locator,」 which lists all reverse 
mortgage lenders in the country. 

Protecting the Value of Your Home 

You can help ensure the value of your home through regular maintenance, 
renovation, and home warranty. 


CHAPTER 8: Inside Real Estate 

MAINTAINING AND IMPROVING YOUR HOME 

Because your home is probably your largest single asset, it pays to maintain 
and improve it over the years to enhance its value. It』s great if you can do much 
of the work yourself, but most people don』t have the time or expertise to handle 
plumbing, electrical, and carpentry repairs, as well as mow the lawn and paint 
occasionally. That is why you should assemble a team of reliable plumbers, 
electricians, carpenters, lawn maintenance workers, painters, and others to keep 
your home in tip-top shape. They not only solve problems and perform regular 
maintenance to keep problems from occurring, but, if you employ them consistently, 
they know your home perhaps better than you do. 

Remodeling your home can cost thousands of dollars but can greatly add to the 
pleasure you derive from it—once the workers finally leave. In general, you 
should not expect to recoup all your money from most remodeling jobs when you 
sell, though some improvements hold their value better than others. The more customized 
your renovations, the more chance that future buyers will not like what 
you have done. If you take on major remodeling, you should plan to stay in your 
home for at least five more years. 

Remodeling that pays off most includes those renovations that add living space 
and those that improve kitchens and bathrooms. Buyers like large master bedrooms, 
many bathrooms (even half-baths), modern appliances, and open kitchen layouts. 

Upgrading that costs the most and probably returns the least includes the addition 
of major recreational facilities like swimming pools, spas, or tennis courts. 
Similarly, decks and patios may be nice but often don』t recoup the money it costs 
to build them. 

When you take on a renovation project, obtain several written bids from qualified 
contractors before you choose one. The following list names some of the key 
items that should be included in the contract: 

. 
Full name, address, and phone number of the company 
. 
Contractor』s name and license number 
. 
Detailed specification of the job, including brand names, styles, colors, and 
model numbers of any materials or appliances being installed. The contractor 
should also agree in writing to give you a credit or refund for any 
materials not used. 
. 
Start and completion dates, with a clause allowing you to withhold money 
if certain deadlines are not met 
. 
Statement from the contractor stating that he or she will obtain all necessary 
building permits or variances before work begins 
. 
Proof that the contractor carries liability and workers』 compensation 
coverage 

PART ONE: Maximizing Your Investment Options 

. 
Written warranty on all work performed 
. 
Promise that the contractor will clean up the site when he or she is finished 
. 
Statement that all changes to the contract must be approved and signed by 
you and the contractor 
. 
Payment schedule specifying the deposit and progress payments 
You should aim to pay contractors as slowly as possible, with perhaps a third of 
the money up front, a third after half the job is finished, and the final third when the 
job is completed to your total satisfaction. If you want a major overhaul of your 
home, you may need a general contractor to coordinate all the subcontractors. Otherwise, 
you must act as the general contractor and stay on top of the subcontractors 
to ensure that they keep to the schedule. The process usually takes much longer than 
you expect and costs far more (many times double) than you planned. But if the renovation 
turns out well, your home will give you many years of enjoyment. 

HOME WARRANTIES 

Another way to protect your investment is through a home warranty. Many 
builders of new homes participate in the HOW (Home Owners Warranty) program, 
which insures a home against major system and structural defects for up to ten 
years. You can learn more about the program by contacting HOW (P.O. Box 
901021, Fort Worth, TX 76101-2021; 800-834-0577; www.howcorp.com). 

Warranties also exist for occupied homes. If you have your home examined by 
a warranty inspector, you can get a policy to cover your major systems for several 
years. Policies issued without inspections restrict coverage greatly and usually are 
not worthwhile. 

Selling Your Home 

When the time comes to sell your home, you must do just as much homework 
as you did when you bought the property. 

The first step in getting the highest price possible for your home is to obtain 
a realistic appraisal of its current value. If you have paid little attention to the 
market for the past several years, you may have an outdated sense of what your 
home is worth. You should get a feel for the market by scanning newspaper ads 
for similar properties and by visiting nearby open houses. Real estate agents will 
be glad to give you a free assessment of your home』s strengths, weaknesses, and 
fair price range. For a fee, you can also obtain a professional appraiser』s opinion. 

If you want to avoid the real estate broker』s fee, you can try to sell your home 
yourself with newspaper ads and a For Sale sign on your front lawn. Although you 
will have to deal with browsers and people unqualified to buy your property, you 


CHAPTER 8: Inside Real Estate 

may be lucky enough to find someone who falls in love with your home and places 
a bid on it. 

Before you let anyone past the front door, make sure your home is in tip-top 
shape. Add a fresh coat of paint. Locate plants and flowers strategically. Mow the 
lawn. Spruce up the exterior. Clean every room thoroughly. Remove excess clutter 
and furniture to maximize the appearance of living space. Distribute a one-page 
fact sheet listing your home』s selling points and illustrating the layout. If you』re 
located in an active real estate market, you might be able to sell within a few 
weeks. It is always best, however, to sell your home before you buy another 
property. You don』t want to owe two mortgage payments if your home sells more 
slowly than you had anticipated. 

More and more states require that you disclose all of your home』s problems in 
writing to prospective buyers. The document covers a property』s structure, utilities 
(such as plumbing, air-conditioning, and water system), and municipal status (such 
as building permits, zoning restrictions, certificate of occupancy, and property tax 
rates). If the buyer signs this sales disclosure form acknowledging that he or she 
has been informed of the home』s problems, the buyer has little right to sue you later 
if any problems crop up for any of the items listed. 

If you cannot sell your home on your own, bring in several real estate agents to 
compete for your listing. Unless you deal with a flat-fee or discount broker, you 
must pay the agent you choose a commission of 6 percent to 8 percent of your 
home』s selling price, but if he or she can find a buyer when you can』t, the fee is 
worthwhile. For much more on how to work with a real estate broker, see Chapter 
17, 「Finding Financial Advisors Who Are Right for You.」 

When you sell your home, either on your own or through a REALTOR., you must 
deduct all selling and closing costs from the gross sales price to arrive at your net 
proceeds. The worksheet in Figure 8.5 lists some of the costs you might incur and 
helps you determine your profit. 

Investment Real Estate 

Buying a home is the primary, but by no means the only, way to profit from 
real estate. Investing in real estate for profit is tricky and can take a great deal of 
time and expertise. Real estate has the advantages of appreciation potential, rental 
income, and tax benefits. On the other hand, it can be extremely illiquid (hard to 
sell) and management intensive. The real estate market is also subject to the 
influence of national trends, such as changes in tax laws and interest rates, as well 
as local trends in economic growth and supply and demand for similar properties. 

When seeking advice about investing in real estate, make sure that you know 
whom you listen to. The field is rife with self-promoters promising instant riches 
for no money down. Their so-called seminars are, in fact, high-pressure sales 
pitches. These scam artists usually show off their wealth to impress you; however, 


PART ONE: Maximizing Your Investment Options 

Figure 8.5 Net Proceeds Worksheet 
Gross Equity $ Amount 
Sale Price of Property $ 
Minus Remaining Mortgage Balance ( 
Minus Other Home-Related Debts ( 
TOTAL GROSS EQUITY 
Selling and Closing Costs 
Escrow or Other Fees $ 
Legal and Document Preparation Fees 
Title Search and Insurance Fees 
Transfer Taxes 
FHA, VA, or Lender Discounts 
Mortgage Prepayment Penalties 
Real Estate Taxes Owed 
Appraisal Fees 
Survey Fees 
Termite and Other Pest Inspection 
Fees 
Fees for Repair Work Required by 
Sales Contract 
Home Protection or Warranty Plan 
Fees 
Unpaid Assessments 
Real Estate Commissions 
Other Selling or Closing Costs 
TOTAL SELLING AND CLOSING COSTS 
TOTAL GROSS EQUITY 
MINUS 
TOTAL SELLING AND CLOSING COSTS 
EQUALS 
NET PROCEEDS 
) 
) 
$ 
$ 
( 
$ 
Total 
) 


CHAPTER 8: Inside Real Estate 

they have probably earned their millions by giving bad real estate advice, not taking 
it. Some tout enormous riches to be made in foreclosed property. Others guarantee 
wealth through government loan programs. A few want you to believe your 
road to easy street is paved with multilevel marketing, another term for a pyramid 
or Ponzi scheme. Be extremely careful when dealing with these promoters. Their 
presentations are slick and convincing, but the chances that you will end up as rich 
as they are are slim or nonexistent. 

If you wish to invest legitimately in real estate, you have seven principal ways 
to do so. They are ranked and discussed below from the safest to the most speculative: 
real estate mutual funds, real estate investment trusts, real estate limited partnerships, 
rental real estate, vacation homes, timeshares, and raw land. 

REAL ESTATE MUTUAL FUNDS 

Several mutual funds invest in publicly traded real estate–oriented stocks. As 
do all mutual funds, they provide a widely diversified portfolio of securities, 
professional management, and reasonable management fees of about 1 percent 
of your assets each year. Because many of these funds buy real estate investment 
trusts (REITs) that pay high dividends, the funds can pay yields of 2 percent to 
about 5 percent. In addition to REITs, these funds buy stocks of home builders and 
suppliers to the home-building industry. 

Real estate funds tend to perform well when interest rates fall and when occupancy 
and rental rates rise. Conversely, they tend to underperform during periods 
of rising interest rates and when gluts of real estate exist on the market. Some funds 
buy only U.S. real estate companies, while other global funds invest in real estate 
companies around the world. 

The popularity of real estate investing through mutual funds has spawned a 
profusion of funds. The funds that have been around the longest are: AIM Advisor 
Real Estate Portfolio (P.O. Box 4333, Houston, TX 77046; 800-347-1919); Alliance 
Real Estate Investment Fund (1345 Avenue of the Americas, New York, 
NY 10105; 800-221-5672); Brazos/JMIC Real Estate Securities Portfolio (733 
Third Ave., 3rd Floor, New York, NY 10017; 800-426-9157); CGM Realty Fund 
(222 Berkeley St., Suite 1013, Boston, MA 02116; 800-345-4048); Cohen and 
Steers Realty Shares (757 Third Ave., New York, NY 10017; 800-437-9912); Columbia 
Real Estate Equity Fund (P.O. Box 1350, Portland, OR 97207; 800-5471707); 
Davis Real Estate Fund (124 E. Marcy St., Santa Fe, NM 87501; 
800-279-0279); Fidelity Real Estate Investment Portfolio (82 Devonshire St., 
Boston, MA 02109; 800-544-8888); Flag Investors Real Estate Securities Fund (1 
South St., Baltimore, MD 21202; 800-767-3524); Franklin Real Estate Securities 
Trust (777 Mariners Island Blvd., San Mateo, CA 94403-7777; 800-342-5236); 
Munder Real Estate Equity Investment Fund (P.O. Box 9755, Providence, RI 
02940; 800-239-3334); Phoenix Real Estate Securities Portfolio (101 Munson 
St., Greenfield, MA 01301; 800-272-2700); Pioneer Real Estate Shares (60 State 


PART ONE: Maximizing Your Investment Options 

St., Boston, MA 02109-1820; 800-225-6292); U.S. Global Investors Real Estate 
Fund (7900 Callaghan Rd., San Antonio, TX 78278; 800-873-8637); Van Kampen 
Capital Real Estate Securities Fund (One Parkview Plaza, Oakbrook Terrace, IL 
60181; 800-225-2222); Victory Real Estate Investors (3435 Stelzer Rd., Boston, 
MA 02266; 800-539-3863). 

REAL ESTATE INVESTMENT TRUSTS (REITS) 

REITs are publicly traded stocks that invest in office buildings, apartment 
complexes, industrial facilities, shopping centers, and other commercial spaces. 
Under current law, they do not pay taxes at the corporate level as long as they distribute 
at least 95 percent of their earnings to shareholders in the form of dividends 
each year. Shareholders then pay taxes on the dividends as regular income. In some 
cases, a portion of the dividends may be considered a return of capital for tax purposes 
and therefore is not taxed. 

Three primary types of REITs exist: 

Equity. These trusts buy properties, fix them up, collect rents, and sometimes 
sell the properties at a profit. Equity REIT share prices greatly reflect the general 
direction of real estate values. Some equity REITs buy different kinds of properties 
across the country. Others specialize in a particular type of real estate. For example, 
several REITs, including Meditrust (197 First Ave., Suite 300, Needham Heights, 
MA 02494; 781-453-8062) and Health Care REIT, Inc. (One Seagate, Suite 1500, 

P.O. Box 1475, Toledo, OH 43603; 419-247-2800), concentrate on health care 
facilities. Others buy properties in one region of the country. For example, Washington 
REIT (6110 Executive Blvd., Rockville, MD 20852; 301-984-9400; http:// 
ir.stockmaster.com/ir/wre) buys properties in the Washington, D.C., market, while 
Weingarten Realty Investors (P.O. Box 924133, Houston, TX 77292; 713-866-6000; 
www.weingarten.com) specializes in shopping centers in Texas and Louisiana. Equity 
REITs can provide some protection against inflation because they usually include 
rent escalator clauses in their contracts with tenants so that price increases 
can be passed along in the form of higher rents. 
Mortgage. This form of REIT originates or buys mortgages on commercial 
properties. Mortgage REITs offer yields of about 6 percent to 10 percent—much 
more than the 4 percent to 7 percent paid by equity REITs. But mortgage REITs 
offer little capital appreciation potential. If mortgages get into trouble or default, 
share prices can plunge. 

Hybrid. These REITs combine equity and mortgage holdings. Hybrid trusts 
pay yields of 6 percent to 9 percent and offer some appreciation potential. 

The REIT industry has become notorious for a boom and bust cycle. Its first 
boom occurred in the early 1970s, which led to an enormous bust in the 1973–1974 
recession, when many REITs went bankrupt in the wake of massive overbuilding. 
The industry recovered and prospered for much of the 1980s until the real estate 


CHAPTER 8: Inside Real Estate 

market again became glutted in the late 1980s and early 1990s. By the mid- and 
late 1990s, REIT shares were popular again as lower interest rates and tightening 
rental markets in many places boosted share prices. 

REAL ESTATE LIMITED PARTNERSHIPS 

Limited partnerships (LPs), which saw their heyday in the 1980s, raise money 
from limited partners and invest it in new or existing commercial real estate. Decisions 
on what to buy and how to manage the properties are made by a general partner. 

Unlike real estate funds or REITs, LPs are not easy to buy and sell. When you 
buy, you must pay onerous sales charges and other fees that may amount to as 
much as 10 percent of your invested capital. On top of that, you remit annual 
management fees of 2 percent or 3 percent of your principal. If you want to withdraw 
from the partnership before it is liquidated, which occurs up to ten years after 
its launch, you must sell in a tricky secondary market where investors offer to buy 
your units at deep discounts. 

In theory, a good real estate partnership produces high current income from 
rents and mortgage interest it collects. Upon liquidation, partners receive magnificent 
capital gains when the partnership』s properties are sold for huge profits. The 
reality of the past decade has been far from the hype, as many partnerships have 
suffered defaults, plunging property values, and declining rental income. 

Another form of real estate partnership that offers more liquidity is a master 
limited partnership (MLP). These operate just like traditional partnerships except 
that they trade on exchanges like any other stock. In some cases, an MLP has been 
formed by combining the assets of several troubled illiquid partnerships into one 
giant, publicly traded vehicle. MLPs typically pay high dividends of 5 percent to 
10 percent. 

RENTAL REAL ESTATE 

Becoming a landlord has its advantages and disadvantages. If you own a good 
property, it can appreciate handsomely over time and provide solid rental income. 
In addition, you can reap substantial tax benefits, such as writing off losses up to 
$25,000 against other income, if you meet certain IRS restrictions. 

On the other hand, few people think being a landlord is fun. Tenants often 
complain. You are responsible if the plumbing breaks down in the middle of the 
night or the heat shuts off in the dead of winter. Not every renter pays his or her 
rent on time. You must constantly guard against vandalism. You must sometimes 
evict a tenant. And in some localities, rent controls prevent you from raising rents 
enough to cover increased expenses. 

The key to successful rental real estate is to buy properties in good locations 
that attract the type of tenant who takes care of his or her unit and is so happy living 
on the property that he or she never objects to rent hikes every year. Easier said 
than done! 


PART ONE: Maximizing Your Investment Options 

When looking for profitable rental properties, you might begin in working-
class neighborhoods, where prices are more reasonable and tenants more reliable 
than they are in the elite neighborhoods of town. To find a bargain, you could focus 
on properties with problems that are relatively easy to resolve. The problem—be 
it asbestos, a leaky roof, or some other repair—might scare the current owner so 
much that he or she will sell at a large discount from the property』s real value. Before 
buying, determine how much it will cost to resolve the problem, and estimate 
the rent you could collect once the place is in tip-top shape. 

Another way to get the best possible value when buying rental real estate is 
to look for a building that sits on a lot providing extra land that could be developed. 
You might be able to add onto the building, erect a new home, or even sell 
part of the land to offset your purchase cost. Before you contemplate such a strategy, 
however, determine whether you will need a zoning variance to subdivide 
the land. 

VACATION HOMES 

One of the more pleasurable forms of real estate investment is a vacation home 
because you can live there up to 14 days a year or 10 percent of the amount of time 
you rent it, whichever is less (according to the tax code). If you own a home in a 
desirable location near a beach, lake, ski resort, or tourist attraction, you should be 
able to rent out the property for at least part of the year. In the best of all worlds, 
your annual rental income would cover your expenses or even exceed them. That 
would mean that you could live in the house rent free during your vacations. Unless 
your property is extremely popular, however, you should not expect to enjoy 
a positive cash flow. 

A vacation home can provide tax benefits if it produces negative cash flow— 
in other words, costs more than it earns in rent. That』s because the tax law allows you 
to deduct up to $25,000 of business losses from your adjusted gross income (AGI), 
as long as you actively rent and maintain the property. You qualify for the full 
$25,000 write-off if your AGI is less than $100,000. From $100,000 to $150,000 
in income, the tax benefit is phased out. If you earn more than $150,000, you can 
deduct business losses only against rental income, not against regular income from 
your job or other investments. (See Chapter 13 on taxes for more information.) In 
calculating business losses, you can count all your expenses for maintaining the 
property, including depreciation, painting, yard maintenance, property taxes, insurance, 
and utility bills. You are also allowed to count any trips you take to inspect 
or repair the property. If you abuse this right of visitation, the IRS may consider 
your vacation home a personal, not a rental, property. 

If you take out a mortgage to purchase a vacation home, you can deduct your 
mortgage interest on your tax return. While that deduction may be sizable, it also 
increases your expenses considerably and makes it more difficult to generate 
positive cash flow. 


CHAPTER 8: Inside Real Estate 

When looking for a vacation home to buy as a rental, you should hunt for a 
property that has already been rented for several seasons. This will earn you a 
return clientele and give you a realistic indication of the level of rent to expect. If 
you improve the property, you might even be able to increase the rent somewhat. 
If you』re going to charge a hefty rent, though, the property must be in excellent 
condition, offer comfortable furnishings, and provide modern appliances that work. 
You might be able to rent the property yourself with ads in the local newspaper, but 
if that doesn』t work, you will have to hire a rental agent, who might charge as much 
as 25 percent of the rent you collect. 

In the end, you should not purchase a vacation home primarily as an investment 
that you expect will earn substantial capital appreciation. Instead, aim to generate 
a positive cash flow and maximize your tax benefits. If you get to live at the 
home two weeks every year for free, you』ve got yourself a good deal. 

TIMESHARES 

While they are often sold as real estate investments, timeshares are, in fact, not 
investments at all. When you purchase a timeshare, you own a specific block of 
time—usually a week—at a particular place—usually a condominium in a resort 
area. Before you buy, you must be convinced that you like the unit, development, 
and surrounding area so much that you will want to come back year after year on 
your vacation. 

Owners of timeshare units built by developers that are members of the Resort 
Property Owners Association (P.O. Box 2395, Northbrook, IL 60062; 708-2910710) 
can swap their units with other members at properties around the world. 
Another company that facilitates exchanges of timeshare units is Interval International 
(62 Sunset Dr., Miami, FL 33243; 305-666-1884; 800-843-8843; www. 
interval-intl.com). However, unless you own a share in a very popular resort at a 
highly desirable time of year, you may not be able to trade for a place you want to 
go. If you become ill or an emergency arises in your week for the timeshare, you 
probably will have to forfeit that week unless you can make a last-minute swap. 

The high-pressure salespeople who sell timeshare units usually pitch the 
excellent resale potential of their developments. Don』t believe it. Hundreds of 
thousands of people can』t find buyers because the salespeople direct most potential 
purchasers to new units. If you still want to buy a timeshare, you will probably get 
the best deal by purchasing an existing unit at a deep discount. 

Be particularly wary of telemarketing firms that sell timeshares. Some of them 
claim to have extensive lists of sales agents and buyers lining up for their resale 
units. The more audacious promoters will even charge up to $500 for an 「advance 
listing,」 promising that you can resell your unit for a quick profit. Some actually 
offer money-back guarantees. 

Timeshare units are not only illiquid; they impose maintenance charges you 
must pay whether you use your unit or not. Even those who try to abandon their 


PART ONE: Maximizing Your Investment Options 

timeshares meet with little luck. The developer and timeshare owners association 
pursue them to collect the money due according to the contract. 

Nevertheless, if you want to own a timeshare, begin by renting an apartment 
a few times in the development in which you are interested. If you really like the 
development and want to return frequently, it might be worth buying into it. However, 
try to buy into a development backed by a major, well-known corporation— 
such as Marriott, Disney, or Hilton—rather than some fly-by-night operation. 
Consider your purchase a way to lock in a long-term price for a vacation. It』s unlikely 
to be an investment that grows in value over time. 

To learn more about timeshares from the industry』s point of view, contact the 
American Resort Development Association (1220 L St., N.W., Suite 500, Washington, 
DC 20005; 202-371-6700; www.arda.org). 

RAW LAND 

Picture the following: You buy a piece of raw land cheaply from owners who 
have been sitting on it for years, unaware of its true value. Knowing that the area is 
about to be developed, you sell the acreage to developers and reap huge profits. 
That』s the dream. The reality of investing in raw land is usually quite different. 

Most raw land is purchased by developers assembling a site for a housing 
project, a shopping center, a factory, or another commercial use. The land』s value 
rises once utilities, roads, sewers, and other amenities are installed. The prospect 
of quick gains usually encourages investment houses to sponsor raw land, or pre-
development, limited partnerships, but most fail. The combination of high interest 
rates and a glut of commercial properties in many markets hurt the value of raw 
land throughout the United States in the 1990s. 

Raw land is usually illiquid, meaning that it can be difficult to sell. In addition, 
unless you rent the land to someone, the property produces no income. Meanwhile, 
you incur expenses, such as maintenance and property taxes. If you borrow to buy 
the land, you must meet regular interest payments as well. This negative cash flow 
can drain your budget and makes sense only if you feel sure the land will rise in 
value soon. 

Many factors affect the selling price of land, including the state of the local 
economy, the direction of interest rates, local zoning, and environmental regulations 
and changing tax laws. Any one of these factors can turn against the owner 
of raw land. For example, the property may be rezoned to a use with less commercial 
potential, hurting the land』s value. Or the land may be classified as a wetland, 
making it unsaleable. Or an inspector may find traces of toxic waste from a 
previous owner that you must clean up before you sell the property. Even if the 
land is clean, you should determine how difficult it will be to get water, electricity, 
sewage systems, and roads to the site. Before you buy, know everything about a 
piece of land, including its present condition and development potential. 

In most cases, it has been difficult for raw land values to rise much in the face 
of increasing property tax burdens, strict zoning enforcement, and slow economic 


CHAPTER 8: Inside Real Estate 

growth. Buying raw land is therefore the most speculative real estate investment. 
You might hit it big with a combination of luck and inside knowledge, but don』t 
count on it. 

Using Your Computer to Buy and Sell Real Estate 

The real estate market has always been considered local. But the advent of the 
computer and the Internet is quickly transforming bringing real estate into a 
national marketplace, making it easier for you to buy and sell your home and get 
financing from lenders anywhere in the country. 

All of the major institutions involved in the homebuying and selling business 
now have a significant presence on the World Wide Web. Mortgage lenders, 
REALTORS., builders, relocation firms, home-oriented magazines, housing-related 
government agencies, and many others now have Web sites (listed in the 「Resources」 
section of this chapter) that can educate you about real estate and help 
you go through much of the homebuying process online: 

. 
You can use various buy-versus-rent calculators to evaluate whether it 
makes sense for you to be buying in the first place. Other calculators help 
you determine how much of a mortgage you can afford based on your 
income and assets. 
. 
You can shop for homes online through the many REALTOR.-sponsored Web 
sites. These sites offer information about various communities you may be 
interested in, as well as pictures and details about houses for sale. Just type 
in the name of your REALTOR.』s company to browse these sites. A few 
examples: Century 21 ; Coldwell Banker ; RE/MAX . 
. 
You can shop for the most competitive mortgage rate online. There now is 
a national market for mortgages, and you do not have to be limited to what 
your local lender is offering. These sites are constantly updated with the 
latest rates on fixed and adjustable loans, points, fees, closing costs, and 
even online applications. A few sample sites to help you tap into this 
market include: American Mortgage Online ; 
HSH Mortgage Information ; Mortgage Mart ; Mortgage-Net ; and the 
Mortgage Rate Shopper Service of the United Homeowners Association, 
reachable through keyword UHA on America Online. 
One of the most complete online services to help you in your real estate 
decisions is the Real Estate section of America Online. Here is a sample of what 
it includes: 

. 
Apartments Plus. An online listing of apartments for rent in most areas of 
the country. You can take a Virtual Tour of your choices, with pictures of 

PART ONE: Maximizing Your Investment Options 

the interior and exterior of the building and apartment and common areas 
like lobbies and pools. There are also listings of movers and relocation 
services to help you find the apartment you can afford. 

. 
Home Magazine Online. A wealth of resources from Home magazine, 
including information on gardening, decorating, how to build your own 
home, and buyers』 guides for home appliances and electronics. The site 
also hosts chat sessions with housing experts. 
. 
The Homeowner』s Forum, sponsored by the United Homeowners Association. 
This site includes sections on home improvement, how to sell your 
home without a broker, how to get the lowest-interest mortgage, how to find 
a good home inspector, and how to find a qualified remodeling contractor. 
. 
Homes.com, sponsored by Homes and Land magazine. This site allows you 
to view homes for sale in almost every state in the country, as seen through 
free magazines distributed in those states. You can also advertise your 
home for sale on this site. 
. 
NAREIT Online. The National Association of Real Estate Investment Trusts 
has a site giving you all the information you need on investing in REITs. 
. 
NARI Online. The National Association of the Remodeling Industry promotes 
sound business practices for remodelers. Their Web site has sections 
on developing a budget, selecting contractors, what should be in a contract, 
and how to satisfy local zoning and housing code laws. 
Other features of the AOL Real Estate section are Community Profiles by Century 
21; Appliances Online with links to major manufacturers and retailers like 
General Electric, Home Depot, and Whirlpool; and School Match, giving you 
details on the quality of schools in the district you are thinking of moving into. 

As in many other areas of personal finance, the computer is making the real 
estate market much more efficient. If you take advantage of the power of the computer, 
you can save thousands of dollars on financing and end up with the home of 
your dreams that you might never have found the old-fashioned way. 

Investing in real estate—both in your home and in other investment property— 
will always hold great appeal for Americans. More people in this country have 
amassed fortunes in real estate than in any other asset. By buying a home, you not 
only acquire pride of ownership, you also get real value out of your property by 
using it every day, even if its market value falls. Investment real estate offers potential 
capital appreciation, income, and tax breaks—as well as headaches. 

The era of the 1970s and early 1980s, when almost every piece of real estate 
appreciated dramatically, has passed, probably forever. To succeed in real estate 
investment now, you must study the markets carefully and understand the complex 
financing options and tax laws that cause values to rise and fall. You need to 
depend less on luck and more on expertise. 


CHAPTER 8: Inside Real Estate 

Resources 

BOOKS 

All about Escrow and Real Estate Closings: Or How to Buy the Brooklyn Bridge 
and Have the Last Laugh, by Sandy Gadow and Dave Patton (Escrow Publishing Company, 
P.O. Box 2165, Palm Beach, FL 33480; 561-659-1474; www.escrowhelp.com). 
Leads the reader through the escrow and closing process, from opening the escrow to 
the closing statements. 

All about Mortgages: Insider Tips for Financing and Refinancing Your Home, by 
Julie Garton-Good (Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-8364400; 
800-245-2665; www.dearborntrade.com). Provides an easy-to-follow road map 
through the twists and turns of the home mortgage loan process. 

All about Real Estate Investing: From the Inside Out, by William Benke and 
Joseph M. Fowler (McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; 
www.mcgraw-hill.com). Practical guide to profitable real estate investing. Covers 
houses, apartments, and commercial real estate. 

Art of Real Estate Appraisal, by William L. Ventolo, Jr. and Martha R. Williams, 
(Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-2452665; 
www.dearborntrade.com). The complete reference on how to appraise the value 
of your home or evaluate appraisal reports. Up-to-date information on financing 
techniques, energy efficient construction, and home depreciation. 

Bob Vila』s Guide to Buying Your Dream House, by Bob Vila (Time Warner, 3 Center 
Plaza, Boston, MA 02108; 800-343-9204). A practical guide to inspecting and buying 
a high-quality house from the man made famous by his TV renovation projects. 

Buy It, Fix It, Sell It: PROFIT!, by Kevin C. Meyers (Dearborn Trade, 155 N. Wacker 
Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com) 

Buy Your First Home, by Robert Irwin (Dearborn Trade, 155 N. Wacker Dr., 
Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Will 
help first-time homebuyers navigate the homebuying process, from selecting a property 
to closing. 

Buyer Beware: Insider Secrets You Need to Know Before Buying Your Home— 
From Choosing an Agent to Closing the Deal, by Carla Cross (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Explains how best to choose and screen an agent, why open houses are a waste 
of time for buyers and sellers, and advises on the right and wrong ways to negotiate a 
discount of an agent』s commission. 

Buying a Home When You』re Single, by Donna G. Albrecht (John Wiley & Sons, 1 
Wiley Dr., Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). A 
one-stop how-to on homebuying for the unmarried. 


PART ONE: Maximizing Your Investment Options 

Buying More House for Less Money, by Ceil R. Lohmar (McGraw-Hill, P.O. Box 
543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Techniques for 
house hunting and bargaining to get the best value for your housing dollar. 

Buying Your Vacation Home for Fun and Profit, by Ruth Rejnis and Claire Walter 
(Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-2452665; 
www.dearborntrade.com). Provides readers with information to make a wise vacation 
home purchase. 

The Common-Sense Mortgage: How to Cut the Cost of Home Ownership by 
$50,000 or More, by Peter G. Miller (Contemporary Books, 4255 W. Touhy Ave., Lincolnwood, 
IL 60712-1975; 800-621-1918; www.contemporarybooks.com). Shows 
how the lending system works, reviews dozens of individual programs, and raises 
questions for consumers to ask. Includes new information on loans for first-time buyers, 
and the pros and cons of finding loans on the Internet. Has lots of tables and 
examples. 

The Common-Sense Mortgage: How to Cut the Cost of Home Ownership by 
$100,000 or More, by Peter G. Miller (Contemporary Books, 4255 W. Touhy Ave., 
Lincolnwood, IL 60712-1975; 800-621-1918; www.contemporarybooks.com). Practical 
advice about using computerized mortgage loan shopping services, refinancing, 
and the different kinds of mortgages. 

Dictionary of Real Estate Terms, by Jack Friedman (Barron』s Educational Series, 
250 Wireless Blvd., Hauppauge, NY 11788; 631-434-3311; 800-645-3476). A complete 
guide to the many terms used in the real estate market. 

Dress Your House for Success: 5 Fast, Easy Steps to Selling Your House, Apartment, 
Condo for the Highest Possible Price!, by Martha Webb and Sarah Parsons 
Zackheim (Random House, 400 Hahn Rd., Westminster, MD 21157; 800-733-3000; 
www.randomhouse.com). Lots of ideas, checklists, and drawings to help the reader 
move property. 

Essentials of Real Estate Finance, by David Sirota (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Comprehensive reference for consumers and real estate practitioners on qualifying 
for and selecting the right loan for a home or investment property. Workbook format 
and questions increase its usefulness as a resource and self-study guide. 

Every Landlord』s Legal Guide: Leases & Rental Agreements, Deposits, Rent 
Rules, Liability, Discrimination, Property Managers, Privacy, Repairs & Maintenance, 
by Marcia Stewart, Janet Portman, and Ralph E. Warner (Nolo Press, 950 Parker St., 
Berkeley, CA 94710; 800-992-6656; www.nolo.com). Outlines what the law requires 
of a landlord and offers advice on how to be conscientious and profitable. Information 
on finding good tenants, on agreements and leases, liability issues, and terminations 
and evictions. Covers the law in all states. 


CHAPTER 8: Inside Real Estate 

Every Tenant』s Legal Guide, by Janet Portman, Marcia Stewart, and Mary Randolph 
(Nolo Press, 950 Parker St., Berkeley, CA 94710; 800-992-6656; www.nolo. 
com). Walks readers through each step of renting, from finding an apartment to giving 
notice. Credit reports, rent control, grace periods for late rent, privacy rights, and eviction 
are all covered. 

Find It, Buy It, Fix It: The Insider』s Guide to Fixer-Uppers, by Robert Irwin 
(Dearborn Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-2452665; 
www.dearborntrade.com). Reveals the ins and outs of buying and renovating 
your very own handyman』s special. Shows homebuyers how to find the real bargains 
and how to avoid the moneypits. 

Finding and Buying Your Place in the Country, by Les and Carol Scher (Dearborn 
Trade, 155 N. Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; 
www.dearborntrade.com). Explains what the reader needs to know about due diligence 
on rural land being considered, contracts, negotiations, financing, etc. 

The For Sale by Owner Kit, by Robert Irwin (Dearborn Trade, 155 N. Wacker Dr., 
Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Explains 
how to set a realistic price; prepare a home for sale; promote the home with effective 
signs and advertising; find buyers; deal with documents, agents, and brokers; 
and close the deal. 

Getting Started in Real Estate Investing, by Michael C. Thomsett and Jean Freestone 
Thomsett (John Wiley & Sons, 1 Wiley Dr., Somerset, NJ 08875; 212-850-6000; 
800-225-5945; www.wiley.com). Gives you information on everything from mortgage 
payments and property selection to financing options and landlording issues. 

Handbook of Real Estate Terms Revised, by Dennis Tosh (Prentice Hall Press, 
One Lake St., Upper Saddle River, NJ 07458; 201-236-7156; 800-382-3419; www. 
prenticehall.com). Defines more than 2,900 real-estate-related terms. Also includes 
standardized forms for trusts, deeds, appraisals, and other real estate transactions. 

Home Buyer』s Checklist, by Richard M. Scutella and D. Heberle (McGraw-Hill, 

P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Provides 
helpful hints on buying a house. 
The Home Buyer』s Inspection Guide, by Warren Boroson (John Wiley & Sons, 1 
Wiley Dr., Somerset, NJ 08875; 212-850-6000; 800-225-5945; www.wiley.com). Explains 
how to find and work with a home inspector and what to look for in a home. 

The Homebuyer』s Kit, by Edith Lank (Dearborn Trade, 155 N. Wacker Dr., 
Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Furnishes 
would-be homebuyers with everything they need to know about buying a home, 
including using the resources on the Internet. 

The Home Buying and Selling Juggling Act: Timing the Process to Maximize Profits 
& Minimize Hassle, by Robert Irwin (Dearborn Trade, 155 N. Wacker Dr., Chicago, 


PART ONE: Maximizing Your Investment Options 

IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Helps homeowners 
face the challenges of selling a house and buying another simultaneously. 

Home Buying for Dummies, by Eric Tyson and Ray Brown (IDG Books, 919 E. 
Hillsdale Blvd., Suite 400, Foster City, CA 94404; 650-653-7000; 800-434-3422; 
www.idg.com, www.dummies.com). Shows readers how buying a home fits into their 
financial picture, from saving for the down payment to selecting the best loan and figuring 
the after-tax cost of ownership. 

The Home Inspection Troubleshooter, by Robert Irwin (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Provides advice on how to hire and work with a home inspector or do some of 
the work yourself, from conducting a full-house investigation to evaluating various 
home systems. 

The Homeowner』s Property Tax Relief Kit, by Vincent and Laurence Czaplyski 
(McGraw-Hill, P.O. Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgrawhill.
com). Describes how to lower your property tax bill through protesting assessments 
and other proven techniques. 

The Homeseller』s Kit, by Edith Lank (Dearborn Trade, 155 N. Wacker Dr., 
Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Tells 
how to list your house with or without an agent and how to price your property. 

The Homeseller』s Survival Guide, by Kenneth W. Edwards (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Identifies hazards associated with selling a home, describes them in some detail, 
and provides guidance to avoid them or deal with them. 

Homesurfing.net, by Blanche Evans (Dearborn Trade, 155 N. Wacker Dr., 
Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade.com). Blends 
real estate information with the latest online sites and trends. 

How to Buy the Home You Want, for the Best Price, in Any Market, by Terry Eilers 
(Hyperion, 77 W. 66th, 11th Floor, New York, NY 10023; 212-456-0100; www. 
hyperionbooks.go.com). Helps readers find their dream home as effectively and inexpensively 
as possible; includes tips on down payments and mortgages, checklists, and 
sample forms. 

How to Buy Your Home . . . and Do It Right, by Sue Beck (Dearborn Trade, 155 N. 
Wacker Dr., Chicago, IL 60606; 312-836-4400; 800-245-2665; www.dearborntrade. 
com). Guidance on home styles, money and loans, house hunting, and contracts. 

How to Find Hidden Real Estate Bargains, by Robert Irwin (McGraw-Hill, P.O. 
Box 543, Blacklick, OH 43004; 800-634-3961; www.mcgraw-hill.com). Explains the 
process of purchasing attractively priced real estate from distressed sellers and foreclosures, 
among other techniques. 


CHAPTER 8: Inside Real Estate 

How to Get the Best Home Loan, by W. Frazier Bell (John Wiley & Sons, 1 
Wiley Dr., Somerset, NJ 08875; 212-850-6000; www.wiley.com). Describes different 
types of home loans and how to choose the best one for you. 

How to Negotiate Real Estate Contracts: For Buyers and Sellers: With Forms