photo: Deja Photo From Lens To Picture

It was 1978, and Saturday Night Fever, the Commodores’ “Three Times a Lady,” and Charlie’s Angels were the nation’s biggest hits. But a new tax law that year would prove even more significant. The Revenue Act of 1978 introduced a provision that become Section 401(k) of the Internal Revenue Code. This bill, and the retirement accounts it helped create, have since become a mixed blessing.

On Jan. 1, 1980, 401(k) accounts became official. In the 30 years that followed, they’ve grown in popularity and usage, replacing defined-benefit pensions at many companies. In 1985, just 10 million Americans participated in them; today some 50 million do, entrusting more than $2 trillion to these plans.

But while 401(k)s can provide a comfortable retirement, they’re also far from perfect.

The problems with 401(k)s
For several reasons, 401(k) plans are failing to save many Americans’ retirements.

Many people just aren’t saving enough in them. The median sum in 401(k)s as of the end of 2008 totalled just $12,655, meaning that half of all workers have set aside even less in their accounts. For those with accounts open since 2003, the sum was a healthier $43,700 — but even that’s not much. Even if you’re 15 years from retirement, you add another $8,000 per year, and it all grows at 8%, you’ll end up with just $373,000.

Many people also fail to invest effectively in their accounts. Some leave most or all of their money in their employers’ stock, or in low-yielding bonds, or in other “safe” options. But if those investments don’t grow enough to provide for your retirement, they’re not safe at all.

Worst of all, 401(k)s represent a transfer of risk and responsibility for retirement income from employers (via pensions) to employees. Most employees are simply ill-equipped to make the most of them. They don’t know to follow Warren Buffett’s excellent advice: “Be fearful when others are greedy, and be greedy when others are fearful.”

The upside of 401(k)s
On the plus side, a growing trend among employers is to enroll new workers in 401(k)s by default, which boosts overall participation rates.

Also, “target-date” mutual funds are growing in popularity within 401(k) plans. Though they themselves are not perfect, they do take on the responsibility of shifting assets from stocks to bonds as the worker nears retirement. As an example, here’s a quick breakdown of holdings in the Vanguard Target Retirement 2025 (VTTVX) fund, for investors planning to retire that year:

Source: Morningstar.
*Return is for similar fund (VBMFX) with longer history.

There are other upsides to 401(k)s. They’re portable, which is handy, given the average American’s job duration of about five years. As long as workers don’t commit the big blunder of cashing out their accounts every time they switch jobs, they can keep growing their nest egg from job to job. (Or they can transfer their money to an IRA.)

They have generous contribution limits, too. In 2010, most of us can contribute as much as $16,500 to a 401(k) — and those 50 or older can throw in an extra “catch-up” $5,500, bringing their total to $22,000. (IRA contribution limits for 2010 are $5,000, plus a catch-up $1,000.) If you manage to sock away $15,000 per year for 20 years which grows at an annual average of 8%, you’ll accumulate more than $740,000. Chipping in more, earning a better return, or investing longer can increase that substantially.

A new possibility for 401(k)s presents a final reason to smile: In future years, you and your colleagues may be able to buy annuities through your 401(k)s, which will essentially let you create your own guaranteed income stream. In short, they’ll function as do-it-yourself pensions.

This article was originally published as Will Your 401(k) Make or Break You? on Fool.com 

photo: MissTessmacher

People may or may not learn from their own mistakes, but apparently, the idea that people learn from other folks’ mistakes is a myth.

OK, maybe that’s not fair, but it was hard for me to avoid that conclusion as I read an email from Fidelity’s PR crew not long ago. Every quarter, Fidelity data-mines its 401(k) records and issues a little report on trends in 401(k) land. And while Fidelity always puts its corporate spin on things, its database of 11.1 million participants is big enough to be a pretty good indicator of what’s going on out there.

One point in particular jumped out at me on first read: In the third quarter of 2009, 8% of dollars contributed to Fidelity-administered 401(k) plans went to the participant’s employer’s stock.

That may not sound like a lot, but it’s enough to worry me. Lots of 401(k) plans don’t offer a company-stock option, so that 8% number is a lot higher among people who actually have the option. Haven’t those folks been watching the news?

Too many eggs, not enough baskets

As far as I’m concerned, even if your employer pays the 401(k) match in company stock, holding it for the long haul is one of the biggest mistakes you can make with a retirement plan. The reason is pretty simple: Even if you don’t own a single share of your employer’s stock, your financial exposure to the company is already huge — you work there!

But it often doesn’t look like a mistake to folks until it’s too late. In fact, it might seem like a really good idea, especially if you work at a blue-chip like Chesapeake Energy or Pfizer  After all, the odds that those companies will go the way of Enron seem really low.

Of course, that’s what the folks at Bear Stearns said.

In all seriousness, I don’t think that either of those companies will go away any time soon. But that doesn’t mean betting your future on their stock prices is a good plan. After all, plenty of big names have seen big drops since the S&P 500 peaked on Oct. 9, 2007, the recent rally notwithstanding. And in many cases, their employees’ 401(k) balances got clobbered as well:

Sources: Yahoo! Finance, Brightscope.com. Data as of market close on March 9, 2010.

But most of those stocks will come back!

Maybe so. But imagine if you’d been working for General Motors for the past 25 years, and investing a big chunk of your retirement savings in GM stock, as many folks did. You would have been feeling pretty good about things — until a few years ago. And now you’d have nothing.

Now imagine that you’re retiring in a month. See, this is where even great companies’ stocks can end up being a retirement disaster — because even great companies hit rough patches. And sometimes not even a dramatic comeback will save you. Dow Chemical‘s stock price has made impressive gains over the past year — but the chemical giant’s share price is still down more than 30% from its highs in 2007.

And if you’d been investing all of your 401(k) contributions in that stock for the past decade or more, and you were looking to retire soon, you’d probably be pretty unhappy with the overall performance of your portfolio. When there are so many great investments out there, are you really willing to bet your future on the ups and downs of your employer’s stock?

This article was originally published Aug. 14, 2009. It has been updated. Fool contributor John Rosevear has no position in the companies mentioned.

This article was originally published as Company Stock in Your 401(k)? Could Be The Biggest Mistake You’ll Ever Make on Fool.com

Photo: WisDoc

For more than 10 years, a unique investment vehicle has given some people the chance to accumulate huge amounts of wealth. But until January of this year, many others didn’t have access to what may prove to be the most important investing tool you’ll ever find.

That tool is the Roth IRA, and although the name suggests that the Roth is primarily a method to invest for your retirement, it is flexible enough to serve a number of other purposes as well. From giving you a way to save for shorter-term goals to protecting your assets for future generations to come, the Roth IRA is so valuable that you won’t want to miss out on the chance to use it in your own financial planning.

Let’s take a closer look at exactly what the Roth can do for you — and why it’s getting so much attention right now.

What makes Roths great

Right now, it’s hard to remember when financial innovation didn’t automatically conjure up feelings of skepticism and distrust. But back in the late 1990s, when the Roth IRA was first created, it ushered in a new way to think about saving for retirement.

Until then, retirement investing was all about tax deferral. Traditional IRAs and 401(k) plans allowed savers to set money aside for the future, giving many of them a current tax break on their contributions. In other words, the government essentially paid you back for part of what you put into a retirement account in the form of a tax deduction. Depending on your tax bracket, that deduction could be extremely valuable as a current benefit, irrespective of whether saving for retirement was your primary goal.

The trade-off, though, was that when you actually used the money, you had to pay taxes on what you took out. From one perspective, then, the U.S. government shared in your investment gains and losses. If your IRA skyrocketed in value, then the IRS would collect more tax. Just look at some of these examples:

Source: Yahoo! Finance. Assumes taxpayer is in top current tax bracket of 35%. Prices from January 1990 to January 2010.

Those tax figures represent a darn good return for the U.S. Treasury, especially when you consider that the upfront deduction on the original $2,000 only cost them $660 or less in tax revenue.

The Roth IRA turned that logic on its end. Rather than giving you a current incentive to save, the Roth pushed the incentive far into the future by making all the growth within your account tax-free. And if you decide to convert an existing traditional IRA into a Roth, then it’s even more obvious that the Roth is a different animal than traditional retirement accounts — because you have to pay tax on the amount you convert.

Opening the door

Until now, though, many investors have been locked out of the Roth IRA. Income limitations prevent many high-income investors from using a Roth IRA, either through annual contributions or by converting existing IRAs to Roths.

Now, though, those income limits on Roth conversions have disappeared. And although high-income earners may still not be able to make their $5,000 annual contribution to a Roth, anyone who has a traditional IRA can choose to convert now.

So the big thing that everyone’s asking right now is this: Should you convert to a Roth?

For the answer to this question, read our story Understanding Roth IRA Conversions.

This article was originally published as The Roth: An Amazing Opportunity on Fool.com

photo: ShellyS

If you’ve spent your entire adult life working for the same employer and you have no plans to change jobs before you retire, you can skip this article. (Try this one instead.)

Everybody else, though, should ponder this: When you left your old job (or jobs), whether because of a recent layoff or a long-ago career change, did you leave money behind?

If so, you might want to go get it. Because even if it’s not a lot of money, leaving it where it is could be a huge mistake.

Um, I’m pretty sure I cleaned out my desk.

I don’t mean, “Did you leave $30 in change in the back of your desk drawer?” I’m talking about your old 401(k). Do you still have a balance in your old employer’s retirement plan?

You might not think of that as leaving money behind, exactly — after all, they probably still send you statements, and maybe you figure you can just leave it there and deal with it after you retire.

And actually, you can. As long as the company doesn’t go out of business (in which case you’d get a check in the mail), you can leave a balance in your former employer’s plans for years, even decades if you like.

Of course, you’ll pay for the privilege — in more ways than one.

How those old 401(k) balances are costing you

It isn’t just the high annual fees you may be paying the plan’s mutual fund managers or outside advisors — 1%, 2%, sometimes even more — though those are bad enough.

It’s the opportunity cost.

See, when you’re in a 401(k) plan, your investment options are limited — typically, you can choose from maybe two dozen mutual funds, of which maybe four or five are actually appealing.

But if you took your money out of that old plan and rolled it into a rollover IRA at a discount brokerage firm like Charles Schwab or Fidelity — a move that would cost you nothing except a few minutes for some paperwork and maybe a toll-free phone call — you could invest it in almost anything.

Including stocks.

Why buying stocks is better

Sure, buying stocks is arguably riskier than just dumping your money into an index fund. And yes, keeping that risk under control requires that you take an active hand in your own future, doing research and keeping an eye on the companies you own.

But the payoffs can be enormous. Consider: If you had put $7,000 into a good index fund 10 years ago — say, Vanguard 500 Index Fund: a popular 401(k) choice — you’d have about $6,570 to show for your efforts now. And that’s with a low-fee fund from a great manager!

On the other hand, what if you had taken that money and bought a fairly mainstream portfolio of stocks? Think about what would have been a good large-cap portfolio 10 years ago: Caterpillar was riding the emerging-world construction boom, Steve Jobs had been back at the helm of Apple for a couple of years, and the U.S. government’s attention on tobacco had driven Altria‘s stock price way down.

So let’s pretend we bought those stocks, along with a few dividend-paying blue-chip perennials, and add a then-obscure small-cap ringer — Hansen Natural. How’d we do?

(Source: Yahoo! Finance, Motley Fool. Hypothetical investment is from market close on March 16, 2000, through market close on March 15, 2010, and includes splits and reinvestment of dividends.)

We did pretty well, wouldn’t you say? Sure, Hansen Natural is a ringer — 80-baggers don’t exactly come along every day — but even if we leave it out and assume that whatever that $1,000 was invested in went to zero, we still have almost $31,000 to show for our $7,000 initial investment. In other words, we thoroughly trounced the poor Vanguard fund. And that’s with a pretty conservative big-name portfolio, and one investment that we’re hypothetically wiping out!

And actually, I included Hansen Natural in that example to make an important point: The biggest returns are often found in the stocks that are too small for mutual funds to buy, as Hansen was 10 years ago. You might not find an 80-bagger very often, but a few 5- or 6-baggers every now and then is a reasonable goal — and the effect those will have on your overall portfolio performance is dramatic.

The upshot

If you’ve been laid off in the last year or two, rolling over your old 401(k) balance probably hasn’t been your highest priority. But now’s the time to make that rollover happen. Remember: The sooner you deal with it, the sooner you can start enjoying market-trouncing returns — the kind that can fund a truly excellent retirement.

This article was originally published as This Wealth-Building Move is a Must on Fool.com

Most investors are painfully aware that the past 10 years have been pretty dismal for the average Joe and Jane. The “Lost Decade” is aptly named, seeing as the S&P 500 wound up basically flat over that time, even as it endured several roller-coaster rides. As you might expect, some money managers destroyed an inordinate amount of wealth over the past decade.

Goodbye, money

According to a recently released report from Morningstar, one mutual fund complex was responsible for the largest fund-related destruction of wealth over the past 10 years. Janus Capital Group’s collective offerings experienced a 10-year asset weighted return of (negative) -1% a year from 2000-2009, which amounted to a loss of $58.4 billion. Much of this loss came in the 2000 and 2001 bear market when Janus’ growth-oriented funds were hit hard by the deflating of the tech bubble.

Of course, it may not be completely fair to single out Janus as a wealth destroyer. Fundholders at Putnam Investments didn’t fare much better, losing a collective $46.4 billion during the same time period. Alliance Bernstein lost $11.4 billion, while Invesco AIM lost $10.1 billion. And many Janus funds have since rebounded, performing rather well in the latter half of the decade under study. And while there’s no changing the amount of wealth that was destroyed by some fund families in the opening decade of the new millennium, there are a few important lessons investors can take away from these events.

Learning from the past

The biggest reason why Janus landed at the top of the money-losing charts was simple: During the late 1990s the shop was pretty heavily growth-oriented. Most Janus funds were heavily invested in technology stocks like Microsoft and Cisco Systems, which had a great run-up in the late 1990s but were slammed in the ensuing bear market.

That’s the danger in following trends too closely: eventually you’re going to be on the wrong side of the market. Janus got into trouble by betting too aggressively on high-priced tech names with little regard for valuation. Investors should exercise caution not to blindly chase performance or run after the hottest-performing investment just because it’s done well in the past. That’s a surefire recipe for disappointment, since investors typically arrive late to the party and miss most of the early gains. (Gold bugs, take note!)

Secondly, this is another lesson on the importance of diversification — not only between stocks and bonds or among market capitalizations and countries, but among fund families as well. Unless you’re tied into a single-fund-family retirement plan, make sure that your fund choices span across several fund shops.

Some firms tend to be more value-oriented and may invest in dividend-producing names like ExxonMobil and Procter & Gamble, while others pursue more richly valued, fast-growing stocks like Apple and Google. You want exposure to both types of stocks and multiple investment approaches, and the easiest way to accomplish this is to invest in a handful of different top-rate managers.

Lastly, when it comes to mutual fund investing, it’s not enough just to sock money away in a random fund and hope that it does well. History has shown that most actively managed funds don’t beat the market consistently over long periods of time. You need the best funds in the bunch — the ones that have the best odds of making you money over the long run.

This article was originally published as The Biggest Wealth Destroyer of the Past Decade on Fool.com.

One month, I counted 92 telemarketing calls, 17 preapproved credit card offers, and a full recycling bin’s worth of fliers for satellite TV service (for the three extra rooms I don’t have), foreclosure avoidance help (despite my up-to-date mortgage payments and good credit), and consolidation deals (for my nonexistent “student loans).

Americans get more than 4 million tons of junk mail a year. (Not surprisingly, storage is a $2 billion-a-year business.) Our response? Call off the dogs already!

Did you throw away your “Do Not Disturb” sign?

Once a year, financial companies with which you hold accounts will ask whether it’s OK to share your name with “partners.” (Yeah, I tossed mine in the trash, too.) Other institutions have 18 months from the time of your last interaction to make contact (three months if you simply made an inquiry).

To get the businesses you know to stop bugging you, you can request another opt-out notice, or ask to be put on their internal do-not-call list. (To report abuse, go to www.donotcall.gov or call 888-382-1222.)

Some companies will do the legwork for you, and, for a fee, opt you out of telemarketing calls and junk mail. Better yet, you can use the opt-out list we lovingly compiled to do the exact same thing for free!

Dear [blank]: Buzz off!

Give your shredder, your mail carrier’s back, and your phone battery a break with this opt-out contact list.

• National Do Not Call Registry: 888-382-1222 (call from the phone — cell and/or home — you wish to register) or www.donotcall.gov
• Direct Marketing Association: Mail Preference Service, P.O. Box 643, Carmel, NY 10512 (free) or www.dmaconsumers.org/cgi/offmailinglist ($5 charge)
• Pre-approved credit cards: 888-567-8688 or www.optoutprescreen.com

Real estate-related pitches

• Acxiom (provides tax assessor public records for marketing use): Opt-Outs/Consumer Advocacy, P.O. Box 2000, Conway, AR 72033-2000; 877-774-2094; or email optoutUS@acxiom.com
• Innovis: 888-567-8688

List vendors

According to Junkbusters.com, the largest marketing list-sellers house data on more than 90 million households. Contacting the following big guns will significantly cut the clutter:

• Abacus: P.O. Box 1478, Broomfield, CO 80038 or email optout@abacus-us.com
• InfoUSA: Product Quality, P.O. Box 27347, Omaha, NE 68127 or 888-633-4402
• The Polk Company: Opt-Out Coordinator, 26955 Northwestern Highway, Southfield, MI 48034-8455 or 800-873-7655
• LexisNexis: Download the form at www.lexisnexis.com and mail to P.O. Box 933, Dayton, OH 45401. (Opt-out provisions are limited to ID theft victims or those whose safety would be at risk if their information were exposed.)
• Metromail: Consumer Services, 901 West Bond, Lincoln, NE 68521 or 800-228-4571, ext. 4633

For more on keeping yourself underexposed, check out privacyrights.org and junkbusters.com.

You owe me one
When marketers tap into our natural propensity to return a favor, the money flows. That’s how Tupperware-party participants (plied with friendly chitchat and free crudites) get swept up in a buying frenzy.

Bob Cialdini, professor of psychology and author of Influence: Science and Practice, calls this strategy “reciprocity,” and he illustrates how powerful it can be in practice. When the American Disabled Veterans organization sent out its standard solicitation, it got an 18% donation-response rate. When customized address labels were added to the packet, the contribution rate jumped to 35%. “They become benefactors before they make a request,” he says. “I’ve gotten this gift with my name on it. As soon as I begin to use it, I feel obligated to say ‘yes’ to their request in return.”

Buy now or regret later
Flea-market shoppers must make split-second buying decisions. Savvy mass marketers also play on shoppers’ limited-time-only emotions to encourage unplanned purchases.

Costco CEO Jim Sinegal revealed how the warehouse chain takes advantage of that mindset. “We refer to it as a treasure hunt. We carry about 4,000 stock-keeping units, and about 1,000 of them are constantly in that changing mode. In the past, you may see that we have some Coach handbags. The next time you come in, the Coach handbags aren’t there, but perhaps there are some Fila jackets. The attitude is that if you see it, you have got to buy it, because it may not be there next time.” (Guilty!)

Tears cloud your cash decisions
A study in the mid-1990s found that disgust (triggered by showing a gross scene from the movie Trainspotting) made test subjects lower their valuation of a commodity, while sadness (brought on by a weeper clip from The Champ) increased people’s value assessments.

Jennifer Lerner, Ph.D., assistant professor of social and decision sciences and co-author of the study, explained that when people are disgusted, they want to get rid of things and avoid acquiring new things. Sadness, however, drives us to change our circumstances. “It’s out with the old, in with the new,” she says. But in pursuit of “the new,” our unhappiness dulls our ability to assign an accurate value, and we are more likely to pay a premium for replacement items. In other words, don’t shop on an empty stomach, or after watching Terms of Endearment.

More is better, and cheaper … right?
Ah yes, the 24-pack of tuna and 280-ounce bag of gummy bears — tempting, indeed. We haul home so much industrial-sized stuff that we should be charging it rent. Just remember, too much of a good thing can actually be a bad thing. The next time you see a supposed “deal” on something that is not an immediate need, ask yourself:

• Is it really a deal? Meaning, do you know the prices on similar products elsewhere, and recognize when the price you’re seeing on the item really is a rare bargain? Pay particular attention to higher-dollar items like cleaning products, Brita water-pitcher filters, dog food, or whatever it is that tends to comprise the bulk of your grocery bill. You’ll drive yourself crazy trying to sweat all the small stuff, so concentrate instead on big-ticket savings.

• Do I really need it — now or later? It’s easy to convince yourself that you absolutely cannot get by without the shredded Swiffer thingie that looks like an old-fashioned duster. (Somehow I’ve managed to make do without it for this long.) However, particularly while warehouse shopping, you’re likely to run across items you know will come in handy a month or two down the road. In that case, stockpiling is fine, so long as you don’t forget about those three tubs of peanut butter already in your pantry the next time you’re at the grocery store.

Now you know how to spot retailers’ mind games. And the next time feelings start invading black-and-white money matters, you’ll be better prepared to decide what’s ultimately best for you and your bottom line.

To make your home seem more attractive than all the rest, consider, well, making it seem more attractive than all the rest. The experts call this “staging.” You can hire a professional to do the job for you, or you can do much of the work yourself.

If you have a few good friends (who doesn’t?) and a couple of free weekends, you can make major improvements without shelling out a lot of money. Think of it as one of those home-and-garden television shows — just without the chummy banter among thin, well-dressed designers.

Start with some criticism
Start by asking particularly opinionated friends to come over and walk through the house as though they were potential buyers. Ask them to point out anything that might turn off a house shopper. Don’t take their comments personally. Everyone who comes to look at your home will walk through a critic. Better to hear the bad news now than suffer the consequences by settling for a lower price, or watching your house sit on the market too long.

With your friends’ list of complaints in hand, tackle the job. Next, get rid of clutter. We all have it, and we get used to looking at it. It’s time to banish it. Think in terms of making your home look like the picture-perfect rooms in those glossy magazines. What makes them so alluring? To begin with, your husband’s shoes aren’t strewn all over the floor, and the dining room’s not piled high with junk mail and dusty knick-knacks.

Empty it out
Remove things that overwhelm visitors with your personality. We know your collection of porcelain dalmatian dogs is charming, but it may interfere with buyers’ efforts to imagine themselves living in the house. Along these lines, experts recommend removing all your family photos. It’s my humble opinion that one or two well-placed snapshots give the warm impression that your home made your family happy, and that it can do the same for others.

Consider removing some furniture if your house is stuffed to the gills. To keep costs low, resist the urge to put everything in self-storage. Give away or sell anything you know you won’t use in your new home. Don’t pile it all into the basement or into a closet. Buyers will look in your closets, your kitchen cabinets, your garage, your basement, and probably even your underwear drawer. Almost nothing’s off limits.

Scrub-a-dub-dub
Then, clean. Clean like you’ve never cleaned before. Pretend Martha Stewart and your mother-in-law will stop by at the same time to inspect for cobwebs in the corners, dust on the mini-blinds, and streaks on the windows. Your potential buyers will consider your house well-maintained if it looks sparkling. Even old kitchens and bathrooms can look newer if they’re scrubbed to a shine.

Also go through your home with a bloodhound’s nose. Now is the time to eliminate the musty odor in the bathroom and eradicate any scent suggesting that Misty the cat likes to hang out in the basement. I recently found myself charmed by a house for sale in my neighborhood, for no other good reason than the scent of freshly baked chocolate chip cookies hanging in the air.

Freshen it up
If you’ve been to many local open houses, you’ve probably realized that first impressions count, and that means your front yard and front door should be inviting. Even if you don’t have a green thumb, planting a few colorful annuals can cheer up an entrance. (Just pull them out if you can’t keep them looking healthy.)

Anything, including the front door, can look fresher with a new coat of paint. Even urbane city dwellers who know a screwdriver only as a drink with orange juice can usually manage to paint. If you’re not that handy, this can be one of the less expensive jobs for a professional. Make your priority any room that has decor you can date. Take note if your opinionated friends say something like, “That’s so mid-1980s country kitchen.”

Now is also the time to fix all the “quirks” that make your house your home. Fix the leaky faucets and running toilets, the broken stair rail, the loose doorknobs, and all the other little things that buyers won’t want to do themselves.

Watch your budget
Like many household improvements, this one can get expensive quickly if you let it. Before you know it, you could be thinking about buying that new sofa you’ve been eyeing, or upgrading all of your kitchen appliances.

But remember — you don’t want to spend all your potential profits. Don’t get carried away if you don’t want to spend a lot of money on this project. Put some elbow grease into the job — by cleaning and getting rid of clutter — before you start the projects that cost you money. Then set a budget, and do whatever gives you the most bang for your buck. Put painting and repair jobs for obvious problems at the top of the list. Flip through some of those glossy magazines for inspiration.

Staging is not glamorous work, but sprucing up your home can mean a faster sale — and a heftier selling price.

Visit our center on real estate investing for more information.

We all know what happened next. A few lucky people cashed out at just the right time. As for the rest — we’re still dealing with the aftermath of their stories. And many people are wondering: Did I miss the right time to sell.

A unique asset

First, remember that your home isn’t like other investments. When housing prices are up, your four walls and a roof may be the best investment you’ve ever made, but pocketing the profit is just half of the process. There are property taxes to consider and school systems to research; commutes to be calculated and condo fees to be factored in.

And guess what? If your house is worth a lot, odds are any house you’re interested in moving into also has a hefty price tag. You can always find a rental, which isn’t a bad option — if you successfully time both the top and the bottom of the real estate market.

Home, sweet investment

As a homeowner, you’ll find it easy to think of your home as a piece of your overall portfolio. You’re the CEO of 1412 Maple Lane. Make the most out of this piece of your portfolio by making sure you aren’t overpaying for your mortgage, and that you are making necessary upgrades to extend the life of your home — and enhance your time there.

In fact, you should approach the housing market — your housing market — with the attitude of a buy-and-hold investor. Long-term buyers know that they will most likely be rewarded, despite the market’s day-to-day ups and downs. Time in the market is a lot easier than market timing.

Granted, things change. It’s pretty rare these days for people to live in the same area for their entire lives. Depending on where you move, you might find yourself in a totally different real estate market, with different price levels and available features. But if you’re lucky, you’ll always be able to at least maintain your standard of living when moving from house to house — thereby enjoying the slow but steady profits that rising housing prices have given homeowners over the decades.

Hot or not

Whatever history tells us about this time period, remember that a home is where you live. Its value in your asset mix is more than a number on a piece of paper. But you already know that. And, honestly, after a weekend of watching homes being razed, refurbished, tricked out, flipped, and traded up on cable TV, we can’t blame you for wondering whether you should have dumped your house at the peak and rented a place until everything cratered.

But while hindsight may be perfect, we don’t have a crystal ball. And with your home, it’s an all-or-nothing proposition. You can’t just take a portion of your profits — say, sell the third half-bathroom with the bad ’80s wallpaper and the seldom-used dining room and unfinished basement.

So if you want to make a killing in real estate over the years, the right time to sell is never. By moving only when your needs change, you spend less on costs such as listing fees and mortgage loan charges — and you benefit from the slow appreciation that real estate has offered over time.

Effective money management is more important than ever in these troubled economic times. Through our partnership with The Motley Fool, we are able to provide you with great personal finance articles that can help you jumpstart your financial planning and give you the actionable advice you need to address the financial crisis.

Foreclosures, flagging home sales, mortgage-meltdown headlines — and bears, oh my!

The events of recent years have brought the risks of adjustable-rate mortgages (ARMs) into the public eye. If you’re a homeowner with an ARM, the question of whether you should try to refinance your mortgage can keep you up at night.

Mortgage pros recommend that you focus on three factors to make your decision:

• How long you plan on staying in your home.
• Which way you think interest rates will go.
• How well you can withstand rate fluctuations.

Based on my cocktail-napkin calculations, the answers to those questions will get you roughly 18.2% of the way to the right result.

As with so many financial decisions, it’s the details that matter — and those fine points of refinancing make up (again, in my estimation) that other 81.8% of the equation. In short, refinancing isn’t right for everyone.

ARM wrestling: Who holds the cards?
If you’re thinking about dumping your ARM, remember this: Refinancing products are being hawked by the same industry that aggressively pushed these nontraditional loans in the first place.

You should be just as careful getting your ninth loan as you were getting your first. Since the process is completely in your control — there’s no moving date looming — it’s easier to take your time and do it right.

5 key questions
Here are the considerations that will help you devise a refinancing strategy:

1. Do you really have a “risky” loan? Not all ARMs are created equal. The riskiest ones offer flexible payment options and carry rates that adjust frequently — anywhere from monthly to every six months. (Not surprisingly, they also provide the biggest commissions for the brokers selling them.) Surveys show that 70% to 80% of option ARM holders make just minimum payments. The danger with such loans lies in ignoring the adjustments — easy to do, since the required payment may change only once a year.

However, there’s no need to wait for a warning bell — your lender’s hand is hovering over the buzzer. Once you’re in negative amortization land and owe 110% of the original loan amount (some have a cap of as much as 125%), the bank will require fully amortized payments. That’s what they can stomach. But remember, it’s not their roof at risk if you’re forced into foreclosure.

Traditional ARMs include long-term adjustment periods. Some come with an interest-only option. But even if your ARM is due to reset soon, refinancing isn’t necessarily a slam-dunk decision. So let’s keep digging.

2. How damning will the rate adjustment be? It’s not enough to say, “I have a five-year ARM.” You need to dig deeper. What index is your rate tied to? When does your loan adjust? What is the annual cap? What is the lifetime cap? And — this is an important one — what is the initial adjustment cap?

According to an independent mortgage-advice site run by Jack Guttentag, professor emeritus of finance at the Wharton School and founder of mortgage technology company GHR Systems, rate increases are fairly standardized on all but the five-year ARMs (second only in popularity to one-year ARMs at the time of his survey). The initial adjustment cap on five-year ARMs ranged from two to six percentage points — a small detail that could have huge long-term consequences.

Say you started out with a loan with a 6% rate. If it caps the first rate adjustment at two percentage points, you’d face a maximum rate of 8%. But if it has an initial rate cap of five percentage points, you could pay as much as a whopping 11% interest rate. That’s quite a handicap right out of the gate.

3. What’s your FIR? One critical input in your refinance research is the current fully indexed rate (FIR) of your ARM — the current rate of the index your ARM follows, plus the margin. “This is the best available predictor of how your ARM rate will change,” Guttentag says. You’ll find the index and your margin in your loan paperwork. For the current rate of the index, go to mortgage-x.com.

When the FIR rate is higher than the fixed-rate mortgage (FRM) rate, refinancing might make sense. However, if the rate for your ARM is currently below the FRM as well (the most common scenario), it makes sense to wait until the next adjustment to refinance, unless you are extremely risk-averse.

4. When do you reach your breakeven point? Don’t let loans that emphasize the monthly payments cloud your judgment. Instead, look at the total cost of refinancing, which isn’t as straightforward as you might think. It’s not as simple as just comparing your upfront costs with your monthly savings. Keep in mind how quickly you’ll pay off your mortgage, and consider the lost interest on the money you use to pay refi costs and any prepayment penalties that apply.

5. Why did you pick an ARM in the first place? Maybe you chose an option-payment ARM because you have an unsteady income — a common situation for small-business owners or commission-based employees. Maybe you didn’t expect to live in your home very long. Did you get an interest-only loan so you could free up cash for other investments? Perhaps you got an 80-10-10 loan, or a “piggyback mortgage” — a primary loan subsidized by a home equity loan or line of credit — to avoid paying private mortgage insurance.

Plans change. It’s important to re-examine your original motivation and see whether those inputs have, too. Look at the equity you’ve built up. Take a truthful look at how you’re handling that “freed-up” cash. Are you investing it or blowing it at the mall? Research home values, which affect your ability to move up or sell. And check your credit report, particularly if you were forced to take a subprime loan because of past bloopers.