Here’s something you haven’t heard in years: I have good news about your 401(k).

Last week, the Department of Labor published a new regulation requiring 401(k) plans to tell participants (that’s you), on an annual basis, what services they’re charging you for and how much they’re charging. No, this wasn’t already required. The regulation takes effect at the end of August.

“It’s an itemized receipt,” says Dave O’Brien, a certified financial planner in Richmond, VA, who helps businesses develop 401(k) plans. “Back in the 80s, when you bought a car, all you knew was the MSRP on the window. Today, you go to any different website and it tells you what the true cost is.”

O’Brien and other retirement plan experts I spoke to agreed on two things: People aren’t going to read the new disclosures, but it’s great news anyway.

“The new regulations are a huge deal, not necessarily because of what an individual can do with the information, but more about what’s going to happen to the overall marketplace,” says Mike Alfred, cofounder and CEO of Brightscope, which helps people see how their employer’s 401(k) stacks up. “You can already see that happening.”

For example, said Alfred, last month Schwab announced a new 401(k) product based entirely around low-cost index funds.

Let’s take a step back, though, and ask: Why does it matter how much your 401(k) costs? You never get a bill for it, right?

The high cost of 1 percent

In the world of 401(k)s, like the rest of the world, there are haves and have-nots. The haves work at big companies that have the size and power to negotiate with plan providers (the insurance companies and mutual fund companies that implement 401(k) plans for employers) for a 401(k) with great investment options and low fees. Think of these good 401(k)s as Disneyland.

Most people are stuck with crappy 401(k)s, full of expensive funds with extra management fees slapped on top. These are more like your skeezy neighborhood amusement park, lousy with pickpockets and greedy carneys. Or, to go back to Dave O’Brien’s car dealership example, these plans sell you undercoating without telling you.

The price difference between the best and worst 401(k)s is shocking. In 2009, the Government Accountability Office released a report that was mostly about the benefits of automatic enrollment in retirement plans, but also included these gems:

- “[M]ore than 80 percent of 401(k) participants reported in a nationwide survey not knowing how much they pay in fees.”

- And what you don’t know can hurt you: Over a 20-year period, a 1 percentage point increase in fees and expenses would reduce a worker’s ending balance by over 17%. If you have an expensive 401(k), you could literally be retiring years later so your retirement plan provider can get richer. And the difference in cost between the best and worst plans is a lot more than 1 percentage point. I’ve seen plans charging as little as 0.1% and as much as 3%.

“Providers, as you may know, don’t want this regulation, because it’ll make it harder for them to make as much money as they have in the past,” says Brightscope’s Alfred.

Let ’em have it

If you’re stuck with a 401(k) run by carneys, it’s probably not because you work for an evil company; it’s because your company is just as confused by this stuff as you are. The new regulations can help there, too, because they require itemized disclosures from plan providers (Schwab, Nationwide, Merrill Lynch, and so on) to plan sponsors (your boss).

Even though the regulations don’t go into effect for another six months, it’s worth trying to figure out what your 401(k) is charging you now. Nobody (other than weird personal finance writers) enjoys talking to their benefits department, but it wouldn’t hurt to let them know that you understand there are new rules coming soon and you’d like to get that information as soon as possible. My fantasy is millions of employees waving their annual fee disclosure forms and descending on their benefits offices in droves, but I’m a weird personal finance writer.

If we’re going to ask workers to manage their own retirement savings, the least we can do is give them an honest, accurate bill. “The spirit of this is, you should know what you pay for,” says O’Brien.

That’s a good start. Now I’m going to go into fantasy mode. You know the sticker on your water heater that shows you how energy-efficient it is compared to the competition? Wouldn’t it be great if your 401(k)’s annual report had to put your expenses in context?

This is, not coincidentally, a lot like what Brightscope shows you on their website, but a federal mandate would make the information more specific and more widely available. If you’re paying 1.1% for the same fund that charges 0.5% in the 401(k) of the company next door (and this happens all the time), wouldn’t you like to know?

Oh, one more thing: I’d like to apologize to carneys for comparing them to financial services industry professionals.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster

Dante warned us that there’s a special place in the underworld for people who make puns about the financial and musical uses of the term “CD” but I like to tempt fate.

I’ve been thinking about reviving my old CD collection. No, I’m not talking about deleting iTunes. I’m talking about inviting some certificates of deposit into my retirement portfolio.

People generally think of CDs as investments for risk-averse retirees—or, at least, we did before interest rates plummeted to historic lows. And you can’t usually buy CDs inside your 401(k) or other workplace retirement plan, even if you want to.

Despite this, CDs have some peculiarities that make them worth a look, even if you’re a long way from retirement.

Certified financial planner Allan Roth (who did not invent the Roth IRA, though wouldn’t that be cool?) writes the Irrational Investor blog and is such a strong proponent of CDs that he is considering changing his name to Allan CD (not really).

Banking on CD singles

Two years ago, I wrote about using CDs for your emergency fund. That was Roth’s idea and I’m glad I took his advice. Most of my emergency fund is sitting in CDs paying 2.74%, with a tiny 2-month early withdrawal penalty. That may not seems like a high interest rate, but compared to an online savings account paying less than 1%, it’s delightful.

Roth says there’s no reason to stop there; I should also consider using CDs as a replacement for bonds in my retirement savings. “I have roughly 70% of my fixed-income portfolio in CDs,” he says.

Why? Because CDs offer two features bonds don’t:

Higher interest. Right now you can buy a 5-year US treasury bond paying 0.92%. An equally safe FDIC-insured 5-year CD from Ally Bank pays 1.79%. A 7-year CD from PenFed Credit Union pays 2.75%, while the comparable treasury bond pays 1.49%. Why would anyone buy the treasury bond?

Less interest rate risk. When interest rates go up (and wouldn’t that be nice?) bond prices go down. That’s not true of CDs, which don’t fluctuate in value. If rates go up, you can just break the CD, pay the penalty, and buy a new CD—or a bond, if bond rates are superior in the future. Of course, if interest rates go down, CDs don’t go up in value, either.

We could also compare CDs to a broad-market bond index fund like the AGG ETF, which has a yield of 2.04% and a duration of 4.3 years. That’s not terribly different from the rate on the Ally Bank CD, and it introduces default risk: about a third of the bonds in the index fund are corporate bonds, which are riskier than US government bonds.

“So I’m getting almost the same yield, I have less default risk, and far less interest-rate risk,” says Roth. Why should this situation persist? “There’s this inefficiency we can take advantage of that Goldman Sachs can’t,” he says. CDs are only risk-free up to the federal insurance limit of $250,000 (double that for a joint account; even more if you open CDs at multiple institutions). I consider that a lot of money. A giant investment bank doesn’t. A bank that needs to bring in deposits has to offer a higher CD rate, but doesn’t have to convince us that the bank is secure, because deposits are insured.

Smooth or chunky?

I have no argument with any of this, and yet I haven’t put any of my retirement portfolio into CDs for several reasons, some more legitimate than others. Listen in while I try to talk myself into it.

Bond funds are smooth; CDs are chunky. Every month, I make a contribution to my retirement account. Setting up an automatic contribution to a bond fund is a snap. No bank that I know of allows you to automatically buy CDs every month, so I’d have to do it manually. I hate manual transactions. Furthermore, it’s almost time to rebalance my investments. This will involve selling bonds and buying stocks. With a bond fund, that’s two clicks of the mouse. With a collection of CDs, it means either redirecting a few months of future contributions to stocks (and remembering to set it back later) or calling the bank to break some CDs. Which brings us to…

Breaking CDs feels wrong. “There is the psychological aspect of a penalty, which you need to get over,” says Roth. “I have the right to sell my CDs back to Ally Bank.” If interest rates rise and people start breaking their CDs all over the place, that might turn out to be the end of the small early withdrawal penalty, but that’s no reason you and I can’t break CDs today.

My bond funds did great last year. In 2011, I got double-digit returns on bonds. If I’d bought CDs instead, I would have made maybe 2.5%. This is an absolutely terrible reason to favor bond funds, however, because it’s looking only at the first year of a five-year investment. What goes up will probably come down.

There are no inflation-protected CDs. I prefer inflation-protected US treasury bonds (TIPS). In the world of CDs, there’s no such animal. Roth says it’s unnecessary: with high inflation comes high interest rates, and again, you can just break your CDs and buy higher-yielding ones. There’s your inflation protection.

The verdict

Well, I’m convinced: by adding CDs to my retirement portfolio, I can get a higher return and take less risk. But I’m still sticking with bond funds.

Why? For simplicity’s sake. My wife and I have all of our individual retirement assets at a single mutual fund company. Buying CDs would mean opening IRAs at a bank and moving money between the fund company and the bank. Smells like paperwork. Then we’d find ourselves tending a herd of CDs, making manual transactions and having to figure out when to call the bank to break them.

This is just too much of an affront to my preference for keeping investing simple (my wife and I own a total of four mutual funds) and automating wherever possible. As Mike Piper, of Oblivious Investor, put it recently, “As to embracing simplicity for simplicity’s sake, you bet I do.” Me too!

If you’re a more hands-on investor, however, and want to add some CDs to your portfolio, you can buy them for your traditional or Roth IRA at most banks and credit unions. You can compare CD rates and terms on Mint.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.

Let’s say you’re a small-time investor. Hmm, that name sounds a little condescending.

Let’s say you’re a mainstream investor. Your name is neither Goldman, nor Sachs, but you’ve accumulated enough money that it would have impressed your younger self. When it comes to managing your investments, however, you’d like to hire the job out but financial advisors charge more than you want to spend, and you’re not sure how to choose a good one, anyway.

Hey, isn’t the Internet supposed to make things easier and cheaper?

Sure it is, and one promising portfolio management app comes from an unlikely source. Last year I wrote about Wealthfront, which was then peddling an expensive beat-the-market service that, I argued, was extremely unlikely to beat the market.

Well, Wealthfront has relaunched (which is web-speak for “reformed”). They’re positioning themselves against Betterment, another simple investment account that MintLife has explored. (Betterment is a Mint.com partner.)

Now, when you sign up for WealthFront, it will build a customized portfolio for you based entirely on low-cost index funds, mostly from Vanguard. The software asks you a few questions about your risk tolerance and then presents your portfolio in full—all before you tell them your name or hand over a dime. “We have an open-source philosophy,” says Wealthfront founder, Dan Carroll. If someone wants to take the Wealthfront-recommended portfolio and implement it without paying Wealthfront, Carroll isn’t worried about it. “People are busy kicking ass in their trade and don’t necessarily want to do it themselves,” he says.

The most exciting feature of Wealthfront is the price: Free (not counting the minimal underlying ETF expenses) for up to $25,000 and 0.25% of assets annually after that. Betterment, by comparison, charges 0.9% a year for the first $25,000. (The minimum opening balance for Wealthfront is $5,000; Betterment has no minimum.) “We have been in process of reviewing our fee structure for several months and expect an update soon,” says Betterment’s Jon Stein. “I expect us to be more than competitive with their offering.”

When these guys get into a price war, average investors win.

Rebalancing act

Rebalancing is when you reset your portfolio to your chosen asset allocation. In other words, if you started out at 60% stocks/40% bonds, but your portfolio has drifted to 70% stocks/30% bonds, you sell some bonds to buy some stocks and get back to your original risk tolerance. Financial writers generally tell people to rebalance once a year, or when your allocation gets some percentage out of whack.

In the real world, rebalancing is like cleaning out the garage: People put it off forever if they can get away with it. It means spending hours on the websites of your various investment account providers, and it’s also a mental hurdle to sell the stuff that has been making you money lately in order to buy more of the stuff that has been losing money. (It helps to think of it as selling expensive assets to buy cheap assets.)

This is where services like Wealthfront and Betterment really shine. You never have to rebalance because the software does it for you.

The old school

The biggest competition for these upstart services comes from target-date and lifestyle funds from big discount mutual fund companies like Schwab, Vanguard, and Fidelity. Vanguard’s LifeStrategy funds, for example, are based on low-cost Vanguard index funds, and you can choose from among four funds with different risk profiles, ranging from 20% stocks to 80% stocks. These funds are also automatically rebalanced and charge a tiny management fee (about 0.15%). Similarly, target-date funds (TDFs) are pegged to your retirement date and offer a diversified mix of stocks and bonds that gets more conservative as you get older.

I asked Carroll why someone should use Wealthfront, rather than one of these funds. “TDFs essentially pinpoint your risk tolerance on a single variable, i.e. your age, and give you a portfolio based on it,” he says. “We actually try to make it even better by looking at many more variables to pinpoint your risk tolerance. Even for the same age group, people might have very different financial situation and risk tolerance, and we capture those differences.” He added that Wealthfront customers get an email every quarter asking them to review their financial situation to see whether anything has changed that would impact their need or ability to take risks. Target-date funds don’t do that.

The taxman cometh

Attention personal finance web startup geeks: I have a wish for you.

One thing that no all-in-one investment product does well is manage taxes. Almost everything complicated about investing comes down to taxes. We have all these different accounts (401(k), Roth IRA, 529 college savings plan, taxable brokerage account) that are taxed in different ways.

To make matters worse, different investments are taxed differently. Interest on bonds is taxable at your ordinary income rate. Most stock dividends are taxed at a lower rate. Then there’s short-term and long-term capital gains rates, which range from zero to 35%, depending on… Oh, let’s not get into it.

What this means, in short, is that if you have a mix of taxable and tax-advantaged investment accounts, like a 401(k) plus a regular brokerage account, it’s a bad idea to reproduce the same portfolio in both places. You’ll pay more tax than necessary. Automated services like Wealthfront or target-date funds don’t take this into account. They can build you a nice diversified portfolio, but if it doesn’t consider your tax situation, it’s not the best portfolio for you.

Traditional financial advisors are good at playing this tax game. While Wealthfront can’t peer into your 401(k), that doesn’t mean it couldn’t ask. There’s no reason an automated service couldn’t ask for your 401(k) balance and investment options, crunch the numbers, and come up with a portfolio that is diversified, low-cost, and tax-efficient. That’s my dream. Hmm, maybe I need to dream bigger.

Having said that, however:

-If your current investment approach involves expensive actively-managed funds or just a mishmash of funds and individual stocks accumulated over the years, moving everything to one of these services would be a huge improvement, taxes or no taxes.

-Most people have all of their investments in tax-advantaged accounts, where you don’t have to worry about tax consequences because everything is taxed the same way. Both Betterment and Wealthfront offer traditional and Roth IRAs.

Is one of these super-simple services for you? Here’s a comparison chart*:

*Based on a $25,000 investment

One final thought: You, and only you, know your portfolio, your tax situation and your tolerance for risk. Wealthfront and Betterment are both excellent apps and it’s up to you to figure out which one is the right fit for your personal needs.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster

If a picture is worth a thousand words, Carl Richards’s napkin sketches are worth a thousand bucks. His minimalist Sharpie art is designed to weasel its way into your brain so that the next time you think, “I should buy that hot stock,” you’ll remember his famous “buy high/sell low” drawing and wait until the must-buy feeling passes.

That sketch appears on the cover of Richards’s new book, The Behavior Gap. The book is short, jargon-free, and loaded with napkin sketches and advice to inoculate you against all sorts of emotion-driven money mistakes.

Going on a media fast

Mint: What are the three stocks I should buy right now?

Richards: Classic. That’s a different book.

Mint: You wrote a whole personal finance book that doesn’t mention the word “401(k)” once, doesn’t mention any specific mutual fund, and doesn’t get down into any real nitty-gritty financial advice. Why did you do it that way?

Richards: I’ve joked from the beginning that my goal was to write a personal finance book for people who would never read a personal finance book. This idea of being prescriptive just hasn’t worked very well. A lot of personal finance books are really specific and really prescriptive, but the problems are as unique as the individual. So, a lot of educated folks have gotten sick of these prescriptive books.

Mint: I’ve increasingly had people email me and say they’re worried about a doomsday scenario: “I’m just scared of everything, that all of my money is going to disappear into a black hole because of something I’m hearing about in the news.” How do you talk someone down from that place?

Richards: We tend to think that today is the worst it’s ever been. I don’t have any memory of the Cuban Missile Crisis, but I have a friend who told me he can remember his dad packing them up to go home early from a vacation in tears because he thought the whole world was going to pot. If you go back and look, historically, we’re going to continue to create apocalypse du jour every single year.

One of the suggestions I make in the book is to go on a media fast, and just stop paying attention to those things that make you feel negative. I was at a lacrosse game, and my sweet mother came and sat down next to me to watch my 10-year-old son play lacrosse. She was really depressed and I said, “What’s wrong, Mom?” And she said, “The dollar.” And I was like, “What did you just say?” I was speechless. She said, “The dollar is just being devalued, and it’s going to collapse.”

I said, “Mom, I’ve been doing this fifteen years, and I don’t even know what that means. Where did you hear that?” “It’s all over the news.” Well, let’s analyze that quickly. What would it mean? Is it really going to happen? There’s one sketch in the book that says, “Things you can control” and “things that matter,” and the overlap is what you should focus on.

Good moves and bad moves

Mint: In the book, you say a bad decision is a bad decision, even if the outcome is okay. Let’s take one popular bad idea: Investing in your employer’s stock. Say you have a client who who has a lot of money in company stock, and they’re loyal to their employer, and the stock has done well. You’re in the position of having to tell them this is a bad idea. How do you do that?

Richards: Let’s say that you’re right and your employer’s stock doubles again. I’m thinking of somebody close to retirement, with a million dollars in their retirement account, and you want to get really aggressive with it. Let’s say that you happen to hit a home run and your account is worth $1.5 million a couple years later. What impact would that have on your life? And then ask the opposite question: What happens if you’re wrong? There re plenty of examples. You could have just as easily had Enron or Tyco, as you could have Apple or Google. And let’s say that your account’s worth half or less. What people find is, the consequence of being wrong has a far greater impact on your life than the chance that you might be right.

Risky business

Mint: Everyone says you should invest according to your risk tolerance, but measuring your own risk tolerance is notoriously difficult. The title of your book refers to the fact that people load up on the hot investment once it’s already overpriced and then sell it after it crashes. How do you figure out what investment approach is going to help someone achieve their goals and let them sleep at night?

Richards: I think you’re constantly trying to balance this idea that you should always have as much in equity exposure as you can emotionally handle — that’s one way to make that decision. And the other way is to have only as much in equity exposure as you need to meet your goals. I think the second way is better. That implies that you have some sort of plan, and that you’ve taken the time to think about your goals, map out a course to meet them and to hire somebody that you trust to help you with that process if you need to.

You may get to the end of that process and decide that you need to take a lot of risk; you need the return that you can only get if you have a high exposure to equities, such as 90% equities. If you are totally uncomfortable with that, then there are other levers. You can say, “Maybe I can save a little bit more, maybe I can find a part-time job in retirement for five years, or maybe I can retire a little later.”

Mint: At what point is it okay to go back and make a change? You don’t want to change your allocation all the time, willy-nilly, and be the person on the cover of your book. On the other hand, sometimes you genuinely realize that your risk tolerance isn’t what you thought it was. How often is it okay to reconsider that, and under what circumstances?

Richards: The cool thing about investing is, if you’ve been investing for 10 or 12 years in your 401(k), then you have enough experience now to know how you’ll behave in certain situations. You can go back and look because you have actual data. Go pull up your tax returns, your 401(k) statements, and your brokerage statements. You can see what you did. So, if you found yourself buying in 1999 because you just couldn’t stand the fact that Cisco was doubling every year, if you found yourself selling in 2002, if you found yourself feeling like you were a professional real estate investor in ‘06 and ’07, and then bailing out in March of ’09, that’s information. At this point, it should be pretty clear that you can’t stand the heat, and you should incorporate that information into your planning.

For many people, ’08-’09 may have been, “Wow! That’s what risk really feels like.” Well, that information should be incorporated into your allocation decision. I don’t think there’s anything wrong with using the feedback we’ve gotten and making changes. I just think often it’s the knee-jerk way in which we make those changes that causes the problem.

Mint: I worry about what’s going to happen when 2008-09 rolls off those 5-year performance charts you always see when you punch in a ticker symbol. It’s a really easy way to show people how much risk could show up for a particular investment.

Richards: Record your feelings about these things. Write them down. Write yourself a little letter and review that once in a while. Because you’re right: We’re going to forget. I had hoped that ’08-’09 was going to be permanently seared in our memories, and we’re already forgetting.

Mint: I hoped 2001-02 was going to be permanently seared in our memories.

Richards: Yeah, me too.

Carried away in the housing boom — and bust

Mint: I read your piece in the New York Times about losing your house. You admitted to some pretty egregious mistakes. What did you learn in the aftermath of publishing that?

Richards: I got hundreds of emails. Most of the emails were these sad stories from people who just felt alone. If we’re going to change the way we approach these decisions in this country, then we’re going to have to figure out (I’m not trying to be overly dramatic here) how to change this conversation. I’m not saying we need to be more permissive, but we need to talk about money more. How are we ever going to learn anything if when we’re trying to make these decisions, we make them in secret, like I did? I didn’t have anybody helping me. Now, I know, I’m a financial planner, I should have been helping myself, but that’s not the way these decisions work. You are too close to them to make objective decisions.

We hired a financial planner about six months ago, when we finally got moved, we got at least a little bit of footing underneath us. I am 100% convinced I would not have made those mistakes if that person had been in my life five years earlier.

Mint: What was that experience like for you as a financial planner, hiring a financial planner? Was it a weird conversation?

Richards: Of course! It was terribly embarrassing.

Mint: I know, for me, the day when I convince myself that I know enough about personal finance that I’m never going to make a dumb money mistake, is the day before I make a huge money mistake.

Richards: Totally. There’s a huge movement in the financial community: The big debate about whether every planner should hire their own planner. I’ve told the Financial Planning Association that I think they should make it a requirement. I think this should be a professional standard. In fact, to me, that may be the single most valuable question a consumer could ask of a financial planner. When you go hire a financial planner or a financial advisor, ask them if they have their own. Then ask, “Do you pay them, like I’m going to pay you?”

Getting creative

Mint: When did you start doing the sketches?

Richards: I think that behavior gap sketch was the first sketch that I drew in front of clients. I had done it so many times that I was finally like, “Wow, maybe this means something.” That sketch probably started happening in the early 2000s.

Mint: So, how did you go from doing these sketches in client meetings to realizing, hey, wait a minute, there’s potential here for these to reach a mass audience?

Richards: Had I started this 20 years earlier, it would have never gone anywhere. I would have drawn this and what would I have done? I would have shown my neighbor, or maybe my mom and dad.

Mint: Make a lot of photocopies.

Richards: They would have been like, “What? That’s silly.” With the internet, you’ve got this massive audience now, and no matter how bad your work is, there’s likely to be at least a few people who enjoy it, and then they’re going to encourage you. So, I think there are two things: 1) Ignore your mother, and I mean that lightheartedly, and 2) Play in traffic. Just get out there and hope you get hit. It happened to me.

Get out there and stick with it. For years I had a blog that only my mom and my sister claimed to read, and I’m pretty sure my sister didn’t. I’m pretty sure she was lying.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.

401(k)s can sometimes seem like a temperamental friend. Sometimes your investments will perform to your satisfaction and sometimes they will end up disappointing you. With the ongoing market volatility, you may become frustrated with your 401(k)’s behavior more often than not. And if you are a younger investor, retirement planning may have confounded you from the moment you enrolled.

Volatile and seemingly unpredictable at times, 401(k)s can cause some plan participants to throw their hands up in the air and wonder if this friendship is worth all the trouble. However, don’t let your 401(k)’s chaotic nature sabotage your desired retirement future. Sometimes it just takes a step back or a “time out” to reevaluate your retirement connection.

When your 401(k) needs a behavior adjustment, these three steps can help you reevaluate and readjust.

Rebalance your portfolio.

If you leave your investments unchecked, your balances in each of the asset classes will stray away from the initial target allocation. If you want your investments to keep up with the market’s ups and downs, you will need to rebalance your portfolio on a regular basis. When your retirement plan has been neglected, it’s important that you step in to readjust your investments so that they realign with your retirement goals.

Raise your contribution amount.

Many financial advisers recommend increasing your contribution amount by 1 percent each year. However, not everyone is in the ideal financial situation to do so. Therefore, at least try to increase your contribution amount with each raise or promotion.

Most Americans need to increase their contribution amount to a work retirement plan over time in order to reach their retirement goals. Although retirement may seem far away, you only have one shot to prepare, so it’s important to do everything you can now for what’s ahead.

Avoid chasing after short-term relief.

Even though we all look for ways to achieve immediate satisfaction, that mentality is dangerous when it comes to your investments. Although the market instability might cause your retirement plan to act up, avoid making sudden investment moves to gain short-term relief. For example, moving your entire portfolio to cash following a significant market downturn could hurt your long-term return potential, as you could miss out on the potential rebound. It is far better to develop a solid plan from the start and stick with it through both the ups and downs.

Retirement planning is a long-term process that takes patience, so it’s crucial to stay levelheaded when you hear or see something like, “The market is down.” Remind yourself that the “market” can mean different things in different contexts. The statement could be referring to the S&P 500, the Dow, housing, commodities, emerging markets, etc.

Depending upon your exposure to the “market” being discussed, you may not be as impacted as you might expect. For example, the S&P 500 and the Dow are benchmarks to describe the general market environment and some of your investments may not even be part of those indexes.

401(k)s or any other retirement plan can be very temperamental, especially given the recent market volatility. However, with patience and commitment, you have the ability to set your retirement account on the right track.  Just as you would take the time to build a life-long friendship, you should take the time with your 401(k) as well.

Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.

We live in interesting times. The stock market served up two brutal bear markets in one decade. I’ve even heard my relatives use the term “market volatility,” which is weird because normally I’m the most boring person in the room. Oh, and as of the end of 2011, bonds have outperformed stocks for 30 years.

Wouldn’t it be great if there were a signal, preferably a glowing bull or bear shining in the night sky, telling you when to get into the stock market and when to take your money and run?

According to two recent academic papers, there is such a (non-celestial, sadly) signal and over the past 100 years, investors who paid attention to it would have enjoyed better returns with less risk. Will it work for you and me? Pretty please?

Stocks: Expensive or cheap?

Both papers, one by Wade Pfau and the other by Michael Kitces and his colleagues, use a similar approach: Own more stocks when they’re cheap and own fewer when they’re expensive.

“Great advice, genius,” you say. “How do we know when they’re cheap or expensive?” By using the PE5 or PE10 ratio, which I am not going to explain, except to say that it compares the recent earnings of the company to the price of its stock. A measure like PE10 is called a valuation metric.

We can look at the ratio for an individual company or for the stock market, as a whole. If the ratio is much higher than the historical average, prices are high. In late 1999, for example, at the height of the Internet bubble, the ratio hit its all-time high. You can check the current and historical PE10 numbers for the S&P 500 here.

Kitces, director of research for Pinnacle Advisory Group, looked at what would happen if you started with a 50/50 portfolio (half stocks, half bonds). You bump up the stocks to, say, 70% when the PE ratio is exceptionally low (low is good, remember) and down to 30% when it’s exceptionally high. Among my colleagues, “market timing” is a curse word that brings to mind a feverish day-trader earning huge commissions while losing money. That’s not what Kitces or Pfau are talking about. “This is not exactly a rapid cycling system here,” says Kitces. “You’re talking about a system that gives an overweight or underweight recommendation, on average, twice a decade.”

The result: Over the long term, the strategy added up to half a percentage point in returns, while reducing downside risk. Sounds good, right? I wish I had gotten a signal to own more bonds and fewer stocks in 2008-09. Unfortunately, we can still wear 80s outfits, but we can’t get back 80s stock returns. Sure, Kitces found a strategy that would have worked in the past, but do we have any reason to believe it’ll work in the future?

“We all use past performance to understand stock returns,” says Kitces. “If you don’t believe our numbers hold water because the future could turn out to be different from the past, it undermines the entire reason for even owning stocks in the first place.” That is, if you believe stocks are going to return something like 10% a year, on average, because that’s what stocks have done for the past 100 years. Let he who is without hindsight bias cast the first stone.

Bad behavior

Let’s assume for the moment that Kitces and Pfau have genuinely identified a way to beat the market over the long term. What will happen if you adopt their strategy with your own portfolio?

You’ll spend a considerable amount of time feeling like an idiot. “It’s going to tell you to not buy stocks in the late 1990s, when everybody bought stocks,” says Kitces. “It’s going to tell you not to buy stocks when everybody else is screaming at you to buy stocks. This system would have been telling you to get out of stocks in 96 or 97, which means you would have looked like a moron for almost three years.”

It’ll also tell you to buy stocks in 1981, when Business Week proclaimed “The Death of Equities.” It’s hard enough to stay the course when you’re losing money along with everyone else. Pursuing a contrarian strategy is even harder. As Pfau put it, “Implementing these strategies requires strong nerves to maintain a contrarian strategy that may only pay off in the long term.”

Meir Statman, professor of finance at Santa Clara University and author of What Investors Really Want, wrote an earlier paper on this type of market timing and concluded it wasn’t worth the trouble. “In my view, individual investors are not likely to benefit from it,” he told me via email. “The amount of information is small, contaminated further by hindsight errors. Execution is costly in taxes and, more importantly, in psychological costs.”

Shutting down inefficiencies

Mike Piper, who writes the Oblivious Investor, points out that while the idea of investing based on stock market valuation is very old, the ability to carry out the kind of strategy proposed by Kitces and Pfau isn’t. Prior to the mid-70s, he points out, there weren’t any no-load index funds for investing in the broad stock market, and transaction costs (including taxes) were much higher.

“If a backtest ignores actual historical circumstances, then it’s not going to be particularly meaningful as a way to prove the existence of a particular market inefficiency,” he explained via email. “Inefficiencies don’t get eliminated until somebody decides to try to profit from them.”

Put another way, it’s now cheap and easy to invest in the entire stock or bond market inside a tax-advantaged account, like an IRA or 401(k). Nearly anyone who wants to follow a valuation-based timing strategy can now do so from the comfort of their desk chair without paying a dime. Once that happens, the strategy won’t work anymore.

Another way to get there

Okay, wait a minute. Enough of the technical blather. If you’re a stock market investor and participate in a massive 80s-style bull market or 2000s bear market, you’ll be highly conscious of one particular indicator: Your account balance.

Real-world investors, not hypothetical folks from academic papers, invest to achieve goals. Let’s say you’ve just come through a massive bull market. “Not only has the future expected return gone down, but you have less need to take risk, because you got a higher than expected return,” says Larry Swedroe, director of research at Buckingham Asset Management and author most recently of Investment Mistakes Even Smart Investors Make. “It’s like an inheritance. You should be much closer to your goal. So, what you should do is change your asset allocation to reflect not a market-timing decision, but the fact that one of the assumptions now has changed: Your need to take risk has changed because of the bull market.”

Swedroe agrees that valuation measures are important, but determining your goals and your need and ability to take risk comes first. You look at how much you need for retirement, how much you can afford to save, and what asset allocation might get you there. Then, you might look at a valuation measure to see if expected stock returns are historically out of whack. At that point, you can decide to take more or less stock market risk or do something boring, like work longer or spend less.

“An investment plan should be a living document, not a plan that lives forever,” says Swedroe, “and you should change it anytime any of the assumptions change, including the need to take risk because the market has changed.”

Words from the scriptures

Still, though, valuation-based market timing intrigues me. Why should I buy stocks no matter what the price? Whenever a siren song calls to me, I turn to the bible of modern investing, A Random Walk Down Wall Street by Burton Malkiel, for guidance. (You can find justification for almost anything in Random Walk, so bear with me.)

Like everyone else, Malkiel agrees that valuations are important and may even have some long-term predictive value. However:

[T]he same models that identified a bubble in early 2000 also identified a vastly “overpriced” stock marketin 1992, when low dividend yields and high price-earnings multiples suggested that long-run equity returns would be close to zero in the United States. In fact, from 1992 through 2004, annual stock market returns were over 11 percent, well above their historical average.

Uh-oh.

In December of 1996, when Chairman Greenspan gave his “irrational exuberance” speech, those same models predicted negative long-run equity returns. From the date of the chairman’s speech through December 2009,the stock market returned 7 percent per year, even after withstanding two sharp bear markets.

Double uh-oh.

Here’s what it comes down to, for me. I suspect Pfau and Kitces are onto something. If so, however, I suspect their approach will be less profitable in the future than it has been in the past, for the reasons Mike Piper laid out. Furthermore, I doubt I could handle the stress of following a contrarian strategy, especially the part where you jack up your stock allocation and stocks continue to decline for several years.

That being said, I’m sticking with with buy, hold, and rebalance. This is both boring and wimpy, but it doesn’t matter whether I beat someone else’s portfolio, only whether I achieve my own personal goals. Oh, and if you’re beating my portfolio, I don’t want to hear about it.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.

You can count on one thing from a college education: It’s going to be more expensive next year than the last. A Los Angeles Times article reported that public school tuition increased by 7.9 percent, while private school tuition increased by 4.5 percent in 2010. With tuition at an all-time high and showing no signs of decreasing in price any time soon, you’re going to need more than a savings account to pay for college. Low-risk investments with modest returns can help you to sock a little something aside for Junior’s college education.

First Things First

Before you begin investing for a college education, you should consider some hard truths about college. First of all, it’s not always the best investment. Liberal arts degrees are not currently in demand on the job market. For the moment, the best investment for college is in a trade or hard sciences degree. Still, even public trade colleges cost money. Further, a liberal arts degree and the learning experience that goes along with it, has a value over and above dollars and cents. Perhaps you consider the cost of exposing your child to new ideas and points of view well worth the cost — you wouldn’t be the first. Finally, consider the budget when you start saving for college. Are you looking for Ivy League savings or state college savings? Remember that there’s nothing wrong with sending your kid to a top-notch public school, or even a modest one. Whatever hopes you have for your child’s future education, you need to know what it’s going to cost.

What Not To Do

The biggest thing not to do is to just throw money in the bank because it won’t keep up with the cost of tuition inflation. The second mistake people make is tapping into their 401(k) to pay for college education. A 401(k) plan is set up specifically for investment in retirement. You can incur steep penalties from withdrawing money from your 401(k) and borrowing against it isn’t a good idea, either. So, what does that leave?

Where To Invest For College Education

A 529 investment plan is specifically designed for those seeking to save and invest for a future college education. 529s offer a number of benefits including:

-The account’s earnings are tax-free.
-If your child doesn’t want to go to college, you can roll the money over to another family member’s education.
-Anyone can put money in the account, making it a perfect baby shower gift.
-People of all income levels are eligible.
-There is typically no age limit for the money to be used by.
-If scholarships offset the cost of education, you can withdraw the money without a penalty. You do, however, have to pay taxes.

Still, 529s have one very important drawback: They offer a very low return on investment, meaning that you might be back to the same old problem of a dollar saved for education buying 75 cents of education tomorrow.

Coverdell Education Savings Accounts are another option. This is a more flexible option than a 529. You don’t have to withdraw money just for college tuition. For example, you can take money out to get your child a computer while they are in high school to benefit their studies. CESAs have many of the same tax benefits as a 529, as well. Although, the biggest problem with CESAs is that they have a $2,000 annual contribution ceiling.

Other Investment Options For College Education

While 529s are safe, the low yield might understandably put you off. Still, you want to go with a relatively safe investment. Some options include:

-Bank Certificates of Deposit: Perhaps one of the least “sexy” forms of investment, CDs are reliable and can offer a respectable yield.
-Short-Term Bond Funds: Short-term bond funds have the benefit of stable returns, as opposed to longer-term bonds. With terms of five years or less, you can reinvest the yield several times over as your child reaches college age.
-I-Bonds: Savings bonds linked to inflation are another safe bet for college investing. This type of investment offers a tax benefit: You can defer paying taxes on the yield until the bond matures. You can also redeem the bond after a year.
-Treasury Inflation-Protected Securities: Also known as TIPS, this investment offers a fixed return adjusted for inflation. From a tax point of view, TIPS are not necessarily the best investment, as the IRS treats Treasury Department inflation adjustments as income.

None of these investment opportunities are right for everyone saving money for college. However, they all provide attractive alternatives to savings accounts or even a 529.

The Best Education Money Can Buy

Help your children get the best education money can buy by investing in their future. 529s and Coverdells are safe, traditional options for college spending, but they aren’t the only ones. Your specific financial situation will dictate which plan is best for you.

Nicholas Pell is a freelance finance and business writer based out of Los Angeles, CA. He loves the thrill of a good deal and living well on a budget.

Is it too late to get on the muni bandwagon? Municipal bonds, one of the more sleepy corners of the investing landscape, outperformed commodities, corporate bonds, Treasuries and even stocks last year. Is there still an upside left in 2012?

The Fall of the Muni

Before we look forward, let’s back it up a bit. Muni bonds did so well last year in part because they entered 2011 beaten down. Meredith Whitney, a Wall Street analyst, spooked the market at the end of 2010 when she predicted that 2011 would be a terrible year for the muni market. She said on CBS’s 60 Minutes that, “The year would see 50 to 100 ‘sizable’ defaults followed by several downgrades of major municipal securities.”

The dire prediction sent muni bond prices down, pushing muni bond yields, the interest the bond pays you per year, up. Note: Bond prices and yields move inversely. That means that state and local governments had to give a higher interest rate to attract investors.

The Rise of the Muni

As a result of Whitney’s call, the muni market remained depressed for the first half of the year, but by June it was becoming clear that the sky was not falling. The total value of muni defaults in the first half of the year was $511 million, a third of what it was the previous year. That $511 million may seem like a lot of money, but that is out of a total market worth around $3.7 trillion.

When investors noticed that the market was doing well, they began dog piling in. Prices for muni bonds shot up, while yields fell. That means that investors were now getting less interest for the money they invested. Those investors brave enough to buy muni bonds in December 2010 averaged a rate of return of around 10.5% on the year.

Are Munis Safe Investments?

Munis are overall safe investments. While some might fail, the vast majority will remain solvent. Most of the state and local governments that Ms. Whitney thought would default on their obligations reversed course last year by raising taxes and cutting spending. It turns out that state and local governments will do almost anything to avoid a trip to the bankruptcy court.

Average yields for high-grade muni bonds ended last year at their lowest rate since the 1960s just below 2%. So, are muni’s still worth it?

While the market almost certainly won’t do as well as last year, muni’s are still worth it for those seeking a very safe investment. The key with muni’s, unlike other investments like corporate bonds or stocks, is that many are tax exempt. That means capital gains and personal income tax will be not be levied on your returns. So ,while the yield seems low, it is actually much higher when you factor in taxes.

There are a lot of options for you if you want to invest in a muni bond. In fact, there are over 60,000 different muni bonds for you to choose from in the US, each with their own specific investing dynamic. Muni’s that have lower credit ratings usually have higher yields, but the price for that extra yield comes in the form of a higher risk of default.

Predictions for 2012

State and local governments are expected to increase the amount of new muni bonds issuances this year, so there will be plenty of choices for you if want to get in the game. Since muni’s will be yielding, on average, single-digit returns, this investment is a great alternative for people who would otherwise buy a certificate of deposit or a US Treasury bill. Those investors that just park their money in their checking account are also good candidates for muni’s. While the muni market probably won’t be as exciting as last year, for many of us, they are still worth taking a look at.

Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati.

The most gratifying comment I can receive from readers of my Smartest series of books is, “I wish I had this information 20 years ago. I bought your book and gave it to each of my children.”

The advice in my books is timeless: Intelligent investing and sound financial planning is not altered by current events. Unfortunately, this is directly contrary to the misinformation in much of the financial media. When you think about all the gifts you want to bestow upon your children, consider providing them with financial advice that will benefit them throughout their lives. You can’t put a value on it. Here’s a good place to begin:

Track Your Income and Expenses

I’m dating myself here, but manually tracking how much you made, how much you spent and what you spent it on used to be so burdensome that very few people had the discipline to do it. Now you have no excuses. Mint.com links your credit or debit card and automatically categorizes your expenses and checks them against your budget. Mint also provides data from which you can compare your expenses in a particular category to other subscribers. The first step towards planning for financial success begins with using Mint (which is free!).

Avoid or Eliminate Debt

Debt is the mortal enemy of those seeking financial success. Use credit cards for emergencies only, pay regular expenses in cash or use a debit card and never co-sign for a loan unless you are prepared to assume liability for it upon default. Your goal is zero debt, except for a mortgage. If you already have credit card debt, pay it off as quickly as possible.

Set Financial Goals

A map won’t help unless you have a destination. Divide your goals between short -term (a car, buying a house) and long-term (having enough money for retirement). A very worthy short-term goal is paying off your credit card debt. Mint has a “Goals” feature that lets you set different goals and ties them to your budget. Use it.

Buy a Home and Pay It Off As Quickly As Possible

In these troublesome economic times, it’s not surprising that many people have a pronounced fear of being homeless. This fear is hardly unfounded, as the U.S. Department of Housing and Urban Development estimated that, in January, 2011, 636,017 people were homeless in the United States.

Historically low housing prices present a unique opportunity for those looking to purchase their first home. Here’s my advice: Buy a house you can afford, put down as much as you can, get the best terms available on a mortgage, and pay the mortgage off as quickly as possible.

If you follow this advice, you won’t have to worry about being homeless.

Buy Insurance

Sorry to tell you this, but you are eventually going to die. The only question is when. Almost everyone who has dependents needs insurance. I know the traditional wisdom is “buy term and invest the difference.” This may make sense for those who need a significant amount of insurance and can’t afford the premiums for whole life (also called “cash value”) insurance. Others should consider cash value insurance, but follow these guidelines:

-Ask your agent about “blended” policies. They combine whole life and term into a single policy. They build up cash value quicker and have higher death benefits than whole life alone because of the lower sales costs. Unfortunately, the lower commissions mean that some agents won’t recommend these policies.

-Limit the insurance to those with very high ratings, like Northwestern Mutual, Guardian, TIAA-CREF (which sells by phone and does not use commissioned sales people), New York Life and Mass Mutual.

I have never met anyone who had built up a significant cash value in a whole life policy and regretted the decision to forego term.

Invest Intelligently

This is the big kahuna and where the biggest danger to your financial success lies. It’s sad because Smart Investing is so simple. I provide chapter and verse in The Smartest Money Book You’ll Ever Read, which is co-branded with Mint. This blog also tells you the exact steps you need to take, and includes the funds, with ticker symbols, that you should consider.

The Bottom Line

-Focus on your asset allocation (the division of your portfolio between stocks and bonds).

-Never use the services of any broker or adviser who tells you he or she can “beat the markets.”

-Your portfolio should be globally diversified and should consist only of low management fee stock and bond index funds, exchange traded funds or passively managed funds. You can purchase these funds directly from large fund families, like Vanguard, which is the leader in low-cost index funds.

-Be sure the custodian of your funds is a large, reputable organization, like Vanguard, Charles, Schwab, Fidelity Investment, or TD Ameritrade.

Educate yourself on sound principles of Smart Investing. You will find they are vastly different from the musings of financial pundits on TV. I distill these principles in The Smartest Investment Book You’ll Ever Read, and John Bogle’s book, The Little Book of Common Sense Investing, is another excellent resource.

Following this advice is no guarantee of financial success but it will go a long way towards getting you there. I wish my own parents had imparted this information to me. Now is the time to reverse the cycle of ignorance and empower your children to avoid our mistakes.

Do you have a question you’d like to have answered by Dan Solin? Join us on the Mint.com Facebok page on January 11th for a LIVE reader Q&A session with Dan. In the meantime, you can submit your questions to editor@mint.com

Dan Solin is a Senior Vice-President of Index Funds Advisors (ifa.com).  He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read and The Smartest Portfolio You’ll Ever Own.  His new book, The Smartest Money Book You’ll Ever Read, will be released January 3, 2012. You can buy the book at several retailers and in various formats, including: Amazon, Barnes & Noble, Nook and  iBooks.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.