Smart Money Moves

Answers to questions about saving, spending -- and catching a break from the tax man.

Money Markets and Real Estate
Q: It's been five years since the stock bubble burst, but the notion of putting money into the market makes me queasy even now. My savings and 401(k) still haven't recovered. Is it time to get back in?

A: I firmly believe that everyone should have some investment in stocks, because the market has gone up in seven out of every ten years. But you need to be in for the long haul -- that is, five to ten years.

What about the down times? If you diversify, one bad year -- or several -- won't cream you. So don't put all your eggs in one basket, like growth stocks, or bet the farm on one or two stocks yielding a high return. And don't put too much money into your own company's stock.

A great way to limit your exposure to stock volatility is through an index fund that holds stocks in a broad market, such as the S&P 500. Some of the stocks in the index will go up, and others will go down -- but you own a tiny slice of many companies, so your risk is spread broadly.

You also might consider dividend-paying indexes. They give you two potential ways to increase your nest egg. The first, of course, is if the stocks' share prices increase. Even if they don't, these funds still make regular payments to shareholders in the form of dividends. You can take the payout as cash or plow it back into savings. And since the federal tax on dividend income is now just 15 percent -- versus up to 35 percent for other investments -- you'll keep more of your money.

Q: The value of my house has doubled since I bought it several years ago. I thought that was a good thing, but now I'm reading about the idea of a housing slump -- or even a bubble. Should I worry?

A: I think there are areas where housing prices will go down as mortgage-interest rates move up. Super-hot markets include Chico, California; Portland, Oregon; and Las Vegas, Nevada, where home prices have soared 100 percent since 2003. A few retirement communities, like West Palm Beach or San Diego, may see down blips too. But I don't think we'll see a national slump anytime soon. Face it, owning your own house is an essential part of the American Dream. A lot of markets -- Salt Lake City, Memphis, and Macon, Georgia -- seem undervalued, at least when you look at the national market. In other regions, prices may have topped out, but it's unlikely they'll move substantially lower.

Here's the other thing: Even if the value of your house should slip below what you paid, you may not have a problem -- except psychologically -- unless you need to sell fast. Over time the trend has usually been for house prices to rise. So just hang on.

The Weak Dollar and Tax Tips
Q: I'm hearing talk about the danger of a weak dollar because of the foreign trade and budget deficits. Will my family be hurt?

A: The federal government can't continue to spend more than it takes in. At some point trillion-dollar cumulative deficits will hit the economy, although the experts disagree on just how and when. For now, do you own bonds? A weaker dollar tends to push interest rates higher and bond prices lower. Eventually, the soft dollar may push up long-term rates, which would affect people with adjustable mortgages.

The biggest immediate impact on you and me is the cost of international goods and travel. If you're planning to travel to Europe, expect to pay something like 25 percent more than you did just two years ago on practically everything. A declining dollar also means that the cost of some goods from overseas will probably go up as well.

Q: I wish I'd seen your article in March ("Tax Relief -- At Last!") before I filed my 2004 taxes. I missed some big deductions. Is there anything I can do now?

A: Fear not. There's paperwork involved, of course -- use IRS Form 1040X -- but you can still file an amended return and claim the additional deductions. You have up to three years from the original date of filing. Although regulations vary, many states have similar provisions.