sne

In December, 2002, ten of the most prominent brokerage firms in the country agreed to a massive settlement. The charges involved well-documented claims that analyst reports issued by these firms were deceptive. The firms sold out their retail clients to curry favor with their underwriting clients.

Among the settling firms were Citigroup (NYSE: C), UBS (NYSE: UBS), JP Morgan Chase & Co. (NYSE: JPM), and Morgan Stanley (NYSE: MS).

Their conduct was so bad that former Attorney General Spitzer agonized over whether to indict them for criminal conduct.

The industry unleashed a massive PR campaign. It convinced you that it saw the error of its ways. They had "reformed." You could trust them again with your hard earned assets.

And you did. Money flowed back in the coffers of these firms and others.

That was the first time.

This is the part of a series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Your broker talks. You listen. At least that is the way it is for most investors. You assume (and she definitely assumes!) she has an expertise that will help you maximize your returns. Sometimes, you almost feel like you should be taking notes.

Based on my experience, this is often not the case. Brokers are not required to have any background in finance or economics and their training is focused primarily on sales.

I thought it might be interesting to turn the tables. Here are some questions you should ask them.

Question #1: What is the most important factor that will affect my returns?

Answer: Your asset allocation, which is the amount of your investments allocated to stocks, bonds and cash. Not stock picking; not mutual fund selection and not market timing. If your broker gets this wrong, get a new broker.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

In these tough economic times the allure of the reverse mortgage salesman to senior citizens (over 62) is hard to resist.

You get cash for the value of your house, which you don't have to repay until you sell your house or die. You can take the cash all at once, monthly or as a line of credit. You can use the money any way you want. No credit checks required.

While reverse mortgages can be a valuable source of cash for seniors, there are a number of problems with them.

The fees are very high. Typical fees for a reverse mortgage on a $250,000 home can exceed $25,000. In addition, interest charges are added every year the loan remains outstanding. While you may not care as long as you get your money, you should realize that the diminution in the remaining equity in your home will affect the money you will receive if you sell your house and the amount of money your heirs will receive upon your death.

Because of these high costs, reverse mortgages are particularly ill-suited for those who intend to remain in their homes for a relatively short period of time.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

Almost everyone has taken a big hit in this bear market. Many investors are tempted to take more risk with their portfolios to make up for their losses.

This is a bad idea.

Your asset allocation, the division of your portfolio between stocks and bonds, accounts for as much as 100% of the level of your returns, according to one prominent study.

Your asset allocation is determined by your ability to withstand market volatility. In large part, it is determined by the amount of time you can keep your assets invested without withdrawing a substantial portion (20% or more) of them.

The fact that you may have lost money in the current markets does not mean that you are able to take more risk. In fact, it may mean the opposite: Your ability to withstand market losses has diminished.

Remember that "risk" means "volatility." When you take on more risk, you are increasing volatility. Volatility is a two way street. It moves both up and down.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

Is there a silver lining in the horrific number of home foreclosures we read about every day?

While having a home foreclosed must be traumatic for the homeowner, does it present an opportunity for investors and potential home buyers to pick up a bargain?

The answer may depend on the nature of the sale.

The classic scenario is the auction, where a home is literally auctioned off to the highest bidder, often right on the lawn in front of the house.

The basic problem with buying a home at auction is that you have no right to inspect the home and you have to pay the full purchase price by cash or bank check on the spot. There have been situations where buyers found serious problems with homes purchased in this manner, which would have been uncovered by a competent home inspector. Also, while not common, the homeowner may refuse to vacate the house. If so, you may be confronted with delays and significant legal fees to evict him.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

You are drowning in credit card debt. Bill collectors are harassing you day and night. You just can't take it any more.

Should you consider filing for bankruptcy and starting fresh with a clean slate?

This is the issue confronting many Americans. According to the Consumer Federation of America, the size of the problem is staggering. There are over one billion cards in circulation. Most people pay only a portion of their credit card debt monthly, leaving an average balance of more than $10,000.

However, filing for bankruptcy is no panacea.

The new bankruptcy law that was passed into law in April 2005 makes it more difficult for consumers to discharge credit card debt. The new law requires debtors to pass a "means test" in order to qualify for discharge of debt or for payment of their obligations from existing assets. If a debtor does not pass the means test, they may still be permitted to file for bankruptcy, but they will be required to pay some portion of their obligations over a three-to-five year period.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

I know it is tempting. With gas at $4 a gallon and your SUV making frequent stops to fill up, the cost seems overwhelming. But does it really make sense to sell your gas guzzler and buy a new hybrid?

We have been led to believe that the greater the miles per gallon (MPG) of a car, the more we will save on gas.

However, a recent study by two professors at Duke University concludes that measuring fuel efficiency solely by MPG is misleading and inaccurate.

Look at these two examples. Which do you think will reduce energy costs and emissions the most:

1. You replace a car that gets 16 MPG with one than gets 20 MPG; or
2. You replace a car that gets 34 MPG with a hybrid that gets 50 MPG?

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

If you fail to file your tax return because you owe more than you can pay, you are digging a deep hole for yourself. It will not be easy to climb out of it.

The IRS treats failure to file a tax return as a far more serious offense than filing a tax return and not paying the full amount of the taxes due.

If you fail to file a tax return, the IRS has the right to prepare and file one for you. The return prepared by the IRS may not give you credit for deductions and exemptions to which you may be entitled. Once the return is prepared, the IRS can bill you for the amount it calculates is due, plus penalties and interest.

While it is not the current policy of the IRS to criminally prosecute taxpayers who fail to file returns, it can happen. If you do not file voluntarily, or make arrangements to file, and you receive a notice from the IRS that you are under criminal investigation, you might run out of options and find yourself facing a criminal trial.

A far better option is to file your returns on time (or seek an extension) and discuss with the IRS the options it has available for making payments over time.

You may qualify for paying your taxes in installments, particularly if the amount owed is less than $25,000 including combined tax, payment and interest.

You also may qualify for an "offer of compromise," which will resolve your tax liability for an amount less than you might otherwise owe. There are a number of stringent requirements imposed by the IRS in order to qualify for an offer of compromise. However, the IRS has broad discretion to resolve tax liabilities if the taxpayer can demonstrate that "... exceptional circumstances exist such that collection of the full amount would create economic hardship...."

You should consult with a tax advisor to be fully informed of your rights in dealing with overdue taxes. But remember, the problem will not just go away. Failing to file your tax returns will only make it worse.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

Lucky you. You have a fixed rate mortgage. However, the payments are a stretch for your budget and you have mounting credit card bills that you are paying off at a high rate of interest.

A friendly "debt counselor" suggests that you refinance your mortgage at a variable rate. Your initial mortgage payments will be less than your fixed mortgage and you will be able to pay off some of those high interest rate credit card debts with the cash you generate. As an added bonus, your mortgage payments are deductible, but your credit card interest is not.

Everyone's a winner. Right?

Not exactly.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

The financial pundits are in a feeding frenzy.

When oil was soaring, they told us to buy energy. When it dropped, they told us that energy stocks were "old news."

When financial stocks were tanking, they told us to dump them. Now they are telling us to buy them because this is a "buying opportunity."

Don't take the bait.

They have no idea whether a stock is poised to take off or about to plunge. Neither do I. That is the point. No one does.

Here is what we do know.

The stock market is random and efficient. Stocks are efficiently priced because all information about them is in the public domain, scrutinized by hundreds of thousands of amateur and professional investors every second of every day.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

Rising gas and food prices, the disappearance of home equity, downsizing by large and small employers and a credit crunch are a perfect storm for cash-strapped investors. Many are tempted to tap into low-hanging fruit: their 401(k) and 403(b) plans.

Is this a good idea?

Other than as a last resort, this answer is "no."

Even in good times, the number of employees who cash out of their retirement plans is alarming. More than 45% of departing employees cash out of their 401(k) plans.

The consequences of doing so are draconian.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

It is a tough time for participants in 401(k) plans. They dread opening their statements and seeing their declining account balances.

Is this the right time to move your 401(k) funds into more conservative investments?

The answer is a resounding "no"!

Your 401(k) plan is intended to fund your retirement. You cannot access it without penalty before age 59 1/2. By definition, for most employees, it is a long-term investment.

By switching into a portfolio that is too conservative, you are compounding the problems inherent in a system that is already rigged against you. Most 401(k) plans charge excessive, indefensible fees and have poor, under-performing, investment options. The primary beneficiaries of these plans are employers (who offload the cost and responsibility for securing the retirement of their employees) and the mutual fund industry (which gouges the $6 trillion in assets in these plans with unconscionable fees and expenses).

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

You can't blame investors for being nervous. The markets go up one day and plunge the next. This stomach-churning turbulence creates anxiety and sometimes panic.

The financial media inflames the situation with breathless news of breaking developments and endless, often contradictory, predictions.

It is no wonder that investors are tempted to sell their stocks and sit on the sidelines until the market "bottoms out."

This is generally a bad idea.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

Life used to be very easy. If you were looking for safety, you drove (or walked) to your friendly neighborhood bank and purchased an FDIC insured Certificate of Deposit. While the interest earned may not have been earth shaking, at least you knew your money was safe.

These days, bank failures are almost daily news. We have seen IndyMac, First National Bank of Nevada and First Heritage Bank go under in the past few weeks.

So is your money still safe?

This is part of a series of columns by retirement expert Dan Solin. Please bring him your questions in the comments box and he will answer as many as he can.

Is this a good time to invest, or should you sit on the sidelines until the market has "bottomed out"? This is the most common question I am asked.

It would be great if there was a way to tell when the market had reached its low. If you could do this, you would be able to buy stocks when the markets were taking off and retreat to risk-free investments, like cash and Treasury bills, in down markets.

Unfortunately, the data on timing the markets is very dismal.

One large study looked at more than 15,000 predictions by 237 market timing newsletters over a 12-year period. At the end of the period studied, 94.5% of the newsletters went bust. Not very impressive.

The financial media likes to hype stories suggesting that the markets are tanking or are poised for a rebound. These predictions are usually inaccurate and generally unreliable.

Here's a better question for you to consider: Should you be in the markets at all?