We use the HOMEFILE (TM) system in our house and find that it saves lots of time. Here’s what we did and it works. First, we got a file cabinet and put it in the office where we handle or generate most of the paper. Anything for filing will do as long as it’s handy and works easily for you. Second, we purchased the HOMEFILE (TM) Financial Planning Organizer Kit and set it up. The kit is a set of plastic coated tabs to organize your manila folders. Each one has printed on it what records should be stored in that tab (and even what records should be somewhere else), and how long you should keep the items. Third, we located all the records that belonged here and filed them away.

The system holds our key documents, everything from Autos to Wills. It has a tab for all key topics including insurance, investments, medical records, and more. Twenty two sections in all.

It sounds kind of silly to wax on about a great filing system, but if you’ve ever spent half an hour searching for something--a birth certificate, a social security number, or your auto insurance policy—then you can imagine how good it feels to have all that at your fingertips. We think so highly of this system that we provide it to our retainer clients. It’s available at www.homefile.net. We recommend it. So, once you’ve gotten your tax information all organized, take the next step and organize all your key information.

It’s been a while since we talked about investing in our newsletter, so we’ll review the first four of the “Ten Keys for Successful Investing” and then continue with the next three. We talked before about the fact that investing can appeal to our fear and greed, and when we react to these emotions we can make bad investment decisions. For example, when one of our investments goes way down, we can get scared and sell. If something we don’t own is doing great, we can get greedy and buy. In this scenario, we have probably bought high and sold low—a sure fire way to lose money. So read these keys to investing and learn how to invest wisely.

The first four of our “Ten Keys to Successful Investing” were to:
Key #1: SAVE, SAVE, SAVE. Start early and don’t stop.
Key #2: SET REALISTIC EXPECTATIONS. Long term returns will likely be 8% to 9%. Don’t use recent returns (good or bad) for long term planning.
Key #3: DON'T TIME THE MARKET/DON'T CHASE PERFORMANCE. You're not smart enough - no one is - and our emotions tend to get in the way. If your feelings are telling you to buy or sell, they're probably wrong.
Key #4: DIVERSIFY.To diversify means to invest in different asset classes. This reduces the risk of large swings in your portfolio value.

These next three keys amplify on the critical concept of diversification—how to diversify, how to stay diversified, and the importance of mutual funds in helping individual investors diversify.

Key #5: SET ASSET ALLOCATION TARGETS. Once you’ve decided on your basic asset classes, decide how much of your portfolio you want in each class. A perfectly good over all asset allocation is 50% bonds and 50% stocks. William Sharpe, along with Harry Markowitz, and Merton Miller won the 1990 Nobel Prize in Economics for their work on financial market theory. When Mr. Sharpe was asked what the ideal asset allocation was, he answered that he used the 50/50 approach, because he had no idea what the future would bring, and at 50/50 he figured he couldn’t lose too much money either way. Once you’ve decided on the bond/stock allocation, decide how you want to divvy up large company stocks vs. small company stocks, etc.

Key #6: REBALANCE. This is the hardest thing to do, but has the biggest payoff over time. Rebalancing means that if a couple of your allocations get out of whack, you put them back to where they belong. If you get out of balance your risk will increase. So if your target allocation for large company stocks is 25%, but we’re in the middle of a bull market, and they now make up 30% of your portfolio, you need to sell enough to get back to 25%. Yes! Even though you’re convinced that those stocks are headed for the moon. The next part is even harder. You take the proceeds from selling your winners and you buy more of the asset class that hasn’t performed as well, getting it up to your target allocation for that class. This forces you to Sell High and Buy Low. This is the discipline – and it’s beautiful.

Key #7: USE MUTUAL FUNDS OR ETFS, NOT INDIVIDUAL STOCKS. One or two stocks does not make a diversified portfolio – not even 10. You won’t see many professional mutual fund managers staking their reputations on fewer than 30 stocks – and they spend hours everyday managing the fund with the support of their research staff. Why should you risk your life savings? You will be busy enough keeping track of seven or eight mutual funds – let the mutual fund managers worry about when and what to buy and sell. You should select your funds based on the asset class that they represent, the consistency of their long term performance and underlying expenses. It’s possible to hold five or ten mutual funds and have very little diversification since they may all hold the same basic stocks or bonds.

In the next newsletter we’ll finish this series on the “Ten Keys to Successful Investing” with ways to keep more of your invested dollars in your pocket and not someone else’s.

This must be the millionth snippet that you have read about what’s new for taxes for tax year 2006. If you are like most people, you spend more on taxes than any other single item, so it pays to know about things that can save you money. This year, there were some December tax rule changes that didn’t make it into IRS forms and instructions. We provide these as a heads up and not as definitive advice:

1. Get a $30 (one exemption) or up to $60 (four exemptions) credit for tax paid on your phone bill. This is a standard amount, some experts say don’t bother going through your old phone bills to try to get more. Take the money and run. The IRS explains it here.

2. Higher education tuition and fees can still be deducted (up to $4000) as an adjustment to income even though the forms were printed before Congress restored the deduction. This break phases out at higher income limits than the HOPE credit or lifetime learning credit. Enter on line 35, "Domestic production activities deduction.” (You would have guessed that, right?) Turbotax or your tax professional will know how to take the deduction; if you are doing your own taxes, read this.

3. Teachers still have the special deduction for out of pocket expenses for classroom supplies, also not on the forms. The above IRS link tells where to claim this.

4. Deductions for charitable donations of used goods (typically clothing) should be documented with a photograph and must be in “Good” or better condition (if donated after Aug. 17, 2006) to qualify.

5. Brokerage houses may be delaying sending out 1099’s, or sending out corrected forms, due to tax law compliance issues. USA Today reported that Morgan Stanley, Merrill Lynch, Wachovia Securities, Edward Jones and Raymond James have received month long extensions from the January 31st deadline. This may delay your tax filing or require you to file an amended return. Last year over 13% of 1099s had to be corrected, in some cases necessitating an amended return, and this year promises to be at least as bad.

Planning for retirement is not a game...or IS it? You're invited (Ladies only!) to join us on March 21st at 7 p.m. We will play a unique, interactive game that's fun, engaging and empowering. Join other women as we help Norm and Sally prepare for, and live in, retirement. You do not need to be a financial expert to learn from this game. Make your mistakes here, not in real life! This game was designed by the Boston College Center for Retirement Research (CRR). Alicia Munnell, Director of the CRR, also wrote Coming Up Short--The Challenge of 401(K) Plans. Her research has had a big impact on recent changes in the design of 401(K) plans to help ensure that women do not end up as bag ladies. Sign up through Acton-Boxborough Community Education.

If all you get out of this book is a filing system that really works, it’s worth the modest price ($8.99 from Amazon). Author and consultant David Allen says that most people are subconsciously stressed out by all the “to do’s” running around in their head. He provides a system for getting it all out of your head and into a unique organization system. You’ll have an inbox, you’ll process whatever is in it efficiently using the “two minute rule”, you’ll have a “next actions” list, and you’ll have a simple filing system to organize all your stuff. The HOMEFILE(TM) system fits right into Allen's system. Priceless if it relieves your stress.