Your 401k retirement account has been devastated in this current market recession, and you don't know where to turn for reliable information and objective advice.

Like everyone else, you're concerned about the future. The stock market feels like a roller coaster, and you're confused, anxious, and stressed out. And no wonder...because to this point, you've had no access to objective financial professionals.

But that's over forever, because now...you do.

Our advisors have been invited to speak across the country for private groups, educating them on how to manage their 401k accounts during these turbulent economic times.

But the Lightship Mutual team is not satisfied with this limited audience. Our over-arching corporate mission is to open the doors of knowledge to everyone.

As a result, we've packaged and are now delivering this 401k education directly into your home via live web-based workshops. For a limited time, we will teach you how to protect your 401k account and to realize an ideal financial future.

Learn more about our 401k Online Training here.

A central investing principle states that your portfolio's asset allocation should depend upon your time horizon, which is the length of time remaining until you will need to cash in your portfolio's assets. But how exactly you distribute your money between stocks, bonds, and cash? And how do risk tolerance and time frame affect your portfolio over time? And what if you want to totally avoid the hassle of ongoing rebalancing for your individual stocks, bonds, and mutual funds?

Set It and Forget It
A lifecycle fund--sometimes called a target fund--attempts to tailor your investing strategy to your time frame for a particular goal, such as retirement.

Let's say you plan to retire in 2040. You might choose a fund with a target maturity date of 2040. Between now and then, the fund will gradually shift its asset allocation between stocks, bonds, and cash. The closer the target date, the more conservatively (less stocks, more bonds) the fund would invest. A lifecycle fund with a target maturity date of 2040 would be likely to have a higher percentage of its assets in stocks than a fund targeted at 2010.

Advantages of Lifecycle Funds
Asset allocation is critical to your long-term returns, but if the idea of regularly rebalancing your retirement portfolio prompts an anxiety attack, then a lifecycle fund can help you simplify the process. The automatic asset allocation of a lifecycle fund may give you a better chance of achieving a long-term goal than if you tried to go it alone without investing experience or good financial advice. (Note: Diversification alone does not guarantee a profit or insure against a loss.)

Disadvantages of Lifecycle Funds
If you have other investments outside of the lifecycle fund, you may need help from a financial professional to achieve an appropriate overall asset allocation for your portfolio. Additionally, a lifecycle fund does not consider your individual financial situation, including tax concerns.

Don't Be Fooled By Look-Alikes
Just because a lifecycle fund targets a particular time frame doesn't mean your choice is a slam dunk. Even if they have the same target maturity date, lifecycle funds from various companies may have different approaches to achieving their goals. Most take a "fund of funds" approach, investing in an assortment of stock or bond funds from the same fund family. However, the number of funds used can vary widely.

An aggressive allocation for one portfolio with a 2040 target date may have a significantly greater percentage of stocks than another. Another important difference among funds is the way asset allocations are shifted over time, particularly after the target date has been reached. Some reach their most conservative allocation at the target date and then keep those percentages static. Others continue to become more conservative after the target date is reached.

You Can Do It!
With lifecycle funds, it's particularly important to take a long-term perspective. You do not want to jump in and out of the fund in response to daily market changes. Lifecycle funds' objectives are long-term, and your short-term selling typically undercuts the overall strategy.

Check your assumptions
Just because a lifecycle fund has a certain target date doesn't mean it's necessarily the right choice for you. People are living longer, and you may need a more aggressive allocation to provide a sufficient nest egg. A qualified financial professional can help you estimate your needs and gauge what strategy is most likely to work best for you.

In a word: Yes. The IRS has long permitted employers to automatically enroll employees in 401(k) plans. These are sometimes referred to as "negative enrollments" because you have to opt out of participation.

Employer Liability
Some employers have shied away from automatic enrollment plans because they were concerned that automatic payroll deductions might not be permitted under state law. Others were concerned that the default investments they chose for employees might be found to be "imprudent," resulting in fiduciary liability for any investment losses incurred by those employees. In order to address these concerns, and to encourage retirement savings, Congress included provisions in the Pension Protection Act of 2006 that make automatic enrollment plans more attractive to employers.

You Must Get the Paperwork...and Then Read It
In general, your plan administrator must provide you with a notice that explains the plan, notifies you of your right to reduce or stop the contributions, and to change the default investments that have been chosen for you. Your plan may also provide a 90-day period in which you can opt out of the auto-enrollment arrangement and receive a refund of your contributions (plus any earnings).

Times are tough. You've got bills. You need cash. And even though we can't know specifically how much money you need to get by, would several billion dollars help? Oh, and don't worry about the interest rate. We'll just settle for a few pennies on the dollar...let's say two-and-a-half percent...sound fair enough?

Even though our tongue is firmly in cheek with this consumer loan scenario, the nation's Federal Reserve is actually quite serious in extending these terms to Wall Street's investment banks. See for yourself as Jeannine Aversa of the Associated Press reports:

"The Fed, for the first time, agreed on March 16 to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Big Wall Street investment companies have jumped all over the Federal Reserve's unprecedented offer to obtain emergency loans, borrowing more than doubled than in the program's debut week.

Those firms averaged $32.9 billion in daily borrowing over the past week from the new lending program, compared with $13.4 billion the previous week, the central bank reported Thursday. The program, which began last Monday, is part of the Fed's effort to aid the financial system.

On Wednesday alone, lending reached $37 billion.

This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed."

From Wall Street to Main Street
Well isn't that thoughtful of Uncle Sam. Lending $200+ billion dollars to our nation's investment banks. I suppose Joe HomeOwner doesn't have much to gripe about anyway. He's getting a hefty rebate check for $600 in May!

A Bailout is a Bailout
Corporate lifelines are tossed towards the flailing companies as necessary components in ensuring our financial markets' ongoing solvency. But consumer assistance is viewed as "unnecessary government intervention" which interferes with our nation's free markets...it expands the government and is seen as wasteful spending.

Give me a break.

I see no difference between the two. But then again, I'd better be quiet or the U.S. Treasury may to decide that my $600 rebate check should get "lost in the mail"...

Last year, New York City school children went door to door collecting pennies. By asking for only 1% of a dollar, they were able to raise $1 million for charity.

Sometimes small actions yield big results. Take a look at three examples of how adjusting your finances by just 1% can make a real difference over time.

1. Boost Your Retirement Contribution
Making contributions to an employer-sponsored retirement account via payroll deductions can be a convenient way to save for retirement. But because these contributions come out of your salary automatically, you can easily lose track of how much you're contributing, and end up with less than you should have--or could have--for retirement.

If you're not already saving the maximum amount allowed, why not commit to steadily increasing your contributions by 1% (or more) each year? For example, if you're earning $33,000 per year, and you're currently contributing 10% of your salary to your retirement account at work, you'll have approximately $394,000 by the time you retire in 30 years, assuming an average return of 8%. But if you increase your contribution by 1% (to 11% of your salary), your retirement account could be worth approximately $433,000--10% more--by the time you retire.*

2. Review Investment Expenses
When you're focused on returns, it's easy to overlook the costs associated with investing. However, it's important to periodically review investment expenses and their impact on returns. These vary widely, but even a 1% difference can be significant over time. For example, the following table shows what a $200,000 investment might be worth in the future, assuming an annual return of 8% before expenses are taken into account. (Note that taxes and inflation are not considered.)*

Of course, there are other things to be concerned about when investing. For example, you may want to consider potential ways to generate higher returns through your asset allocation and investment management choices, taking into account your investment objectives, risk tolerance, and time horizon.

3. Refinance Higher-Cost Loans
Concerns about the economy have led to rate cuts by the Federal Reserve. With some interest rates falling to their lowest levels in two years, now might be a good time to think about refinancing a higher-cost loan or mortgage. As the following examples show, interest rates don't need to fall far for you to save money. Here's what you could potentially save by reducing your interest rate by just 1%:

• Refinancing a 48-month, $25,000 car loan to reduce the rate from 6.99% to 5.99% could save you approximately $553 in interest over the life of the loan
• Refinancing a 25-year, $400,000 mortgage to reduce the rate from 6.75% to 5.75% could save you approximately $74,166 in interest over the life of the loan

*This is a hypothetical example, and does not reflect the performance of any specific investment.

If you have a 401(k) plan at work and need some cash, you might be tempted to borrow or withdraw money from it. But keep in mind that the purpose of a 401(k) is to save for retirement. Take money out of it now, and you'll risk reducing the amount of money available during your Golden Years.

Additionally, you will most likely face stiff tax consequences and penalties for withdrawing money before age 59½. Still, if you're facing a financial emergency--for instance, your child's college tuition is almost due and your 401(k) is your only source of available funds--borrowing or withdrawing money from a 401(k) may be your only viable option.

Plan Loans
To find out if you're allowed to borrow from your 401(k) plan and under what circumstances, check with your plan's administrator or read your summary plan description. Many employers allow 401(k) loans only in cases of financial hardship, but you may be able to borrow money to buy a car, to improve your home, or to use for other purposes. Generally, obtaining a 401(k) loan is easy--there's little paperwork, and there's no credit check. The fees are limited too--you may be charged a small processing fee, but that's generally it.

How Much Can You Borrow?
No matter how much you have in your 401(k) plan, you probably won't be able to borrow the entire sum. Generally, you can borrow the lesser of $50,000 or one-half of your vested plan benefits. (An exception applies if your account value is less than $20,000; in this case, you may be able to borrow up to $10,000, even if this is your entire balance.)

What are the Requirements for Repaying the Loan?
Typically, you have to repay money you've borrowed from your 401(k) within five years by making regular payments of principal and interest at least quarterly, often through payroll deduction. However, if you use the funds to purchase a primary residence, you may have a much longer period of time to repay the loan.

Make sure you follow to the letter the repayment requirements for your loan. If you don't repay the loan as required, the money you borrowed will be considered a taxable distribution. If you're under age 59½, you'll owe a 10 percent federal penalty tax, as well as regular income tax on the outstanding loan balance.

Disadvantages of borrowing money from your 401(k)
If you don't repay your plan loan when required, it will generally be treated as a taxable distribution.

• You lose the pre-tax advantage of the 401(k) account
• Loan repayments are made with after-tax dollars
• If you leave your employer's service (whether voluntarily or not) and still have an outstanding balance on a plan loan, you'll usually be required to repay the loan in full within 60 days. Otherwise, the outstanding balance will be treated as a taxable distribution, and you'll owe a 10 percent penalty tax in addition to regular income taxes if you're under age 59½.
• Loan interest is generally not tax deductible (unless the loan is secured by your principal residence).
• You'll lose out on any tax-deferred interest that may have accrued on the borrowed funds had they remained in your 401(k).

Hardship Withdrawals
Your 401(k) plan may have a provision that allows you to withdraw money from the plan while you're still employed if you can demonstrate "heavy and immediate" financial need and you have no other resources you can use to meet that need (e.g., you can't borrow from a commercial lender or from a retirement account and you have no other available savings). It's up to your employer to determine which financial needs qualify. Many employers allow hardship withdrawals only for the following reasons:

• To pay the medical expenses of you, your spouse, your children, your other dependents, or your plan beneficiary
• To pay the burial or funeral expenses of your parent, your spouse, your children, your other dependents, or your plan beneficiary
• To pay a maximum of 12 months worth of tuition and related educational expenses for post-secondary education for you, your spouse, your children, your other dependents, or your plan beneficiary
• To pay costs related to the purchase of your principal residence
• To make payments to prevent eviction from or foreclosure on your principal residence
• To pay expenses for the repair of damage to your principal residence after certain casualty losses

Note: You may also be allowed to withdraw funds to pay income tax and/or penalties on the hardship withdrawal itself, if these are due.

Your employer will generally require that you submit your request for a hardship withdrawal in writing.

How Much Can You Withdraw?
Generally, you can't withdraw more than the total amount you've contributed to the plan, minus the amount of any previous hardship withdrawals you've made. In some cases, though, you may be able to withdraw the earnings on contributions you've made. Check with your plan administrator for more information on the rules that apply to withdrawals from your 401(k) plan.

What are the Advantages of Withdrawing Money from Your 401(k) in Cases of Hardship?
The option to take a hardship withdrawal can come in very handy if you really need money and you have no other assets to draw on, and your plan does not allow loans (or if you can't afford to make loan payments).
What are the disadvantages of withdrawing money from your 401(k) in cases of hardship?

• Taking a hardship withdrawal will reduce the size of your retirement nest egg, and the funds you withdraw will no longer grow tax deferred.
• Hardship withdrawals are generally subject to federal (and possibly state) income tax. A 10 percent federal penalty tax may also apply if you're under age 59½.
• You may not be able to contribute to your 401(k) plan for six months following a hardship distribution.

What Else do I Need to Know?
If your employer makes contributions to your 401(k) plan (for example, matching contributions) you may be able to withdraw those dollars once you become vested (that is, once you own your employer's contributions). Check with your plan administrator for your plan's withdrawal rules.

• If you were impacted by Hurricanes Katrina, Rita, or Wilma, or if you are a reservist called to active duty after September 11, 2001 and before December 31, 2007, special rules may apply to you.

With all the media buzz about private equity, clients ask us more than ever about lesser known, riskier investment options. At some point, "hedge funds" usually enter the discussion. In response, here's our quick analysis of this emerging investment option.

What is a Hedge Fund?
Hedge funds are private investment vehicles that manage money for institutions and wealthy individuals. They generally are organized as limited partnerships, with the fund managers as general partners and the investors as limited partners. The general partner may receive a percentage of the assets, additional fees based on performance, or both.

Hedge funds originally derived their name from their ability to hedge against a market downturn by selling short. Though they may invest in stocks and bonds, hedge funds are typically considered an alternative asset class because of their ability to implement complex investing strategies that involve many other asset classes and investment options.

How do Hedge Funds Differ From Mutual Funds?
Quite simply, hedge funds are not available to the public.

Unlike mutual funds, hedge funds traditionally have not been offered for sale to the public at large; they are available only to a limited number of wealthy investors. The demand to participate in the most successful hedge funds can be so high that many funds are able to pick and choose who is permitted to invest.

Middle-Income Investors Need Not Apply
Investors normally must have a significant amount of money available to invest or have a high level of financial sophistication. For example, to invest in a hedge fund, an individual must have at least $1 million or an ongoing income of at least $200,000 in each of the two previous years ($300,000 if a spouse's income is included). Depending on how the hedge fund is structured and the demand to participate, the minimum requirement can be much higher. Also, hedge funds usually require an investor to invest in the fund for a period of one year or longer and may limit transferability, making them a less liquid investment than mutual funds.

By contrast, mutual fund minimums are typically $1,000 or less, and investors may typically sell at any time (though some funds impose a fee for short holding periods).

Hedge Funds are not Required to Register with the SEC
Because they are not offered publicly and have limits on who may invest in them, most hedge funds are exempt from much of the regulation to which mutual funds are subject, though some hedge funds have registered with the SEC. Thought there have been attempts in recent years to increase supervision of hedge funds, their reporting requirements are minimal, though they are still subject to general prohibitions against securities fraud.

As a result, investors in hedge funds do not receive some of the protections that investors in mutual funds enjoy. In particular, hedge funds:

• Are not required to maintain a certain degree of liquidity
• Are not limited in how much they can invest in a single investment
• Are not limited in their use of leverage
• May take great latitude in determining the value of the fund's investments, which does not have to be verified by independent sources
• Are not required to disclose information regarding the fund's management, fees and expenses, holdings, or performance

As a result of this lax environment, hedge funds have a great deal more latitude in how they invest funds. They use a variety of investment types and strategies to try to minimize risk and maximize return including:

• Hedging: buying an investment that has the potential to offset losses in other investments
• Selling short: borrowing shares and selling them immediately, hoping that the price will drop and the shares can be replaced at a lower cost, thereby generating a profit.
• Arbitrage: simultaneously buying and selling the same security to take advantage of different prices
• Leverage: investing with borrowed money to try to maximize profitability
• Concentrating positions: making big investments in relatively few securities that are expected to be highly profitable
• Investing in distressed or bankrupt companies
• Investing in derivatives, such as options or futures contracts
• Investing in privately issued securities

How a given fund employs any or all of these techniques constitutes its unique investing strategy. Many of these techniques involve unique risks and pitfalls, and there have been some spectacular crises with hedge funds--notably Long Term Capital Management in 1998 and Amaranth Advisors in 2006--that used them.

Are Hedge Funds a Good Investment Option?
Since we deal with middle-market consumers, Lightship Mutual does not recommend hedge funds to our clients as an alternative asset class. Actually, even if we did work with a high-net worth individual, we would likely still not recommend investing in this ultra-risky asset class. We would likely construct an aggressive internationally-focused portfolio of low-cost mutual funds to accomplish a similar risk/return model.

The Downside of Hedge Funds
You could easily lose your entire investment.

As mentioned previously, hedge funds are able to use higher-risk investment strategies. Because of these risks and others, investors may lose their entire investment.

Second, because of the lack of regulation, a hedge fund's investing strategy and performance can be difficult to research, verify and compare to other investments. Hedge funds are notoriously private about how they achieve their results, and may not disclose that information even to their own investors.

You may be able to check into the background of a hedge fund's manager--for example, whether the manager has a disciplinary history in the securities industry-by going to the SEC's web site and looking up the firm's Form ADV. Depending on how the hedge fund is registered, you may be able to get information from the National Futures Association's web site, your state securities regulator, or the Financial Industry Regulatory Authority (FINRA).

Third, hedge funds are typically more costly than mutual funds. Management fees for hedge funds are typically higher than actively managed mutual funds or separately managed accounts. Also, unlike mutual fund or other money managers, hedge fund managers generally receive a share of the fund's gains. These added costs are passed on to the fund's individual shareholders in the form of higher management and administrative fees when compared to mutual funds or separately managed accounts.

Fourth, hedge fund investments may lack liquidity. In most cases, hedge fund shares are not traded on any public exchange, so you may not be able to redeem your investment when you want to or at the price you paid.

Alternative Ways to Take Advantage of Hedge Funds
If you still have a burning desire to go forward with hedge fund investing--and have tens of thousands of dollars to potentially lose--then you may be able to invest in a fund that invests not in securities but in multiple hedge funds. In most cases, the minimum investment is lower than that of a hedge fund--as low as $25,000--though that is still higher than the minimum of many mutual funds.

By investing in a variety of investing styles, managers and strategies, a fund of funds may provide greater diversification than a single hedge fund, though diversification alone cannot guarantee a profit or ensure against a loss.

As with hedge funds, a fund of funds may or may not be registered with the SEC; make sure you find out its status. Even if it is registered, remember that any SEC protections apply only to the fund of funds, not to the underlying hedge funds in which it invests.

Even if a fund of hedge funds is registered with the SEC, there may not be a secondary market and you could have difficulty selling your shares readily. Also, a fund of hedge funds is not required to redeem your shares at any time, as an open-ended mutual fund is.

Remember that you will be paying a double layer of fees: one set of fees to the fund of funds and, indirectly, another set of fees charged by each of the underlying hedge funds.

Good luck!

It's no fun to look at your mutual fund statement and realize that you've had losses for the year. It's even more painful if you discover that, in addition to suffering a paper loss, you owe taxes on the fund's distribution of capital gains. It's a question that puzzles a lot of investors...How can you owe taxes on an investment that has lost money?

The answer has to do with the difference between your profit when you sell fund shares, and the fund's profit when it sells individual securities. As a fund buys and sells securities during the year, it will typically have some gains and some losses. At the end of the year, losses are subtracted from gains to determine the fund's shareholder distribution. The fund also may use losses from previous years to help offset gains.

By law, gains and/or income must be distributed each year; typically, those distributions occur around the end of the year and are taxable (unless the fund is held in a tax-advantaged account such as an IRA). Even if a fund is down at the end of that year, it may still have capital gains from earlier sales of securities.

Example: In 2002, Cesar's stock fund bought 10,000 shares of XYZ Corporation for $33 a share. By the end of last year, the share price had reached $50, helping to push up the net asset value (NAV) the fund reported on its year-end statement to shareholders. This year, XYZ's price drops to $43. The fund's manager, concerned that XYZ might fall still further, sells the shares for a $100,000 profit. However, other shares held by the fund drop in value, and Cesar's end-of-year statement now shows a lower balance compared to the year before. Because the fund did not sell shares to realize losses, it must still pass its $100,000 XYZ profit on to shareholders as capital gains distributions.

Good News, Bad News
Owing taxes on distributions from a fund that's down is especially likely in years when a fund experiences substantial redemptions. If your fellow investors in a mutual fund have been pulling money out, the manager might have had to sell securities in order to meet those redemption demands. High market volatility also could mean a greater than usual level of capital gains distributions by funds with managers who traded actively, either to try to lock in gains or avoid further losses.

Some capital gains distributions this year may be affected by what happened in 2000-2002. Many funds that suffered during the bear market could use those losses in subsequent years to offset any capital gains and minimize that year's taxable distribution. However, many funds have now used up their losses from the down years, leaving their managers with fewer leftover losses to offset any current gains from selling individual securities.

Tax Factors to Consider in Fund Selection
One way to minimize such problems is to consider a fund's tax efficiency in advance. Taxes shouldn't be the single deciding factor in any investment decision. However, when assessing the capital gains impact of a potential purchase, consider the following points:

• Some mutual funds tend to be more susceptible to the capital-gains dilemma than others. For example, funds with a high turnover ratio buy and sell more often and may generate more capital gains distributions.
• Some actively managed funds are designed specifically to be tax efficient, taking capital gains into account when making trading decisions.
• A fund's long-term capital gains will be taxed at a more favorable rate than its short-term gains.
• Bond funds can experience capital gains and losses from the sale of individual bonds.
• Each mutual fund must report its after-tax return in its prospectus.

A (Small) Consolation
If you are squeezed by both a loss in your fund's value and a capital gains distribution this year, remind yourself that at least the maximum tax rate on long-term capital gains and qualified dividends is 15% until January 1, 2011 (less if you're in the 15% or 10% tax bracket).

You also may be able to offset capital gains from one mutual fund by taking a capital loss on another investment. A financial professional can help you assess the potential tax impact of a given mutual fund, as well as the best way to manage any capital gains liability.

A 401(k) plan is an employer-sponsored retirement savings plan that offers you significant tax benefits. Here's how it works...

You contribute to the plan via pretax payroll deductions. Pretax means that your contributions are deducted from your pay, and transferred to the 401(k) plan, before federal (and most state) income taxes are calculated. This reduces your current taxable income because you don't pay income taxes on the dollars you contribute--or any investment gains on your contributions--until you start making withdrawals ("distributions") from the account during retirement.

For example, let's say Riley earns $30,000 annually. She contributes $4,000 of her pay to her employer’s 401(k) plan on a pretax basis. As a result, Riley's taxable income is now only $26,000. She isn’t taxed on her contributions ($4,000), or any investment earnings, until she receives a distribution from the plan.

What's the Deal on the Roth 401k?
Due to recent tax law changes, a new option is appearing on the benefits sheet for many employees: The Roth 401k. The difference is that Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. As a result, unlike pretax contributions to a traditional 401(k) plan, there is no up-front tax benefit--your contributions are deducted from your pay and transferred to the plan after taxes are calculated. However, distributions from your Roth 401(k) account are entirely federal-tax free if the distribution is qualified, as discussed below.

Many 401(k) plans let you direct the investment of your 401(k) plan account. Your employer will provide a menu of investment options (for example, a family of mutual funds). But it's your responsibility to choose the investments most suitable for your retirement objectives.

When Can I Contribute?
You can contribute to your employer's 401(k) plan as soon as you're eligible to participate under the terms of the plan. In general, a 401(k) plan can make you wait up to a year before you're eligible to contribute. But many plans don't have a waiting period at all, allowing you to contribute via payroll deduction beginning with your first paycheck.

Some 401(k) plans provide for automatic enrollment once you’ve satisfied the plan's eligibility requirements. For example, the plan might provide that you’ll be automatically enrolled at a 3 percent pretax contribution rate unless you elect a different deferral percentage, or choose not to participate in the plan. This is sometimes called a "negative enrollment" because you haven't affirmatively elected to participate--instead you must affirmatively act to change or stop contributions. If you've been automatically enrolled in your 401(k) plan, make sure to check that your assigned contribution rate and investments are appropriate for your circumstances.

How Much Can I Contribute?
There's an overall cap on your combined pretax and Roth 401(k) contributions. In 2007, you can contribute up to $15,500 ($20,500 if you're age 50 or older) to a 401(k) plan. If your plan allows Roth 401(k) contributions you can split your contribution between pretax and Roth contributions any way you wish. For example, you can make $8,000 of Roth contributions and $7,500 of pretax 401(k) contributions.

But keep in mind that if you also contribute to another employer's 401(k), 403(b), SIMPLE, or SAR-SEP plan, your total contributions to all of these plans--both pretax and Roth--can't exceed $15,500 in 2007 ($20,500 if you're age 50 or older). In order to escape IRS penalties, it's up to you to make sure you don't exceed these limits if you contribute to plans of more than one employer.

Can I Also Contribute to an IRA in the Same Year?
Yes. Your participation in a 401(k) plan has no impact on your ability to contribute to an IRA (Roth or traditional). You can contribute up to $4,000 to an IRA in 2007 ($5,000 if you're age 50 or older). But, depending on your salary level, your ability to make deductible contributions to a traditional IRA may be limited if you participate in a 401(k) plan.

What are the Income Tax Consequences of Contributing to a 401(k) Plan?
When you make pretax 401(k) contributions, you don't pay current income taxes on those dollars (which means more take-home pay compared to an after-tax Roth contribution of the same amount). But your contributions and investment earnings are fully taxable when you receive a distribution from the plan. In contrast, Roth 401(k) contributions are subject to income taxes up front, but qualified distributions of your contributions and earnings are entirely free from federal income tax. In general, a distribution from your Roth 401(k) account is qualified only if it satisfies both of the following requirements:

• It's made after the end of a five-year waiting period
• The payment is made after you turn 59½, become disabled, or die

The five-year waiting period for qualified distributions starts with the year you make your first Roth contribution to the 401(k) plan. For example, if you make your first Roth contribution to your employer's 401(k) plan in December 2006, your five-year waiting period begins January 1, 2006, and ends on December 31, 2010.

What About Employer Contributions?
Employers don't have to contribute to 401(k) plans, but many will match all or part of your contributions. Your employer can match your Roth contributions, your pretax contributions, or both. But your employer's contributions are always made on a pretax basis, even if they match your Roth contributions. That is, your employer's contributions, and investment earnings on those contributions, are always taxable to you when you receive a distribution from the plan.

Which Should I Choose: Pretax or Roth Contributions?
Assuming your 401(k) plan allows you to make Roth 401(k) contributions, which option should you choose? It depends on your personal situation. If you think you'll be in a similar or higher tax bracket when you retire, Roth 401(k) contributions may be more appealing, since you'll effectively lock in today's lower tax rates. However, if you think you'll be in a lower tax bracket when you retire, pretax 401(k) contributions may be more appropriate. Your investment horizon and projected investment results are also important factors. A qualified financial professional can help you determine which course is best for you.

Whichever you decide--Roth or pretax--make sure you contribute as much as necessary to get the maximum matching contribution from your employer. This is essentially free money that can help you reach your retirement goals that much sooner.

What Happens When My Employment Ends?
When you (or your employer) terminate employment, you generally forfeit all contributions that have not yet vested. Vesting means that you own the contributions. All of your contributions, pretax and Roth, are always 100 percent vested. But your 401(k) plan may require up to 6 years of service before you fully vest the employer's matching contributions (although some plans have a much faster vesting schedule).

When you terminate employment you can generally leave your money in your 401(k) plan until the plan's normal retirement age (typically age 65), or you can roll your dollars over tax free into an IRA or into another employer's retirement plan.

What Else Do I Need to Know?
Payroll deductions can make saving for retirement easier. The money is "out of sight, out of mind."

• You may be eligible to borrow up to one half of your vested 401(k) account (to a maximum of $50,000) if you need the money.
• You may also be able to make a hardship withdrawal if you have an immediate and heavy financial need. But this should be a last resort--hardship distributions are taxable to you (except for your Roth after-tax contributions), and you may be suspended from plan participation for 6 months or more.
• If you receive a distribution from your 401(k) plan before you turn 59½, the taxable portion may be subject to a 10 percent early distribution penalty unless an exception applies.
• Depending on your income, you may be eligible for an income tax credit of up to $1,000 for amounts contributed to the 401(k) plan.
• Your assets are fully protected in the event of your, or your employer’s, bankruptcy.

Open the newspaper or turn on the TV, and you're bound to see a recurring stock market theme: DOW UP...DOW DOWN! S&P ON A ROLLER COASTER RIDE! So you ask yourself, "What the heck is going on?" Here's the scoop...analysts, commentators, and equity investors are beside themselves with euphoria as the U.S. stock market rises and falls on a weekly basis, and this market is creating a lot of wealth for those who are in the business of "financial news and analysis".

Keep it in Context
Even though the U.S. stock market rose to record levels not long ago, these metrics are not the end-all-be-all measures of our nation's financial status. Let's not forget the other (currently less favorable) economic indicators and their effects on our economy:

• Consumers are saddled with enormous levels of revolving debt
  
• Real wage growth is stagnant
• Personal savings rates are at 70-year lows
• Home-foreclosure rates are accelerating
  
• Oil prices are at record highs
• Our nation is bogged down in a costly, unpopular war
• Health care and college tuition costs are easily out pacing inflation

This all adds up to a perfect storm of reduced consumer spending. In other words, the amount of disposable income the average American has available to spend on products and services is quickly declining beyond expectations...just ask J.C. Penny Co. and Starbucks.

Some might dismiss these consumer statistics as insignificant, particularly since corporate profits remain strong. But let's not forget that consumer spending accounts for two-thirds of our nation's Gross Domestic Product (or GDP). GDP is one of the ways we measure the size of the U.S. economy. So when consumer spending slows, guess what? You got it...the U.S. economy contracts. This contraction is an indicator of negative economic growth, also known as recession.

Now before you go running outside to see if the sky is falling, please note that we are not predicting a massive downturn in U.S. stock market stability. We are, however, suggesting that the national economic picture may not be as rosy as pundits, commentators, and Wall Street experts would have you to believe.

Stay Focused...and Cautious
As investing sage Warren Buffett once said: "Be fearful when others are greedy and greedy when others are fearful." With investors now seeing dollars signs everywhere, market greed is spreading like wildfire. Buffett's wise words urge you to remain prudent and to go forward with your eyes wide open, particularly as the ever-hungry market mavens continue to beat the drums of higher...higher...higher.

Where Does the Market Typically Go After Sustained Highs?
Mark Arbeter, Chief Technical Strategist at Standard & Poor's chimes in on this point:

"If history can serve as a guide...we will likely see sub-par price performance in the first month following the setting of a new high, and then find above-average price appreciation in the three and six months after. In addition, the next market top usually occurred around three years after the setting of a record high."

Once again, do not take Mr. Arbeter's words as the gospel. He may be right...he may be wrong. But nobody--and we mean nobody--knows at what levels our stock market will be one, three, or ten months from now...and if they did, trust us, they wouldn't tell you or anybody else!

So What Do You Do Now?
Carry on as if it's just another day. Continue contributing to your 401k plan. Continue dollar cost averaging shares of an index mutual fund within your Roth IRA. Continue practicing intelligent spending habits.

There is no reason to lose your head and begin taking unnecessary risk when you've already developed a plan to succeed. Be patient, and be smart.

An Individual Retirement Account (IRA) is a personal savings vehicle that offers specific tax benefits. IRAs are one of the most powerful retirement savings tools available to you. Even if you're contributing to a 401 at work, you should consider opening an IRA and other accounts as well.

It is important to point out that an IRA is an account that holds investments such as mutual funds, stocks, and bonds. An IRA, in itself, is not an investment, so it would be incorrect to say that "I bought $500 worth of IRAs". The correct statement would be "I bought $500 worth of mutual funds within my IRA account."

What Types of IRAs are Available?
The two major types of IRAs:

1. Traditional IRA
2. Roth IRA

Both allow you to contribute as much as $4,000 in 2006 and 2007. You must have at least as much (taxable) earned income as the amount of your IRA contribution. But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she does not have taxable compensation. The law also allows taxpayers age 50 and older to make additional "catch-up" contributions. They can contribute up to $5,000 in 2006 and 2007.

Both traditional and Roth IRAs feature tax-sheltered growth of earnings. And both give you a wide range of investment choices. However, there are important differences between the two, and you must understand these differences before you can choose the type that's best for you.

Note: If you were affected by Hurricanes Katrina, Rita, or Wilma, or if you are a reservist called to active duty after September 11, 2001 and before December 21, 2007, special rules may apply to you.

Learn the Rules for Traditional IRAs
Practically anyone can open and contribute to a traditional IRA. The only requirements are that you must have taxable compensation and be under age 70½. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount that you earned. The tax implications can get tricky, but here is a quick overview of the benefits...

Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pretax) contributions lower your taxable income for the year, saving you money in taxes. If neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual contribution. If one of you is covered by such a plan, your ability to deduct your contributions depends on your annual income and your income tax filing status. You may qualify for a full deduction, a partial deduction, or no deduction at all.

Withdrawing Money From a Traditional IRA
Any portion of a distribution that represents deductible contributions is subject to income tax because those contributions were not taxed when you made them. Any portion that represents investment earnings is also subject to income tax because those earnings were not previously taxed either. Only the portion that represents nondeductible, after-tax contributions (if any) is not subject to income tax. In addition to income tax, you may have to pay a 10 percent early withdrawal penalty if you're under age 59½, unless you meet one of the exceptions.

If you wish to defer taxes, you can leave your funds in the traditional IRA, but only until April 1 of the year following the year you reach age 70½. That's when you have to take your first required minimum distribution from the IRA. After that, you must take a distribution by the end of every calendar year until you die or your funds are exhausted. The annual distribution amounts are based on a standard life expectancy table. You can always withdraw more than you're required to in any year. However, if you withdraw less, you'll be hit with a 50 percent penalty on the difference between the required minimum and the amount you actually withdrew.

The Roth IRA
Not everyone can set up a Roth IRA. Even if you can, you may not qualify to take full advantage of it. The first requirement is that you must have taxable compensation. If your taxable compensation for the year is at least $4,000 (for 2006 and 2007), you may be able to contribute the full $4,000. But it gets more complicated. Your ability to contribute to a Roth IRA in any year depends on your adjusted gross income and your income tax filing status. Your allowable contribution may be less than the maximum possible, or nothing at all.

Your contributions to a Roth IRA are not tax deductible. You can invest only after-tax dollars in a Roth IRA. The good news is that if you meet certain conditions, your withdrawals from a Roth IRA will be completely income tax free, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply:

• You have reached age 59½ by the time of the withdrawal
• The withdrawal is made because of disability
• The withdrawal (of up to $10,000) is made to pay first-time home-buyer expenses
• The withdrawal is made by your beneficiary or estate after your death

Qualifying distributions will also avoid the 10 percent early withdrawal penalty. This ability to withdraw your funds with no taxes or penalties is a key strength of the Roth IRA. And remember, even non-qualifying distributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions that you have made.

Another advantage of the Roth IRA is that there are no required distributions after age 70½ or at any time during your life. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution. Also, as long as you have taxable compensation and qualify, you can keep contributing to a Roth IRA after age 70½.

Which IRA is Best for You?
Sometimes the choice is easy. The Roth IRA will probably be a more effective tool if you don't qualify for tax-deductible contributions to a traditional IRA. However, if you can deduct your traditional IRA contributions, the choice is more difficult. The Roth IRA may very well make more sense if you want to minimize taxes during retirement and preserve assets for your beneficiaries. But a traditional deductible IRA may be a better tool if you want to lower your yearly tax bill while you're still working (and probably in a higher tax bracket than you'll be in after you retire). A qualified financial planner or tax advisor can help you pick the right type of IRA for you.

Note: You can have both a traditional IRA and a Roth IRA, but your total annual contribution to all of the IRAs that you own cannot be more than $4,000 for 2006 and 2007 ($5,000 in 2006 and 2007, if age 50 or older).

Wouldn't it be great if you could reduce your portfolio's risk by some means other than simply reducing or eliminating your investments in highly volatile asset classes? Well, that's the goal of absolute return investing. However, as with all investments, there's a trade off. To try to reduce market risk, you'll probably increase your exposure to other types of risk.

Benchmarks and Absolute Return
An investment typically is measured relative to its benchmark's performance. For example, a negative return might still be considered successful if the loss was less than that of the benchmark to which it is compared. And an investment might have positive returns simply because its asset class is doing well.

By contrast, absolute return, or market-neutral, strategies attempt to make money each year--or at least not lose it--no matter what's happening with the market. An absolute return portfolio's performance benchmark might be the risk-free return on cash. For example, a manager might aim for a return equal to that of a short-term bank deposit plus three or four percentage points. (Of course, as with any investment, there's no guarantee that it will achieve its goal.)

The Long and Short of Investing
Many absolute return investments attempt to eliminate market risk--that is, be market-neutral--by adopting so-called long-short strategies, which rely on the difference between being "long" and selling short. Short selling involves borrowing shares or other securities and selling them, in the belief that the price will drop and you will be able to buy them for less when you must replace them later. The difference between the price you got when you sold the shares and the price you paid to replace them is your profit. However, you also can lose money if the price rises and you must pay more to replace the borrowed shares than you got for them.

A short sale is bearish. By contrast, being long--buying a security outright--is a bullish position; if you think an investment will decrease in value, you probably won't buy it.

Trying to Have it Both Ways
Market-neutral strategies try to have the best of both worlds by investing in both long and short positions, typically in equal proportion. For example, a manager might buy a security he or she considers undervalued, and sell short an equal dollar amount of a similar security that appears overvalued. The opposing long and short positions are designed to neutralize the ups and downs of that particular market--hence the name--and reduce a portfolio's volatility. Because it strives to be independent of market behavior, a market-neutral portfolio's performance is based almost exclusively on its manager's ability to identify and trade under- and overvalued securities.

But wait--isn't that exactly what an actively managed mutual fund does? Yes, but the typical mutual fund manager who's concerned about a particular security or sector either invests less in it or avoids it. A market-neutral manager might actually short that sector or security, actively attempting to take advantage of its problems. In some ways, a market-neutral fund is the mirror image of an index mutual fund. Because an index fund is designed to replicate a particular market, it is 100% exposed to market risk; a market-neutral portfolio takes the opposite approach.

If It's Not One Thing, It's Another
Of course, even if a portfolio manages to be independent of market risk, that doesn't mean it's eliminated other risks. A market-neutral portfolio's manager can misjudge which securities to buy or short, or the timing of those trades; also, there are specific risks associated with each individual security. Any of the above can have as unexpected and dramatic an impact as overall market movements. Though absolute return investing attempts to lower volatility and achieve a positive return, there are no guarantees it will do so, and it may not be appropriate for all investors.

Seeking Absolute Return
Hedge funds and institutional investors often rely on absolute return investing. However, in recent years, mutual funds with similar strategies have expanded the concept to a broader range of investors. A fund may focus on a single asset class, or include multiple asset classes as well as global investments.

If you're considering an absolute return fund, you'll need to pay attention to costs; a greater level of complexity can increase trading expenses. Consider also how a given strategy has fared in both up and down markets. Consult a financial professional to see if absolute return investing makes sense for part of your portfolio.

When investing in a mutual fund, you may have the opportunity to choose among several share classes, most commonly Index, Class A, Class B, and Class C. The differences among these share classes typically revolve around how much you will be charged for buying the fund, when you will pay any sales charges that apply, and the amount you will pay in annual fees and expenses. This multi-class structure offers you the opportunity to select a share class that is best suited to your investment goals.

The Index Way is the Only Way
Let's be very clear up front. Our advisors only recommend no-load index funds to clients. With their minimal annual costs and tax efficient structures, index funds are an easy favorite at Lightship Mutual.

So you ask, if index funds are so great, then why do we need Class A, Class B, and Class C mutual fund shares anyway? Great question! Well, it all has to do with a little something called "commission". In the old days, you had to pay a sharply-dressed stockbroker to purchase your mutual fund shares for you. And in exchange, you paid him/her a commission of 5-10% to do so.

But then then the whole Internet revolution came along, and what do you know...now we can purchase our mutual fund shares directly from the fund companies and cut out the middle man (and his $2000 Italian suit). Ain't life grand? At any rate, it is still important for you to know what the other various classes of funds are, just in case someone ever tries to pitch them to you.

The Costs Associated with Mutual Funds
Typically, mutual fund costs consist of two different fees: the initial sales charges and the annual expense. The sales charge, often called a "load", is the broker's commission, deducted from your investment when you buy the fund, or when you sell it. The annual expenses cover the fund's operating costs, including management fees, distribution and service fees (commonly known as 12b-1 fees), and general administrative expenses. They are generally computed as a percentage of your assets and then deducted from the fund before the fund's returns are calculated. (To better understand what these charges are, you should review the Fees and Expenses section of the fund's prospectus.)

Class A Shares
When you purchase Class A shares, an up front sales charge, called a front-end load, is typically deducted, thus reducing the actual amount of your initial investment. For example, suppose you decide to spend $1,000 on Class A shares with a hypothetical front-end sales load of 5 percent. You will be charged $50 on your purchase, and only $950 will be invested. You lost fifty dollars just like that...Ouch!

Class B Shares
Unlike Class A shares, there is no up-front sales charge, so all of your initial investment is put to work immediately. However, Class B shares do have a back-end load, often called a contingent deferred sales charge (CDSC) that you pay when you sell your shares. The load usually decreases over time (typically 6 to 8 years), although this varies from fund to fund. By the end of the time period no charge applies. At that stage your shares may convert to Class A shares.

For example, suppose you invest $5,000 in Class B shares, with a 5 percent CDSC that decreases by 1 percent every year after the second year. If you sell your shares within the first year, you will pay 5 percent of the value of your assets or the value of the initial investment, whichever is less. If you hold your shares for 6 years, the CDSC will be reduced to zero.

Class C Shares
When you purchase Class C shares, a front-end load is normally not imposed, and the CDSC is generally lower than for Class B shares. This charge is reduced to zero if you hold the shares beyond the CDSC period, which for Class C shares is typically 12 months.

Do Your Homework
Don't just take our word for it. Grab and pencil and paper and check out the National Association of Securities Dealers (NASD) at www.nasd.com. You can also find information on the Securities and Exchange Commission (SEC) website at www.sec.gov.

As you consider how best to invest in mutual funds, remember that there's no guarantee any mutual fund will achieve its investment objective. You should discuss all of your investment goals with a qualified financial professional.

A variable annuity is a contract between an individual (the purchaser) and an insurance company (the insurer). In return for premium payments, the insurer agrees to make periodic payments to the purchaser (if the purchaser elects this option), beginning either immediately or at some future date. Deposits can be made by either a single purchase payment or a series of purchase payments.

Purchasers of variable annuities have some control over the manner in which their annuity premiums are invested (unlike fixed annuities). The investment options (or sub accounts) for a variable annuity will usually include stocks, bonds, money market instruments, or some combination of the three. As the purchaser, you can designate how your premium dollars will be allocated among the offered investment choices.

Variable Annuity Features
Like all annuities, variable annuities possess a unique combination of attributes:

• Tax deferral: Taxes on the income and investment gains from the annuity are deferred until money is withdrawn. Note that all distributed earnings are taxed at ordinary income tax rates and never at capital gains rates. Distributions taken before age 59½ are subject to a 10 percent early withdrawal penalty tax on earnings.
• Periodic payments: Proceeds can be distributed in periodic payments for the life of the annuitant, or for the lives of the annuitant and a spouse (or some other person). If this option is elected, the annuitant cannot outlive the payment stream.
• Death benefits: If an annuitant dies before reaching the annuity payout date, his or her beneficiary is generally guaranteed a death benefit. (Guarantees are subject to the claims-paying ability of the issuing insurance company.) The amount of the death benefit is usually the greater of an amount specified in the annuity contract, or the amounts contributed to the contract and the investment income credited to the contributions, reduced by any withdrawals made from the annuity. Annuity proceeds paid at the death of the annuitant will bypass probate if left to a named beneficiary.
• The funds in an annuity are generally unreachable by creditors (laws vary by state).

The Phases: Accumulation and Payout
Like other annuities, there are two phases to a variable annuity: the accumulation phase and the payout phase.

During the accumulation phase, you (as the purchaser of the annuity) make payments that are allocated to the various investment options. You can typically transfer funds from one investment option to another without paying tax on the investment income and gains.

After the accumulation phase, the funds are paid out (the payout phase). At the beginning of the payout phase, you generally elect how you want to take payouts--in a lump sum, as funds are needed, or annuitized over your life, the joint life of you and another individual, or over a specific period of time.

The amount of each periodic payment you receive depends in part, of course, on how you elect to take payouts.

The Death Benefit
Variable annuities commonly provide a death benefit. The amount of the death benefit may be specified in the annuity contract, or it may be calculated as the greater of some guaranteed minimum (e.g., all purchase payments minus withdrawals) or all the moneys in the account at the time of death. (Guarantees are subject to the claims-paying ability of the issuing insurance company.)

Many variable annuities allow you to choose a stepped-up death benefit for an additional charge. The stepped-up benefit is a higher guaranteed death benefit, for which the insurance company charges extra premiums. The advantage of these benefits is that you will know with some certainty how much your beneficiary will receive when you die.

A number of other optional benefits can be purchased as part of a variable annuity policy to guarantee higher streams of payments. Of course, these benefits add to the cost of purchasing the annuity.

Annuity Fees
Among the many major differences between mutual funds and variable annuities are the relatively high fees charged to annuity holders. But with variable annuities, the sales load is a substantial up-front amount the consumer must pay to buy into the contract, combined with an ongoing yearly maintenance fee, and finally a surrender charge, which is applied only on withdrawals during the initial years after purchase, usually about seven years.

All of these miscellaneous fees go directly into your stockbroker's pockets (Hey, muli-billion dollar international stock brokerage firms have to eat too! How else can they afford the Lear jets and a decent Ivy League education for Junior? Have a heart!)

Are Variable Annuities Right For You?
We very rarely advise our clients to invest in variable annuities. There are some cases--only if you've already maxed out your Roth IRA and 401k for the year in which you may look into a fixed annuity option. Otherwise, if you are under 40, your best bet to facilitate growth and minimize costs (go back and count the number of times we used the words "load" and "fee "above") is to stick with low-cost, no load index mutual funds. A diversified mix of quality index funds remains our favorite strategy, and we will continue to steer client away from the variable annuity trap.

Are health insurance premiums taking too big of a bite out of your budget? Do you wish you had better control over how you spend your health-care dollars? If so, you may be interested in an alternative to traditional health insurance called a health savings account (HSA).

How Does a Health Savings Account work?
An HSA is a tax-advantaged account that's paired with a high-deductible health plan (HDHP). Let's look at how an HSA works with an HDHP to enable you to cover your current health-care costs and also save for your future needs.

Before opening an HSA, you must first enroll in an HDHP, either on your own or through your employer. An HDHP is "catastrophic" health coverage that pays benefits only after you've satisfied a high annual deductible. (Some preventative care, such as routine physicals, may be covered without being subject to the deductible.) For 2007, the annual deductible for an HSA-qualified HDHP must be at least $1,100 for individual coverage and $2,200 for family coverage. However, your deductible may be higher, depending on the plan.

Once you've satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan's annual out-of-pocket limit). A qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $5,500 for individual coverage and $11,000 for family coverage (for 2007). Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy.

Because you're shouldering a greater portion of your health-care costs, you'll usually pay a much lower premium for an HDHP than for traditional health insurance, allowing you to contribute the premium dollars you're saving to your HSA. Your employer may also contribute to your HSA, or pay part of your HDHP premium. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds.

An HSA can be a powerful savings tool. Because there's no "use it or lose it" provision, funds roll over from year to year. And the account is yours, so you can keep it even if you change employers or lose your job. If your health expenses are relatively low, you may be able to build up a significant balance in your HSA over time. You can even let your money grow until retirement, when your health expenses are likely to be substantial. However, HSAs aren't foolproof. If you have relatively high health expenses (especially within the first year or two of opening your account, before you've built up a balance), you could deplete your HSA or even face a shortfall.

HSA as a Tool for Tax Reduction

HSAs offer several valuable tax benefits:

• You may be able to make pretax contributions via payroll deduction through your employer, reducing your current income tax.
• If you make contributions on your own using after-tax dollars, they're deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not. You can also deduct contributions made on your behalf by family members.
• Contributions to your HSA, and any interest or earnings, grow tax deferred.
• Contributions and any earnings you withdraw will be tax free if they're used to pay qualified medical expenses.

Consult a tax professional if you have questions about the tax advantages offered by an HSA.

Can Anyone Open an HSA?

Any individual with qualifying HDHP coverage can open an HSA. However, you won't be eligible to open an HSA if you're already covered by another health plan (although some specialized health plans are exempt from this provision). You're also out of luck if you're 65 and eligible for Medicare or if you can be claimed as a dependent on someone else's tax return.

How Much Can I Contribute to an HSA?

Each year, you can contribute up to $2,850 for individual coverage and $5,650 for family coverage (for 2007). This limit applies to all contributions, whether they're made by you, your employer, or your family members. You can make contributions up to April 15th of the following year (i.e., you can make 2007 contributions up to April 15, 2008). If you're 55 or older, you may also be eligible to make "catch-up contributions" to your HSA, but you can't contribute anything once you reach age 65.

Note: Starting in 2007, you'll be able to make a one-time tax-free rollover of funds to your HSA from a health flexible spending account (FSA), a health reimbursement arrangement (HRA), or a traditional IRA (certain limits apply).

Can I Invest My HSA funds?
HSAs typically offer several savings and investment options. These may include interest-earning savings, checking, and money market accounts, or investments such as stocks, bonds, and mutual funds that offer the potential to earn higher returns but carry more risk (including the risk of loss of principal). Make sure that you carefully consider the investment objectives, risks, charges, and expenses associated with each option before investing. A financial professional can help you decide which savings or investment options are appropriate.

How Else Can I Use My HSA Funds?
You can use your HSA funds for many types of health-care expenses, including prescription drugs, eyeglasses, deductibles, and co-payments. Although you can't use funds to pay regular health insurance premiums, you can withdraw money to pay for specialized types of insurance such as long-term care or disability insurance. IRS Publication 502 contains a list of allowable expenses.

There's no rule against using your HSA funds for expenses that aren't health-care related, but watch out--you'll pay a 10% penalty if you withdraw money and use it for nonqualified expenses, and you'll owe income taxes as well. Once you reach age 65, however, this penalty no longer applies, though you'll owe income taxes on any money you withdraw that isn't used for qualified medical expenses.

A self-directed IRA isn't a different type of IRA. Rather, the term refers to any individual retirement account (traditional or Roth) that gives you more investment control by allowing you to direct your IRA assets into nontraditional investments.

For example, in addition to the usual IRA mainstays (stocks, bonds, mutual funds, and CDs), a self-directed IRA might invest in real estate, options, limited partnership interests, or anything else the law (and your IRA trustee/custodian) allows. In fact, the only investment you can't have in an IRA is life insurance. (Collectibles--for example, artwork, stamps, wine, and antiques--aren't prohibited, but if your IRA purchases these items, you could suffer adverse tax consequences.)

Get A Specialist
To get started, you'll need to find a trustee or custodian that specializes in self-directed IRAs. Make sure you understand the expenses involved--some trustees charge transaction fees and/or asset-based fees, depending on the particular investment.
You also need to be aware of the prohibited transaction rules. These rules are designed to make sure that only your IRA, and not you (or your immediate family), benefits from your IRA transactions. For example, you are prohibited from buying investments from, or selling investments to, your IRA. If you violate these rules, your account will cease to be treated as an IRA, with potentially devastating tax consequences.

Understand the Additional Costs
Finally, you need to understand the UBIT (unrelated business income tax) rules. Even though IRA investments usually grow tax deferred (or even potentially tax free in the case of a Roth IRA), if your IRA conducts certain business activities, or has debt-financed income, then your IRA could be taxed currently on all or part of the income generated.

Although we don't generally recommend these alternative IRA accounts, a qualified financial professional can help you weigh the benefits and risks of a self-directed IRA...and help you determine if it's the right choice for you.

Volatility measurements can be used to evaluate the performance of mutual funds and investment portfolios as well as individual securities. An investment is considered 'volatile' when it experiences significant ups and downs in price...or when the prices and returns on that particular investment vary wildly from month to month (or year to year). A far cry from the market exuberance we experienced in the early spring, we are currently on the brink of a full-blown Wall Street panic, and television pundits love to use their fancy jargon to discuss this current volatility. Here's some insight into what the heck they're talking about.

Standard Deviation
This figure measures how much an investment's return varies from its mean return. The higher an investment's standard deviation is, the more dramatic its ups and downs. For example, let's say two stocks each return an average of 6 percent a year. However, one of those stocks might have a much higher return in some years, but lose a lot of value in others. That stock's standard deviation from its mean would be quite high. The second stock might achieve the same average without such dramatic price swings, and would therefore have a lower standard deviation.

Beta
Another way to evaluate an investment's volatility is to look at its beta, which compares an individual investment's volatility to that of the market. A stock or mutual fund with a beta of 1.0 would have exactly as much market risk as its benchmark--for example, the S&P 500 stock index. A stock or mutual fund with a beta of 1.5 would involve 50 percent more market risk than the benchmark; if the benchmark went up, the individual security would be expected to go 50 percent higher. If the benchmark's return dropped, the security's return should be 50 percent lower. Conversely, a stock or fund with a beta of less than 1.0 would involve less market-related volatility than the overall market. If the S&P rose by 50 percent, an investment with a beta of .5 should benefit by only 25 percent. If the benchmark fell by 50 percent, the individual security with a .5 beta should experience only a 25 percent drop.

R-Squared
Beta as a measurement of volatility is useful only if the investment is being compared to an appropriate benchmark. R-squared measures how much of an investment's volatility depends on the volatility of its benchmark. If an investment's performance is perfectly correlated with that of the overall market, it would have an R-squared of 1.00. The lower the R-squared, the less the investment's performance can be explained by the market's overall performance. For example, a stock with an R-squared of .80 would mirror the performance of the S&P 500 index much more closely than a stock with an R-squared of .40, which would be much more affected by factors specific to that stock.

Alpha
In addition to risk and reward that is linked to market movements, an investment involves risk and reward that is unique to the investment itself. A stock, for example, might benefit from superior management of the company, or suffer because of a substantial delay in launching an important product. Alpha indicates how well an investor is being compensated for the level of that specific (nonmarket-related) risk. It compares an investment's returns to the performance an investor might expect given the level of risk indicated by its beta. A positive alpha would mean that for the time period measured, the investment has done better than the return that investors could have predicted simply by multiplying its beta figure times the return of the benchmark index. A negative alpha means just the opposite: that the investment's returns have been worse than they should have been for the level of risk taken. At the portfolio level, alpha is a way to gauge whether you benefit from active management, compared to simply investing passively in an index.

Let's Get Technical: Measuring Overall Market Volatility
One way investors sometimes try to gauge short-term volatility in the market as a whole is to look at the Volatility Index (VIX) created by the Chicago Board Options Exchange. The VIX is calculated as a percentage figure by averaging the prices of options on the S&P 500 index. The figure, which is calculated minute-by-minute based on ongoing options trading, is used to gauge investor expectations for market volatility over the next 30 days. Though past performance is no guarantee of future results, options prices tend to rise when the markets are in turmoil and investor anxiety is high. That pushes the VIX up as well. When investors are feeling more certain about the future, options prices and the VIX tend to drop.

Chocolate cake. Pasta. Pancakes. They're all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that's right for you.

Getting the Right Mix
The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash equivalents, accounts for most of the ups and downs of a portfolio's returns.

There's another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types.

Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation. It doesn't guarantee a profit or insure against a loss, but it does help you manage the level and type of risks you face.

Balancing Risk and Return
Ideally, you should strive for a mixture of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let's say you want to get a 7.5% return on your money. You should keep in mind that market returns have historically averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out perfectly that way, of course. This is only a hypothetical illustration, not a real portfolio, and there's no guarantee that either stocks or bonds will perform as they have in the past. But at least asset allocation gives you a place to start.

Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that's 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor's age. These can help jump-start your thinking about how to divide up your investments. However, because they're based on averages and hypothetical situations, they shouldn't be seen as definitive. Your asset allocation is--or should be--as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.

Many Ways to Diversify
When we refer to asset allocation, we're usually talking about overall classes: stocks, bonds, and cash or cash equivalents. However, there are others that also can be used to complement the major asset classes once you've got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don't necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio.

Even within an asset class, consider how your assets are allocated. For example, if you're investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.

Asset Allocation Strategies
There are various approaches to calculating an asset allocation that makes the most sense for you.

The most popular approach is to look at what you're investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to achieve your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you're stretched financially and would have to tap your investments in an emergency, you'll need to balance that fact against your longer-term goals. In addition to establishing a (very important) emergency fund, you may need to invest more conservatively than you might otherwise want to.

Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called "market timing," is extremely difficult even for experienced investors. If you're determined to try this, you should probably get some expert advice--and recognize that no one really knows where markets are headed.

Some people try to match market returns with an overall "core" strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management.

Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild's inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.

Things to Consider:

• Don't forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
• Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you're pursuing is worth the lost sleep.
• Your tax status might affect your asset allocation, though your decisions shouldn't be based solely on tax concerns.

Even if your asset allocation was right for you when you chose it, it may not be right for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.