While the market had its usual positive reaction to the Fed lowering the federal funds rate to 2.25%, over the long term, lowering the Fed rate will continue to lower the value of the dollar, leading to higher inflation and a weaker US economy.

In 2001, the Fed began lowering interest rates. By the end of 2001, the Fed funds rate was below 2% and it stayed below 2% until the end of 2004. During that same time period, the dollar went from being worth 1.12 Euros to a value of .75 Euros, a 33% decease in its value. As the Fed raised interest rates in 2005, the dollar increased in value, hitting a high of .85 Euros in late 2005.

Even with higher Fed rates, the dollar continued to decline in 2006, going to .75 Euros in mid 2007. However, since the banking debacle and the recent dramatic lowering of the Fed rates, the dollar is once again in rapid decline, trading at just .64 Euros.

To give a slightly different perspective, if the dollar was as strong today as it was in 2001, we would be paying $62 per barrel instead of $109 and gasoline would be $1.80/ gallon instead of $3.15.

So what can the average investor do in this time of sinking stock prices and short term interest rates that are below the rate of inflation?

Before Christmas, I recommended gold as an inflation hedge and as protection against the continued decline of the dollar. Since the beginning of 2008, gold is up over 17%. With the present Fed approach to devaluing the dollar through lower interest rates, I still believe that gold has upside potential. An easy way to own gold is through the ETF (Exchange Traded Fund) GLD.

Another approach is to buy stocks in high quality companies with high yields. While the stock market will probably continue to decline in 2008, a quality company such a GE, which yields 3.7%, will likely pay off in the long term. In the meantime, you will receive a yield that is higher than money market rates and that is taxed at a maximum of 15%.

I do not recommend buying any financial institutions stock at this juncture. The picture is still too clouded, and no one knows if another Bear Stearns is around the corner. However, if you are willing to take some risk, you might consider a Business Development Company. My favorite is Kohlberg Capital (KCAP). KCAP has an expense ratio of just 2.5% vs an industry average of 5.7%. It is trading at a 35% discount off of its Net Asset Value (NAV) and is yielding over 15% annually.

Regardless of how you decide to invest in these challenging times, remember to stay well diversified and not to chase the latest investment fad.

Until we see a different approach from the Fed, it is wise to plan for a continued dollar deterioration combined with higher inflation. This combination will lead to lower real rates of return on bonds and money market funds, providing a challenge to all investors.

In the biblical story of the birth of Christ, the Magi gave Jesus gold, frankincense and myrrh. As many of us celebrate the Christmas season, perhaps we should consider giving ourselves one of these gifts, the gift of gold.

While I have never been a gold enthusiast, gold can be an excellent hedge against insipient inflation. In the 1970’s gold was a good investment during the extended “stagflation” that the US experienced.

The nominal price of gold has increased by approximately 75% over the past five years and is now trading at approximately $800 per ounce. However, the Euro has also increased in value against the dollar by approximately 40% over the same 5 year period. Thus, more than ½ of the increase in the price of gold can be attributed to the declining value of the dollar.

With the recent recognition that the CPI is dramatically increasing, it is possible that the US economy may soon face an extended period in which the economy is flat to negative and inflation is above the historical 3% average. If this occurs, it is likely that gold will once again become more valuable as a hedge against increased inflationary pressure.

You may be thinking that gold is already near its all time high of $850/oz. (reached in 1980), so where is the upside of buying gold at $800/oz. ? While in nominal terms that thinking is correct, in inflation adjusted dollars, the $850/oz in 1980 is actually $2145/oz. in 2007 dollars. Thus, on an inflation adjusted basis, gold is now trading at $317/oz. in 1980 dollars.

I am not suggesting that anyone sell all of their stocks and bonds and use the proceeds to buy gold. However, proper asset allocation requires us to look at present economic conditions. If inflation does increase in 2008 and if the dollar remains weak, the odds are high that the price of gold in US dollars could increase. Thus, it may be prudent to put a small amount (5% or less) of your liquid assets into gold, until economic conditions change.

If you decide to add gold to your portfolio, one of the easiest ways of owning gold is through Exchange Traded Funds (ETFs). One such ETF is the streetTRACKS Gold Shares ETF, with the call symbol GLD. This ETF is traded like a stock and is easy and inexpensive to buy and sell through a discount brokerage house.

Gold investments are not for everyone. However, if you think that inflation will rise in 2008 and the dollar will remain weak, adding to your portfolio the “Magi’s gift” may increase your portfolio returns in 2008.

I hope that you have a joy filled Christmas and a Happy and Prosperous New Year.

With the turmoil in the mortgage industry, many people think that this is the worst possible time to consider refinancing their home. However, if you have good credit and if you have an adjustable rate mortgage (ARM) that is scheduled to adjust in the next 2 - 3 years, now might be a perfect time to consider refinancing your home.

The November CPI was recently shown at .8% over October and 4.6% higher than November 2006. The Fed is admitting that they must get serious about curbing the increasing inflationary pressures. If inflation continues to increase over the next one to two years, interest rates and mortgage rates will rise to reflect this increased inflationary risk.

Currently, if you have good credit, a 30 year fixed rate mortgage can be found with an interest rate of 6% or less. A fifteen year mortgage can be found with interest rates as low as 5.625%. If you have a $200K mortgage, the 30 year loan payments will be $1200 and the 15 year payments would be $1650.

With an ARM that will reset in 2009, if increasing inflation persists, fixed mortgage rates could easily hit 7.5%. By waiting to refinance in 2009, you could end up paying $1,400 per month for he same $200k mortgage that you could get for $1200 per month now.

If your finances allow, consider a 15 year mortgage. Not only will you pay less than 1/2 of the total interest paid on a 30 year mortgage, in 15 years you will completely own your home. When you no longer are paying $15,000 -$20,000 per year in mortgage payments, you will be surprised at the flexibility you have in your career and retirement choices.

All indicators are pointing toward significantly increased inflationary pressures in the coming years. When inflation increases, interest rates, including mortgages, increase. If you have an ARM, you are at risk of paying much higher mortgage payments in the future. It may be in your best interests to refinance your ARM with a long term, fixed rate mortgage now.

In the November 28th Wall Street Journal, Jonathan Clements seems to suggest that investors increase their yield on the fixed asset (bond and bond funds) portion of their portfolio by buying stocks (especially banking stocks) with a high dividend yield.

What his column seems to ignore is that a significant reason to buy fixed assets is to provide diversification and protection for when the stock market tanks. High yield stocks have a high yield because the company can find nothing better to do with their income than to redistribute it to their shareholders. Stock holdings in these companies can often be a high risk investment.

Often, high yields occur when a stock price falls precipitously. Consider Washington Mutual (WM) which currently yields around 13%. This stock has fallen approximately 60% since June, when it’s 5% yield was considered high. In WaMu’s present financial condition, the odds are very high that the dividend will receive a substantial cut in the near future.

The reason to diversify into fixed assets is not for your fixed income investment to outperform the equity market. You diversify to lower your overall investment risk. Short term bonds, CDs and money market funds will hold most, if not all of their value when the stock market sinks. High yielding stocks will fall with a falling market, often at an even faster rate than the overall market.

If you choose to chase high yields, be sure that you do not confuse stocks with bonds. Keep your high yielding stocks on the stock side of your portfolio. They are NOT fixed assets that will hold their value when the market declines.

You recognize that you need help with financial planning and advice on the investments required to meet your financial goals. How do you find an advisor that is right for you?

The way an advisor is compensated can influence the advice that they provide. Let’s look at compensation methods for financial advisors.

Commissioned based advisors – These advisors typically sell both insurance based financial products and load mutual funds. They will often state that their financial planning services are “free” and that you will pay no commissions, as long as you hold the product for a period of five years or more. Always ask the advisor what they will receive in commissions for each product you are offered. Once you know what their commissions are, you know how much you are really paying for their advice.

Fee based brokerage advisors – To join the popular trend of charging fees instead of commissions, brokerage firms are offering “fee based” accounts. You pay an annual fee, based on a percentage of the assets in the account. For this fee, you may make unlimited trades without paying any brokerage commissions. Commissions on mutual funds (such as the 12-b1 annual load) and certain proprietary products may also compensate the broker.

Fee only assets based advisors – These advisors provided professional asset management and financial advice and typically offer products that pay no commissions. Their compensation is based on an annual percentage of the assets that you place with them to manage.

Fee only financial planners – Fee only financial planners provide financial planning and investment advice for an hourly fee and/or retainer. They sell no products and receive no commissions. Since they are advising you on all of your financial resources, there is no incentive to have assets under management.

On the surface, advisors that sell commissioned-based products appear to charge less than fee only advisors. However, when you “look behind the curtain,” you will often find that the commissions paid are more than you would pay for fee only based advice.

To demonstrate this, ask a commissioned based financial advisor about variable annuities. Then compare their product with a similar product from Schwab, Fidelity or Vanguard (all non-commissioned brokers). You will always pay more for the variable annuity from a commissioned broker than you do from a non-commissioned brokerage firm.

Financial advisors are legally required to tell you how they are compensated. Always ask how they will be compensated for financial advice provided. Once you know how they are compensated, you can determine if any conflicts of interest might arise. With this knowledge, you can make an informed decision on the type of financial advisor that is best for you.

As the end of the year draws near, mutual fund companies are required to distribute all of their capital gains and dividend income accumulated over the past year. If you have mutual funds, you likely reinvest these distributions into more shares of the mutual fund.

If you plan on selling a mutual fund soon, you might want to sell the fund before the year end distribution, to avoid paying taxes on this year's distributions. If you are planning on buying a mutual fund, you may want to wait until after the yearly distribution is made, to avoid paying taxes on gains in which you did not participate.

A costly mistake, that many people make, is not keeping track of their yearly distributions from mutual funds. Each year, you will pay taxes on the capital gains and dividend distributions from a mutual fund. If you reinvest your capital gains and dividends, when you decide to sell the mutual fund, these distributions should be included in your cost (basis) of the fund. If you forget to do this, you will end up paying taxes twice on these distributions.

As an example, suppose that you bought a mutual fund five years ago for $10,000. Each year you reinvest your $1,000 capital gains and dividend distribution. At the end of five years, your mutual fund holdings are valued at $17,000. What is your capital gain if you sell?

If you forget that you have already paid taxes on $5,000 of capital gains and dividend distributions, you might report a capital gain of $7,000. However, since you have already paid taxes on $5,000 of capital gains and dividends, your cost/basis is $15,000 and your capital gain is only $2,000.

If you buy and hold mutual funds, be sure to keep track of the reinvested gains that you receive and pay taxes on each year. This will keep you from paying Uncle Sam more than you should when you sell the fund.