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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM Monday, January 23, 2006: Timing is everything. Here are am I on Jan 5 telling everyone to buy Vanguard's International Stock Index Fund (VGTSX) and Vanguard's Pacific Stock Index Fund Admiral Shares (VPADX) and then on Jan 10 telling everyone to buy Vanguard's Emerging Markets Stock Index (VEIEX). All three had performed stellar in 2005 -- up 15.6%, 22.7% and 30.8% respectively.

Then comes last week's meltdown -- who can predict?. My money in Pacific Stock Index fund is now down 4.7%. I'm down 3% in the Total International Stock Index and 2% in the Emerging Markets Stock Index Fund. The whole thing reminds me of the Polish comedian whose success was bad timing.

I'm won't sell these funds, for now. They haven't hit my 15% Stop Loss Rule. I should probably buy more. (I'm mulling that one.) I believe last week's fall was one of those quirky events that hits stockmarkets every so often -- especially volatile Asian markets. It presents the classic "buying opportunity." Japan has already bounced back a little. If you didn't buy these funds, now might be a good time to ease in.

The good news is that I'm still up on my entire investment in Vanguard Funds -- My other two -- the International Value Fund (VTRIX) and the Mid-Cap Index Fund Admiral Shares (VIMAX) are up more than the three more recent ones are down. I'm still a genius, though more humbled.

The lesson remains. Don't put all your eggs -- or many of your eggs -- in one basket -- no matter how many golden eggs the basket has laid in the past. Continuing that thought, I bet my commodities fund is up nicely. After all, one of the reasons equities were down last week (especially Friday) was because oil was up.

My idea for the next Google evaporates. Thursday night, I'm ecstatic. I've found the next Google -- an entrepreneurial startup that will make me a billionaire. By Sunday, I'm running the numbers and they look truly awful. That's the way this search for the perfect investment goes. You get turned on when you hear the idea. You fantasize about everyone in the entire world giving you a buck or two a month... And then you figure the costs of getting to them...

Meantime, entrepreneurs are also entranced with Google. The two Google founders have their own private jet. Every self-respecting entrepreneur wants one. Entrepreneurs now have fantastical ideas about what their company is worth, and equally fantastical ideas on how much they're willing to sell you a tiny piece of their precious billion-dollar-baby for.

If a company has no revenues and no profits but does have an interesting idea and some technology (mostly unpatented), how much is it worth? $10 million? $1 million? There's no scientific measure. Which brings me to my favorite cartoon. This thing dates back to the tech boom of the late 1990s. It summed it all up.

With a Little Estate Planning, Your House Can Stay in the Family. My son is forever rebuking me because our family estate planning sucks (i.e. is basically nonexistent). It's time to do something about it. This article from Saturday's New York Times plucked my guilty strings:

CAUTION: Reading this article may provoke self-inflicted slaps to the head and utterances of "Why didn't I do this five years ago?"

In 1999, Farhad Aghdami, a trust lawyer in Richmond, Va., suggested to Jim and Yolonda Roberts that they put their home in a Qualified Personal Residence Trust to shelter it from looming estate taxes.

Piedmont Lodge, the Robertses' white clapboard house with six portico columns sitting on 53 acres near Keswick, Va., was worth about $1.6 million back then. The trust lets them give the property to their four children for about a third of what it was valued at in 1999. The couple, now 75 years old, can live in the home for the 10-year term of the trust. When the trust expires in three years, the house belongs to the children.

Here's where you slap yourself. The home is probably worth close to $4 million now. All of that appreciation was removed from the Roberts estate. "We are very happy with how it worked out," said Mr. Roberts, a retired Exxon executive. "We love the house and wanted to keep it in the family."

You keep hearing how your home is your primary financial asset. As home prices have climbed sharply in most areas of the country, many older Americans are finding themselves living in an asset worth $1 million or more. Some also own vacation homes that have increased in value.

Add that real estate to stocks, bonds, life insurance and other property and suddenly people who thought they were just average folks could expect to have those assets subject to estate taxes after they die. Congress has set the exemption from estate tax at $2 million, but as Carrie C. Simchuk, a trust and estates lawyer at Perkins & Coie in Seattle, said, "It doesn't take all that long to get to $2 million."

That's what makes the QPRT, pronounced "cue-pert" by the experts skilled in setting up these tax-reducing vehicles, so attractive these days. During the Clinton administration, Congress made noises about limiting the trusts, but in recent years no legislator has crusaded for their abolition.

Certainly a lot of people have put aside worrying about estate taxes. After all, Internal Revenue Service statistics show that the federal estate tax was paid by only 1.17 percent of estates of those who died in 2002, the last year with published figures. That could be because few people amass appreciable estates or because so many who did accumulate wealth had hired excellent tax planners. Either way you look at it, it might seem even more irrelevant because Congress has raised the exemption to $3.5 million in 2009 and then removed the estate tax entirely in 2010.

The rub, of course, is that the tax relief expires in 2011, which would bring the tax back and scale back the exemption to $1 million if Congress does not act. What Congress will do about estate taxes over the next couple of years is anyone's guess, but tax planners say it is foolhardy for anyone with $2 million in assets to do nothing and hope for the best.

"The worst thing you can do is let it paralyze you into inaction," said Jim Ellis, a managing director and estate planner at J. P. Morgan Private Bank.

The QPRT works best for those people who expect to live another decade or so. The longer the term of the trust, the more beneficial the gift is to the children. A $1 million home in a three-year trust saves about $147,000, according to calculations by Mr. Aghdami, but one stretching 18 years saves almost $850,000.

Here's the big catch: The QPRT helps you sidestep the taxman, but you have to outrun death to get the benefit. If the parent dies before the trust expires, the children have to pay the estate tax on what the value of the house was when the parent died.

Consider the QPRT a gamble, but a reasonable one. It has to be set up wisely by a tax lawyer who consults actuarial tables after a frank talk with the client about his or her health and family medical history. But should the heirs lose when a parent dies early, said Mr. Aghdami, the tax lawyer with the firm of Williams Mullen, "they are no worse than if the parent had not set up the trust."

QPRT make the most sense when interest rates are high. The higher the interest rate, the greater the discount, which, in turn, increases the tax savings. When a home is put into the trust its value is not the current value of the house, but what is called the "present value" of the future gift - a deep discount. For instance, a $1 million home in a 12-year trust is valued at $370,460. The same house in an 18-year trust would be valued as a gift at only $185,400. (Don't worry. This is about the only complicated concept in setting up a QPRT, and fortunately the "present value" is determined by Internal Revenue Service formulas.)

The government sets those values reasoning that the heirs are not getting the value of the house right then. The money they would have received is worth less in the future, hence the discount. (It's the same concept that makes the cash value option of a lottery ticket's winnings less than the annual payout option.)

Of course, that ignores the possibility that the house increases in value. The QPRT makes a lot of sense, as the Robertses can happily attest, when real estate is expected to appreciate. "Even if it appreciates modestly, you are ahead of the game," Mr. Ellis said. In the event that prices drop, a house would have to depreciate a lot - say by half - before the trust makes no economic sense. That's unlikely to happen.

The ideal time for a QPRT, tax planners said, is after one parent dies. The widow or widower inherits the shared property at its stepped-up value, that is, not what the couple paid for it back in their day, but what its current value is. Then it is placed in the trust.

Getting the step-up is advantageous because it removes one of the few pitfalls of the QPRT. Normally with QPRT, the heirs get the property at the "cost basis," the price the parents paid for the property. Should the heirs sell it, they may have considerable capital gains. But estate planners point out that because the capital gains tax is only 15 percent and the estate tax is 46 percent, the QPRT, even with a cost-basis property, is still a good deal.

If the parent outlives the trust, the parent can continue to live in the house by paying the children fair-market rent. Turning their progeny into their landlords may be disconcerting for some parents. If they can foresee conflicts, maybe it's time to start spending so the last check written bounces or, alternatively, stick the greedy ingrates with the estate tax.

For everyone else who has what might be described as a loving and trusting relationship with their offspring, the rent-back feature is but one more tax benefit. "It's all good. They are continuing to transfer wealth downstream," Ms. Simchuk said.

Dick Kinyon, senior counsel at Morrison & Foerster in San Francisco, suggests another twist. After the QPRT expires, the house is owned by a grantor trust and rent is paid to that trust, so there is no income tax for the children to pay on the rent.

The QPRT is most popular as a vehicle to protect a treasured family vacation home. Often, no one in the family wants to sell it, so there is little concern about a capital gains tax. Paying rent for a vacation home is less of an emotional issue. "The fact that you rent it is a way to pass wealth onto the kids," Mr. Kinyon said.

A good estate and trusts lawyer will be brimming with ways to make these simple trusts even better by making them more complicated. If a parent wants to hedge against dying before a trust expires, a lawyer can ladder the trusts by putting a third of a home in a 3-year trust, a third in a 7-year trust, and the final third in a 10-year trust.

Splitting the home into several trusts has another virtue. Split ownership is deemed to reduce the value of the property, sometimes by as much as 30 percent. "People would have to have a certain tolerance for complexity," said Ms. Simchuk, the Seattle lawyer.

But over all, she said, "this is a no-brainer for estate planning; it's free money."

Strokes can kill. Get victim to hospital fast. You might save their life:

First you must recognize it's a stroke. Ask the victim three questions:

+ Ask him to smile.
+ Ask him to raise both arms.
+ Ask him to speak a simple sentence.

If they have trouble with any of these, call 911 immediately, and describe the symptoms to the dispatcher. For more,
click here.

Five Sexist Rules to living a happy life. (You didn't read them here. My wife will kill me.)
1. It's important to have a woman who helps at home, who cooks from time to time, cleans up and has a job.
2. It's important to have a woman who can make you laugh.
3. It's important to have a woman who you can trust and who doesn't lie to you.
4. It's important to have a woman who is good in bed and who likes to be with you.
5. It's very important that these four women don't know each other.

The Australian Tennis Open TV Schedule
January 23
2:00pm-6:00pm
16/Quarterfinals
ESPN2
January 23
9:30pm-1:30am
16/Quarterfinals
ESPN2
January 24
2:00pm-6:00pm
Quarterfinals
ESPN2
January 24
10:00pm-2:00pm
Quarterfinals
ESPN2
January 25
2:00pm-6:00pm
Mens Qtrs/Women's Semis
ESPN2
January 25
9:30pm-12:30am
Mens Qtrs/Women's Semis
ESPN2
January 26
3:30am-6:00am
Men's Semifinals
ESPN2
January 26
3:00pm-5:30pm
Men's Semifinals
ESPN2
January 26
11:30pm-12:30pm
Men's Semifinals
ESPN2
January 27
12:30pm-1:00am
Men's Semis/Women's Finals
ESPN2
January 27
3:30am-6:00am
Men's Semis/Women's Finals
ESPN2
January 27
3:00pm-5:20pm
Men's Semis/Women's Finals
ESPN2
January 27
9:30pm-11:30pm
Men's Semis/Women's Sinals
ESPN2
January 29
3:30am-6:30am
Men's Finals
ESPN2
January 29
12:00pm-3:00pm
Men's Finals
ESPN2

Recent column highlights:
+ Munich, the movie. A must-see. Click here.
+ Identity Theft precautions. Click here.
+ Dumb reasons we hold losing stocks. Click here.
+ How my private equity fund is doing. Click here.
+ Blackstone private equity funds. Click here.
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here. The full audio is available. Click here.
+ The March of the Penguins, an exquisite movie. Click here.
+ When to sell stocks. Click here.


Harry Newton


This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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