The stock market drops 50 percent and comes up 50 percent, so you are back where you started, right? Not so right. After a moment of thinking about it, you probably realized the real math does not add up that way, but consumers see it that way in their mental accounting, a phenomenon that affects how people spend, save and invest their money.

If you were to ask people what the average of 3 and 5 is, they typically respond as follows: (3 + 5 = 8)/2=4. The average is 4.

If you were then to ask them for the average of a negative 50 and a positive 50 they would do the equation the same way. So the typical investors assume that if they are getting positive returns and negative returns that they are still doing fine.

So what if you were then to ask them, What is the impact of losing 50 percent one year and gaining 50 percent the following year? Back to your starting amount, right? Actually, that would work out like this:

Lets look at an example in which the gaining percentage is greater than the losing one. A return of +66 percent followed by -50 percent would seem to add up to an 8 percent return. But actually:

So, many people wrongly think that if they are getting a greater return than a loss, then they are doing well. But obviously thats not true. Another misperception is just how deep a hole is created by losses. A 100 percent return would be necessary to offset a 50 percent loss. But a 300 percent return is required to offset a 66 percent loss. And then 400 percent for a 75 percent loss.

So, the next time youre thinking about taking a risk, make sure you are doing an accurate mental accounting.

When investors consider mutual funds, they often hear warnings about the impact of fees and expenses on returns. But these seem invisible to investors, so what really is the impact?

A mutual funds fees and expenses may be more important than an investor might realize. Ads, rankings and ratings will often emphasize how well a fund has

. But according to the Securities and Exchange Commission (SEC), studies show that the future often is different. Fees and expenses can be a reliable predictor of mutual fund performance.

When considering a mutual fund, one of the most important numbers is the expense ratio, which tells you how much the fund costs. The ratio shows how much of the funds assets are paid to the portfolio manager and for other operating expenses. Typically, a fund pays an average of 1.5 percent of assets annually.

Three things typically figure into this ratio. The investment advisory fee pays the managers of the fund, which accounts for .50 to 1 percent. Then, administrative costs cover services such as record keeping, mailing and maintaining a customer service line, which can range from .20 to .40 percent. And often a fund will charge a 12b-1 distribution fee, which covers marketing, advertising and distribution services. This ranges from .25 percent to 1 percent of assets.

The upper range of these fees shows how high an expense ratio can be. And even though the fee seems to be just a few percentage points, it is

charged in down years, when it can represent a significant slice of the return. Also, over time, the fee can cut the ultimate return by nearly 50 percent, according to one analysis. With an initial $10,000 invested after 30 years of 10 percent returns (a bit optimistic, perhaps), the fund has made $174,494, but with a 2.5 percent expense ratio, it has lost $86,944, according to an analysis by .

But even that isnt the bottom line. There are still transaction fees incurred by the buying and selling of assets in the fund that go unreported, and that can double or triple the cost, according to Richard Kopcke of the Center for Retirement Research at Boston College.

Of the 100 largest stock funds held in defined contribution plans as of December 2007, trading costs averaged from 0.11 percent of assets annually in the quintile with the lowest costs to 1.99 percent of assets in the quintile with the highest costs, with a median of 0.66 percent, Kopcke found. But it is difficult for average investors to determine this percentage, he said.

The SEC has not been able to develop ways to report this percentage in the same way an expense ratio is reported, partly because fund managers say the number is too difficult to determine. One way to get an indication of the percentage is the funds turnover. The percentage of turnover shows at what rate stocks in the fund have been replaced. A high turnover rate would mean more fees.

The SEC last year required fund managers to disclose one year of turnover at the front of a prospectus in addition to the already required five years of turnover disclosed in the financial highlights section, according to a March 1 Wall Street Journal article. Turnover of more than 100 percent can indicate trading costs may be high, the

When people are working, they might not realize how big an impact taxes will have on their retirement lifestyle. Taxes end up being among the most significant expenses seniors face.

Once you start tallying up the federal, state and local taxes, you can see you have to be aware of how to mitigate the impact. One way is to choose a place to retire that does not have onerous state and local taxes.

For example, nine states have no state income tax, according to the Federation of Tax Administrators. They are

, income tax is limited to dividends and interest income.)

According to the Tax Foundation, the states with the highest tax impact are

. The foundation also says that Americans will pay more in taxes in 2010 than they will spend on food, clothing and shelter combined. Another factor to consider, if you have a large inheritance to leave, is whether the state has an estate tax.

If you move, the good news is the tax impact of selling your home is less these days. Thats because Congress changed the rules in 1997. According to the book The New Retirement, by Jan Cullinane and Cathy Fitzgerald, Some or all of the gain on the sale is not taxable as long as the taxpayers owned [the house] as their principal residence for at least two years during the five-year period ending with the date of the sale. The amount of gain that is not taxable is limited to $250,000 for a single taxpayer (or a single taxpayer limited separately) and $500,000 for a married couple filing a joint return. Significantly, unlike under the old law, this gain is eliminated from taxable income and is not deferred to reduce the tax basis of any replacement residence.

Cullinane and Fitzgerald also wrote that the sellers do not have to buy a replacement principal residence, so it especially benefits those wanting to downsize

The legal and tax information contained in these articles is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax advisor for advice concerning your particular circumstances.

A central target in financial reform has been derivatives. They have been blamed for the economic meltdown, and many people are calling for their strict regulation. So what are these financial rascals, and how do they affect the economy?

Derivatives protect people from a change in prices of an underlying asset. They began, generally speaking, as a hedge against changes in commodities prices. So, if you are a corn farmer and want to be able to plan on how much you will receive for your crop, you can agree on the price with a miller. The farmer is in a sense betting that the price will be higher or at least the same as the rest of the market at harvest time, and the miller is betting that the price will be lower or at least the same and the miller is ensured of a supply of corn. The result is stability for both parties. The agreement is derived from the underlying asset of corn. That is the essence of a derivative.

Derivatives also hedge against price changes in other financial instruments and can become far more complicated or exotic. An institution can buy a credit default swap (CDS), for example. Institution No. 1 would pay institution No. 2 to ensure that the value of an asset does not fall under a certain level. If the value does drop, then No. 2 would pay No. 1. When the value of real estate plummeted in 2007 and 2008, many No. 1 institutions were banging on No. 2 institutions doors to get paid. This was one of the factors leading to the economic collapse, when the overall value of the CDS market dropped from $62.2 trillion at the end of 2007 to $38.6 trillion at the end

of 2008, according to the International Swaps and Derivatives Association.

Another factor was collateralized debt obligations (CDOs). These are packages of debts such as bonds or mortgage-backed securities. The idea is to reduce risk by spreading it around. But some in finance, such as Warren Buffett, said that they instead spread risky investments to more institutions. So when the underlying, or derived, asset plummeted, the rug was pulled out from under everyone.

Although some, like Buffett, had sounded the alarm on derivatives, many people were surprised by the enormous impact the instruments had on the financial sector in the collapse of September 2008. Regulators were also surprised, because derivatives are often unregulated because they are essentially an agreement exchanged between parties but amount to a $400 trillion market traded over the counter (OTC).

Financial reformers want to shed more light on the market, but on April 21, a Senate committee went even further than that and approved tough standards that would force banks to get rid of their swaps trading operations. That rule might not make it to the final financial reform package, but it is certain that the eventual law will clamp down on derivatives in some way.

It might be easy, or even convenient to think that the worlds most successful people were just born with natural abilities which the majority of individuals dont possess, if you were to research these men and women carefully one of the common traits that you would find would be a thirst for knowledge and a dedication to learning.

The great scientists and captains of industry didnt just happen upon the skills and knowledge which led to their life-changing discoveries or their incredible power and wealth.

They acquired these things through devotion, commitment and continual effort.

They had a goal in sight and they worked tirelessly to achieve it without letting minor setbacks stand in their way.

Most people bemoan their fates and believe that they will never truly amount to anything and in many cases their predictions come true, not because of their lack of ability, but because of their lack of application.

It would be hard to imagine, for instance, the Richard Bransons and the Bill Gates of the world wasting valuable hours sitting in front of the television.

More likely, they were immersed in learning everything they could about their fields and industries in order to build their mighty empires.

Time is precious, so why not turn off the TV for just half an hour or an hour a day and devote yourself to becoming an expert in something that you feel passionate about?

Is Twitter About to Be Knocked Off Its Perch?

Twitter, the popular micro-blogging service with around 200 million users, suspended several rival mobile applications earlier this year, but it now looks as though one of those rivals might be set to go into direct competition by setting up its own alternative service.

Reports suggest that UberMedia, which owns applications such as UberSocial for the BlackBerry platform, Twidroyd for Android devices and UberCurrent for iPhones and iPads, plans to launch its own social network service that could be in direct competition with Twitter.

Although the limit of 140 characters in Twitter messages is what has characterized the service, it seems that users are simply finding this too restrictive.

In addition, there have been complaints by newcomers that the service is somewhat less than user-friendly.

Should UberMedia decide to go ahead with a rival service, those are likely to be two areas that it addresses, which could result in Twitter users defecting in droves, especially because the company already has the attention of many Twitter members through its existing applications.

Although it might seem inconceivable that anyone could come along and knock Twitter off its perch, one only has to look at how Facebook totally eclipsed existing social media sites such as MySpace.

Whether reports of UberMedias plans turn out to be accurate or not, however, remains to be seen.

But there will be another generation of such men and women in the next few decades and chances are, they will tread the same path as those who have come before.

So lets look at Warren Buffetts path as an example, shall we?

1) Start with a meat and potatoes small business and be your own boss.

Buffett made his fortune by doing things his way, not by following the crowd. In high school, Buffett and a pal bought a pinball machine to put inside a barbershop. With the money they earned, they bought more machines until they had eight different shops running their machines. When they sold the venture, Buffett used the proceeds to buy stock and start another small business. By age 26, hed become his own boss and amassed $174,000 or $1.4 million in todays money.

Dont fall for the temptations of a huge, immediate windfall business. Cut your teeth on the side, with something basic, reliable and small.

2) Mind the foxes who steal from the vineyard: small expenses.

In the famous book, The Millionaire Next Door, authors Stanley and Danko report that millionaires live well below their means. They budget, plan investments, and allocate their time, energy, and money into building wealth instead of displaying high social status.

Warren Buffetts companies are known for watching out for small expenses. Exercising vigilance over every expense can make your profits and your paycheck go much further.

The next time you spot a sale or online deal, check in with yourself to see if that $50 is better saved or invested than spent. It might seem like youre spending a relatively small amount of money, but it all adds up.

Warren Buffett advises his people to limit what they borrow. Living on credit cards and loans wont make you rich. Buffett never borrowed a significant amount of money, not even for investments or mortgages.

reports that millionaires parents did not provide economic outpatient care, and their own adult children are economically self-sufficient as well.

If you do give your teenager a credit card, make sure to set firm limits and specify use ahead of time. If they abuse the privilege, they lose the card. Do the same for yourself.

Very often those who supply the affluent become wealthy themselves. In fact, one of the best ways to make money is to sell products or services to those who already have money. Many people dont see these opportunities because theyre far too busy seeking money and security in the short term only.

Well, when Buffett began managing money in 1956 with $100,000 cobbled together from a handful of investors, he was dubbed an oddball. But he didnt allow others opinions to keep him from leaping into a profitable venture. Over and above, I might add, others with greater private means.

Lastly, I will suggest this: Get professional advice on new ventures and ideas. We are here for far more than just tax planning. I would love the opportunity to sit with you, and help you evaluate the direction of your financial life and point you in a new direction, should it be necessary.

Daniel, the Investor Coach of Virginia, is now entering his fourteenth year in the financial service industry. He is a 1978 graduate of The College of William and Mary School of Business Administration. He holds the professional designation of Certified Financial Planner professional, and has his Series 65 registration and Life and Health Insurance licenses.

Is Twitter About to Be Knocked Off Its Perch?

Broadridge Investor Communication Solutions, Inc. Copyright 2012

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