Q. I am 29, an attorney with two years of practice, and single. For two years I have been maxing out my 401(k) and investing about 20 percent of my gross salary and bonus each year (or about $27,000) into a basic Vanguard S&P 500 fund. I put another $1,000 a month into a money market account, which I use for big purchases, furniture, travel, etc. and continue building an emergency fund.

During this time the stock market has gone nowhere but down and interest rates have continued to fall. Needless to say, it has been disheartening. I am now thinking about buying a home.

I have three questions:

(1)  Am I doing the right thing putting all of my money into the general market?

(2)  Do you think I am just going to buy a house and have a repeat as the "housing         bubble" bursts?

(3)  Should I be saving more or differently?

---J.W., by e-mail from Dallas


A. Basically, you're doing the right thing. You're taking maximum risk when you can most afford to take it. If market losses feel too horrible, you should reduce risk and put 25 to 50 percent of your new investment money in a fund that invests in Treasury Inflation Protected Bonds.  

Investing felt pretty terrible from 1973 through early 1981 but investors were eventually rewarded for tenacity. We may be in another such period.

The "housing bubble" is real but it isn't universal. The most exposed areas are the ones where housing prices have risen much faster than income and where people are paying a premium for ownership, like Boston or San Francisco.

I don't think that's the case in Dallas or in Texas. One way to make certain you avoid the bubble is to check the cost of any house you consider against its likely value as a rental. If there is an "ownership premium" don't buy.

While this is difficult to test in the single-family house market, it's very easy to test in the condo/townhouse market where units in the same complex may be rented or sold.


Q. In seeking higher yields have you looked into master limited partnerships (MLPs)? I'm sure you know that they are large stable businesses, mostly large oil and gas pipelines, that are allowed by law to do business as publicly traded limited partnerships. The net effect is that they pass through substantially all of their "distributable" cash flow to their unit holders. These distributions usually have little or no concurrent tax obligation. The unit holder's taxable cost basis declines and there is a tax liability when the unit is sold, most of it long term capital gains.

I have no connection with this industry and am not a stockbroker. I have been using these securities for a portion of my income needs in retirement.

---C.R., Athens, TX


A. Thanks for an excellent summary of these relatively obscure investment vehicles. Most have current yields in the range of 7-8 percent and a major part of the dividend is regarded as return of capital. This reduces your cost basis so that when the investment is sold, you'll have a capital gains tax to pay.

Because of their tax complexity, these investments definitely aren't for everyone. They can be very useful, however, as a way to work off some of the tax-loss carry forwards many investors have.

Here's how. You buy the MLP shares, hold until distributions reduce the cost basis, and then let your tax-loss carry-forward offset your capital gain. As a consequence, all income distributions are entirely tax-free. You might even get rid of your loss carry forwards before turning 100.

MLPs are also useful for older people looking for higher income without taxes. If   the shares are held until death, the unrealized capital gains will disappear at death.