Yes, we continue to live in volatile times. Just check the recent performance of the stock market. In October, we witnessed an unprecedented surge of stocks of every size and sector over a three-week period. And that performance came on the heels of the three major indices--the Dow Jones industrial average, the Nasdaq composite index, and the Standard & Poor's 500 index--hitting all-time lows. So did we see the beginnings of a market turnaround or another sucker's rally? Quite frankly, it's hard to tell. One thing's for sure, though. The investment climate will continue to resemble that of a roller coaster. And the best way to brace yourself for the ride is through diversification. It's also a good time to pay down your debts. Among the best places to put your money this year--or any year--are your credit card balances. If your finances are stretched by plastic debt, pay it off. "Interest rates on credit card debt tend to be high, and that interest is not deductible," says Damon Dyas, a certified financial planner with American Express Financial Advisors in Southfield, Michigan. "Reducing your balances will make those monthly payments less painful." According to Bankrate Monitor (www.bankrate.com), the average interest rate on standard credit cards was more than 13% in late 2002. Thus, paying off your debt is the equivalent of earning more than 13%, after-tax, with no risk. Why put your money anywhere else? On the following pages, we will show you other places to stash your cash. We offer the best strategies to keep your finances on track for 2003--and beyond. MUTUAL FUNDS: THE BALANCING ACT Stocks will come back." That's the view of Robert and Roxanne Chatman of Farmington Hills, Michigan. "We have 10 to 15 years before we retire," says Robert, a 51-year-old sales manager. "In that time period, we expect stocks to recover and outperform other types of investments, so we're putting our money into stock funds now." There's a difference, though. "Before, we were emphasizing funds that bought large-company growth stocks," says Roxanne, 49, who works as a manager with an auto parts company. "Now, we're putting more money into value funds, small-company funds, and foreign funds." In Roxanne's 401(k), for example, large-capitalization growth funds such as Janus Mercury--a '90s dynamo--isn't receiving a new influx of money these days. Instead, she's steering her contributions to Fidelity VIP Contrafund (large blend), T. Rowe Price Small-cap Stock (OTCFX; small blend), Templeton Foreign (TEMFX), and Van Kampen Equity and Income (ACEIX; a balanced fund holding large value stocks and bonds). Blend funds are those that aren't purists in either the growth or value style of stock picking. "We're not aggressive investors," says Robert, "and with two kids in college we're reluctant to take risks. So this type of balanced approach is likely to produce better returns than we'd get in bonds, before and after our retirement, without the volatility a portfolio of growth funds might produce." According to the Chatman's advisor, Dyas, large-cap growth funds led the way during the 1990s. "As a result," he says, "many portfolios were overweighted in that area, and many investors have suffered as those stocks fell in the past few years. Now is not the time to get out of stocks--you don't want to miss big days when the market turns around--but it is a time for diversifying. You don't know which asset classes will be the leaders so it pays to own different types of funds." Diversification may mean some portfolio shifts for investors seeking options. "Outside of Roxanne's 401(k), the Chatmans held AXP European Equity [AXEAX]" says Dyas, "but I thought they should have a real international fund rather than a regional fund. Therefore, I suggested they move money into Putnam International Growth (POVFX), which has an excellent record of picking stocks around the world." Not all of Dyas' favored funds are carrying American Express' proprietary AXP brand. "I also recommend Ariel Appreciation (CAAPX), Strong Advisor Small-cap Value (SMVAX), and Liberty Acorn (LACAX)," he says, reciting a menu of blend, value, and small-cap funds for investors who have a taste for something besides yesterday's house specials: large-cap growth funds. STOCKS:THE BULLS MAY BE RUNNING IN EUROPE Domestic stocks have taken a beating since early 2000, but foreign stocks have fared even worse. Through the third quarter of 2002, the S&P 500 was off 12.88% a year, for the last three years, but the leading international index, the MSCI EAFE index, lost a staggering 14.60% per year. Thus, if stocks rebound this year, offshore issues may bounce higher. Derek Sasveld, who helps direct portfolio strategy for the UBS Global Allocation fund, feels investors generally will find better values outside the U.S. now. The UBS position is that U.S. stocks are undervalued by roughly 10%, but foreign stocks are undervalued by as much as 20%, making them better buys. "Japan is slightly overvalued," he says, "so Europe can be assumed to provide the bulk of that undervaluation." Among his favorite foreign sectors: forest products and energy. "In forest products," says Sasveld, "we have a significant overweight position in Svenska Cellulosa, a Scandinavian [Swedish] firm with low-cost stands of timber, state-of-the-art production equipment, and operating costs that are half of those found in North America." In energy, Sasveld favors Italy's ENI and France's TotalFina. "Investors have driven up the stock prices of larger oil companies but have given smaller firms less attention," he says. "These two companies have higher returns on equity and faster production growth than the majors." What about U.S. stocks? Now may be the time to rake in some oversold blue chips. "Our recommendations include large-cap stocks that have strong cash flows, solid balance sheets, and dividend payouts," says Dyas, the American Express financial planner. "Examples include Procter & Gamble, Wal-Mart, Costco Wholesale, and Anheuser-Busch." BONDS: MAX OUT ON MUNIS If the skimpy yields on bank CDs and money market funds don't excite you, consider bonds. Morningstar Inc., the Chicago-based mutual fund research company, put the average bond-fund yield at 5.52% as of Sept. 30, while 10-year Treasuries were yielding a little more than 4% over the same period. The catch? Such yields are taxable so you might wind up with around 2.5%, after-tax, depending on your bracket. That's why investors like 37-year-old Dion Graham turned to munis to generate interest income and a tax break at the same time. "I'm happy I have money in municipal bonds," says Graham, a software company executive in Cerritos, California. "I locked in a 4.8% yield, after-tax; my bonds have appreciated a bit; and I had less money to lose in stocks during the past two years." Graham made his move in early 2001 when the economic downturn was becoming apparent. "I found myself having to lay people off and I realized the importance of having a cash reserve," he says, "so I moved a little more than 10% of my portfolio into municipal bonds as a reserve in case of a future emergency. With two young children [twins who just turned 3 years old], I thought I should be taking less risk in my portfolio, so I shifted some assets from stocks to municipal bonds." To receive interest that was exempt from state as well as federal income tax, Graham bought bonds issued in California. "I bought individual issues," he says, "which I plan to hold until maturity [20 years]. In case I run into a need for cash, though, I can sell them. I realize that there is a chance the bonds might lose value, but bond pr ices are likely to be fairly stable, certainly when compared with stocks." Antoinette Chandler, a financial advisor with Bank of America in San Francisco, says that she's currently advising clients in high tax brackets to buy municipal bonds maturing in three to five years. "That appears to be the best combination of risks and rewards," she says. "Yields may be around 3%, tax-exempt, and there's less chance of a loss of principal, in case interest rates rise." Individual municipal bonds may be a good alternative to municipal bond funds, according to Chandler. "Funds have expenses which can eat into your yield," she says, "however, bond funds are more practical for many investors. If you're investing through a fund, try to find one with a low expense ratio and a history of doing fairly well when the bond market has been weak." REAL ESTATE: PAPER OR PROPERTY While stocks have sagged, real estate values have risen. One way to put real estate into your portfolio is though real estate investment trusts (REITs) or REIT mutual funds. Equity REITs, the most popular kind, are essentially companies that own many properties and trade like stocks. During the past three years, REIT funds have gained nearly 13% per year, according to Morningstar. "They've had a good run," says Garry Bridgeman, first vice president-investments at Merrill Lynch in Atlanta, "and they belong in many portfolios. However, investors often rush into asset classes that have done the best recently. Sometimes you're better off with asset classes that have not performed as well lately." As an alternative to REITs, you might decide to own investment property directly. Last year, for example, Sonia Daniels, 31, bought a three-bedroom house in the Seven Hills area of Atlanta, her hometown. "It's an up-and-coming neighborhood, not far from downtown," she says. "I look for neighborhoods that are being revitalized because that's where you're likely to see properties appreciate." Daniels reports that she purchased the house for $89,000, paying 5% down. "The house needed a great deal of work," she says, "so I wound up putting around $25,000 into it. Today, that house is valued at $155,000." Since the house has been renovated, Daniels can either sell it or rent it out. "Today, with the weak economy, quick re-sales have become more difficult," she says, "so I'm doing more renting." The house rents for $1,200 per month, which is enough to cover the costs of interest, taxes, insurance, etc. "I might sell it eventually or just keep it for the ongoing income once the mortgage is paid and I own it free and clear," Daniels says. A few years ago, Daniels sold an insurance agency and went into the real estate business full-time. "If you're interested in owning investment property," she says, "start slowly. Make a small investment to see how it works. Your best bet might be to partner with someone in your community who has been doing this for a while." Whether you're buying for a quick profit or long-term gains, a real estate truism is that you make money when you buy a property at a good price, not when you sell. "Establish a relationship with a seasoned real estate appraiser so you can understand the true value of your prospective property," says Genevia Gee Fulbright, a CPA in Durham, North Carolina. "If you're planning to rent your property, positive cash flow should be your focus." That is, you want to be confident that the income from the property will exceed all the out-of-pocket costs, including mortgage interest. Real estate tax breaks may shelter that income and perhaps even provide a paper loss to offset other gains