The recovery puzzle's missing piece

Investors, if you think US fortunes continue to drive the world economy, keep your money out of this market. But if you expect Asia and South America to lead the recovery, jump in now.

U.S. and global economic data have begun to diverge so greatly in recent months -- with sustained weakness here and a surge of strength overseas -- that it's a wonder we're all on the same planet.

The differential is more than just a matter for academics to discuss at the faculty club, because investors large and small need to decide, pretty much immediately, which set of data to believe.

Those who believe that American consumers, banks and factories are still the main engine of growth in the world are taking profits on recent gains in stocks, shying away from risk and husbanding cash. Those who believe instead that rising consumption and industrial might in Asia and South America are more important are going in the opposite direction, diving into risk with abandon.

We'll know who's right in the fullness of time, but in the near term, investors do not have the luxury of waiting. They must anticipate the future based on limited data, act now, and prepare to face the consequences if they're wrong. That makes this summer one of the most intense stretches of soul-searching for professionals in the past two years, as it will make and break careers, reputations and fortunes for years to come.

In a moment I'll tell you why data and psychology now favor bulls, but let's look at the story from the perspective of active practitioners rather than economists -- two private wealth managers who actually have to make decisions on behalf of clients, rather than just spout off with no consequences.

Worries and economic warts

Eric Sprott, a veteran fund manager and researcher based in Toronto, believes the buyers are in la-la land when it comes to interpreting economic data emanating from the world's largest economy. A few of his salient points include:

• A prolonged U.S. retail sales slump, highlighted by a same-store sales plunge of 32% last month at Abercrombie & Fitch (ANF, news, msgs), shows that consumers are in no mood to buy goods even if factories were ready to make them. A plunge of 5.1% reported by U.S. shopping malls in June was worse than the dire 4.5% forecast.

• Unemployment is not just the worst since 1983 -- 29% of the unemployed have been looking for work more than six months; the number of people taking unemployment benefits has reached a record 6.88 million; and six people are looking for work for every job opening, a fourfold increase from just a year ago.

• With consumers on the sidelines, U.S. industry is on the brink. Factories used only 68.3% of available capacity in May 2009. The lowest prior level since the Depression was 70.9% in December 1982.

• Despite the recent uptick in construction, new-home sales are down 73% from their 2005 high, and the cumulative loading of rail cars is down 19.2% from 2008's depressed levels.

• Price/earnings multiples on U.S. stocks, reflecting investor sentiment, fell only to a multidecade average at 16 rather than to the single-digit lows seen in prior deep recessions.

Sprott concludes by listing three scenarios for his clients: If S&P 500 earnings stay constant at $63.03 and price-to-earnings multiples hit cycle lows at 6 due to worsening sentiment, he sees the Standard & Poor's 500 Index ($INX) falling to 378. (It closed at 987 on Thursday.) If earnings are halved, as they have done three times in the past 30 years, and the P/E stays constant at 16, the S&P 500 would fall to 506. If earnings are halved and the P/E hits cycle lows, he gets an S&P 500 value of 189 -- a true, old-school depression.

Sprott says only buoyant investor sentiment is keeping the market up, as earnings have not improved. "Keep it simple, stupid," he says. "Investing is and always has been about the real economy, and this market is ignoring the hard data."

Globalization's other face

Worried yet? Well, Chris Helton, research director at Paragon Asset Management in Seattle, isn't. In an interview he said Sprott's point of view is misguided.

Helton believes bears like Sprott are selecting only the data that make their points and missing noncorroborating evidence. He points out that P/Es have indeed come down by more than half, so what's the problem? Corporate earnings are stabilizing and show signs of going positive in the fourth quarter, and that's even more clear when you look at the S&P 500 without the volatile results of the banks and energy producers. And while more people are out of work, those who are working are enjoying rising real incomes because of low inflation and improving wages.

Don't focus just on struggling retailers, which always have troubles forecasting demand, Helton says. Look at networking equipment titan Cisco Systems (CSCO, news, msgs), whose chief executive last week said he predicts 12% to 17% growth and sees productivity for the nation overall rising up to 3% annually, which would potentially equate to gross domestic product growth rising to around the normal rate of 4% by 2011. "The bears are always squawking about dangers at inflection points," Helton added. "But they're just projecting the recent past into the future," he said. Three months from now, he suspects, data will force the bears to reconsider.

If Helton is right, and I suspect he is, it's going to be in large part because U.S. companies are getting a huge boost from their international operations. Most North Americans don't pay enough attention to this data, but a quick synopsis from ISI Group analysts from the past week can shed some light.

The improvements, in many cases due to government stimulus, make your eyes bug out: Global vehicle sales are up 21% in the past seven months; steel production is up 15%; China's electricity production is up 14%; Korean GDP is up 9.7%; Japanese exports are up 20%; and Taiwan export orders are up 45% and industrial production is up 50% in the past five months. It's not just Asia, either: French consumer spending is up 3.4% in the past four months; Canadian retail sales are up 2.5% in the past five months; the Brazilian unemployment rate has fallen to 7.9% from 8.6%; and the Mexican unemployment rate has fallen to 5.7% from 6.2%.

This is not a trivial travelogue. These countries' companies are buying more Caterpillar (CAT, news, msgs) and Cisco equipment, organizing their sales databases with Oracle (ORCL, news, msgs) software and charging purchases on MasterCard (MA, news, msgs). Last summer, I wrote a column headlined "Warning: Worldwide wipeout ahead." Now the opposite seems likely, as the U.S. has an opportunity to follow the rest of the world out of recession.

Room to run

In short, while globalization has been fingered as a culprit that got us into this mess, fast-twitch global supply chains and software may actually get us out. Already it looks like one reason for second-quarter improvements has been the unprecedented speed with which companies have responded to their fear of a depression by slashing employment, capital expenditures, advertising and travel to levels that were well beyond necessary -- and unsustainable.

Now that unprecedented levels of worldwide fiscal and monetary stimulus have blunted the credit crisis and parried the recession, companies are doing well enough to beat analysts' panic-inspired earnings expectations. And those improvements in stock prices and the tone of hopefulness are likely to make consumers more optimistic, and thus more likely to spend in the third and fourth quarters of this year.

Even bulls are not calling for another rip-roaring move higher now to complement the 45% advance off the March lows that has already been recorded. But with so many investors still on the sidelines or short, paralyzed with disbelief and anxiety over having missed the initial move, you can probably count on an advance for the rest of the year even if it's punctuated with more 10% to 15% corrections such as the one just seen in June.

How Whole Foods profits in lean times

The purveyor of gourmet foods has retained customers without slashing prices through an effective promotional campaign stressing the 'values' to be found in its aisles.

If green shoots are what you seek, stop by the Whole Foods store in Paramus, N.J. Wander past the multihued display of locally grown flowers and into the oasis of produce for which the upscale grocer is known -- more than 20 types of leafy greens and pristine arrangements of flawless fruit, from rolling mounds of kiwis to deep bins of shiny crimson cherries.

Beyond that, the store stretches on and on. At 63,000 square feet, it's one of the biggest Whole Foods ever.

It opened in March as the recession was in full swing. Skeptics predicted it would elicit an underwhelming consumer response, but thus far the store has exceeded the company's expectations; in the words of CEO John Mackey, customer volume has been "phenomenal."

If Whole Foods Markets (WFMI, news, msgs) were perishable, it probably would have expired this past year. But instead, it’s holding its own in what's now been a yearlong assault on any store considered expensive.

While Whole Foods' most-recent earnings report wasn't dazzling -– year-on-year revenue was flat -– it wasn't dismal, either. And many analysts foresee increased sales when the Austin, Texas, company posts third-quarter financial results on Aug. 4. "We haven't been hearing that anywhere else in the luxury retail space," says supermarket analyst Scott Mushkin at investment bank Jefferies.

Such optimism has fueled the grocer's soaring stock price, up 159% this year. In the same period, shares of traditional grocers Safeway (SWY, news, msgs) and Kroger (KR, news, msgs) have each lost 19% of their value.

What's kept Whole Foods healthy? "We have shown that we can adjust if we have to," co-president and COO A.C. Gallo said.

One adjustment was to slow the pace of expansion. The company now expects to open half the stores it had planned for 2009. "We are moving a little more slowly," says Whole Foods spokeswoman Libba Letton. "We're (also) opening smaller stores."

The Paramus store was one of just three Whole Foods outlets opened in the second quarter. And the sprawling store may be one of the last of its kind as Whole Foods shifts from the megamart model and focuses on less labor-intensive stores, like one recently opened in Capitola, Calif., which, at 23,000 square feet, is half the size of most new Whole Foods outlets and about one-third the size of the Paramus store.

From the onset of the recession, Whole Foods has moved to prevent an exodus of customers. One-fifth of shoppers surveyed by research firm Retail Forward last summer said they had switched grocery stores to save money. Whole Foods' reputation as an expensive place to shop -- it's been nicknamed "Whole Paycheck" -- made it especially vulnerable to losing market share.

Instead of hunkering down and holding out for an economic recovery, Whole Foods experimented with ways of convincing America that it was, in fact, an affordable place to shop, without actually slashing prices storewide.

"Of course, we realized that everyone was trying to save money," Letton says. To make sure budget-conscious customers didn't write off Whole Foods, the retailer ramped up the marketing. "About a year ago, we launched a campaign to make our customers aware of the value that there was in the stores," she says.

The "values" Whole Foods is hawking vary from week to week and don't emulate the "everyday low prices" of a discount retailers like Wal-Mart Stores (WMT, news, msgs).

In a May conference call with analysts and investors, Walter Robb, the company's co-president and chief operating officer, cited research from Nielsen suggesting that negative perceptions about Whole Foods prices had declined from 20% to 10% in recent months.

"While it hasn't been an overnight shift, we believe we are starting to change the dialogue about our prices and, hopefully, the perception as well," Robb said.

Though analysts doubted Whole Foods' ability to flip its image, many, like Mushkin, are impressed. "It was actually a smart move to emphasize value in the store," he says. "It kept their customers coming in, even if those customers were trading down once inside the store."

If you don't believe Whole Foods is affordable, staff members such as Nancy Katz are happy to show you that it is. Katz sells Whole Foods' budget-friendlier image as part of her job as a "value tour" guide. By leading customers around the store and pointing out the deals, she aims to debunk the assumption that everything at Whole Foods is expensive.

On a recent tour, she flagged a sale on melons and organic lemonade selling for $1.99 a bottle. "You can't get that price at 7-Eleven," she said of the drink. She also emphasized the value of the store's private-label goods, pointing to a container of store-brand organic baby greens that sells year-round for $6.99 a pound.

Katz also noted that you'll pay a premium for organic food wherever you go, and added that a price point isn't everything:"Value means getting a good exchange for your money."

At least for now, Whole Foods shoppers seem to agree.

Financial planner as therapist?

Plunging portfolio balances seem to cry out for a little crisis counseling . . . but not everybody thinks your money pro is equipped to help you explore your feelings.

Shortly after Andrea and Rick Campbell got married, when Rick was fresh out of graduate school, Andrea's parents suggested the young couple could benefit from a trip to their financial planner. Before they knew it, the Reading, Mass., couple were being poked and prodded -- gently, but still -- by a man they'd just met.

They had a kid on the way. Any plans for more? Had they considered how they'd want to live if one or the other died? Rick found himself talking about his parents' divorce, his dad's death and his childhood messages about money.

"Are we going to get Prozac at the end of this?" Rick wondered. He caught Andrea's eye across the table: Was this financial planning?

Financial advisers have always considered themselves hand-holders and confidantes, and with the economy in flux, it's no wonder they're logging extra hours playing crisis counselors. But more and more planners think a sympathetic ear and a pat on the back don't go far enough, especially with clients nursing weak portfolios, even after the bounce-back from the March lows. Instead, thousands of planners and brokers are taking a cue from Dr. Phil, promising to improve your life while they manage your portfolio.

Putting it all out there

In spite of criticism that this new approach comes dangerously close to therapy, advisers are getting more comfortable asking the kinds of questions that would ruin Thanksgiving dinner. Shame, guilt, embarrassment -- it's all on the table, says James Weiss, a Connecticut planner who encourages clients to divulge their childhood money memories and practice meditation to focus on their priorities. Financial goals? Those are lower on the list.

"It's not about the money," Weiss says. "It's about how you want to live your life."

If it sounds touchy-feely, that's because it is. But it's not just the domain of ex-Deadheads; recently, it has moved firmly into the mainstream: Merrill Lynch Wealth Management trains its advisers to do "values clarification" exercises and daylong retreats with clients. Wells Fargo and its newly acquired Wachovia unit have hired psychologists and "family dynamics" counselors to detangle the thorny personal issues of their wealthiest clients.

The firms say it's more than just new-age pabulum; it helps them get to know their clients better, which leads to better financial planning. And, of course, it's a selling point.

"Anyone can allocate your portfolio," says Keith Whitaker, head of the family-dynamics practice at Calibre, Wachovia's financial-planning practice for its ultrawealthy clients. "We can help you talk to your kids."

Too awkward?

Not everyone thinks that's a good thing, however. Financial advisers are trained to recommend investments and manage money; for most, probing for deeply personal, sometimes painful details isn't in the curriculum. It's a process critics fear can go wrong without warning, making client and adviser uncomfortable.

"If you're going to open a can of worms, you'd better be prepared to do some good," says Michael Fitzhugh, a principal in the San Francisco office of money-management firm Aspiriant.

The bigger danger, though, may just be the awkward feeling that it's inappropriate and that sharing all those details effectively tangles heartstrings with purse strings. That's one reason advisers like it so much: The intimacy creates trust, making clients less likely to defect and more willing to ignore the dollars and cents. But it's possible to trust too much, as the investors who lost their life savings with fraudster Bernie Madoff discovered. And that raises a question: What does all that soul-searching do for the client?

Classes on empathy -- and 'vigor dancing'

To learn how to unravel clients' emotional knots, more than a dozen financial planners and a few curious civilians gathered in a ballroom at the San Jose, Calif., Doubletree hotel. Over a day and a half, they discussed parental betrayal and feelings of professional anxiety and inadequacy, practiced empathic listening ("When you said [blank], I felt . . .") and, for a brief moment, engaged in a strange ritual called "vigor dancing."

Advisers in the room say they wanted to learn how to engage their clients in a conversation about their unfulfilled hopes and, eventually, to encourage them to use their money to meet those aspirations. True, investment advisers have always talked loftily about meeting clients' goals. But that conversation is typically dominated by dollars and cents and a retirement timetable -- how much will it take to retire, and how soon can you get there? Let a "life planner" steer the process and it's more like a parent encouraging a wayward college student by asking questions like "What do you want to do with your life?"

For workshop leader George Kinder, founder of the Kinder Institute of Life Planning, that means requiring clients to ponder a series of questions, the last one a showstopper: "If you found out you had one day left to live, what would be your biggest regrets? What did you not get to do, who did you not get to be, what did you miss?"

There are other ways to get deep. At a daylong Merrill Lynch retreat, advisers meet clients outside the office for six hours of conversation that starts with the biggest money issues and challenges but moves quickly to a discussion of the personalities at play in the family. Outside Seattle, an adviser-training program called Money Quotient has developed questionnaires that ask clients to rank their satisfaction with their lives, evaluate their life balance and relive money memories. Whatever the method, the goal is to get clients to stop thinking about their money and start talking about their lives.

But what about the money?

Of course, all the empathy in the world doesn't make any more money for clients. Planners tend to have one investment philosophy -- and often, stocks and mutual funds they use over and over again -- and they stick to it. A psychological gut check might reveal that a couple needs more short-term money for emergencies or that their retirement dreams require life insurance, but when it comes to actual investments, they're all treated basically the same, says Stacy Allred, director of the wealth-structuring group for Merrill Lynch. "It's like choosing from a fleet of cars." All that talk about clarifying values is like a leather interior or a fancy sound system -- it's nice to have, but it doesn't get you more mileage."

That's what Martha Nossiff found when her adviser started adding "life planning" techniques to his practice. A Portsmouth, N.H., voice teacher, Nossiff noticed their conversations becoming deeper and more personal. But her planner used the same investments he'd been using for years, and when the market crashed, she and her husband didn't do any better than anyone else. In fact, after a 38% loss, the Nossiffs, who are both self-employed, considered working harder and longer to make up for what they'd lost. They did a long session of soul-searching with their planner and decided instead to work part-time during their retirement and allocate less than they'd planned on college for their children.

To other people, though, the money is far more important than any self-discovery process. Even advisers admit their attempts to connect with their clients don't always fly. In Marblehead, Mass., Chris Dowley recalled having disagreements with a client over things like how much life insurance the client should have and what Dowley saw as his "mechanical approach" to money. But the relationship really went downhill after Dowley suggested couples counseling for the client and his wife. "He got very angry," says Dowley. "He thought I was saying he was sick."

In New York, Lois Braverman, who runs the Ackerman Institute for the Family, says that while money managers are trained and licensed based on their ability to evaluate a client's tolerance for risk and invest his money accordingly, they're not trained to treat traumatic childhood memories or adult anxiety. Indeed, many advisers found themselves ill-equipped to handle their clients' panic and fear after last fall's crash.

In January, more than 800 advisers turned to an online seminar called "Volatile Times, Volatile Clients" for help. Offered by the American College, which trains financial planners, empathy was high on the tip sheet. Advisers were encouraged to call their clients and acknowledge their own feelings of anxiety and fear. "Be an empathic sharer," Larry Barton, the college's president, told the audience.

Psychologists say all this sharing creates the appearance of closeness, which breeds trust. Sure, investors want to have confidence in their adviser, but critics say that should come from consistent, ethical performance, not tearful self-disclosure.

And Sherri Morgan, associate counsel for the National Association of Social Workers, says putting too many emotions on the table can cloud clients' judgment. An adviser typically has complete access to client accounts; if an adviser also has access to a client's personal weaknesses, Morgan says, "the consumer is just that much more vulnerable."

What's in the mix

As clients fret about the future, advisers are finding new ways to talk to them. A sampling:

Staff Ph.D.s: Wells Fargo employs two psychologists to counsel its wealthiest clients and smooth out family disputes, though a bank spokesperson says they don't provide therapy. And as Wells Fargo absorbs Wachovia, it will also adopt the "family dynamics" practice at its Calibre unit, which employs a philosopher and a psychologist to work with that bank's ultrarich families.

Software solutions: Independent advisers are experimenting with new software like "myFinancial Reflection," a program developed by a social-worker-turned-banker in Michigan. Instead of dollars-and-cents calculations, users answer questions like "What do your values say about you?"

Accredited Financial Counselors: Adding to the mix-and-match certifications designed to show an adviser is qualified, an increasing number of brokers, planners and accountants are paying $850 for training that leads to the AFC designation. The self-study program includes sections on "listening skills" and "problem solving and intervention strategies."

Outside help: Citigroup hired the counselors at the Money, Meaning and Choices Institute in California to train salespeople who help the well-to-do handle trusts. By teaching advisers how to talk to clients about family relationships and inheritance issues, the idea is to address the emotions often raised by trusts, like "If Mom and Dad loved me, why didn't they just leave me the money all at once?"

Financial planner as therapist?

Plunging portfolio balances seem to cry out for a little crisis counseling . . . but not everybody thinks your money pro is equipped to help you explore your feelings.

Shortly after Andrea and Rick Campbell got married, when Rick was fresh out of graduate school, Andrea's parents suggested the young couple could benefit from a trip to their financial planner. Before they knew it, the Reading, Mass., couple were being poked and prodded -- gently, but still -- by a man they'd just met.

They had a kid on the way. Any plans for more? Had they considered how they'd want to live if one or the other died? Rick found himself talking about his parents' divorce, his dad's death and his childhood messages about money.

"Are we going to get Prozac at the end of this?" Rick wondered. He caught Andrea's eye across the table: Was this financial planning?

Financial advisers have always considered themselves hand-holders and confidantes, and with the economy in flux, it's no wonder they're logging extra hours playing crisis counselors. But more and more planners think a sympathetic ear and a pat on the back don't go far enough, especially with clients nursing weak portfolios, even after the bounce-back from the March lows. Instead, thousands of planners and brokers are taking a cue from Dr. Phil, promising to improve your life while they manage your portfolio.

Putting it all out there

In spite of criticism that this new approach comes dangerously close to therapy, advisers are getting more comfortable asking the kinds of questions that would ruin Thanksgiving dinner. Shame, guilt, embarrassment -- it's all on the table, says James Weiss, a Connecticut planner who encourages clients to divulge their childhood money memories and practice meditation to focus on their priorities. Financial goals? Those are lower on the list.

"It's not about the money," Weiss says. "It's about how you want to live your life."

If it sounds touchy-feely, that's because it is. But it's not just the domain of ex-Deadheads; recently, it has moved firmly into the mainstream: Merrill Lynch Wealth Management trains its advisers to do "values clarification" exercises and daylong retreats with clients. Wells Fargo and its newly acquired Wachovia unit have hired psychologists and "family dynamics" counselors to detangle the thorny personal issues of their wealthiest clients.

The firms say it's more than just new-age pabulum; it helps them get to know their clients better, which leads to better financial planning. And, of course, it's a selling point.

"Anyone can allocate your portfolio," says Keith Whitaker, head of the family-dynamics practice at Calibre, Wachovia's financial-planning practice for its ultrawealthy clients. "We can help you talk to your kids."

Too awkward?

Not everyone thinks that's a good thing, however. Financial advisers are trained to recommend investments and manage money; for most, probing for deeply personal, sometimes painful details isn't in the curriculum. It's a process critics fear can go wrong without warning, making client and adviser uncomfortable.

"If you're going to open a can of worms, you'd better be prepared to do some good," says Michael Fitzhugh, a principal in the San Francisco office of money-management firm Aspiriant.

The bigger danger, though, may just be the awkward feeling that it's inappropriate and that sharing all those details effectively tangles heartstrings with purse strings. That's one reason advisers like it so much: The intimacy creates trust, making clients less likely to defect and more willing to ignore the dollars and cents. But it's possible to trust too much, as the investors who lost their life savings with fraudster Bernie Madoff discovered. And that raises a question: What does all that soul-searching do for the client?

Classes on empathy -- and 'vigor dancing'

To learn how to unravel clients' emotional knots, more than a dozen financial planners and a few curious civilians gathered in a ballroom at the San Jose, Calif., Doubletree hotel. Over a day and a half, they discussed parental betrayal and feelings of professional anxiety and inadequacy, practiced empathic listening ("When you said [blank], I felt . . .") and, for a brief moment, engaged in a strange ritual called "vigor dancing."

Advisers in the room say they wanted to learn how to engage their clients in a conversation about their unfulfilled hopes and, eventually, to encourage them to use their money to meet those aspirations. True, investment advisers have always talked loftily about meeting clients' goals. But that conversation is typically dominated by dollars and cents and a retirement timetable -- how much will it take to retire, and how soon can you get there? Let a "life planner" steer the process and it's more like a parent encouraging a wayward college student by asking questions like "What do you want to do with your life?"

For workshop leader George Kinder, founder of the Kinder Institute of Life Planning, that means requiring clients to ponder a series of questions, the last one a showstopper: "If you found out you had one day left to live, what would be your biggest regrets? What did you not get to do, who did you not get to be, what did you miss?"

There are other ways to get deep. At a daylong Merrill Lynch retreat, advisers meet clients outside the office for six hours of conversation that starts with the biggest money issues and challenges but moves quickly to a discussion of the personalities at play in the family. Outside Seattle, an adviser-training program called Money Quotient has developed questionnaires that ask clients to rank their satisfaction with their lives, evaluate their life balance and relive money memories. Whatever the method, the goal is to get clients to stop thinking about their money and start talking about their lives.

But what about the money?

Of course, all the empathy in the world doesn't make any more money for clients. Planners tend to have one investment philosophy -- and often, stocks and mutual funds they use over and over again -- and they stick to it. A psychological gut check might reveal that a couple needs more short-term money for emergencies or that their retirement dreams require life insurance, but when it comes to actual investments, they're all treated basically the same, says Stacy Allred, director of the wealth-structuring group for Merrill Lynch. "It's like choosing from a fleet of cars." All that talk about clarifying values is like a leather interior or a fancy sound system -- it's nice to have, but it doesn't get you more mileage."

That's what Martha Nossiff found when her adviser started adding "life planning" techniques to his practice. A Portsmouth, N.H., voice teacher, Nossiff noticed their conversations becoming deeper and more personal. But her planner used the same investments he'd been using for years, and when the market crashed, she and her husband didn't do any better than anyone else. In fact, after a 38% loss, the Nossiffs, who are both self-employed, considered working harder and longer to make up for what they'd lost. They did a long session of soul-searching with their planner and decided instead to work part-time during their retirement and allocate less than they'd planned on college for their children.

To other people, though, the money is far more important than any self-discovery process. Even advisers admit their attempts to connect with their clients don't always fly. In Marblehead, Mass., Chris Dowley recalled having disagreements with a client over things like how much life insurance the client should have and what Dowley saw as his "mechanical approach" to money. But the relationship really went downhill after Dowley suggested couples counseling for the client and his wife. "He got very angry," says Dowley. "He thought I was saying he was sick."

In New York, Lois Braverman, who runs the Ackerman Institute for the Family, says that while money managers are trained and licensed based on their ability to evaluate a client's tolerance for risk and invest his money accordingly, they're not trained to treat traumatic childhood memories or adult anxiety. Indeed, many advisers found themselves ill-equipped to handle their clients' panic and fear after last fall's crash.

In January, more than 800 advisers turned to an online seminar called "Volatile Times, Volatile Clients" for help. Offered by the American College, which trains financial planners, empathy was high on the tip sheet. Advisers were encouraged to call their clients and acknowledge their own feelings of anxiety and fear. "Be an empathic sharer," Larry Barton, the college's president, told the audience.

Psychologists say all this sharing creates the appearance of closeness, which breeds trust. Sure, investors want to have confidence in their adviser, but critics say that should come from consistent, ethical performance, not tearful self-disclosure.

And Sherri Morgan, associate counsel for the National Association of Social Workers, says putting too many emotions on the table can cloud clients' judgment. An adviser typically has complete access to client accounts; if an adviser also has access to a client's personal weaknesses, Morgan says, "the consumer is just that much more vulnerable."

What's in the mix

As clients fret about the future, advisers are finding new ways to talk to them. A sampling:

Staff Ph.D.s: Wells Fargo employs two psychologists to counsel its wealthiest clients and smooth out family disputes, though a bank spokesperson says they don't provide therapy. And as Wells Fargo absorbs Wachovia, it will also adopt the "family dynamics" practice at its Calibre unit, which employs a philosopher and a psychologist to work with that bank's ultrarich families.

Software solutions: Independent advisers are experimenting with new software like "myFinancial Reflection," a program developed by a social-worker-turned-banker in Michigan. Instead of dollars-and-cents calculations, users answer questions like "What do your values say about you?"

Accredited Financial Counselors: Adding to the mix-and-match certifications designed to show an adviser is qualified, an increasing number of brokers, planners and accountants are paying $850 for training that leads to the AFC designation. The self-study program includes sections on "listening skills" and "problem solving and intervention strategies."

Outside help: Citigroup hired the counselors at the Money, Meaning and Choices Institute in California to train salespeople who help the well-to-do handle trusts. By teaching advisers how to talk to clients about family relationships and inheritance issues, the idea is to address the emotions often raised by trusts, like "If Mom and Dad loved me, why didn't they just leave me the money all at once?"

10 idiotic 'investment' ideas

From shares of bankrupt companies to vending machines stocked with gold bars, these are lemons to avoid. Don't pay for lunch with Warren Buffett, either.

With so much flotsam littering the investment universe, we usually limit ourselves to pointing you toward the few stocks, bonds and funds worthy of your portfolio. But occasionally there come along new products so hazardous to your wealth that they merit a spotlight all their own.

In our Hall of Shame, we list the most idiotic investment ideas around. Some are gimmicks, others prey on investors' fears, and a few are downright silly.

Single-state stock ETFs

In a pitch to local pride, one promoter is trying to launch exchange-traded funds that track indexes of Texas and Oklahoma stocks. Those states are in better financial shape than most, but in each case the ETF would be dominated by energy stocks. Moreover, why should anyone care whether a producer of oil and gas -- which, after all, are commodities -- hails from Dallas or Tulsa rather than Denver or Dubai?

Two years ago, a different outfit toyed with StateShares. It was the same idea, but on a national basis -- that is, a separate ETF for each of the 50 states. It never came to fruition, and just as well: The wheels would have come off the Michigan fund. The New York portfolio would have gone the way of AIG, Citigroup, Merrill Lynch and the rest of what used to be known as Wall Street. Good businesses just aren't this local anymore.

REITs under lock and key

How can you fathom a real-estate investment that denies you the opportunity to gain from rising property values? In a "nontraded," or private, real-estate investment trust, you pay a fixed price (typically $10) for each unit. You get regular dividends from the income produced by rents from the offices, shopping centers or what have you. But the private REIT units don't trade -- except during certain windows of time when you can redeem them to the issuer on the issuer's terms.

No problem, you may say, given that the shares of traditional, publicly traded REITs crashed during the bear market (along with so many other kinds of stocks). Property values will surely recover, however, and prices of public REITs will rise to reflect those higher values. But private REIT investors get no such benefit unless the trust liquidates -- and even then, double-digit-percentage sales charges and high annual fees will erode the gains. Moreover, many private REITs have suspended all redemptions. That has the regulatory group Finra examining the sale and promotion of these illiquid deals.

Overpriced buffet with Buffett

No offense to the Oracle of Omaha, but the Toronto investment firm that recently won an auction for the right to have lunch with Warren Buffett definitely overpaid. Even a few hours with the Great One isn't worth $1.68 million. Surely, whoever attends from the victor, Salida Capital, will walk away stuffed with folksy Nebraskan wisdom. And Buffett, after all, isn't keeping the money, which is going to charity.

A smarter way to pick Buffett's brain is to buy shares of Berkshire Hathaway itself. With $1.68 million, you could have bought 17 shares of Berkshire's Class A shares (BRK.A, news, msgs) at recent prices of about $95,000 each. And the folks at Salida would have had enough pocket change left over to cover the cost of traveling to Omaha next May for Berkshire's annual meeting, where Buffett normally waxes eloquent for hours about the markets, the economy and his company.

Currency roulette

True story: One day not long ago, a New York City subway car was lined from end to end with ads for a get-rich-quick trading scheme involving the dollar, the euro, the British pound and luck. To play, you need $2,000, an understanding of all the flashing numbers on your computer screen and the chutzpah to guess when and whether the U.S. dollar will be worth more or fewer scraps of the world's other currencies.

This game goes on all day and all night, so you can wake up that much richer -- or poorer. It's like electronic roulette at a casino, except roulette is undeniably a game of chance, while promoters of currency trading claim that "forex" (foreign exchange) involves skill and knowledge. An expert told us that 90% of those who try this stuff lose money. That's unacceptable for something that's held out as an investment rather than a wager.

Absolutely awful

The phrase "absolute-return fund" casts a wide net, but be especially careful with funds that claim they'll beat inflation by a certain number of percentage points each year. Putnam recently launched four such funds, which it hopes will beat Treasurys by one, three, five or seven points annually by darting among bond and stock sectors.

Morningstar has studied past returns of similar strategies and found that managers have come up pitifully short of meeting their lofty goals.

Clipped by hedging

The marketing materials for principal-protected funds sing a mighty sweet song: Here, finally, is an investment that lets you collect the stock market's gains while protecting you from ever losing money! But keep listening, and the song slips out of key.

Take the S&P 500 Capital Appreciation fund (SSPAX). The fund is indexed only to the price gains of the Standard & Poor’s 500 Index ($INX), meaning investors miss every penny of the market's dividends. The costs of hedging against the possibility of negative returns eat up a big portion of whatever measly gains you might still be left with -- assuming the people in charge know how to hedge. Plug your ears to this sales pitch.

A bankrupt strategy

It's a common temptation: A famous company's shares are down to $1 or even less, but it's still in business and people and politicians are anxious to save it (yup, think General Motors), so you buy the stock. You figure the upside is way more than the pittance you're putting out, and you hope that the bankruptcy court is lenient or that the company manages to find new financing and stays out of reorganization.

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The problem is that "old" stockholders generally get wiped out. Federal-Mogul (FDML, news, msgs), an auto-parts maker that was once in bankruptcy reorganization, is very much alive now. Its stock trades for $12, more than double the $5 it fetched early in 2009. But that's the new stock, issued post-bankruptcy. Those who paid as little as 15 cents or as much as $1.30 for old Federal-Mogul shares in 2006 and 2007 have only warrants that are nearly worthless, table scraps from the bankruptcy settlement. Similarly, you should avoid the shares of the old General Motors, now called Motors Liquidation Company (MTLQQ, news, msgs) as worthless.

Sucker bet on housing

In the chasing-a-horse-that's-already-out-of-the-barn department, Yale professor Robert Shiller has put his prestige behind two exchange-traded products that allow you to bet on U.S. home prices. Specifically, the MacroShares Major Metro Housing exchange-traded securities let you chase either three times the movement of the Case-Shiller index of home prices in 10 major U.S. cities or three times the inverse of the index's movement. Or at least that's the idea.

Because of technical quirks, the securities are unlikely to track the indexes properly. Instead, investor expectations for housing values will likely determine how the securities trade. But the timing of the products' launch -- just as the end of the long slide in housing prices is finally coming into view -- and their 1.25% expense ratios are the biggest strikes against this dumb idea.

Raw deal in real estate

It sounds as if we're picking on real estate, but here's another really wacky idea involving property: Buy a vacant house in a supposedly cheap neighborhood from one of those outfits that say "we buy ugly houses," pray for divine intervention and wait for a developer or speculator to take the property off your hands.

This isn't the same as buying a habitable house, a strategy that can work if you know something about being a landlord. We're talking about bricked-up hulks in derelict parts of cities that haven't been livable since the '50s. The Web pitches are enticing -- and the prices are superlow -- but even vacant properties will drain you for taxes, insurance and security.

Gold bars just left of the Snickers

Yes, vending machines that spit out gold bullion are now popping up in airports and train stations. So far, the "Gold to go" machines, dreamed up by German company TG-Gold-Super-Markt, have been installed only in Germany, but the company says it plans to expand to other European locations, notably Austria and Switzerland. Travelers can buy small coins, wafers and bars of up to 10 grams for a whopping 30% markup over market prices. In test runs the machines had some trouble giving the correct change.

Where bailout money goes to die

Bailout architects have argued that the government is likely to get most of its money back. But it's becoming clear that taxpayers can kiss a chunk of that money goodbye.

When CIT Group (CIT, news, msgs), a medium-sized lender, faced the threat of bankruptcy recently, it raised an uncomfortable prospect for the officials in Washington managing the financial system bailout.

CIT got $2.3 billion in bailout funds last year -- yet it was still failing. And the government decided not to offer any more help. So if CIT declared bankruptcy, taxpayers would be out their $2.3 billion.

CIT has averted bankruptcy, for now, but its brush with insolvency highlighted one of the biggest risks of the entire bailout scheme: that taxpayers won't get their money back.

That problem has been overshadowed recently by some good news from firms like Goldman Sachs (GS, news, msgs) and JPMorgan Chase (JPM, news, msgs), which have paid back loans they got under the government's Troubled Asset Relief Program. So far, 34 companies have returned about $72 billion in TARP funds to the government, according to a bailout tracker maintained by journalism site ProPublica.

But nearly 700 firms have received bailout money, and many of them are still in rough shape.

To gauge how much bailout money may be at risk, we asked the Ethisphere Institute, a private research group that studies corporate responsibility, to identify who the biggest TARP-jumpers are likely to be. Ethisphere publishes a TARP Index Report, updated weekly, that measures the financial performance of all TARP recipients and calculates the "return" to taxpayers if the bailout funds are treated as an investment in the companies that got them.

By that measure, the government has been a poor investor, losing about $148 billion so far -- $1,233 per U.S. household. Ethisphere analyzed the same data, including results from the Federal Reserve's recent stress tests, to identify companies most likely to write off their debts to the federal government, either partly or completely.

Bailout architects like Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have argued that the government is likely to get most of the bailout money back, which would make it more like an interest-bearing loan than a giveaway. But since the bailouts began last fall, a number of developments have made it clear that the feds -- and the taxpayers -- can kiss some of that money goodbye.

Ethisphere estimates that the following nine companies could end up costing the government the most when the final bailout accounts are tallied. Together, they account for nearly $220 billion in government bailouts, including TARP money and other funds.

AIG (total bailout received: $85 billion). It's hard to imagine a more complicated bailout than this monstrous money hole. The $85 billion includes $40 billion in TARP infusions and about $45 billion in loans from a government credit line. The Federal Reserve has paid an additional $47 billion for troubled AIG securities, which it hopes to resell at some point in the future. And American International Group (AIG, news, msgs) can still tap another $30 billion in credit lines extended by the government.

All of that money has bought the feds 79.9% of the insurance giant -- the most it can own without triggering accounting rules that would effectively nationalize the whole company. To pay back the government, AIG has developed a long-term plan to break itself up and sell off various insurance divisions and other assets.

But the horrible economy makes it a fire-sale market, with many bids coming in at less than half the asking price. So it could be three to five years before all of AIG's assets have been spun off. The government's exposure should shrink later this year, when the $45 billion credit line drops to about $20 billion. But Ethisphere predicts that the government will recoup far less than what it has plowed into the sinking firm.

Chrysler ($14.9 billion). In March, the government gave Chrysler $7 billion to stay afloat. That money essentially disappeared when the company declared bankruptcy in April.

Then the government provided Chrysler an additional $8 billion in financing to help it exit bankruptcy in exchange for an 8% ownership stake in the new Chrysler. The idea is that Chrysler will go public at some point, sell shares and buy out the government's position. But the return to the government will probably be well below face value, since it holds a relatively small stake in a company that's still endangered.

"The government will get back materially less than its $8 billion principal," says analyst Stefan Linssen of Ethisphere.

CIT Group ($2.3 billion). A string of strapped borrowers and a heavy debt load have nearly sunk CIT, which lends money to small and medium-sized businesses. The company escaped a bankruptcy in mid-July when bondholders provided fresh funds to keep it operating. But the interest rate is high, and many analysts think a bankruptcy filing is still likely. The Treasury Department, meanwhile, has hinted that it has already written off CIT's $2.3 billion in TARP funds.

Citigroup ($45 billion). The huge bank posted a $4.3 billion profit in the second quarter, but that's only because it spun off its valuable Smith Barney brokerage unit. Otherwise, Citigroup (C, news, msgs) would have lost money, and by almost any measure, it is a deeply wounded bank.

Citigroup's market value is just $16 billion -- one third of the government's cash investment in the company. For the foreseeable future, Citi is likely to wrestle with mounting losses on credit cards and other consumer loans. In addition to $45 billion in TARP funds, the government has guaranteed a humongous pool of dodgy Citigroup assets worth $301 billion.

Citigroup paid $7 billion for the insurance and must absorb the first $39.5 billion in losses. But after that, the government would bear 90% of any write-offs. That gives taxpayers long-term exposure to Citi's troubled balance sheet.

Chief Executive Vikram Pandit has insisted his company is on a path back toward sustained profitability, which will allow it to pay back the government. But Citi hasn't announced any timeline for paybacks.

General Motors ($50.7 billion). That long-forgotten $13.4 billion bailout last December was just a down payment, it turns out. Through bankruptcy funding and other expenditures, the government has nearly quadrupled its investment in GM (MTLQQ, news, msgs), in the process gaining 60.8% ownership of the new company. For the government to get all of its money back, Ethisphere calculates that GM would have to achieve a market value of $80 billion -- which would be 43% higher than GM's value in 2000 when the automaker was highly profitable and much larger.

With half as many divisions now and falling market share, it's hard to see how GM could ever reclaim its former glory (or profits).

Ethisphere estimates that taxpayers will be lucky if they get back $20 billion, a mere 40% of their investment in GM. GM argues that its implied market value, taking into account the prices its bonds are trading at and other factors, will allow a higher repayment, closer to $34 billion. And that could go up, GM insists, if the company does well.

GMAC ($12.5 billion). GM's car-financing arm also writes mortgages, which got it into deep trouble, forcing the lender to take more bailout money than any bank except for Citi, Bank of America (BAC, news, msgs) and Wells Fargo (WFC, news, msgs).

Part of GMAC's funding came with the auto bailout, to help ensure that car buyers who want to buy GM or Chrysler vehicles can get loans. But Ethisphere believes that with GMAC's vast exposure to two depressed industries -- cars and homes -- at least $5 billion of GMAC's TARP funds are a complete write-off.

GMAC says otherwise, insisting that it's taking the necessary steps to strengthen its business. "We intend to repay the full TARP investment over time and have been making scheduled dividend payments on the investment," says spokesperson Gina Proia.

Marshall & Ilsley ($1.7 billion). This bank holding company, parent of M&I Bank, is headquartered in Wisconsin, but it made thousands of housing, construction and commercial loans in Arizona, one of its target markets during the go-go years. With a huge housing bust in Arizona, many of those loans are now worth far less than their face value.

That makes M&I one of the most vulnerable regional banks. Ethisphere believes the government could lose $1.3 billion, more than three quarters of its investment in Marshall & Ilsley (MI, news, msgs).

The company says it is confident that the government will get all of its money back, plus dividend payments. The bank also argues that it has higher "capital ratios" than many other banks of its size and points out that it recently raised $552 million through an equity offering, "clearly indicative of the market's belief that the (government's) capital will be repaid."

Regions Financial ($3.5 billion). This Birmingham, Ala., bank has been losing a bundle from bad mortgages and other loans, mainly across the South. And its CEO said recently that losses are likely to get worse for the foreseeable future.

Ethisphere believes taxpayers will be lucky if they get half their money back. A spokesman for Regions Financial (RF, news, msgs) says the bank plans to pay back its government loans in full, pointing out that the company has $6.9 billion more in reserves than the required minimum, and recently raised $2.5 billion in the private markets.

Zions Bank ($1.4 billion). Utah has fared relatively well during the recession, but this Salt Lake City bank hasn't. That's because its core markets include California, Arizona and Nevada -- ground zero for the housing meltdown.

Zions Bancorp (ZIONS, news, msgs) has lost nearly $900 million so far this year and remains exposed to housing woes. Ethisphere tallies Zions as another 50% write-off, meaning taxpayers might get back just $700 million.

The company says it has plenty of earnings power and reserves to offset future losses, and points out that it recently raised $511 million in capital from the private markets."Zions believes the company has the long-term capacity to repay TARP in full at the appropriate time," says spokesman James Abbott.

Big changes for state tax laws

To bridge budget gaps this year, several states are levying large taxes on high-income earners and raising sales taxes. But a taxpayer group sees flaws.

Think millionaires are the only folks facing tax hikes this year and next? Think again. At least half a dozen states raised income tax rates for their highest earners this year. In many cases, the increases affect employees earning $150,000 or less annually.

"I wish we had a better term for these taxes than millionaire taxes because the threshold in which they kick in keeps dipping lower and lower," said Joseph Henchman, tax counsel at the Tax Foundation, a nonprofit taxpayer group that monitors federal, state and local levies.

The Tax Foundation released its first midyear analysis on state taxes July 29. The organization typically publishes annual reports. This year, however, the organization released an early review due to the large number of states that have changed their tax codes in the past several months. The most high-profile example is California. The state faced a $24 billion budget deficit. Earlier this week, California Gov. Arnold Schwarzenegger cut spending by $16.1 billion in order to balance the state budget and stop issuing IOUs to vendors. Five months ago, the state also raised income taxes for all brackets by 0.25 percentage points, retroactive to the start of the year.

California is far from the only state to raise income taxes to balance the budget. Hawaii, New York, Delaware, New Jersey, Oregon and Wisconsin all raised taxes on workers in the top income brackets.

• Hawaii: The state added three new income tax brackets in May. Before the changes, the state levied an 8.25% tax on all income above $48,000 a year. Under the new rules, which are retroactive to Jan. 1, income of $150,000 or more is taxed at 9%. Wages greater than $175,000 are taxed at 10%. Incomes of $200,000 or more are taxed at 11%.

• New York: The Empire State raised taxes on earners making $200,000 a year or more. Workers earning $200K saw their state taxes increase from 6.85% to 7.85%. Workers earning $500K per year saw an even greater increase, from 6.85% to 8.97%. The new rates are retroactive to the start of the year and are intended to last three years. They do not include local taxes. Cities such as New York City charge heads of households as much as 3.2% on all annual income over $60,000.

• Delaware: This state increased its top income tax rate a percentage point to 6.95% in July. The new rate, which impacts those earning more than $60,000 a year, is expected to take effect Jan. 1, 2010.

• New Jersey: The Garden State levies the highest property taxes in the nation. The state now also has the distinction of being one of the most expensive places for "millionaires" to live in terms of income tax. The state added three new tax brackets this year for earners making $400,000 or more. The income tax rate for employees earning $400,000 jumped to 8% from 6.37%. Those earning $500,000 will pay 10.25%. Workers making seven figures or more will pay an income tax rate of 10.75% on every dollar at or above the $1 million mark. The new tax rates are intended only for the 2009 tax year and are retroactive to Jan 1.

• Oregon: This state adopted two new brackets for top earners. Now, residents earning more than $125,000 will pay 10.8% instead of 9%. Those earning more than $250,000 will pay 11%. The new rates apply to tax years after Jan. 1, 2009, and before Jan. 1, 2012. In 2012, the state plans to reduce the 10.8% rate to 9.9%. The impact of the hikes may not be as bad as it first appears, however, since Oregon does allow residents to deduct federal taxes from their state taxes.

• Wisconsin: In June, the state added a new tax bracket for people earning more than $225,000 a year. The tax rate on these earners rose from 6.75% to 7.75%.

The state tax hikes combined with proposed federal increases on high-income workers may effectively raise the marginal tax rate well above 50% for those in the top brackets. In states with "millionaire taxes," many may see their taxes jump to 55%.

States are overhauling their tax systems in an attempt to bridge massive budget gaps. High unemployment, combined with plummeting property values, last year's stock market declines and reduced consumer spending, has left many states facing revenue shortfalls of crisis proportions. Receipts from income taxes on income, property, sales and capital gains have fallen drastically for many states.

"Obviously states have been having trouble trying to balance their budgets right now," said Mark Robyn, a staff economist at the Tax Foundation.

Tax Foundation economists say the focus on hikes for the highest earners may backfire for some states. Raising taxes on people earning above $100,000 a year -- about 126% more the average American's annual salary of $44,254 -- does give states more income in the short run. But in the long run it can discourage high earners from producing more, curb their business investments and push them to move to nearby states with lower income tax rates, said Henchman. Relying on high earners can also leave states vulnerable to future budget shortfalls, since high earners tend to rely more on capital gains and bonuses to pad their incomes -- both of which fluctuate wildly depending on the state of the economy and the markets.

"Rather than just take a politically unpopular minority of people to fund their services, they should focus on broad-based taxes," said the Tax Foundation's Robyn. "That is really only a temporary band-aid that can hurt economic performance in the long term."

Many state officials say they have little choice but to raise rates on the rich. Many argue that they can't cut state services any more and need to raise revenues somewhere. They're loath to raise corporate taxes for fear that businesses will cut back on hiring.

Wages have remained stagnant for many in lower income brackets. And many state officials fear that additional taxes levied on working-class or middle-class consumers will only further curb consumer spending, reducing both business profits and tax receipts.

Still, some states are not hoping that the "rich" will solve all their budget problems. Other states are turning to sales tax increases and additional taxes on alcohol and cigarettes to pay for services. Massachusetts, for example, has raised its sales taxes 25% to 6.25%. California has raised its sales tax to 8.25%, the highest in the nation.

The danger in raising sales taxes, of course, is that struggling Main Street businesses will suffer as their goods become more expensive than those in other states.

"This is definitely going to be a problem going forward," says Kail Padgitt, an economist at the Tax Foundation focusing on sales tax. "In Massachusetts, it's easy to drive over to New Hampshire (where there is no sales tax) and purchase goods there. This can hurt the state's competitiveness."

Not all states are responding to budget shortfalls with tax hikes. Maine actually plans to lower its tax rates for high-income earners starting Jan. 1, 2010. Workers earning annual salaries between $20,150 and $250,000 will see their rate drop from 8.5% to 6.5%. Employees earning more than $250,000 a year will see their rates decrease to 6.85% from 8.5%. Vermont and North Dakota are also reducing income tax rates this year.

Those who didn't see tax increases this year, however, could see them next year. As unemployment continues to rise, states will see more pressure on their budgets. That could lead to additional shortfalls and tax increases, said Henchman, of the Tax Foundation.

"Right now a lot of states closed their budgets gaps," he said. "But given that the national economy, if it has recovered, is only starting the recovery, the fact is that state government revenues will not be bouncing back during fiscal year 2010. At best they will plateau and, at worst, budget gaps will continue to open, requiring spending cuts or tax increases."

How much should you spend on . . .

Housing? Groceries? The truthful, frustrating answer is 'it depends.' Now there's a simple -- but not easy -- way to figure it out, and it works regardless of your income.

For years, I struggled to help people answer a fundamental budgeting question: "How much should I be spending?"

Most who asked were looking for specific answers about what they should devote to various categories such as housing, food, transportation, utilities and so on.

The answer I used to give -- that there's no one-size-fits-all solution -- was really unsatisfying. It's true, of course, because people's circumstances vary so widely. But it wasn't very helpful to people trying to create a workable budget.

Then Harvard bankruptcy professor Elizabeth Warren and her daughter Amelia Warren Tyagi wrote a terrific book called "All Your Worth: The Ultimate Lifetime Money Plan," and I finally have an answer that works.

It's simple, if not easy. It's designed to work for any income. Its purpose is to help you live your life while building financial security and minimizing the chances a setback will send you over the edge.

It's the 50/30/20 budget. Here's how it works:

You start with your after-tax income. That's your gross pay minus any wage-based taxes, such as withheld income tax, Social Security and Medicare taxes, and disability taxes. If your employer deducts other expenses from your paycheck, such as 401k contributions, health insurance premiums and union dues, add those back into your net pay to get your after-tax income.

You aim to limit your "must-have" expenses to 50% of that after-tax figure. "Must-haves" include all the basic expenditures you really need to make each month: outlays for housing, utilities, transportation, food, insurance, child care, tuition and minimum loan payments. If you can delay a purchase for a few months with no serious consequences -- for example, clothing or dining out -- it's not a must-have. If you're contractually obligated to pay something (a credit card minimum, child support or a cell phone bill), it's a must-have, at least for now.

Your "wants" can consume 30% of your after-tax pay. Vacations, gifts, entertainment, clothes, eating out and other expenses are all "wants." Some bills you pay might overlap the two categories. For example, basic phone service is a must-have. But features such as call waiting or unlimited long distance are wants. Internet access and pay television are two other expenditures that can feel like must-haves but usually are wants, unless you're on some kind of long-term contract.

Savings and debt repayment make up the final 20% of your budget. Warren's a bankruptcy expert, remember, and she knows the devastation that results from too much debt and too little savings. To achieve financial independence and minimize the chances of disaster, you need to get rid of consumer debt, save for retirement and build your emergency fund. Any loan payments you make above the minimum belong in this category, as do contributions to your retirement and emergency funds.

(If you pay your credit cards in full every month, by the way, your credit card bills aren't debt. You don't assign the credit card payments themselves to categories; instead, you allocate each individual expenditure on the bill to its appropriate category and that's it.)

I said earlier that this budget plan isn't easy, and it's not. Limiting your must-haves to 50%, especially, is flat tough for most of us.

My husband and I make a generous income, and we have affordable mortgage payments and no other debt. But the first time I did this exercise, our must-haves consumed more than 60% of our after-tax income. It took a year of trimming, and some more income, to get us to the 50% mark.

We were lucky. I've heard from other people whose must-haves consumed 75%, 80% or even more of their after-tax pay. Fixing that can take a while.

You may be discouraged by how far you are from the ideal. But running the numbers can help you understand why your money isn't working for you. If basic overhead consumes so much of your paycheck, it's no wonder you have trouble saving, paying off debt and living the rest of your life.

If it's so hard to keep to the 50% limit, why do it? Several good reasons:

• It gives you flexibility. Your income could drop by half and you'd still be able to pay your essential bills. When your must-haves eat up more of your income, you have less ability to cope with setbacks such as layoffs, reduced work hours or unexpected expenses.

• It helps you figure out what you can and can't afford. If you're considering adding a loan payment or other contractual obligation to your overhead, you simply check to see if it would push you over the 50% mark. If not, you can consider adding the payment; if so, you don't.

• It gives you balance. Limiting your overhead allows you to have money for the pleasures in life, such as dinners out and vacations, without stress. It also allows you to get out of debt and save for your future.

So what should you do if your numbers are out of whack? Remember that the 50/30/20 plan is a goal to work toward, not something you'll necessarily achieve overnight. And if you're already in financial crisis -- you're unemployed, for example, or suffering through a disability -- true balance may have to wait until the crisis has passed.

But here are some places most people can tweak:

• Food. You've got to eat, but most of us could trim our grocery bills, often substantially, without too much effort. Plan your meals, cook from scratch, use up leftovers, clip coupons -- you know the drill.

• Utilities. You want the lights to stay on, but the air conditioner doesn't have to blast 24/7.

• Transportation. More carpooling and public transportation, less time alone in your car. If it's your car payment that's killing you, read "The real reason you're broke."

• Insurance. Higher deductibles can help reduce your premiums, as can shopping around and taking advantage of all available discounts. Ditch insurance you don't need, such as life insurance if you don't have financial dependents, or collision and comprehensive coverage on a clunker.

• Ditch the contracts. Early termination fees might make canceling your cell service too expensive, for example, but once your contract is up, consider switching to prepaid or pay-as-you-go service. Unless you're a real gym rat, gym contracts are another expense to shed as soon as you can. Consider paying by the visit or signing up at the local Y, which offers monthly billing without long-term contracts.

Other costs are tough to winnow but may be worth the effort. If you're paying too much for housing, you may need to consider a roommate or a move to cheaper quarters. If your child care expenses are eating you alive, brainstorm other alternatives. Several posters on the Your Money message board have found solutions, from sharing nannies to less-expensive day care (that turned out to be better) to changing their work hours so that one parent could always be at home.

You may think it's your income, rather than your expenses, that's the problem. That could be true, and if you can boost your income, go for it. But people can balance their budgets and save money on virtually any income, as MSN Money columnist Donna Freedman wrote in "Surviving -- and thriving -- on $12,000 a year."

If it's your debt that's unmanageable, you may need to consider some more drastic solutions -- credit counseling, debt settlement, bankruptcy or foreclosure. Some bills are simply impossible to pay, despite your best efforts, and you may need help or a fresh start.

Once you get back on your feet, though, the 50/30/20 plan can help you stay there.

Why this recession feels so bad

By some indicators, previous downturns were more severe. But none since World War II has caused so much pain on so many fronts.

What makes the current recession so bad? Other downturns have been more painful by some measures, but none since World War II has delivered so many severe blows to the economy at the same time.

Already it is the longest. The nonprofit National Bureau of Economic Research, which determines when the U.S. economy slips into recession, says the downturn began in December 2007, 19 months ago. That makes it longer than the wrenching, 16-month recessions of 1973-75 and 1981-82.

The unemployment rate is approaching the peak seen in the 1981-82 recession, and the scope of job losses is the worst since the 1948-49 recession. The decline in gross domestic product is the deepest since the 1957-58 downturn, and Americans haven't seen so much of their wealth evaporate since the Great Depression.

The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months."

Among the gauges the organization watches are GDP and employment, as well as income, sales and industrial output. Even if the current recession is, as many economists believe, at or near its end, it already looks worse than its postwar predecessors.

With a dwindling number of people who remember the Great Depression, the 1981-82 recession is many Americans' high-water mark for economic pain. To tame that era's rampant inflation, the Federal Reserve pushed short-term interest rates above 20%, slamming the brakes on the economy. Millions lost their jobs, pushing the jobless rate to 10.8%.

Last month, the unemployment rate hit 9.5%. But most economists forecast it will keep climbing even after the recession ends because businesses will remain cautious about hiring. Making matters worse, the economy needs to add some 100,000 jobs a month to keep pace with population growth.

While the unemployment rate isn't yet as high as in the early 1980s, the job losses associated with this recession already have been deeper because the downturn started with a lower unemployment rate than in the 1981-82 slump. Last month, there were 6.7 million fewer Americans working than in December 2007, when employment peaked -- a 4.7% decline, compared with 3.1% in 1981-82.

"In terms of employment, we're now way past 1982 and we're just about to cross the worst postwar recession, which was 1948," says Stanford University economist Bob Hall, who heads the NBER's recession-dating group.

In 1948, the demand that built up during World War II rationing programs had been sated. Companies, left holding more inventory than they could sell, throttled back production and laid off workers. The recession that began that year pushed payrolls down by 5.2%. Jobs recovered quickly, however, after the excess inventory was cleared away.

In contrast, the past two recessions, in 1990-91 and in 2001, saw payrolls decline long after the economy began recovering. That lagging drop is a shift in the way jobs respond to downturns that economists worry will continue.

Recent downturns have also been less abrupt, in part because the manufacturing sector, which responds to trouble by slashing production, is no longer as large a part of the economy. The declines in GDP -- the value of all goods and services produced -- associated with the 1990-91 and 2001 recessions were slight.

That makes this recession's decline in GDP striking.

Through the first quarter, GDP was down 3.1% from the peak it reached last year. The only post-World War II recession more severe was in 1958, when the United States was a manufacturing powerhouse. After consumer spending cooled in response to Fed rate increases, manufacturers ratcheted back, sending GDP down 3.7%.

But the Fed cut rates, and the economy recovered quickly, making the downturn one of the briefest ever.

"A normal postwar recession ends when the Fed thinks it's done enough to fight inflation," says Brad DeLong, an economic historian at the University of California, Berkeley.

But this downturn was set off by a housing and credit collapse, making Fed rate cuts less effective in spurring growth.

Economists believe Friday's GDP report will show the economy contracted again in the second quarter and that, in combination with downward government data revisions, could make this recession's GDP drop even larger than 1958's.

The good news: This recession's drop in household income hasn't been nearly as severe as one of its predecessors. That is partly because many states have extended unemployment benefits. It also is because workers haven't seen their earning power eaten up by rising prices.

That wasn't the case in the recession that stretched from 1973 to 1975, when food and energy costs jumped. Adjusting for inflation, U.S. household income fell 5.3% during that period. In the current recession, it has fallen 3%.

But this recession has eaten away at Americans' wealth like never before.

Falling home prices have decreased the equity households have in their homes -- that is, the value of their homes minus what they owe on them -- by $5.1 trillion, a 41% drop. They also have lost trillions of dollars in the stock market. No other episode of wealth destruction since the 1930s comes close.

As households work to rebuild the stores of wealth they lost, they are spending less. Although spending has recovered a bit, it is still an inflation-adjusted 1.9% below its peak 2008 levels.

Only two other downturns have had comparable spending drops. In the 1953-54 recession, when Congress added to the Fed's inflation-fighting efforts by extending an unpopular tax on corporate profits, spending fell by as much as 3.3%. That drop was matched in 1980, after President Jimmy Carter, in an attempt to rein in inflation, persuaded the Fed to introduce stringent controls on the use of credit.

Reversing those policies, and getting spending moving again, was relatively easy. But reversing the drop in wealth isn't. That means that tepid consumer spending could be a drag on the economy for years to come.

7 dividend stocks you can count on

Rising payouts to investors usually means a company is strong right now and confident about its future. These 7 pay out more and more, year after year.

After many dark months, investors' appetite for risk is back, prompting a buying binge that is driving up the value of some pretty speculative stocks and asset classes.

You can play the momentum game, hoping to enter and exit a hot stock at just the right juncture. Or you can ignore the siren song of quick but highly uncertain gains and instead invest for the long term, using the tried-and-true technique of identifying companies that regularly raise their dividends.

History is on the side of the dividend strategy. Howard Silverblatt, of Standard & Poor's, calculates that from 1926 through March 2009, reinvested dividends accounted for 44% of the 9.5% annualized return of the S&P 500-stock index ($INX). From 1972 through April 2009, dividend growers returned 8.7% annualized, according to Ned Davis Research, compared with 6.2% for the S&P 500 and just 0.7% for stocks that paid no dividends.

Why has a dividend-growth strategy stood the test of time? First, to commit to boosting its payout, a company must be financially strong and confident that its business plan will generate a stream of profit and cash flow. A growing payout, says Judy Saryan, the manager of Eaton Vance Dividend Builder fund (EVTMX), is the "best, most tangible signal that a company's board of directors and management have confidence in future cash flows."

Saryan notes some subtle effects of managers' commitment to boost the distribution annually. Shareholders' anticipation of that dividend check forces a company's leaders to be more disciplined with their cash and more careful in selecting capital projects. Paying dividends discourages dubious accounting: The company must have the real money to make the payments.

Coke: The real thing

The trick is to identify companies that have the stamina to keep increasing dividends for many years -- and to acquire their stocks at reasonable prices. A sustainable business model is crucial. You want a company with a strong balance sheet, robust free cash flow (the money left over after capital expenditures needed to maintain the business) and a high return on equity, which enables the business to pay out a handsome dividend while also reinvesting in its growth.

One way to analyze the expected return on a dividend-growth stock is to compare it with a U.S. Treasury bond. Let's take the example of Coca-Cola (KO, news, msgs). Over the next four quarters, Coke should pay a dividend of close to $1.70 a share; based on its recent share price, that's a yield of 3.4%, slightly less than the 3.9% yield of a 10-year Treasury.

But compare the potential of the two investments over the next 10 years. Let's say that both Coke's earnings and its dividend grow by 8% per year. Over the next decade, that 3.4% yield will swell to 7.3% based on today's share price (and, for the truly patient investor, to 15.9% after 20 years), while the fixed-income Treasury will still return a bit less than 4% for someone who buys the bond today. Moreover, assuming the price-to-earnings ratio remains the same, you'll earn an annualized total return of 11.4% (3.4% annual yield plus 8% annual capital appreciation), compared with roughly 4% for the Treasury. If the P/E rises, you will earn more than 11.4%; if it declines, your return will be less.

Coke, which has raised its dividend for 47 consecutive years, certainly passes the endurance test. Its iconic brands, unparalleled global distribution network and steady growth in beverage volumes generate high returns on capital and free cash. Goldman Sachs' Judy Hong calculates that Coke's cost of capital is less than 8%, compared with its return on invested capital of 18%. No wonder Warren Buffett's Berkshire Hathaway (BRK.A, news, msgs) is Coke's largest shareholder.

Philip Morris: Ugly wares, nice numbers

We know many of you are averse to investing in tobacco companies. But if you're not, you'll appreciate the striking financials of Philip Morris International (PM, news, msgs), the world's largest publicly traded tobacco company. Based in New York City, Philip Morris books 100% of its sales outside the U.S. The maker of Marlboro generates an eye-popping 60% return on equity, partly because its stable, predictable cash flows allow it to carry more leverage on its balance sheet. Capital-investment needs are nominal, which helps it produce $7 billion of free cash flow a year. At the current dividend rate of $2.16 per share, the stock yields a sturdy 4.9%.

Philip Morris' outlook is bright. Consumption of cigarettes is shrinking in Western Europe and Japan but growing briskly in emerging markets, where Philip Morris earns the bulk of its profits. Overall, the number of cigarettes sold is growing just 1% to 2% a year, but the company has an unusual ability to raise prices -- one advantage of selling an addictive product. Philip Morris thinks it can boost earnings per share 10% to 12% a year over the long term and has committed to paying out at least 65% of its earnings in dividends. Big, ugly tobacco companies like this one tend to treat loyal shareholders well.

Sysco: Dominant food supplier

Let's move to a predominantly domestic company, Sysco (SYY, news, msgs). The leader in its field, Sysco distributes food to hospitals, hotels, campuses, restaurants and company cafeterias across the U.S. It has a peerless distribution system, with the most warehouses and delivery trucks through which to push growing volumes of food and related supplies (annual revenues are $37 billion).

Earnings may be flat this year because Americans aren't eating out as much. But as Cliff Remily, associate manager of Thornburg Investment Income Builder fund (TIBAX), says, Sysco's history suggests that it will emerge stronger after the recession because it's a serial consolidator (more than 100 acquisitions in 40 years) and by far the largest and strongest player in a fragmented industry full of mom-and-pop outfits.

Sysco has a sterling dividend record (the payout has compounded by 18% per year over the past decade) and, at a 4% yield, the shares are as cheap as they've ever been. Companies such as Sysco and Philip Morris International are in the dividend sweet spot, offering a combination of relatively high yield (4% to 5%) and the prospect of being able to boost their dividends by 10% or more annually.

2 health care giants

The medical sector has historically yielded many dividend-growth champions. Leaders tend to be mature, financially solid companies that generate relatively dependable cash flows in economies both buoyant and sour. Health care now faces more regulation, litigation, and pricing and patent issues than in the past, so the search is a bit trickier -- witness Pfizer's stunning dividend cut earlier this year.

Two standouts in health care are Abbott Laboratories (ABT, news, msgs) and Becton Dickinson (BDX, news, msgs). Both are well diversified and should be able to boost earnings by at least 10% even this year, during the worst recession in decades.

Abbott has a handsome growth profile with products such as Humira, a leading rheumatoid arthritis medication (protected by patent until 2016); Lasik eye-surgery devices; the vascular industry's top drug-delivering stent, used to unblock coronary arteries; and hand-held glucose monitors for diabetics. The Abbott Park, Ill., company is a model of consistency, having raised its dividend for 37 straight years. It plows 9% of its sales ($30 billion) into research and development each year.

Like Abbott Labs, Becton Dickinson makes more than half of its sales abroad. This venerable company (founded in 1897 and based in Franklin Lakes, N.J.) made its name in needles and syringes, and is also a big supplier of surgical scalpels and blades. A sticky business, to be sure, but as Larry Coats, of Oak Value fund (OAKVX) says, safety is paramount, so hospitals and doctors offices are unlikely to try other, unknown suppliers of such skin-piercing devices. BD also has good businesses in catheters, insulin-delivery products and infectious-disease diagnostic systems.

BD is resistant to recessions. This year the company raised its dividend by 16% -- not many companies can match that increase -- and distributions have grown an annualized 21% over the past five years. The stock yields just 2%, but the company, which pays out only 25% of its earnings, has plenty of resources to keep those dividend increases flowing.

Indeed, a successful dividend-growth strategy involves identifying low-yielding stocks with very promising growth prospects, as well as higher-yielding, more-mature companies with less-exciting growth profiles. Fast-growing companies typically retain a high portion of their earnings, which they plow back into attractive reinvestment opportunities.

Accenture: High-growth consultant

Don Kilbride, the manager of Vanguard Dividend Growth fund (VDIGX), employs a "barbell" approach in his portfolio. At one end are dividend bluebloods, such as Johnson & Johnson (JNJ, news, msgs). At the other end of the barbell is a new generation of dividend payers with plenty of room to grow.

One Kilbride favorite is Accenture (ACN, news, msgs), formerly Andersen Consulting, which went public in 2001 and paid its first dividend in 2005.

When you look at the financial statements of this management-and-technology consulting firm (which competes with the likes of IBM), it's clear that this is a phenomenal business. Headquartered in Bermuda, Accenture employs 181,000 workers around the globe in 200 cities and 52 countries. It has $3 billion in cash and no debt, and it generates $3 billion of free cash flow per year on revenues of $26 billion.

Because the company spends only about 10% of its cash flow each year on capital investment (the business doesn't have much to invest in except its people), it returns the bulk of its cash to investors in the form of share buybacks and dividends, which have mounted by 19% a year since their initiation. The business has held up well through the recession because clients seek Accenture's advice for improving efficiency in areas such as inventory management.

Total: Big Oil, French-style

We'll leave you with a major energy company, France's Total (TOT, news, msgs). Big domestic oil companies such as Exxon Mobil (XOM, news, msgs) and Chevron (CVX, news, msgs) have outstanding records of boosting dividends over the long haul, and we expect the same from Total.

Consumers are hooked on oil. Economists call this inelastic demand, which is fairly uncommon with merchandise. When producers of inelastic goods increase prices, demand declines only slightly, resulting in a net increase in revenues. (By contrast, when producers of products with elastic demand, such as autos and furniture, try to raise prices, doing so leads to revenue declines.)

Total's stock serves up a generous 5.4% yield, and the company has boosted dividends at an annualized rate of 14% over the past four years. Kilbride compares Total to Exxon Mobil in terms of financial discipline, skilled allocation of capital and execution of large projects. Total is also particularly well placed in important production-growth areas, such as West Africa. Socially conscious investors, take note: Total deals with regimes in countries (such as Venezuela and Myanmar) where U.S. energy firms dare not tread.