Some closed-end funds pay out what is known as managed distributions as a template for their dividend policy.

What happens here is that the fund, in its attempt to draw investor attention, states that it will pay out a managed distribution that is a percentage of the net asset value (NAV) at the end of each quarter. The idea is stability of income.

Hardly! Most closed-end funds that employ a managed distribution payout policy use 8% as the percentage of NAV they peg the fund to at the end of the quarter.

This is one of those areas that should be treated like poison. When a big, fat, juicy dividend yield is composed in whole or in part by what is termed a return of capital, you want to steer clear.

When a mutual fund or entity pays out a scheduled dividend payment that hasn't been earned by profits or interest income, you can bet that a portion of that dividend will be in the form of a return of capital, which simply means you as an investor are receiving some of your money back as part of the dividend.

Two negative things happen here.

Most closed-end funds trade at a premium or discount to their net asset value (NAV) for various reasons and can offer excellent investment opportunities. Locking in a high-yield payout in a discounted fund can make for some exciting total returns.

Yet some investors buy into a popular closed-end fund that is trading at an enormous premium to its NAV. Why would anyone pay up to 25% for shares of a hot closed-end fund when they could buy that same basket of stocks or bonds from their broker at real market value? It's a bit insane.

This statement may come as a shock to most investors, but if there is a choice to buy a certain index or sector closed-end fund instead of an open-end fund, opt for the closed-end fund.

First of all, with the Dow showing triple-digit point swings on an intra-day basis, you never know when you may want to exit the fund if the market makes a dramatic move up or down. With an open-end mutual fund, you can only sell at the end of the day

In the world of high-yield securities, investors on a quest for the biggest yields are often lured into securities that either they don't understand or are simply tempted beyond their personal discipline to investigate how that yield is being supported.

If you can't identify where the "Yield Power" is that makes the king-size payouts possible, then they should avoid purchasing them.

So how do you know which ones to avoid?

Bill Gross is one of the world's biggest investors. In his recent monthly letter he cites the dangers of ultra high deficits in the US.

But first, we must cite Gross' comments on the state of our democracy. He said: "Our democracy does not work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people." "When special interests even singular citizens write a check, it represents a perversion of democracy, not the exercise of the First Amendment..."

Here's another priceless quote: Referring to the money spent by health care lobbyists, he said: "What amazes me the most of all is that politicians can be bought so cheaply."

A new year is upon us and like the beginnings of any year, and even more so, a decade, the predictions are flying fast and furious.

The start of 2010 is bringing out every analyst, talking head, business journalist, periodical and newsletter propagator, sportscaster, palm reader, taro card interpreter, astrologist, medium and madam making predictions to garner attention, entertain and even profit. Apologies to anyone I left out.

During my tenure at BloggingStocks I have expressed my opinion often about the contribution that dividends make to your overall return. Most shrewd investors, and especially "my pal Warren," know this and understand why I re-emphasize the point when I make my annual selections.

By now I hope you have had a chance to peruse my picks for 2010. If not the links below will give you another opportunity.

If there ever was a stock that was hiding in plain sight, it is that of Berkshire Hathaway (BRK.B) which is capitalized at a tad over $150 billion and run by "my pal Warren" and his pal Charlie. That's Warren Buffett and Charlie Munger, perhaps the most successful investors in five generations.

Berkshire Hathaway, a textile mill, was Buffett's first turn-around play. He was successful and started generating significant amounts of free cash-flow that allowed him to invest in other things. Those investments also paid off and eventually the original enterprise became the namesake of today's diversified giant holding company.

I selected BRK.B for numerous reasons and believe it will easily beat the market next year as has been it's history.

The market continues to befuddle the bears as the third quarter earnings and stock prices continued to move in a positive direction.

During this period Washington has taken charge of the auto industry and helped prop it up with the "cash-for-clunkers" program. They continue to subsidize the real estate market with first-time home buyers incentives, and very low interest rates. The banks are being refueled by the Federal Reserve with interest rates as low as zero, while all the time currency stability has been sacrificed. This has driven gold prices to new highs.

This is the third review of my 2009 stock picks through September 30 (see: Chasing Value: 9 picks for 2009 -- APC, GE, ISRG, WFC and more). This years picks have annihilated index comparisons, so much so that I must attribute some of my good fortune to luck. However, I do believe the original reasoning was sound and the outlier nature of the gains certainly a result of an oversold market living in fear.

One of my wonderful friends, Ms. P, asked me for some guidance on how she might allocate $50,000 currently earning peanuts in a money market account. Though she is decades from becoming a grandmother, after a brief discussion about her financial parameters, it became clear to me that she was looking for a "granny fund."

In reality, my recommendations would be suitable, and perhaps desirable, for many passive investors as well.

The $50,000 is a portion of money Ms. P has set aside to purchase a home, which might happen in six months, but could also be pushed out further, depending on the economy and her situation. Basically, she wants to cover all her bases because she might need the money at any time and does not want to be caught short, while at the same time she would like to generate some revenue without taking any big risks.

We keep hearing that consumer spending propels 70% of our economy and that we will not see real growth without an increase in consumer confidence, meaning spend, spend, spend. This is very bad advice! Let other people spend -- you should be saving!

This is a theme I have been hammering on all year and I will continue to do so. I believe this is so important to our personal and national long term health that any true investment discussion, be it on the web, radio, television, newspapers or magazines, is just blowing smoke if it is not a primary focus.

Money market accounts and certificates of deposit are safe, but they provide very little return on your investment. This fact, and the invigorated stock market, provoked one of my bankers, Dobrinka, at the local Santa Monica Wells Fargo branch, to ask for advice on how I would invest $25,000 if I was just starting out.

This is a common question although the starting point in terms of cash varies. It certainly makes a difference how old the person is, their general knowledge about investing and finance, and the particulars of their financial statement.

Here is what I suggested sticking to regular themes I have written about before and broadly speaking would be a conservative approach emphasizing safety, diversity, liquidity, dividends and the potential for growth far exceeding cash in the mattress or in a money market account. I also think that it is important for beginners to educate themselves so my suggestions include an educational aspect.

There's an old saying: "He who hesitates is lost." This is one of the best rules to use when investing.

Professor Lasse H. Pedersen of New York University wrote a book on the liquidity crisis titled When Everyone Runs for the Exit. He uses a poker analogy in which the player who has decided to either fold early or stay in for the kill makes the most money. The player who hesitates loses the most money.

You can learn a lot from your elders and when it comes to investing, you best listen very attentively. I often refer to 'my pal Warren' in my posts and I credit Mr. Buffett's investment advice and parables over the years for much of my gains in 2009.

There is another mentor, though, one I have not referred to often but that I have gleaned some wisdom from in terms of value investing and courage, and that is 'my pal Sir John.' While Buffett has been very straight forward in his position that you should buy on fear and this was the year to do that, it was Templeton that preached buying far and wide and diversifying broadly into out-of-favor companies. As he did when he started out.