With 2004 firmly in its final quarter, it's time to concentrate on what financial avenues are best pursued for the coming year. This requires some clairvoyance, as the path ahead is not clearly staked with road markers. Of course, it's always arguable that the future is uncertain, which is often used as an excuse for remaining locked in neutral gear. Fortunately, however, there are some indicators in play that can be used for guidance. Let's take a look at some of these.

The one guidepost that cannot be ignored is short-term interest rates. Federal Reserve Chairman Alan Greenspan should have left no doubt in anyone's mind that rising interest rates are in our future. As to how rapidly and to what extent these increases will occur can be debated, but they seem inevitable. And despite the distinction between short-term borrowing and long-term mortgage loans, there is a connection, ill-defined though it may be. For this reason, it behooves those of you with adjustable home loans to consider converting them to fixed rate mortgages while reasonable rates are still available. This is not just idle conversation on my part. I put my money where my mouth is recently by refinancing the mortgage loan on one of my major apartment complexes. It covered a set of buildings I purchased two years ago, on which I'd obtained a favorable adjustable rate. Although the current rate stood at 5.1%, I refinanced at 6.125%, fixed for 10 years. Today's increase of 1.025% buys an assurance that I'll not experience the sort of rates I witnessed a dozen and a half years ago. Those of you new to borrowing have seen nothing but low single-digit interest rates. My memory tells me that it can be otherwise.

Before we leave the subject of interest rates, there is another matter to consider. For those of you whose securities portfolio contains a meaningful portion of fixed investments-translated as bonds or bond funds-you must do some analyzing. The critical factor is remaining term, meaning the length of time until a bond matures, thereby returning the full face amount of the instrument. The rule you must remember is that a bond's market value falls as general interest rates rise, and the longer the term, the more observable this becomes. Thus in a period of rising interest rates, it's disadvantageous to have bonds or bond funds that are long-term-and this I consider to be anything more than about 5 years. So, now that you know the rules, you can decide what you want to do.

Let me now shift to a subject I've long watched with interest, and that seems headed toward more of an uncertain future than ever before. It is the Social Security and Medicare programs that are funded together under the Federal Insurance Contributions Act (FICA), and that each year find themselves closer to insolvency. Several weeks before the start of this year, President George W. Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act (MMA). With this enactment, a prescription drug benefit was tacked onto the Medicare portion, imposing yet another $400 billion obligation on the system over the next 10 years. Inasmuch as the assets securing eventual payment of benefits, presumably residing in the "Social Security Trust Fund," consist of nothing more than government IOUs, there are conflicting views over its soundness for future recipients.

As you might guess, I have some strong opinions on this subject. I expect the social security system to continue to exist, but that profound changes are in store. Its current function of robbing youthful Peter to pay elderly Paul will gradually phase out, to be replaced by a system in which means testing, and eventually assets exclusion, will convert it into a simple welfare system. Within a generation, only those who qualify as needy will receive benefits. The real pity, of course, is that today's young and middle age, middle class, middle income, citizens are being bled to death to sustain a fraction from which they will receive, at best, a pittance.

I'll conclude this subject with a pair of comments-depressing for some, but encouraging for others. The disconcerting part is that for most of you, there is nothing you can do about it. You working Americans who receive salary or wages will continue to finance this system through the FICA taxes taken involuntarily from your pay. I'm sorry, but this is the way it is. The only good news is that for a small portion of you, generally the self-employed with a certain amount of investment or non-earnings income, there is a loophole that enables you to opt out, either fully or partially. Anyone interested may find the details in Chapter 8 of my book Nobody's Fool: A Skeptic's Guide to Prosperity. For a summary of what the book contains, you're invited to visit www.onthemoneytrail.com.

Al Jacobs has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody's Fool: A Skeptic's Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting www.onthemoneytrail.com.