What are some of the features of a DB(k) plan?

This retirement plan option, which is employer sponsored, is designed only for companies that have between two and five hundred employees. These plans are simple for employees to participate in and easy for companies to maintain. A DB(k) plan combines the best features of a 401(k) plan with a small income stream, which is guaranteed. Although these plans are essentially equivalent to two different kinds of retirement plans, they are conveniently combined into one, making it much easier for companies to administer. There is much less paperwork involved for a company to administer one single DB(k) plan as compared to a 401(k) plan plus a pension plan. The DB(k) plan is a relative newcomer to the retirement plan arena, with Congress authorizing it during the 2006 Pension Protection Act. The overall intention of this plan was to compensate for a perceived flaw in the existing pension and retirement fund systems, which is the possibility that a person may run completely out of money after retirement when their 401(k) funds are depleted.

Are there any specific advantages to a DB(k) plan?

These plans can provide a good alternative to plans which are designed for only voluntary employee contributions. Especially in the current economic climate, with the stock market in fluctuation, the DB(k) plan can provide an extra measure of security. Instead of simply receiving a lump sum of money at retirement, as is the case with a 401(k) plan, a DB(k) plan will also provide a small ongoing pension amount. The amount of pension provided is far less than traditional pension plans provided in the past, but it can still help to protect people who may run out of money after their lump sum of retirement funds are depleted.

What are some of the features of a DB(k) plan?

There are a number of requirements that must be satisfied in order for a company to set up a DB(k) plan for its employees. In addition to satisfying the required number of employees, these plans must also provide an automatic enrollment option for the contribution portion of the plan. There are also requirements for how the defined benefits portion of the plan is to be administered, based on a percentage of years of service calculated along with the average final rate of pay. After the designated years of service, employees become fully vested in the plan. By implementing a DB(k) plan, employers can help boost the retirement savings for their employees, while providing cost-savings benefits for the company itself.

A term certain annuity is an insurance product which is designed to provide a person with predetermined payments over a designated period of time. Term certain annuities can be purchased gradually over many years, with the person making regular payments towards the total purchase amount. However, these are often purchased at the time of a person’s retirement, using one lump sum of retirement funds. The main thing to keep in mind when purchasing a term certain annuity is that they are designed for a specific timeframe. Once the overall term has expired, there can be no further payments made.

What are some things to think about when considering a term certain annuity?

The overall term length of the annuity is one of the most important things to consider. Because annuities are designed for a particular timeframe, it is possible to outlive your annuity. If the annuity is your only planned resource in regards to your retirement, you might find yourself without any further means of support if the term of the annuity expires. Because of this, a term certain annuity can be a great enhancement to an overall retirement plan, but it should never be the entire financial plan. It can be helpful to seek out the advice of a good financial planner if you are contemplating the purchase of a term certain annuity.

What are the advantages of a term certain annuity?

Term certain annuities are a good choice if somebody is looking to help stabilize other forms of investment income after retirement. They are also a good choice for those who may not have been fully employed earlier in life, and as such, may not have a 401(k) plan or other retirement option. One of the advantages of an annuity is that there is a guaranteed fixed rate of return, which can help take some of the guesswork out of retirement. With careful planning, a term certain annuity can provide a dependable source of income that is not affected by fluctuating interest rates or the stock market, which can provide a lot of peace of mind. They are also much less expensive than a life annuity, since there aren’t any insurance components involved.

What are the disadvantages of a term certain annuity?

One of the primary concerns with a term certain annuity is the chance that it may run out of funds while the person is still alive. If a person is counting heavily on the regular payments provided by the annuity as their income after retirement, they could run into problems if they live longer than they expect. Although one of the advantages of an annuity is the fixed rate of return, this can also be a disadvantage under certain circumstances. In many cases, other types of investments can offer a better return. The annuity will continue to provide payments up to a specified date, regardless of the circumstances that occur during this time period. If the person dies before that date, the remainder of the annuity’s value is kept by the insurance company. These annuities do not take beneficiaries into account, and there are no insurance components to the plan. If a person’s health begins to falter and their medical bills increase, the payments will not increase in a corresponding fashion. For those who are looking for the assurance of insurance benefits, or for those who wish to provide their beneficiaries with the remainder of the annuity’s value, a life annuity could be a better choice.

The stock market seems to be climbing the proverbial “wall of worry.”

Despite potential road hazards such as sovereign debt issues, rising interest rates, a weak job market, and a stalled housing recovery, investors bid up stock prices last week to an 18-month high, according to MarketWatch. Of course, these things could eventually affect stock prices, but, for now, stocks are riding the momentum of improving earnings and some underlying stability in the economy.

Lack of job growth has been a major problem for our economy the past couple years, but that could change this week. On April 2, the government will release the March employment report and, according to CNBC, economists expect it to show a rise of about 200,000 non-farm jobs. That would be a small down payment on the 8.4 million jobs lost since December 2007, according to Bloomberg. The fact that the S&P 500 has risen for four consecutive weeks may suggest that the market has been anticipating a good report. Ironically, on the day the employment report is released, the U.S. stock market will be closed for the Good Friday holiday, so we won’t know the market’s reaction until the following Monday.

Fear of a double-dip recession seems to be fading, too. In its final revision, the Commerce Department said fourth quarter 2009 GDP increased at a 5.6% annualized rate, which is the fastest rate in six years. For 2010, economists surveyed by MarketWatch expect GDP to expand at a non-recessionary 3% rate. On a regional note, the Great Lakes commercial shipping season has started early partly due to increased demand for iron ore and coal. “Things are moving quicker, sooner than a year ago. And it seems like more ships are involved,” said Eric Reinelt, Port of Milwaukee executive director as quoted in the March 28 edition of the Milwaukee Journal Sentinel.

So, despite the worries, there is some good economic news supporting stock prices.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

THE DAY OF RECKONING due to our country’s ballooning deficits may be getting closer. Back in 2008, the Congressional Budget Office (CBO), projected the U.S. would run a budget surplus of $247 billion for the years 2009 through 2018. Now, just two years later, CNBC and the CBO have crunched the numbers again and project that we will incur a $7.4 trillion deficit during that 10-year period, according to a March 26 CNBC article.

How could the situation deteriorate so much in just two years?

The CBO said 57% of the projected deficit increase was due to lower government revenues–much of which is due to the decline in our economy and projected sluggish economic growth. The other 43% included expenses such as, “the stimulus bill, a change in accounting for the war, extended unemployment benefits, and additional interest on debt.”

At the end of 2009, the U.S. national debt stood at $12.3 trillion, according to the Treasury Department. Tack on the projected deficit over the next 10 years and we could be close to $20 trillion in the hole 10 years hence.

Like chocolate chip cookie dough, a spoonful of annual deficit and national debt is fine, but gorging our country on borrowed money may eventually cause significant problems. Too much government debt could lead to rising interest rates and slower economic growth, according to Fortune Magazine. In a worst-case scenario, it could lead to economic collapse.

We have several options to solve the budding debt problem before it gets completely out of hand. First, we could grow our way out of it. This is the preferred method and the least painful. Second, we could raise taxes. Third, we could cut government spending. Most likely, we’ll see a combination of the three.

Given the magnitude of our swelling deficits, we will likely have pain in our future. Whether that pain happens in our generation, our children’s, or our grandchildren’s, remains to be seen.

Weekly Focus – Think About It

“The way to wealth depends on just two words, industry and frugality.”

–Benjamin Franklin

Value vs. Growth Investing

Here are the numbers (3/26/10)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

***For the remainder of tax season we will prepare current tax returns (Federal & State) for the immediate family (serviceperson & spouse, etc) of any serviceman or woman currently serving in a war zone living in PA, NJ or Delaware.***

Office Notes

The Pros and Cons of Alternative Investments

If you start to really look at all of your investing options and you start collecting advice, it would not be long before you ran into an investment professional who touts the benefits of a “public, all-cash, non-traded REIT. “ Your first response might be, “What’s the ticker symbol?”

Since they have no ticker symbols, your next conversation would probably consist of a description of what an “alternative” investment is and how, although there is a share price, it can’t be found on an exchange. Then, if market fluctuations make you queasier with age, this investment may start sounding pretty good the more you look into it because it’s a competitive investment that takes some of your money off of the daily pricing roller coaster. You may find that it’s an alternative worth exploring, although there are, of course, pros and cons.

What Alternative Investments Are

Investments that are considered “alternative” are investments other than the traditional stocks, bonds, mutual funds, and annuities offered by stock brokerage and insurance companies. They allow for a more direct way of investing in an entity in that you buy your shares, or units, from the company itself, not over an exchange like the New York Stock Exchange or the NASDAQ. They are usually long-term investments by nature with very limited liquidity.

One of the most common assets classes for alternative investments is real estate. Real estate investment trusts provide the opportunity to invest into a wide variety of different classes and types of real estate including, but not limited to, office, retail, industrial, houses, apartments, self- storage, timberland, healthcare, and government tenant buildings. In addition, there are varying degrees of risk which usually can be measured by the level of leverage the program uses. For example, a program that buys buildings using all cash has no mortgage default risk, so interest rate risk and property value fluctuations are less of a concern. There is no mortgage to default, whereas a speculative program that uses a high level of leverage and is probably aiming for spectacular returns, is much more likely to default if there is, say, a commercial credit freeze such as we are experiencing right now. Low debt is also usually associated with competitive monthly or quarterly distribution payments with limited appreciation potential. High debt is also usually associated with little or no periodic distributions, but high appreciation potential.

Those are the extremes. There are many levels of risk in between and it takes some effort to gauge the level of risk you are taking. What is somewhat helpful is that the alternative investment industry is using some general terms when titling their programs that loosely describe the level of risk for the program. “Core” means no leverage. “Core Plus” means some leverage, with probably an overall loan-to-value ratio of 25% to 50%. “Value Added” or “Growth and Income” means moderate leverage, with probably an overall loan-to-value of 40% to 60%. ”Opportunity” means they are probably on the high side with 55% to 75% overall loan-to-value.

In general, REITs usually have a Share Repurchase Program which typically states that they will buy back your shares at a reasonable discount to the purchase price in the first two or three years, and then at either 100% or the appraised REIT value thereafter. However, they are limited to redeeming 5% of the REIT per year and can stop redemptions at any time if it’s in the best interest of other shareholders. A “public” REIT is also one of the easiest alternative investments for which to qualify. You will typically need to have either a net worth of $250,000, or a net worth of $70,000 combined with an income of $70,000. It differs, though, REIT by REIT, and state by state.

Investing in real estate entails certain risks, including, but not limited to, changes in the economy, supply and demand, laws, tenant turnover, and interest rates. Some real estate investments offer limited liquidity options. There is no assurance that the investment objectives of any program will be met. REITs are not right for all investors. Be sure to consult your advisor regarding your specific situation.

For more information regarding risks, fees and expense, you can obtain a copy of a prospectus relating to the offering  from your financial professional. Read it carefully before investing.”

To sum it up, alternative investments can be useful in several ways. They can diversify your overall portfolio, provide some tax advantages, and provide strong cash flow and/or appreciation. On the minus side, your liquidity is very limited until the program goes full cycle and returns your principal along with whatever gain or loss it generated. As with all investments, the return of your principal is not guaranteed.

The shocking (in a positive way) unemployment report released last Friday by the Labor Department showed the economy lost only 11,000 jobs in November. The markets were bracing for a number well in excess of 100,000, according to CNBC. On top of that, revisions to the previous two months showed 159,000 fewer jobs were lost than initially reported. And, to complete the trifecta, the unemployment rate dropped to 10.0% in November, down from 10.2% in October. On the surface, this is extremely good news for the economy as it suggests the economy is healing nicely.
 
Initially, the stock market roared higher on the news. However, as the day wore on, prices started to fade as investors realized that if the economy is too strong, it will cause interest rates to rise sooner than expected. As interest rates rise, it may cause the economy to slow down. So, in the (almost) comical way that Wall Street works, investors like good news – but not too good of news!

Gold prices plunged on the unemployment report and interest rates and the U.S. dollar soared. True to form, whenever there is major market moving news, we tend to see some asset classes that benefit and some that lose out. This complex and ever-shifting interrelationship among various asset classes was on full display after the unemployment news broke. Of course, we do our best to stay on top of these relationships and profit from them on your behalf.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

THERE IS A DIFFERENCE BETWEEN LUCK AND SKILL and knowing when you are just lucky and when you are successful due to skill is of paramount importance as an investor. Let’s say you correctly called the flip of a coin five times in a row. What are the odds that you will correctly call the next flip? Correctly calling five flips in a row might be considered a “hot streak” and lead you to believe that chances are high you can correctly call the next flip. Well, assuming it is a fair flip, there is, of course, only a 50/50 chance that you will be correct because flipping a coin is a game of known probability. The fact is the coin flip has no memory of your hot streak.
 
An investor who is on a “hot streak” may or may not be lucky. Let’s take John Paulson as an example. He was a faceless hedge fund manager toiling in obscurity until he came upon an idea. He became convinced several years ago that the housing market was a bubble ready to burst. He put his money where his thesis was and he made billions of dollars for himself and his clients, according to a new book, The Greatest Trade Ever, by Gregory Zuckerman.
 
Today, Paulson is the toast of the hedge fund world and his latest “big bet” is that gold prices will continue to rise. This is not a recommendation from us to either buy or sell gold; rather, we want to make a point.
 
With millions of investors, odds are that some of them will make winning investments numerous times in a row. If these winning investors were, in reality, just lucky, but they think they were actually skillful, then that is when the situation turns problematic. The lucky investor may start to think they are infallible and get stubborn when the market turns against them. Eventually, when the lucky streak ends, it will likely mean serious losses for the investor. Only time will tell whether John Paulson got lucky or whether he has substantial investment skill.
 
The best antidote we know of to the danger of confusing luck and skill is to remain humble. When our investment strategy performs well, we are very thankful. When it doesn’t perform well, we try to learn from it. The investment business has an uncanny way of turning hubris into painful losses. We think humility is a safer route.
 
Weekly Focus – Think About It
 
“If we become increasingly humble about how little we know, we may be more eager to search.”
– John Templeton

Value vs. Growth Investing

Here are the numbers (12/4/09)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes

Have A Living Trust? Make Sure It’s “Funded”

Using effective Estate Planning strategies could prove to be one of your best overall investments. That’s because your estate is everything you own, including the value of life insurance in most cases. One of the most effective tools families can use to properly plan their estate is the revocable living trust.

Trusts aren’t just for the “rich and famous.” Families of more modest means could benefit as well, provided they use it properly. Experience suggests that many revocable trusts are often “unfunded” after they’ve been drafted by the attorney and signed by the grantor (the person who creates the trust).

Funding the trust simply means assets are placed in the name of the trust. For example, if Bob and Mary Jones have a brokerage account in their names as joint tenants with rights of survival (JTWROS) they would need to have the account re-titled in the name of their trust(s). This isn’t a big deal. It just requires some paperwork and follow-up. 

Once a regular brokerage account is re-titled into the trust, it would look something like this:

The Bob Jones Revocable Trust, dated June 10, 2009, Bob and Mary Jones Trustees. This would place all the assets in this account in Bob’s name. Mary should have her own separate trust with appropriate assets funding it in her name. This allows the full unified credit for estate tax exemption (currently $3.5 million per person as of November 2009) to be used when each one dies. Note: the unified credit is scheduled to be unlimited next year before reverting back to $1 million per person in 2011.  (There are currently 3 bills before congress that most believe will keep the current $3.5 million per person but until something passes and is confirmed this is just speculation).

It’s important to know that if assets aren’t placed in individual names (whether a trust is used or not) and remain as JTWROS, then the unified credit of the first spouse to die is lost forever! And, if the unified credit does revert back to only $1 million per person in 2011, it could be an important planning issue for many “middle class” households. Note: Qualified Retirement plans (IRA, 401(k), 403(b), etc.) should not be re-titled to the trust because that’s a taxable event.

Properly funding a living trust provides a variety of benefits. First, it enables the Trustee (the person who manages the trust after the grantor dies or becomes incapacitated) to manage the funds for the benefit of the beneficiaries without going through the probate process. Probate is a legal process, administered by the local court, to ensure a decedent’s estate is distributed properly. The court wants to make sure any debts they may have are paid before beneficiaries receive funds.

Unfortunately, for the dearly departed and their family, probate is public. Anyone is able to obtain a copy of the decedent’s will, which often lists bank accounts and brokerage statements, as well as the amount in each. And the amount each beneficiary receives may be listed as well! Some people don’t care about this lack of privacy, but others find it intolerable. You can easily confirm this by going down to your local courthouse and asking to see recent wills. They’ll even let you make copies and take them home if you like!

This is where the living trust really shines. Assets that have been placed in the name of the trust don’t have to go through the probate process at all; it’s completely private. In addition, unlike a will, funds can remain in the trust for the benefit of beneficiaries until they reach a certain age, or to protect them from predators or their own incompetence.

It’s important to note that some attorneys include trust language inside a will. This is called a “testamentary trust” that doesn’t become effective until after the estate has gone through the probate process. While it’s better than no trust at all, it doesn’t avoid the public nature of probate.

Of course this information is not intended to be “legal advice.” You should always meet with a knowledgeable estate planning attorney for professional advice. Some basic estate planning now could pay big dividends for your family in the years to come.

We started the week on a good note as the National Association of Realtors said existing home sales rose 10.1% in October to the highest seasonally adjusted annual rate since February 2007. Later in the week, the Commerce Department said new home sales rose 6.2% in October, which was well above the number that economists surveyed by MarketWatch had expected. And, the Labor Department said 466,000 Americans filed for unemployment benefits for the week ending November 21. That was the lowest number since September 2008. The stock market liked these numbers and by Wednesday of last week, the S&P 500 index had hit a 13-month high, according to MarketWatch.

Then came Thursday. As most of us were celebrating Thanksgiving, Dubai World – the investment arm of the country of Dubai, announced that it was delaying repayment on much of its debt. That surprise announcement sent stocks, bonds, and commodities around the world into a tailspin. By Friday, cooler heads prevailed and the decline in the U.S. market was limited. For the week, the S&P 500 was flat

This week, investors will likely focus on the early read from “Black Friday” sales to determine if the consumer has any oomph left. Additional news from Dubai may also move the markets. While the S&P 500 is up about 60% from its March 9 low, last week’s surprise news from Dubai indicates that there may be lingering effects from the recession for some time to come.
 

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

EXPERTS HAVE DEVELOPED MANY RULES OF INVESTING, some of which work better than others. It would make our lives easier if we found some rules that worked in all situations and at all times, but, of course, we haven’t found those rules, yet! Nonetheless, here are several from veteran investor and market observer Dennis Gartman that are worth considering. Gartman published these rules in a book edited by John Mauldin titled, Just One Thing.

RULE # 1

Never add to a losing position. Gartman says the market knows best and, if an investment is going down in value, then you should get out, not add more.

RULE # 2

Mental capital trumps real capital. Yes, you lose money (real capital) by holding onto a losing position, but Gartman says the emotional cost of holding onto a losing position is even more costly as you toss and turn about what to do. Better to take your loss and move on to something more promising.

RULE #3

Sell markets that show the greatest weakness; buy markets that show the greatest strength. This is similar to the old saying, “The trend is your friend.” You may not agree with the trend, but the market doesn’t really care what you think; it responds to what the majority of investors think.

RULE #4

Keep your trading system simple. Some of the most “sophisticated” investors were the biggest losers in 2008. Gartman says, “Complexity breeds confusion; simplicity breeds an ability to make decisions swiftly, and to admit error when wrong. Simplicity breeds elegance.”

RULE # 5

Do more of that which is working and do less of that which is not. Sounds simple, doesn’t it? Essentially, it’s add to your winners and sell your losers.

Rules-based investing is only as good as the “programmer” of those rules, the investor’s ability to implement those rules, and the markets’ desire to follow those rules. In reality, the financial markets reflect the combined actions of investors around the world. Trying to come up with rules that accurately reflect this human herd at all times in all situations is, if not impossible, right next to it. However, rules can be helpful as a guide.

Weekly Focus – Think About It

“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”

–Warren Buffett

Value vs. Growth Investing
Here are the numbers (11/27/09)

Office Notes

The Time is Right to Consider Roth IRA Conversion

Since its creation more than a decade ago, the Roth Individual Retirement Account (IRA) has been among the best tax breaks available. You get tax-free withdrawals of your earnings after your taxed dollars have been contributed, and once the five-year and age 59½ (whichever is later) (or death, disability, or first-time home buyer) requirements are met.

And, now, you have a unique opportunity to keep more of your eligible retirement assets protected from any increase in federal and state taxes by moving those monies into a Roth IRA while taxes are still relatively low. The planning you do now can have major long-term impact for you and your family.

Is a Roth IRA conversion right for you? Now is the time to decide.

Here are some other benefits:

·        No required distributions (i.e., withdrawals) for Roth IRA owners. 

·        Roth IRA beneficiaries can stretch tax-free distributions over their lifetimes.

·        Since distributions are tax free, Roth IRAs remove the uncertainty over future income tax rates.

·        Roth IRA conversions can be undone up to October 15th of the year following the conversion.

Anyone considering a Roth IRA conversion in 2009 must meet the $100,000 modified adjusted gross income (MAGI) limit. That $100,000 ceiling applies to joint or single returns. 

However, a new Roth era begins in January 2010. Anyone will be able to convert to a Roth IRA.

The $100,000 MAGI ceiling for Roth IRA conversions will be permanently repealed. As a bonus, for the tax year 2010 you will be able to spread the tax impact (remember – money contributed to a Roth IRA is taxed upfront) over the next two years on your 2011 and 2012 tax returns. In all other years, income must be included on the current year return.

Many individuals will want to implement conversions as soon as possible, while tax rates are low and account values are still depressed. But, before you decide, there are a few things to consider:

First, the tax should be paid from other monies. Taking cash from the IRA to pay the tax bill would diminish the benefit of the Roth IRA conversion.

Second, determine how much of your traditional IRAs you might want to convert. Consult with your tax advisor to figure out what deductions and credits might be lost. For example, parents of students might find that increasing adjusted gross income will reduce your eligibility for college aid and scholarships.

Third, determine the best timing for a conversion. “For individuals who are currently eligible in 2009, more information is known. They know their IRA balances are depressed after last year’s stock market decline, income taxes are at the lowest historical levels in years, and converting now will start the five-year clock for withdrawals as of January 1, 2009,” says Ed Slott, CPA and author of Parlay Your IRA into a Family Fortune. That five-year period is important because a converted amount that is withdrawn from the Roth IRA before the period ends is subject to the 10% premature distribution penalty tax.

Slott adds, “However, if you wait until 2010, you will delay the reporting of income to your 2011 and 2012 tax returns.”

The big Roth IRA question is, “Can you trust the government to keep its word about tax-free withdrawals?” There are no guarantees as to what might happen in the future if budget deficits keep expanding. However, Slott believes there are some reasons why Roth IRAs won’t be taxed.

First, such a reversal would be politically risky. Most of the legislators in office today voted for this provision and could be seen as reneging on their promises of a tax-free retirement savings account. 

Second, the federal government would lose the tax revenue that is collected upfront.

And, even if the government does change the rules on Roth IRAs to make them less appealing, existing accounts may well be grandfathered, based on how Congress has acted in the past. Therefore, the sooner you act, the greater the chance you would qualify for any potential grandfathering. 

Of course, you can determine on your own what makes sense for your situation, taking into account the whole picture including cash flow planning both now and in retirement, as well as tax, investment, and estate planning. Also, be aware that not all Roth IRA conversion calculators are created equal. Depending on the size of the conversion, you might want to seek advice from a professional who specializes in this subject.

Is a conversion right for you? Now is the time to decide.

Investing in the equity markets can be a very formidable and daunting task.  That is why the upside return potential is so good.  We get paid to take risk.  No investment risk today comes in the form of a three percent plus ten-year treasury bond.  Some people are willing to settle for that.  As long as inflation stays at these low rates it is not such a bad return.  However, there is a camp of people that believe that inflation remains a great possibility in which case ten year bonds at three percent could be something of a problem.

A trend that we are beginning to see is for investors to be willing to buy blue chip, high dividend paying stocks for income instead of bonds.  It is not too difficult today to get a three percent dividend on a stock.  The stock dividend also has some potential favorable tax treatment if it is a       qualified dividend.  Of course these dividends can be cut in the future and the stock can appreciate or depreciate in value.  Tax laws can also change, but many times we have to go on what is happening at the moment while making our best guesses about the future.

We are coming into the earning season releases for a lot of stocks so the bumpy road will probably not be any smoother over the next month.  October has been a volatile month for the stock market in the past.  We see no reason why this year should be any different.  But remember if it all looks too rosy and everyone wants to get in, that is the time to start looking toward the exits. 

As far as a V-shaped recovery, “W”, “U”, “L” or whatever letter you choose for the future, the fact is that to present from March lows, the recovery looks a lot like a “V.”  Could that change?  You bet.  Could the “V” turn into a “W”?  Sure.

We have recovered very quickly in the stock market.  Are we at a point where we could blow off some steam?  Sure.  Could we continue to make gains as money on the sidelines gets tired of the low money market and C.D. returns?  Sure.

Keeping well diversified with some money in safer areas and some money at risk probably makes sense to most of us.  You and your various financial advisors need to make that determination for yourself.

In closing, I would like to share a couple of quotes with you. 

“Ask five economists and you’ll get five different answers (six if one went toHarvard).”   
 - Edgar R. Fielder

“Economics is extremely useful as a form of employment for economists.”                               
- John Kenneth Gilbraith         

Securities and Advisory Services are offered through Nations Financial Group, Inc (NFGI) member FINRA, SIPC.  Mr. Eugene V Wehrheim, Jr is a Registered Representative of NFGI.  The Wehrheim Group is a separate entity and not affiliated with NFGI.

The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.   NFGI did not assist with the preparation of the content in this article, and its accuracy and completeness are not guaranteed.  The opinions expressed in this article are those of the author(s) and are not necessarily those of NFGI.  Any information provided is general in nature and is not tailored to your individual investment objectives or needs or relate to any specific investments. Any investment(s) or strategies discussed may not be suitable for all investors.  Investors must make their own decisions based on their specific investment objectives and financial circumstances.

Of all the lessons that have come out of the past many months, one of the most useful ones for investors is the value of price transparency and liquidity.

Facing the Music

This recession was characterized by a dramatic loss in value across the entire range of asset classes. But while all owners of assets were negatively impacted, some asset owners suffered worse than others. Owners of stocks, bonds and mutual funds felt the pain first because stocks and mutual funds trade daily on an exchange, and similarly bonds trade daily over-the-counter and are valued daily by pricing services. The benefit of having exchange-traded or highly liquid over-the-counter traded assets is that there is always a market for them, meaning that those assets can be converted to cash when necessary and desirable.

Prices for exchange-traded and daily-valued over-the-counter assets are transparent and readily available. Owners of such assets thus are aware of the assets’ values each and every day. During the market declines of the past year and a half, owners of these liquid assets were fully and regularly (and yes, painfully) informed of the hits to their net worth. Because of the price transparency of daily-valued exchange traded and over-the-counter assets, those whose balance sheets were largely populated by such assets readily faced and adapted to the reality of price depreciation.

The same can not be said for non-exchange traded assets or non-daily-valued assets, where each transaction must be separately negotiated. There is no daily pricing or exchange-like trading mechanism for assets such as real estate, closely held businesses, partnerships, and complex financial instruments such as asset-backed securities. Valuation is generally based on a historical record of comparable sales or infrequent appraisals. When sales activity of that class of assets slows, there is even less basis to determine realistic values.

The consequence of an inaccurate perception of value is that owners of non-exchange traded or non-daily valued assets don’t recognize value impairment in a timely manner, and are not as quick to adapt their financial decisions to the new reality. These owners often end up holding these types of assets for a period beyond which they can make a reasonable return on their investment. Worse yet, owners of non-daily valued assets can make risky decisions about incurring further liability, erroneously thinking they are worth more than in reality they are. In this sense, illiquid, non-daily valued assets can “contaminate” a balance sheet, leading both borrowers and lenders to make bad

The Nature of Leverage

There are two ways to purchase assets—cash or credit. Most investors pay cash for their investments (note that we do not view one’s primary residence as an investment). However, some investors use leverage to increase their returns. Investors using this strategy, called margin, take on debt in order to have the capital to buy more assets. This strategy works well during periods of rising asset values, as the investor is using the lender’s capital to expand his net worth. But when asset values decline, the magnitude of exposure can wipe out the investor’s equity in the asset, leaving the investor potentially owing more than the asset is worth.

Consider the difference in lending practices based on liquid versus illiquid collateral. Lenders loan money based on the value of the collateral that secures the loan. When the collateral is accurately and continually priced, lenders make “real-time” appropriate lending decisions. In the case of margin lending based on daily valued exchange-traded assets such as stocks, lenders make an immediate call to add or sell assets if the value of the assets falls below a certain level.

Compare this to lending based on illiquid non-exchange traded assets such as real estate or private securities. The lack of accurate, daily valuation leads lenders to make mistakes in the pricing of the credit they provide to borrowers. One of the striking lessons of the past few years is that lenders (both consumer and commercial) offered too much credit on the basis of the perceived (not real) value of the loan collateral. Lenders also charged too low an interest rate for the deflationary risk associated with those assets.

In the years leading up to the recession, we experienced a robust real estate market with continually increasing sale prices. Other assets including stocks and bonds also rose in value. With the increase in asset values, households and businesses incurred a massive build-up of debt. From Main Street to Wall Street, a pervasive attitude developed that asset values will continually rise, safely supporting additional debt. Businesses and households became more and more laden with debt based on “contaminated” balance sheets.

Balance Sheet Contamination

Once asset values started to decline, credit as a source of capital dried up. And because borrowers often had taken out loans with short durations, the loans came due just as the value of collateral was sinking. At that point, households and businesses realized that they had assumed more debt than their cash flow could support. Lenders now had securitized interests in assets that were dropping in value below the loan amounts and, worse, there was no quick and easy method to convert those assets to cash.

The mistake of so many investors, households, and businesses was to incur excessive debt which could only be rationalized if the value of the collateral supporting that debt continued to increase. Because the owners of illiquid, non-daily valued assets could not rely on an exchange or daily over-the-counter market for accurate valuations and continual liquidity, owners of these assets ended up misjudging the severity of their asset impairment.

Though the owners of daily valued, exchange traded assets were the first to “feel the pain” of declining net worth in real time, those same investors now are enjoying rising prices on the exchanges.

The cumulative effect of contaminated balance sheets across the board, from households to banks and businesses, caused the recession. The main lesson: investors holding assets with clear and transparent values and daily liquidity have a tremendous advantage during times of high market volatility, particularly when markets freeze up as they did last year. Liquidity and transparency go hand in hand, and are critical components of sustainable wealth.

But the rules have changed in the year 2009 only. Persons who are over the age of 70 1/2 will NOT be required to take the Required Minimum Distributions (RMD) in 2009.  Recent legislation was passed so that retirees are not required to withdraw money out of accounts that have been decimated by the stock market. This means that people can keep money in their retirement plans that they would normally have to withdraw in 2009.  The idea is for people to keep more money invested, with the hope that the stock market recovers and more of their money is still at work.  Many people do not need to take this extra income and would prefer to leave their money invested and not have to pay extra taxes.  This means a lower tax bill for the people who choose to keep their money invested in 2009.  Of course, if people need to take distributions in 2009, they still may do so, and they would be required to pay income taxes on these withdrawals.  The 2009 RMD rule also applies to other types of retirement accounts such as 403b plans.

It’s important to note that this RMD rule only applies in 2009.  In 2010, retirees will again be required to take their required minimum distributions (RMD).

I guess when investors keep hearing the words, “it’s different this time,” you start to believe it.  But based on my 22 years of experience in trading the stock market, it’s usually not “different this time.”  That said, I think we’re in for a 5-10% correction, which is a far cry from what we saw in China.  The Chinese market has been taken apart to the tune of 20+% in a few short weeks.  I don’t foresee this type of hit in our markets, but certainly we’re in for some uncomfortable times in the short-term.

On Monday, I suggest a hedge by picking up some Bearish ETF’s, the (QID) and (SDS).  So far this is working out.  However, the market can also turn on a dime and you need to be prepared to sell these positions quickly.

Until tomorrow, I wish you a great day…

So far during this economic crisis, the foreign markets have been leading us to the upside.  Now we see markets abroad leading us to the downside.  That said, it’s just a matter of time that we see the pullback many of us have been expecting.

So the question is how to play this?  A good way to capitalize on the downside is the bearish ETF’s.  Proshares has an Ultra short S&P 500 (SDS) and Nasdaq 100 (QID).  These funds will perform twice the inverse of the indexes.  So for example, if the Nasdaq 100 index drops 3%, your investment in the (QID) would rise approximately 6%.  The (SDS) would work the same way, but would be against the S&P 500.  These are volatile holdings, but are also a good way to hedge your long positions.

I look for the markets to correct between 7-10%.  However, sometime between September and October, we should have great buying opportunity.

Until tomorrow, I wish you a great day…

The market continues to be in a seriously over-bought state.  However, as I’ve said in the past, markets and stocks can stay that way for quite some time.  My concern is that the stock market is way ahead economic conditions.  Even with the economy still in a fragile state, stocks have continued to rally, which leads me to believe that we could have a tough September and October.

The focus list has been totally updated with some new ideas and new stop orders for existing buys.  It’s tough finding ideas that are not severely extended above its 50-day moving average.  However, a pullback would likely put us in a sweet spot to buy.

Until tomorrow, I wish you a great day…

Also in earnings news, J & J beat expectations on strong results from pharmaceutical and consumer products sales.  Both earnings and revenues were less than this same time last year, but handily beat estimates.  The Stock has been trading higher since the March lows and is finally trading above its 50 and 200 day moving average…

I think yesterday’s rally was clearly and oversold bounce and not likely to last.  Stock futures are indicating a flat opening.

For today, we’re holding firm on our cash position.  I need to see more than a one day rally to change my opinion of the stock market.

Until tomorrow, let’s have a great day…

Historically, the market has been a “leading indicator.” This means that the market should begin to go up before there is tangible evidence that the economy and the many factors that have caused the downtown actually improve. One example of this is unemployment –although we continue to see an increase in the unemployment numbers the actual percentage increase is beginning to decrease. In fact, it is not unusual for stocks to increase during a recession as the market focuses on the better days to come.

We might also suggest that this is not a time to scrutinize the market values of your investment accounts more frequently than normal, or to spend more time than normal watching business news and commentary – which will have you think the sky is falling. Our experience is that this can magnify matters beyond what they, and cause short-term reactions that are probably not beneficial in the long-term.

If you are using asset values to support living expenses, you should be careful to evaluate between needs and wants.  You may want a new car but your current vehicle works just fine.

Past performance is no guarantee of future results.  Mutual funds are sold only by prospectus. Investments in these vehicles may either gain or lose value.  Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional or Mutual Fund Company. Be sure to read the prospectus carefully before deciding whether to invest. Securities offered through Crown Capital Securities, LP; member FINRA/SIPC

This morning things look much like yesterday.  Good earnings out of AT&T and McDonalds are being overshadowed by wider-than-expected losses out of Morgan Stanley.  Morgan Stanley actually broke the trend of better-than-expected earnings out of the financial companies.

In the tech sector all eyes will be on Apple and Ebay as they report earnings after the close.  Apple is expected to earn $1.09 per share.  I expect them to beat by at least 10 cents.  However, it will be all about their guidance and sales on Mac’s and Iphones.

I think the market has the potential to reverse again today.  But, I still believe we are in an over-bought state and should be prepared for an inevitable pullback.

Let’s have a great day…

The major concerns regarding the banking sector is the deterioration of consumer credit.  Bank of America has relatively high consumer credit exposure, as their credit card net charge offs soared from Q4.  B of A set aside $13.4 billion for potential future losses up 57%.

Five Dow components reported earnings this morning.  The common theme between CAT, KO, MRK, DD and UTX is their guidance.  Aside from UTX, guidance going forward has been weak from these corporate giants.  Although except for Merck (MRK), earnings were generally better than expected.  However, Coca-Cola (KO) was a little light on the revenue side.

For today, I don’t have any new buy ideas, as I think the pressure will continue in the short-term.  That said, keep your stops in place and be ready to pick some bargains over the next few weeks…

Have a great day…

Earnings continue to come in better than expected especially in the banks.  Bank of America (BAC) following the lead of Citi, JP Morgan and Goldman Sachs and reported earnings that crushed expectations.  However, the company continues to be cautious and does see some more challenging times ahead.  The Merrill Lynch and Countrywide acquisitions significantly added to B of A’s top line.

Also in the news, Oracle makes a bid to buy Sun Microsystems for $7.4 billion or $9.50 a share in cash.  The bid comes in after IBM dropped its offer to buy the company for $9.40 a share.  This offer is a 42% premium above Sun’s close on Friday.  The way the stock opened this morning, it appears that Wall Street expects this deal to get done, as Sun is trading over $9 a share.

I added one new stock to the focus list this morning.  It’s in the tech sector and has a very constructive looking chart.  The reason I’m not loading you up with new ideas is because I think we’ll be buying everything a little cheaper in the short-term…

Have a great day…

Pulte Homes agreed to acquire Centex homes in a stock for stock deal valued at $1.3 billion.  This move will create the nation’s largest home building company and would give the combined company a strong liquidity position with more than $3.4 billion in cash.  This news should give some confidence to the market that possibly the home building group is starting stabilize.

I think the market still has a little downside left.  The typical pullback from an upward move is about one-third to one-half of the move.  In this case, the Dow Jones rallied about 1500 points from the low to 8000.  I think the minimum retracement should be about 500 points to roughly 7500.  However, it could pullback as much as 750 points without violating anything.

Investor sentiment has really come a long way.  Six months ago if an announcement came out that the government is now going to have to bailout the life insurers, the market would take a significant hit.  But, today it’s construed as good news.  Go figure…

I’ll be adding some new ideas to the list very soon.  I’m simply trying to be cautious in the short-term…

Stocks have opened down about 1% on the Dow and S&P 500.  However, the Nasdaq is only trade off slightly.  The market has come a long way in a short period of time.  I think we are in for some sideways choppy trading.  This next move will likely be trendless for a few weeks.

All eyes will start to focus on earnings, as Alcoa will get things started tomorrow after the close.  The Street is expecting a loss of .57 for the quarter.

I did not place any new buy ideas on the focus list.  I do believe we’re at an overbought state and stocks should pullback in the short-term.

Until tomorrow, let’s have a great day…

The performance of the first quarter could’ve ended much worse than it did.  In fact, at one point the Dow Jones was down over 25%, but the March rally helped the numbers look a little better than they were.  Compound this stock market carnage with continued weakness in the housing market and you have trillions of dollars in lost wealth over the past year.

Yesterday’s housing data said the average home dropped 19% in the last year.  However, many markets were much worse the average.  Homes in Miami and Tampa for example tanked 29% and 26% respectively and the numbers were much worse in Phoenix and Las Vegas.

To make matter even worse, the ADP Employer Services report showed that employers cut jobs at a record pace.  Economists had been expecting a decrease of 655,000 jobs for the month of March, but instead saw employers cut 742,000 jobs.  This trend is likely to continue, as we still await more fallout from the pending General Motors bankruptcy.

I did not add any new ideas to the focus list this morning.  I’m watching to see if this pullback will be controlled and the volume on the lighter side.  What I would like to see is the opposite of yesterday.  After rallying almost 200 points, the Dow Jones fizzled to only lock in an 86 point gain at the close.  Obviously, we would much rather see an early pullback followed by a late day rally.  We’ll see what happens…

As always, have a great day…

How times change. Since 2001 we have seen terrorist attacks, followed by instability in the Middle East. As if the constant threat of a terrorist attack weren’t enough, an unprecented number of hurricanes now threaten our shores, one of which will be a part of our lives for years to come.

As we have watched a painfully slow recovery following Hurricane Katrina from the comfort of our living rooms, thousands have had their lives destroyed. Many of those who survived have no jobs or homes to go back to, and many still live in temporary housing or reside in another area all together.

We should all take this time to think about how this would affect us financially. If the unthinkable does happen, money will be the last thing we want to think about, but it will play a huge role in how we are able to protect ourselves. There are some things you can and should do now:

Emergency Fund

A large part of this site will focus on budgeting, mainly because it is the foundation to building true wealth. As it pertains to emergencies make sure you have 6-9 months living expenses set aside. This needs to be liquid and not in the stock market, real estate, or any other hard to quickly access fund. Don’t count on insurance or the government to offer quick relief for food, mortgage payments, car payments, or other monthly bills. Keep this in a general savings account, or a safe money market account.

Though it does not need to be a significant portion, keep some cash secured so that you can buy the essentials. If power is knocked out or if banks are not operating, credit cards are not dependable for the immediate future. Nothing trades like cash.

If starting from nothing for this fund, don’t let it be overwhelming. Start small by setting as little as $100 per month, and make it an automatic deduction from your check or transfer from one bank account to another. Even with other investments and monthly expenses, chances are it will not be noticed. With even the most basic interest rates, it is amazing how soon the goal will be realized.

Financial Records

In the event of a disaster checkbooks and computers may be destroyed or left behind. Make sure to backup your records on disc or a USB flash drive, which are both affordable. Invest in a fireproof safe and keep backups there in case of flood or fire.

In addition, take advantage of web-based access that almost all financial institutions offer today. Records can be accessed from anywhere should you be forced to leave home. It is also possible to set up bill pay online, so taking care of monthly expenses can be done with a few clicks. This will keep financial life to a minimum during a stressful personal time.

Create a Will

Creating or updating a will is not a fun task and most people put it off. However, making sure loved ones are taken care of should be a top priority. Ignoring this task can cause loved ones to endure costly court proceedings to have your wishes followed out during an emotional time.

Putting a will in place is easy for everyone, as there are a number of generic templates that can be purchased for cheap. If you aren’t sure what is needed in your case, see an attorney. Having the base template to work off of can still save in legal bills as it prevents the attorney from doing a complete draft.

Make sure to keep documents updated as life changes, and make sure loved ones know where to find them. As mentioned, keep documents in a secure place like a safe or a safety deposit box at your bank.

Hopefully there will not be a need to use a will or emergency savings. Though should the time come, the above tips will be extremely valuable.