Russell Bailyn -

A recent InvestmentNews survey finds that the majority of money managers in the US don’t think Obama’s economic recovery plan will achieve its stated goal. Frankly, I’m yet to hear any one plan which I’m jumping for joy over. In my understanding of Obama’s plan, the economy would be stimulated using a bottom-up strategy rather than the Republican favored, top-down strategy of across-the-board tax cuts. Obama believes creating jobs through state-government mandated infrastructure projects will jump start consumer spending and pull the economy out of any further immediate danger. It’s nearly impossible to know if this will work. And if it does, will it be a temporary, shot-in-the-arm stimulus which ultimately fails due to excessive debt burdens and mounting inflation? I don’t think across the board tax cuts would work any better if we’re truly aiming to stimulate the economy and get more dollars circulating. Politics will undoubtedly interfere with the Obama plan and marginal tax rates will ultimately increase to balance future budgets and service debt. I am somewhat intrigued by the idea of government assistance for past-due mortgage payments and renegotiations of mortgage rates and terms. This concept would at least chip away at the housing problems which are at the heart of the financial crisis. I also think eliminating mark-to-market accounting is crucial along with restoring the uptick rule. A real concerted effort is needed right now to mitigate the economic problems and restore some badly needed consumer confidence.

My concern with Obama’s plan is that the stimulus will be temporary. One scenario could be that we ultimately create three million jobs rather than four million, and the new trend of saving rather than spending will decrease the effect of the stimulus dramatically. Stats show that lower income Americans tend to spend the large majority of their earnings but I think that may be changing in the foreseeable future. The Obama plan may succeed in giving the Dow a temporary bounce, perhaps up to 9,000 or so. It would seem impossible that nearly a trillion dollars of stimulus doesn’t improve our economic stats for a few months. But once the dust settles and we start to ponder paying back the trillions of dollars we spent jump-starting the economy and bailing out the banks, then what happens? We raise taxes on the rich and on small businesses, lose more jobs as a result, and hope that Bernanke and his crew are right about their ability to contain inflation. If not, we get this inflationary deep recession which could easily push the Dow below 7,000.

As for the housing crisis, I firmly believe that 80% of the solution will happen naturally. Any attempt to ‘float’ home prices or spend money to keep people in homes which they can’t afford is absurd. If prices drop another 10% or so, new buyers will likely venture back into the market and scoop up deals. If prices drop back to 2000-2001 levels, the historical chart of national home price appreciation will start making sense again. As for areas with high rates of foreclosure and abandoned homes, I agree with the response given by the Feds lately that allowing regional clumps of foreclosures can be viral and ultimately reduce the property value of broader neighborhoods. We don’t need to be as concerned about foreclosures rates on a national basis: it’s the individual regions which require additional oversight to prevent the scenario of spiraling price declines.

In terms of dealing with the bleeding stock market, I think we have to at least temporarily eliminate mark-to-market accounting. These onerous requirements, designed to improve transparency and fairness for investors, have caused financial stocks to fall apart. In testimony Wednesday, Ben Bernanke first defended mark-to-market by saying it’s logical that investors should have the right to see the actual market value of assets rather than fake ‘book values’ and other bogus valuations designed to dress up balance sheets.
He went on to say that the large number of complex financial instruments we have here in the US along with many illiquid assets make it very difficult to implement a ‘real-time’ valuation. Bernanke said he supports the efforts to further analyze mark-to-market accounting and would like to especially improve the illiquid side of the market.

Similar comments were made with respect to the uptick rule. Bernanke wouldn’t comment too closely on the issue because it’s ultimately the responsibility of the SEC, but he did say they are giving careful consideration to its implications going forward. He certainly left the window open for restoring it. It doesn’t take a genius to realize short-selling by hedge funds and other market-moving investors have exacerbated the downtrend of financial stocks over the past six months.

If we can swiftly address all of the issues above in some kind of organized fashion, I genuinely believe our economy will come out better a couple years down the road. At this point we desperately need some confidence boosting to lift stocks and give ordinary citizens something positive to talk about.

Please e-mail me with any questions or comments here.

Russell Bailyn
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Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 11:43 AM | Permalink | Comments ( 3 ) | TrackBacks ( 0 )

This post is inspired by the endless string of questions I receive each month regarding “in-service” 401k rollovers. As any competent financial advisor or retirement plan sponsor will reply: in-service rollovers before a qualifying event such as reaching retirement age or separating from service are rare and scarcely permitted. The underlying logic is that employers have a fiduciary responsibility and overall moral obligation to their employees when it comes to their retirement plans. Allowing a client to invest their nest-egg in individual stocks and/or other asset classes would present the possibility of that nest egg disappearing quickly. However, because 401k performance has been so dismal over the past six months anyhow, why not give employees the flexibility they so desire? A good solution may lie in a 401k feature which many people don’t talk about: self-directed brokerage accounts commonly referred to as an SDBA feature.

Although long-permitted by ERISA law, SDBAs weren’t particularly popular until the bull market of the 90’s sparked a major interest in stocks. Because so many people invest through 401k plans, this became the logical place to tap funds for speculation. While SDBAs are extremely flexible in terms of investment options, they don’t allow investors to lose more than the total value of their accounts. Options, short-selling and other products and practices which require margin privileges are strictly prohibited by ERISA.

The interesting part to me is how the financial services industry views SDBAs as a win-win-win situation for the brokerage firms, plan participants, and plan fiduciaries. I can certainly understand the benefits to the brokerage firms, but I’d be more cautious as to the benefits to both plan participants and fiduciaries. As we’ll get to below, recent litigation which has heightened the responsibility of plan fiduciaries would probably make SDBAs more of a liability than anything else. That beings said, they may still choose to offer it.

The complaints being waged by those looking for in-service rollovers of their 401k balances is that their employer-sponsored plans are either overly expensive, have limited investment options, or a combination of the two.

An article written by George Chimento on February 20th, 2008 sheds more light on the potential risks to employers offering SDBA and other increasingly flexible 401k arrangements. Chimento writes about the verdict in LaRue v. DeWolff, Boberg & Associates, Inc, et al., one of the more significant ERISA cases of late. The Supreme Court verdict was that if a participant in a self-directed 401k plan gives investment directions, and if a plan fiduciary ignores or botches those directions, the fiduciary should be liable for damages to the participant's account. This may sound like common sense, but the federal courts repeatedly ruled that it would be unreasonable to hold fiduciaries responsible for mistakes made unless they harm an entire plan. In the case of James LaRue, he wasn’t even arguing about losses he sustained in his 401k account as a result of the error--he was arguing for lost profits he suffered due to the error.

The case can serve as an example of the increased liability placed on employers offering self-directed 401k plans (of which there are millions). This case didn’t deal with the specific issue of self-directed brokerage accounts, but one might logically conclude that the more flexibility you offer a participant over their investment decisions, the greater chance of financial losses and blame getting thrown around. It reminds me in some ways of the Social Security debate. While a true laissez-faire capitalist may prefer to self-invest their social security taxes (or eliminate them outright) we must deal with the greater issue of the masses. Investing requires education, discipline, and the ability to act without emotion. Many people--many very smart people--try their hand at investing and ultimately fail in frustration.

So is it beneficial to allow your employees to self-direct a portion of their 401k balances through brokerage accounts? My answer would be yes. It’s not like the majority of paid investment managers are crushing their benchmarks each year. In fact, most of them fall short over long periods of time and simply waste investment dollars in the process. So why not give employees increased access to better products and strategies? For the sake of employers, I might suggest an additional disclaimer document for clients who opt into the self-directed brokerage accounts. It may not hold up in court but it could at least prevent some liability in the short-run.

Please feel free to e-mail me with any questions or comments. If you have a 401k plan at work which you have questions about or feel may not be the best fit for your business, I’d be happy to discuss that as well.

Russell Bailyn

--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 12:08 PM | Permalink | Comments ( 0 ) | TrackBacks ( 0 )

Some of my clients have baulked at the idea of making a contribution to their traditional or Roth IRA accounts for 2008 before the April 15th deadline. The idea of pumping more money into stock and bond investments in the midst of this ‘economic storm’ is an eerie proposition for some. I’d like to remind anybody still pondering their IRA decisions for 2008 about a few things:

First, we make IRA contributions primarily for the tax benefits. If you’re convinced that the market may still shed some value in the near future, you can always put your contribution into cash or a money market and move it into different asset classes when you feel ready to do so. If you’re within the income limits, making a deductible contribution of $5,000 or $6,000 can greatly cut your tax bill for the year. It could also possibly lower your income enough to qualify you for student loan deductions, a stimulus check, etc. These things are hard to anticipate but can work to your advantage.

If you’re making a Roth IRA contribution, those funds will grow tax-free forever because you’ve already paid income tax on the money you’re contributing. If you consider the possible effects of the massive government spending being considered right now to help the economy, tax brackets seem likely to increase over the long-term. If that turns out to be true, the benefits of Roth IRA investing will only increase.

Second, this isn’t necessarily a bad time to make an IRA contribution just because the markets aren’t doing well overall. Most advisors would view this market downturn as an opportunity to buy shares at lower prices. This will depend on your time frame as the younger you are, the more time you have to wait before cracking your IRA without having to pay the early withdrawal (10%) penalty. Consider your longer-term objectives and try not to act with emotion.

Finally, amidst all of this turmoil, IRA investors at least have the option of self-direction, whereas 401k participants are at the whim of their retirement plans and its investment options. This can often mean higher expenses and more limited choices than one would normally expect. I get countless e-mails each month from readers who want to know if they can perform ‘in-service’ rollovers of their 401k funds into self-directed IRA accounts. While this would be logical considering that employees generally make the bulk of these contributions, in-service withdrawals are generally prohibited. The reason behind this is that some people (not all, but some) would make the silly mistake of investing their life savings in a penny stock or something along those lines which would be risky and irresponsible. Forcing an investor to buy shares through investment companies is, in theory, a protective measure.

As always, feel free to e-mail me with questions or comments.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 04:58 PM | Permalink | Comments ( 0 ) | TrackBacks ( 0 )

Twelve months ago, not many people expected 2008 to end in an economic downturn so severe that it would take many of the great 20th century financial institutions with it. Most of us had a basic understanding that a bubble was forming in the housing market, fueled by low interest rates and other pro-growth fiscal and monetary policies. However, the high level of risk within the financial sector was difficult for most investors to detect due to the inherent complexity of securitized assets. Like many things in life which seem too good to be true, people focus on the benefits without giving adequate consideration to the risks. Why rock the boat, right? Well, as the financial bubble continues to burst and scandals like Bernie Madoff's come to light, investors are realizing that due diligence is more important than ever. This applies not only in a broad sense as a wake-up call for Wall Street and its regulators, but in our personal financial lives. 2009 is a good time to re-evaluate investment objectives, investment assumptions, and liquidity needs. In today's column I'd like to consider whether cherished portfolio strategies such as diversification, asset rebalancing, and dollar-cost averaging should remain as fundamental to our investment philosophy as they were a decade ago. I'd also like to review some of the 2009 retirement plan contribution limits. Even if your investment choices become more conservative this year, taking advantage of tax-deferred investment accounts can be important to your longer-term financial success.

Money managers and financial advisors often cheer a diverse portfolio as the best way to defend against market volatility and achieve long-term growth potential. As the theory goes, a well diversified portfolio will be less susceptible to single-sector volatility because when certain sectors move up, others tend to move down. Similar rules apply to a variety of asset classes including international vs. domestic stocks, small-cap vs. large-cap, and growth vs. value. While following these rules has arguably reduced the overall volatility in your portfolio in the past, it hasn't saved you a dime of late. The correlations between various asset classes have seemingly disappeared over the past few months with most assets simply shedding value at this point. One could argue that mass liquidations and de-leveraging within the financial sector are to blame for some of the fire-sale pricing. There's very little an investor can do to diversify away these sorts of risks and others associated with recession. When a lack of consumer confidence pervades markets, we generally see a broad and extended decline in asset prices. Treasuries would be the notable exception in this case. What we can use diversification for is to help protect our investment portfolios against company-specific risks. This might include the labor union issues which tend to flair in the auto sector, and litigation risk which can affect any firm at any time without warning.

Next we explore asset rebalancing, the practice of establishing and maintaining a target asset allocation. If one asset class in our portfolio is outperforming another, we'll move money from the higher performing asset class into others, potentially shifting some profits into weaker performing investments. If we believe markets work in cycles, rebalancing will help us when the tide shifts to benefit the weaker asset classes. The downside to this strategy in the short-run is that larger allocations get made into investments which continue to struggle. If you're automatically moving money into an asset class as it declines, you may be throwing good money after bad without realizing it. Concerned investors need to be exploring the reasons why certain asset classes are declining to determine whether further exposure is potentially profitable, or downright disastrous. Consider the high-yield bond market for a moment. While the stock market has clearly priced in a recession at this point, many high-yield bonds are priced for a depression. The corporate bond spread, which represents the extra yield investors demand to compensate for risk, is near depression era levels. If you believe corporate bond defaults in 2009 could possibly rival the amount seen in the 1930’s, you may be better off shedding this asset class from your portfolio outright. You can always add it back in when the volatility has reduced to normal levels.

Dollar-cost averaging, or the process of depositing money slowly into markets rather than in one lump sum, is arguably as important now as ever before. Because of the wild volatility we've been seeing, where stocks have moved as much as 10% up or down in a single session, investors should remain extra cautious about getting into an investment just prior to a major market move. This is why 401k investing and other automatic investment plans work well for most people. Rather than falling into emotional patterns of buying high and selling low, securities are purchased at random times and prices. Theories vary as to the effectiveness of dollar-cost averaging in the long-run, but many investors seem to like the idea of testing the waters, especially at a time of peaking volatility.*

Overall I'm not convinced the time has come to abandon these fundamental rules of investing. If we assume this recession will pass like the others before it, adapting a new, more conservative approach might only lock in your losses and prevent you from participating in the recovery to come. That being said, this recession revealed an unfortunate interconnectivity between physical real estate and financial markets. The practice of securitization, which was originally pitched as a diversification tool, has allowed even the risk-averse to feel blindsided and taken advantage of. Investors need to pay closer attention to risk exposure inside their portfolios going forward. Speaking to your advisors and evaluating your overall investment strategy and eventual needs for liquidity is a smart idea for early 2009. Consider whether the speculative investments in your portfolio still have the same upside potential as they did in 2006. Rethink the total return potential of owning growth stocks versus dividend-paying consumer staple stocks. People will still be purchasing tissues and toothpaste even when they decide against that second I-pod.
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Contribution Limits for 2009

Regardless of how your risk tolerance may have changed over the past year, qualified retirement plans still offer a way for law firm employees to reduce taxable income and grow savings on a tax-deferred basis. Some firms may offer a 401k plan. If so, the elective deferral limit will jump by $1,000 this year to $16,500. If you're over age 50, you can defer up to an extra $5,500, for a total of $22,000. The same limits would apply to a 403b plan if you work for a non-profit. If you are self-employed or work at a small or mid-sized firm you may have a SEP IRA, Solo 401k, or Profit-Sharing Plan available to you. The contribution limits for these defined contribution plans will rise to $49,000 in 2009, up from $46,000 in 2008. Defined-benefit (pension) plans generally allow much larger contributions but are more complicated to administer. Like the rest of the financial industry, many large retirement plans will see changes in the coming year related to increased transparency for investors. A lot of trust has been lost this year on Wall Street. A genuine effort to better regulate financial firms and keep them honest will go a long way towards rebuilding trust and ultimately, promoting the recovery of our economy.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Dollar cost averaging does not assure a profit or protect against loss in declining markets. This program involves continuous investment in securities regardless of fluctuating price levels. Investors should consider their ability to continue their purchases through periods of low price levels.

Posted by Russell Bailyn at 01:14 PM | Permalink | Comments ( 1 ) | TrackBacks ( 0 )