Russell Bailyn -

When I do budgets with my clients, I’m frequently shocked at the annual outlay for gifts. After housing and food, gifting is one of the larger annual expenses for individuals in terms of percentage of income dedicated to it. For one of my clients who earns around $100,000 per year gifts accounted for roughly $3,500 (3.5%) of her gross income. For another client who only earns around $60,000 gifts accounted for almost $2,400 (4%) of her annual income. And that’s after taxes! The percentage of income dedicated to gifts was noticeably higher for people in their late 20’s and early 30’s when wedding season tends to hit hardest. So the question begs itself: does gift giving come back to reward you, or bite you?

I’ve got to say bite you—and often bite you hard. I say this not just because giving gifts requires spending money, but also because the amount of utility recognized for items purchased as gifts is often much lower than items purchased by a person for him/herself. Clearly I’m disregarding the whole sentiment angle—the bubbly, warm feeling people get when purchasing a gift for someone else. There’s also that lovely moment of shock for the recipient when they learn that someone else spent time and money on them without their knowledge.

Joel Waldfogel, author of the book Scrooged: Why You Shouldn’t Buy Presents for the Holidays, makes the interesting point that retail campaigns designed to encourage holiday spending lead to many inconsistencies in terms of matching products with users. People feel pressured into holiday spending an often blow money in the holiday spirit, not because they’ve successfully matched an appropriate gift for an appreciative recipient. Waldfogel goes on to analyze the amount of money spent on gifts and compare the utility of those gifts vs. things he may purchase for himself. On average, gifts get 20-30% less utility than items purchased by oneself. Why? Well, it’s fairly obvious. People giving gifts don’t know exactly what you want and they don’t know exactly what you have. They also can’t navigate around the particulars of a gift such as exact colors and sizes the way you could. Therefore, they make a worse purchase than you would have with the same number of dollars.

So what can we conclude from all of this? Not a whole lot. Gift giving is an important part of our culture and is likely to stay that way. What we can do is carefully consider the recipient and attempt to find something which they will appreciate that isn’t overly expensive. People who don’t earn a huge amount of money should focus more on the thoughtful aspect of gifting and try to spend only 1-2% of their after-tax income on gifts. The most important thing is to be honest with oneself and others about what is reasonable to spend and what you can afford to spend. Take someone out to dinner if you can’t afford to buy them a $100 gift. Buying a few good books or DVDs is often a less expensive way to provide someone else with many hours of enjoyment.

Happy holidays to my readers! See you in the New Year.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors, Inc.
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
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 11:27 AM | Permalink | Comments ( 1 ) | TrackBacks ( 0 )

There is an interesting article in this month’s Financial Planning Magazine which questions how realistic it is for the dollar to “fail” on a global scale. These sorts of articles aren’t unusual these days as much debate takes place over US debt, continued foreign investment, rising gold prices, etc. The article’s main contributor, Frank Wei of FundQuest, argues that the dollar is too important to both the global economy and the financial system for it to experience a sudden collapse. Any further declines, he argues, will be gradual.

Among the major causes for concern by investors right now is the long and continuous period of low interest rates which encourages the printing of new dollars. Because of how many global products are priced in dollars (i.e. oil) a collapse would instantly shock the world in a similar fashion to how systemic risk fears plagued the global equity markets and forced emergency policy action during 2008 and early 2009.

A weaker dollar means inflation, right? Not necessarily. The way Americans measure inflation is primarily through CPI, a measure of the prices of goods and services commonly consumed in our economy. As it currently stands, housing prices comprise roughly 40% of the CPI basket. Unless you believe housing prices will rise sharply during 2010, rampant inflation is unlikely, at least during 2010. Along those lines, the number of Americans struggling to make their ballooning mortgage payments will more than likely curb spending in other parts of the economy during 2010. If consumer spending remains flat, it becomes much less likely we’ll experience runaway inflation.

Next, we have the automatic defenses or “hedges” which surround the weak dollar. For one, US stocks have been rising as the dollar falls against other currencies. This relationship has been dominating the equity markets over the past few months although just recently we’re seeing equity prices rise even with a stronger dollar. As the dollar continues to drop, Asia, Europe and others have been snapping up US goods and services trading at sale prices. The subsequent rise in equity prices is good for the economy, at least in the short run. Second, as the dollar declines, US exports become cheaper, reducing the price of our debt payments. This helps China who can use the proceeds of cheaper exports to offset the potential for losses on US debt.

Even if the dollar continues to decline, which most money managers agree that it will, I don’t see doomsday coming. I mean, how many times have we seen this before? The dollar declined heavily in the 1970’s, the early 80’s and early 90’s. Everybody talked about China and others removing their peg to the dollar during those periods. What ultimately happened? People realized there isn’t an adequate substitute to the dollar and stuck with us. I would imagine the same thing is likely to happen again. Further, even if another currency were to ultimately replace the dollar globally, it probably wouldn’t be in collapse fashion but through a gradual transition. Because the US consumes a tremendous amount of goods and services, the manufacturers of those goods around the world want our economy, and our dollar, to avoid collapse. It would benefit those countries selling finished goods to the US for the dollar to decline at a measured pace rather than suddenly.

Question or comments? E-mail me.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors, Inc
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
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 04:55 PM | Permalink | Comments ( 0 ) | TrackBacks ( 0 )

The 401k industry is in a pretty sweet spot. Corporate pensions are quickly becoming obsolete and now more than ever employees need to rely on their own ability to save money. What could be easier than an automatic payroll deduction plan such as a 401k or 403b which provides tax-deferred growth and in some cases an employer match? Many people I know who really don’t have much investment savvy accept the 401k as one of those investment programs which they need to sign up for and that’s all there is to it. Sounds a little hasty, right? Well, according to a 2008 survey discussed in the November, 2009 issue of Registered Rep magazine (Introducing 401k 2.0), about 77% of 401k plan participants claim to have little, basic or no level of investment understanding. And despite Department of Labor requirements regarding improved efforts to educate participants, the reality is that many people simply don’t have the time or energy or desire to educate themselves about stock and bond investments. What they really need is good advice—a person or team of people whom they can reach out to on short notice to provide specific advice relevant to each participant’s situation.

As an advisor, part of my concern regarding the 401k industry stems from its complexity. Because of my experience administering and monitoring retirement programs, I’m fairly knowledgeable on the fees, expenses, investment options, service issues, tax issues and economic factors related to 401k plans. I’m also current on the issue of after-tax (Roth) contributions which have been all the rage lately. The way I see it, a 401k plan participant should be not merely be given an enrollment document and left with a pen to check off boxes. The concept of “auto-enrollment” is good only in that it encourages greater levels of savings. It’s dangerous in that ordinary investors could be making hurtful decisions in terms of their own tax consequences, liquidity needs, tolerance for risk, etc. I think a 401k enrollment application should be filled out by an employee with an advisor present who doesn’t have any conflict of interest (i.e. getting paid by) the retirement plan.

The 401k industry has traditionally been led by Wall Street. 401k is “product” which is actively sold to the tune of trillions of dollars to millions of Americans. It’s time for us to move the focus away from the profits of large and financially comfortable firms and onto the needs of the participants, many of which face a looming retirement crisis. With the first round of baby boomers starting to retire, the advisor community needs to band together on the issue of not letting retirees outlive their money. And while honest financial professionals deserve to get paid for their time and knowledge, they’ve got to remember that serving their clients objectively should be the #1 priority.

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

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
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 02:24 PM | Permalink | Comments ( 2 ) | TrackBacks ( 0 )