Holy Cow! They're finally catching on!

Recently Registered Rep Magazine posted an article 'Forget Stock Market Gains , It's Best to Avoid Losses' Well, it's about time!

The article features a mutual fund company that is just now figuring out what we have known all along, the math of investment losses makes preserving capital the most important task facing individual investors. Maybe soon they will realize that folks don't buy stock because they enjoy getting proxy notices, we buy stock in hopes of actually making money, and if the market stinks we want to take our marbles somewhere else to play.

If you lose 10% it takes just over 11% to be back to even. That kind of gain is quite common for the S&P. If you suffer a 20% loss you need a 25% gain just to be even, years where the S&P rise 25% are rare. If you suffer a 50% loss it takes a 100% gain just to get back to even, the S&P will take years to achieve the double you need for that. It is easy to see that avoiding really big losses is the key to investor heaven.

But rather than put together a mutual fund that is fighting the last war, investors would do better to learn to recognize the warning signals that the markets exhibit and be prepared or even expect that you'll need to sell any investment from time to time.

Roth IRA Conversion Alert

If you converted all or a part of a Traditional IRA to a Roth IRA in 2008 you may have an opportunity to recoup the income taxes you paid when making that conversion. But you must act before October 15th of this year.

If you made a conversion to a Roth IRA in 2008, the value of the securities you converted have probably gone down. This means you paid taxes on money you no longer have. You should consider "recharacterizing" that Roth IRA conversion back to a Traditional IRA. Recharacterization is the IRS lingo for canceling the conversion and it helps you in a couple of ways. First, you can get a refund of the taxes you paid on the converted IRA funds and secondly, you can redo the conversion 31 days later, potentially producing even more tax free income.

To learn more see the entire article from Ed Slott in this months Financial Planning magazine.

TARP Could Be Watershed For Taxpayers

Banks have been repaying the loans they received last fall at a steady pace. The treasury department has received their principle and 8% interest from over 30 banks. Additionally, the treasury has made some tidy profits on the stock warrants the received as part of the bailout package. Some of the big profits for the government include $950 million from Morgan Stanley, $340 million from American Express, and $1.1 Billion from Goldman Sachs.

Is it possible that the TARP program could pay for itself and provide extra fund to cover some of the other items in the stimulus package?

Stay tuned!

Maximize the Benefit of a Losing Variable Annuity

I had the chance back in the 01-03 bear market to help some clients with variable annuities maximize the benefits of investments that had gone sour, and just this past week ran across another opportunity to help a potential client with this same strategy. Here is what to look for:

• You purchased a variable annuity that has lost value.
• The death benefit of your annuity is calculated based on a dollar for dollar reduction for withdrawals.

Here is how this strategy works:

Let's say you originally put $100,000 in the annuity and the value has now dropped to $70,000. The death benefit of this annuity equals premium payments less withdrawals on a dollar for dollar basis. You withdraw most of the money from your annuity, leaving only enough to keep the policy active. Let's say you must leave $5,000 in the policy so the insurance company can't cancel the contract. That means you withdraw $65,000 from the policy and move that money elsewhere to recover as the markets recover. Your death benefit on the annuity falls from $100,000 to $35,000 refecting this withdrawal.

What you have done in effect is to create a synthetic paid up whole life insurance policy that will pay out one day to your heirs. Meanwhile your remaining value can be invested to create even more wealth and income for you and your heirs.

This opportunity may also apply if you have a 403b plan that utilizes group variable annuities.

This strategy will not work if the death benefit of your policy is calculated on a pro rata basis, and the insurance industry has caught on to this ploy so most new policies have a pro rata calculation. So before you exchange an old annuity or just give up on it check to see if there may be a better way to skin that cat.

Understanding Money Supply and the Federal Reserve

I have to disagree with the talking heads I've seen on television recently, warning investors of hyper inflation. According to these 'experts' a serious bout of inflation is imminent due to the tremendous injections of liquidity by the Federal Reserve. I believe these pundits are overlooking one of the most basic factors in economics and I fear some of the talk is more politically motivated than financially motivated. While it is true that the Federal Reserve has been pumping money into our economy, the important thing these pundits miss is the 'why'.

There are two components to the effective money supply in the US economy. One is the amount of cash flowing through the economy, and the second is the velocity of the cash flowing through the economy. Of the two, the velocity of money is the more important.

If you studied economics is college you will recall that the velocity of money is normally a function of bank reserve requirements, which are set by the Fed. Simply put, if the reserve requirements are set at 20% then each dollar does the work of five dollars (100/20). If the reserve requirements are set at 10% then each dollar does the work of $10 (100/10).

I say under normal conditions because what we have seen during this credit crunch is anything but normal. Usually banks lend as much as they are allowed to lend based on the reserve requirements. That is how they make profits. However, because of loose lending standards in the past and questionable reserves, lending in our economy has slowed to a virtual crawl. Couple this decreased lending with increased reserve requirements for non bank financial entities such as Merrill Lynch, Morgan Stanley, and Goldman Sacks and you have created a serious speed bump for the velocity of money in our economy.

As lending contracts, the velocity of money in our system contracts. Because velocity is usually a multiplier of the physical currency in circulation any contraction in velocity reduces the effective liquidity in our economy many times.

The Federal Reserve's policy of providing liquidity to our ailing economy is not currently inflationary, it is simply an attempt to offset the slowing velocity of money. Without this infusion of liquidity there is a real danger of deflation, which is much harder for the Fed to fight than inflation. It is easier to slow the economy down than it is to speed the economy up.

The Federal Reserve will need to be vigilant as the economy eventually improves. The liquidity injected into the system could become inflationary as the velocity of money through our economy accelerates. But that won't occur until the credit crunch abates, which is a problem we would all like to see come sooner rather than later. Until then investors should not be overly concerned with inflation. Coming to the party too soon is nearly as bad as staying too late.

Cash for Clunkers

Have a kids car that your ready to trade in? That old clunker in he driveway could bring big bucks under a new government program aimed to stimulate the economy and clean the environment.

Get a credit from Uncle Sam to trade. The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Different requirements apply for work trucks.

* Your vehicle must be less than 25 years old on the trade-in date
* Only purchase or lease of new vehicles qualify
* Generally, trade-in vehicles must get 18 or less MPG (some very large pick-up trucks and cargo vans have different requirements)
* Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in
* You don't need a voucher, dealers will apply a credit at purchase

For more info go to cars.gov

Wall of Worry

It is said all bull markets begin by climbing a wall of worry. You haven't heard that phrase used in the media recently, so let me be the first to bring it out of the closet and dust it off. The market seems to be gaining strength in spite of the poor state of the economy. Remember the market is a predictive mechanism, not a reactive one. The market is telling us that all the best minds in the world of finance believe the economy will be doing better in about six months. Look for a Merry Christmas in 2009. You are probably to scared and shell shocked to step in here, but you should at least be getting your toes wet.