Suspend Mark-to-Market Accounting

As our government continues to print & spend trillions of dollars to resuscitate the ailing US economy, their time & energy would be better served by simply suspending or modifying mark-to-market accounting.

What is mark-to-market accounting? It is an accounting methodology of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments. For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is marked to market, for accounting purposes it is assigned the value that it would currently fetch in the open market.

This definition seems very logical, but in my opinion does NOT apply to all assets. For example, if you had to sell your home on a Tuesday and didn't receive any offers, you would have to mark down the value of the asset the next day due to lack of offers the previous day. Some assets are simply not as liquid as others and should be priced in a different manner. How they should be priced is open to debate.

A brief look at history: Mark-to-market accounting existed during the Great Depression and many economists feel was the culprit for many bank failures at the time. Franklin Roosevelt suspended it in 1938 and the rule didn't exist until again until FASB 157 brought it back in 2007 (largely due to the Enron debacle and 'off balance sheet' assets). How is it we had no panics or depressions for 70 years and now we're dealing with a financial crisis?

First Trust Economist Brian Westbury succinctly described the benefits of suspending mark-to-market accounting. He states, 'both time & growth are absolutely essential when fixing financial problems. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away."

The Power of the Roth IRA

As Washington continues to print and spend billions of dollars, two things are certain in the future:

1)Inflationary pressures will increase at some point. You can't flood the market with new dollars and not expect a buying frenzy to occur at some point. Supply and demand will change and higher prices will unfold.

2) The Roth IRA is going to be the retirement vehicle of choice (some investors will also turn to the Roth 401K plan as well). The plethora of money currently being spent by Congress is borrowed from future generations and sooner or later will have to be repaid. Budget cuts & economic reform may recoup a small portion of what is owed, but the vast majority of repayment will come from higher tax rates.

As an investment with 'after tax' dollars, the growth of a Roth IRA is tax free. Not tax deferred, but rather tax FREE. Don't confuse the two. Most retirement plans (401k, 403B, Traditional IRA's and SEP/IRA's), use pretax dollars and offer tax reductions upfront. However, when funds are distributed, the government will tax the proceeds at that time. Depending on future income tax brackets, this could be expensive.

The old school of thought was simple: Defer your income until you retire and then take distributions at a lower marginal tax rate. This will afford less taxes are paid upfront AND less taxes will be paid in retirement as your household income decreases.

This sounds great in theory, but I think the game has changed with the current economic situation. Borrowed dollars are going to dictate higher taxes across the board (tax brackets, capital gains, dividends, etc.). It may not happen this year or next, but higher rates are coming from the current administration. This is where the true value of the Roth IRA will come into play.

Let's look at an example: Pat and Rose both save aggressively for retirement. After investing for a number of years, they both accumulate a cool $1 million. Pat uses her 401k plan to amass this money and Rose uses a Roth IRA account. Once retired, Pat elects to take a one time lump sum distribution of $1 million to travel the world and play tennis. If tax brackets remain where they are today (probably unlikely), Pat will owe about $360,000 (36%) in income taxes and pocket the remaining $640,000. Rose on the other hand elects to cash in her Roth IRA and move to Aruba to look at Dive-Dive trees all day. In her case, she walks away with a cool $1 million as NO income taxes are due.

The power of the Roth IRA is undeniable.

"Rule of 72"

When it comes to investing & savings, the "Rule of 72" is the gold standard. It simply states how long it will take for your money to double at a given rate of interest. The true benefit of this concept is derived from retirement accounts (i.e. Traditional & Roth IRA, 401k, 403B) as opposed to everyday or non-qualified accounts.


Let's look at a few examples:

What the above fails to indicate is with higher returns comes higher volatility (aka 'risk'). Growth mutual funds can have wild fluctuations while CD's offer stability. However, the lower the volatility, the lower your annual returns.

For example, if you start with $10,000 and desire a $20,000 ending balance in 10 years, you're going to have to strive for a 7.2% annualized return. Simply choosing a 2% CD will not get you to your goal. Balancing risk & reward is key.

Recent years have many raising an eyebrow as to the validity of this concept. 2008 was a dismal year for the stock market and essentially erased 5 years of gains. However, averages do play out over time and things will eventually revert back to the mean. If your time horizon is long enough you should see the "Rule of 72" work in your favor.

Bernie Madoff Client List Revealed

The first official client list of Bernard Madoff, LLC, was released yesterday by a Manhattan Bankruptcy Court filing. The 162 document contains over 13,500 celebrity names, trusts and average Joe's.

The list includes many of the names already revealed in prior news releases, but fails to recognize the thousands of other entities, pensions and charities who were invested with the firm via feeder funds. These often include 'fund of funds' type investments.

Many of these victims, not on the list, were derived via feeder funds such as Chais Investments, Ascot Partners and Fairfield Greenich. All fell prey to the Madoff Ponzi scheme.

Some duplication of client names does exist. It is not known why this occurred, but the complexity of the investment web is certainly confusing. A few new names that surfaced include CNN's Larry King and a trust account of Jeffrey Katzenberg.

Here's the complete client list in .pdf format.

Best Financial Websites

Financial news & commentary is only a click away. From Internet sites to domestic & international newspapers, magazines and trade journals, you can find virtually anything online these days.

In the Internet only world, Yahoo!Finance , Marketwatch.com, AOL Finance and MSNMoney are the 800 pound gorillas and dominate the space. General market commentary, such as stock, bond, mutual fund and option quotes are available. For mutual fund commentary, Morningstar.com is still the leader for insight & commentary.

If you're looking for daily news items, look no further than the Wall Street Journal, Financial Times or USA Today. Feature magazine articles on financial planning and money matters can be found in the pages of Smartmoney, CNNMoney, Kiplinger's, Forbes, Fortune and the elder statesman... The Economist.

For the technicians & fundamentalists amongst us, stock charts can be found at BigCharts, Clearstation and of course, StockCharts. And, for the fundys in the crowd, Motley Fool, TheStreet.com and Ragingbull shouldn't be missed.

Finally, in the miscellaneous category, here are a few more worth noting:

• Bloomberg for news, tv & radio feeds.




• Bankrate.com offers a host of online content.




• Financial calculators are always useful.




• A few financial blogs to note: The Icahn Report, 24/7 WallStreet, Kirk Report & Carl Futia




• Stock markets - Nasdaq, NYSE Euronext , and CBOT




• ETF Information: iShares and Proshares