JR Snell Capital Management, LLC

I’ve gotten a fair number of questions about this Roth IRA conversion that’s going to be available to all IRA owners next year.

The basics are that you will be able to convert all of your regular IRA-type accounts over to Roth IRAs during 2010, regardless of your income level. The million dollar questions is, “Is it a good idea?” … and I can’t provide an answer to that question.

So, what good am I? Well, I brought it up didn’t I? Ok… actually, I’m willing to be the “go-fer” between my clients and their accountants… but they and their accountants have the ultimate say  whether it’s a right thing to consider… that’s what good I am.

Just to get the ball rolling, I stole an article that’s got way too much detail about the whole issue… It might be confusing to us mere mortals, but your accountant will probably be interested in it. So, read – copy – print the attached article and then pass it on to your accountant.

OK, it might be just a wee-bit twisted that I sit around and think about IRA accounts… but I do. Anyway, I was thinking about IRAs last night and I wanted to remind everyone about two things with IRA accounts that are coming up.

First…

Our rich Uncle Sam, in his efforts to help soften the blow of the stock and bond mess we’ve all experienced over the last year or so, has waived the Required Minimum Distribution for 2009. I IMPLORE YOU… if you do not absolutely, positively NEED your RMD to keep the lights on, PLEASE do not take the distribution. This is a GIFT… (another) from your Rich Uncle Sam… do not look it in the mouth.

Second…

2010 is the year of the Roth IRA conversion. This can be a tricky one, but the basic difference between a Roth IRA and a regular IRA is that Roth IRAs are the opposite of regular IRAs… their contributions are not tax deductible, but their withdrawals are tax free. The catch is that there are income limits on who can contribute to a Roth IRA… so most of my clients and others who I work with demographically, we have usually not been able to throw Roth IRAs into the mix…. EXCEPT:

THE LOOPHOLE…. during 2010 ONLY, regular IRAs can be converted to Roth IRAs FOR ANY INCOME LEVEL… not just the restricted lower income limits. You will have to pay taxes on the amount converted, but that will be it forever…. No required minimum distributions, no taxes on withdrawals, no affect on your Social Security Income if you have a pretty beefy IRA account.

Given that the taxes on your IRA can also be spread out over three years (2010 ONLY, AGAIN) and the investment markets may have handed you a fairly low valuation point for conversion, this just might be the best news you’ve gotten in a while.

It’s complicated and unique to each individual’s situation, so I will be working with my clients and their accountants over the next few months to help them decide if it is right for each of them. If you are not a client and would like additional information, contact me at 480-575-7688 and I’ll hook you up with the right people.

Remember when I wrote the “Market Timing for Dummies” thing? It was in December of 2008 and my little chart that I showed in the post indicated that, at that point we’d been out of the market for a year and we might be out of it a while longer too.

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We’ll, we’ve been out of the market another 8-plus months since then. Guess what? While you weren’t paying attention, we slipped into a bull market! What? Yes, it’s true… here’s the chart from almost a year ago brought up to today’s date.

Before you defrost those little wieners-on-a-toothpick that you’ve been saving for this party, here’s what it means and what I’m doing about it and what I think you should do…

Ready? Here’s the answer: “ATTITUDE SHIFT”. Since 75% of all stock price movements are in the direction of the overall market, we can begin to think that price situations will begin to resolve in our favor now, instead of assuming that everything’s going to immediately go into the crapper the instant we buy it like the last almost two years. That’s an attitude shift.

Before buying anything, make sure the financials are right and good… and that the chart looks favorable… and that you’re only putting an appropriate amount of your dough in each situation… and that you protect yourself against too much loss. (I like 10%).

As the rally continues to mature and goes through a couple of “tests” and subsequently continues to keep the wheels on, you can add to successful positions, start adding additional positions, etc. etc…. all the while limiting your risks.

So, it’s an attitude shift to where you would begin the process of investing in stocks when they look right. Moving all at once to a fully invested position could end up being a mistake if things take a sudden turn for the worse.

I remind all that you cannot predict the future.

This is fairly succint and seems to sum up pretty well what my big-picture concerns are about not just the economy, but society… at present. (I am an optimist/realist.)

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

Dr. Adrian Rogers, 1931

One of my silly pleasures in life has been to surprise people with how little it actually costs to have your portfolio professionally managed, and custom-tailored by our firm… especially versus a mutual fund.

I present a listing of average expenses paid by mutual fund investors and then ask my prospective clients to propose a reasonable fee for our firm to charge them. They might want to consider that their portfolio will be custom built and managed with their personal objectives in mind… not to mention all of the retirement planning, goal-setting and progress-check sessions that we will complete over the years.

If we’re all being reasonable, I am almost without fail presented with a suggested management charge by the prospective client that is higher than our published rate schedule.

Mutual funds (for a whole raft of reasons) have built in disadvantages to all but the smallest of investors. But, one of the most obvious disadvantages is that they are fairly expensive to buy and hold for the long term. They get away with it because they don’t send an invoice to you that you have to pay… they just sneak it out of your net asset value.

Another disadvantage is the actual fee structure and the fixed cost portion of the internal fees causes something even stranger to happen… the more money you lose, the higher percentage fees that you get charged.

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If you look at the chart, you’ll see some percentages charged by AllianceBernstein last year and the expected charges coming up in this year. They’ve all gone up because of the dramatic loss of market value that they’ve all experienced.

Oh… and if you want to know total expenses that they’ll be charging, you have to take the portfolio turnover times 0.5% and add this to the published rates… these are trading cost averages. The average portfolio here turns over once (100%), so add 0.5% to the numbers for 2009 to find out how much you would be paying in total every year. In these cases, it’s roughly about 1.88% to 2.25% every year.

Oh… and don’t forget to add in the 4.25% commission that you would have to pay your “advisor” just to get in.

It’s important to know that it’s not just AllianceBernstein, it is all mutual funds to varying degrees… This example is just the latest that popped onto my radar recently and I felt like writing about this topic today.

Kick you down, beat you up, then kick you again. “Thank you sir! May I have another?”

OK. OK. OK. I know. Things are “all better” now, right? This seems to be the general mood on Wall Street and around investing circles on Main Street. There’s a feeling that things are getting better. The market has put in a fairly impressive rally for a couple of months.

People are starting to ask about when I am going to start making them some money. For the last year plus and some change, folks have been OK with simply having avoided the train wreck that the market is. Now, I can feel a shift back toward that old, familiar “left behind” fear… and some performance anxiety building up amongst the natives.

This has got my antennae up. But, putting the recent performance of the stock market aside, I’m having a whole lot of trouble finding the signs of recovery…. Is the recovery a mirage? Are others seeing things that I cannot?

As for me, rising interest rates and energy costs might be enough to derail this figment of a recovery, if it was even there. Or maybe the perceptions of a possible derailment of a potential recovery? You get my point, right? It is all a little nebulous at present.

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So, what to do? Here’s the answer… Back in December I put together a post about “Market Timing for Dummies” and explained EXACTLY when I would call this a Bull market. If you take another moment and read the article, then you’ll see that “we ain’t there yet”.  Doesn’t mean we never will be… just not yet. Here’s the latest chart to go with a re-read of the article.

I write the posts that you have been reading (or are about to read) for a couple of simple reasons:

First, from time to time our clients want to know a little bit more about the “why” of the investment positions / decisions that are being made in their accounts. Although all clients know they are completely free to call or email us (me) at anytime for any question, the blog offers them a non-intrusive way to “eavesdrop” on what we’re thinking. Sometimes it’s a “just curious” sort of thing and nobody seems to want to bug us for that reason. Even though it would be perfectly OK.

The second reason is that I expect that people who are looking for an investment advisor might enjoy the opportunity to “follow along” over time, just to feel comfortable with us before making any kind of an investment decision. I anticipate that by following my rationale and reasoning you will think, “This guy knows what he’s doing” and you might see that I’m straightforward, kind of plain vanilla, and honest with good news and bad. You might decide this is the kind of guy (company) that you’d like to do business with.

Lastly, people like to do business with people that they know and like. If you follow along for long enough, you will get to know me… and maybe even like me. I’m just saying… there’s a chance.

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It looks like we’re stretching out our “hang time” at this potential top for a little while longer here. As I’ve mentioned in a number of previous posts, we look like we’re in a spot where we’ve rallied of off a potential bottom and now we’re about to test the resiliency of it.

I mentioned in my last post about this that we’ve failed our recent “tests”… so it’s important to be uber-cautious here. Note that on this chart we have actually made little to no NET progress since the beginning of May. Actually, before today, we had made none.

Back to the “bouncing ball” theory from a couple of weeks ago.

I’ve had this gut feel that while some of the “stimulus” stuff might be helpful to our economy, I’m a little uneasy about the “big-picture” ramifications of our economice malaise being used as an excuse for the government to FINALLY make some big inroads into our personal freedoms.

Here’s an article that I think is OUTSTANDING at explaining my “pit of the stomach” feeling about this. I think you’ll find it thought provoking as well.

First, I think I’m going to “choke” the next journalist who makes another wondrous statement about the stock market being up about 30% or more from the March lows. Although technically it is true, in the context of what just happened to investors that set up this rally, the rally is insignificant and most likely meaningless. But, it makes for a good headline.

Please remember that the media’s job is to attract viewers or readers, not to elucidate the real inner workings of the financial world.

So, yes we are up from the March lows. However, the million dollar questions are, “Is that it, or do we have another one or two or more leg(s) down? Are we approaching a place in this economy and the market where it might be prudent to start again to make some long-term investments?”

Good questions, yes… and no, I do not have the answers to them. I have my guesses, but it’s not really a good idea to lay out my guesses, lest they be mistaken for attempts at prophecy. As a matter of fact, most of the “analysis” about the future course of our economy and the markets that we see on the financial channels might be couched in the terms of “finance-speak”, but when the varnish is stripped away they’re just guessing too.

This isn’t really revolutionary thought: It’s accepted wisdom that the future cannot be predicted. I do find it more than a little odd that people would believe that the laws of reality can be suspended when we’re talking about the economy or the stock market.

Do yourself a favor and remember that no future is predictable and what you need to be on guard for is those that would have you believe that it can be foreseen and proceed to spout it on CNBC as some sort of a “fact”.

This brings me to strategy… which for me is a set of “if-then” decisions that I will make to help us to try to be in the right place in the right time. At this moment, we have seen a strong rally from the March lows. We appear to be in a spot where this rally, like all rallies, is beginning to run out of steam. We are seeing a little bit of the recovery-euphoria begin to melt away from people’s emotional mindset, opening the door to the possibility that we’re embarking on the selloff that will “test” how strong everyone’s conviction is about the strength of the market.

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For the last 18 months, we have failed each test and the market has ultimately moved to fresh, dramatic and scary lows each time. The VERY BEST strategy (IMHO) to pursue right now is to begin to lighten up on a few issues that did not rally strongly over the past two months as we get confirmations that the selloff has begun for the weakest stocks that we hold. Then, step two is to “stand-aside” and let this thing run it’s course. We should be lightly invested as it does. Next, we will look for signs that strength is coming into the market and if it does come in without the market violating the March lows, then we have to assume that the time is better for making some longer-term investments.

This whole process could (and probably will) take several months, or more. This is not the time to be anxious, nor do we need to try to be heros… we sidestepped some of the worst and this gives us the opportunity to be selective about when to re-enter the market. It’s a difficult time right now and these things take time to work themselves out, so be patient… we will prevail.