It is safe to state that 2008 could not end fast enough. Crises arose rapidly and often beginning with the meltdown on Wall Street and ending with the Bernard Madoff scandal. Instead of focusing on the carnage, there are several very important lessons that can be learned before picking up the pieces and moving forward.

Investors who experienced sizeable portfolio losses might be considered lucky compared to other more unfortunate folks. After all, many supposedly sophisticated investors along with their investment advisers were victimized when the Ponzi scheme orchestrated by Bernard Madoff was finally exposed. While the press has written extensively about the red flags that existed for at least 10 years, one very simple safeguard can re-assure investors about the validity of their accounts. Typically, a third party custodian, such as National Financial, trust companies and banks, act as a conduit between the investor and the investment firm. The case with Brad Bleidt, an investment adviser in Boston who devised a similar albeit much smaller Ponzi scheme in Boston several years ago, was similar to the Madoff debacle in that the funds were deposited directly with their respective firms and not funneled through a custodian. While most investment advisers who handle client funds directly through their firms are highly reputable, this arrangement requires careful verification.

All of my accounts are handled thru these reputable third parties and never has a check from a client been made payable to Neponset Valley Financial Partners or Clifford Caplan. Furthermore, none of my clients have positions in so-called fund of funds where a portion of the portfolio is outsourced to another money manager such as Madoff. Typically, these portfolios are hedge funds, an arena that I have never participated on behalf of clients.

In a perverse manner, the meltdown in the economy and financial markets has actually created numerous planning opportunities. The value of an adviser who manages portfolios for both performance and taxes has never been more obvious. Many mutual fund investors will shortly be stunned to learn that they owe capital gains taxes for 2008 on a portfolio whose value has plummeted. Pro-active advisers who sold losing positions by the end of the year not only avoided these onerous taxes for 2008, but have probably positioned their clients' portfolio to skip capital gains taxes for many years to come.

Unfortunately, the unemployment rate has been rising at an alarming rate and is likely to continue. While securing gainful employment remains their top priority, those terminated employees who participated in 401(k) plans should be proactive about the management of their retirement plan assets. Generally, it is advantageous to immediately execute a retirement plan distribution to an IRA on a tax-free basis to expand the universe of investment options essential to effective management of these assets. While it won't solve the employment issue, continued prudent management of these funds is critical and has the potential to accelerate the recovery process in achieving long term financial goals.

For IRA account holders who have an abundance of liquidity and earn an Adjusted Gross Income (AGI) of $100,000 or less (if married), it may be an opportune time to convert the IRA to a Roth IRA. The benefit of this conversion is that all future growth and subsequent distributions are tax-free and not subject to the required minimum distribution. However, income taxes are currently due on the value of the converted IRA. With depressed account values, the tax liability for conversions may never again be this low. Furthermore, with the possibility of income tax hikes under the Obama Administration and the probability of a rebound in the financial markets, the future tax liability may increase greatly if taxpayers do not take advantage of this opportunity now. In 2010,all taxpayers may benefit from Roth IRA conversions due to the removal of the $100,000 income cap.

With the tremendous liquidity in our financial system as a result of actions by both The Treasury and Federal Reserve, interest rates on mortgages are near all time lows, under 5% for a 30 year mortgage. For those homeowners who qualify, this may represent the last chance to lock in these rates and permanently reduce their monthly payments. Refinancing makes great sense for homeowners who plan to remain in their home for many years.

Finally, after living through a period of turmoil and uncertainty, the need to focus on the security aspects of your financial plan has never been more pertinent. For many years, I have continually contributed to permanent life insurance policies that gradually build cash value over time. While I sometimes questioned this strategy during the great bull stock market, I am relieved that I stayed the course. Not only have I protected my family in the event of my death, I have accumulated a significant amount of guaranteed interest earning funds that I may access in the event of an unanticipated cash crunch. Other clients who are more concerned with protecting their assets in retirement, might strongly consider the purchase of long-term care insurance as it becomes a higher priority due to diminished financial resources resulting from the decline in the markets.

These are difficult times for many, but I remain confident that our resilience will ultimately result in a stronger economy. However, I believe that this recovery will be slow and grinding. I do know that uncertain times and volatile markets often present once in a lifetime opportunities that may shorten the time frame for the attainment of financial objectives. While these times are unprecedented and challenging, the need to plan for the future has never been more urgent.

As usual, I welcome any comments or questions.


Best Wishes,

Clifford L. Caplan, CFP®


In the News: Since our last newsletter, I was quoted in the November 16th edition of The Boston Globe in an article titled “Taxes will never disappear but you can ease the sting” where I discussed the advantages of borrowing from your 401(k) account.