Investing for your security: Social Security reform, market fluctuations, and inflationary pressures mean you've got to take an active role in securing your finances. Our expert panel of money managers tells you what to do with your money now

LIKE MANY AMERICANS, GINA AND Lybroan D. James are forming an opinion about President Bush's plan to privatize Social Security. The plan would give individuals an opportunity to invest a portion of their retirement benefits in the stock market--something the James family feels cautiously optimistic about.

The James family has made a good life for themselves in Los Angeles. Gina, 32, is a systems analyst in the entertainment IT unit of NBC Universal. Lybroan, 36, recently quit his job as a math teacher and started his own real estate appraisal business, Rock Water Appraisal. Because they have two sons--3-year-old Lybroan G. and 3-month-old Nigel--they've been actively planning for their future. But Social Security and the stock market have not been their primary focus.

Why not? Gina explains that the president's plan "only works if you know how to manage the stock market." And she reluctantly admits, "I don't know enough about how to invest.... There's a big education piece that has to be included [in the plan]."

Lybroan says he'd welcome the chance to privately invest his Social Security funds, because the interest those funds currently earn hasn't kept pace with inflation. "That's why I've personally planned our retirement around real estate," he says. "Historically, it gives a higher rate of return than inflation, and it's easier to learn and manage than the stock market."

While they both believe individuals could benefit from managing some of their Social Security funds, Gina and Lybroan say that such a plan could challenge African Americans more than others. "I don't think it's easy for the average person who has to work every day and take care of a family--unless you have a financial manager who can help you," says Gina.

That's why BLACK ENTERPRISE convened a panel of four accomplished investment professionals to discuss the market outlook for 2005 and the merits of the Social Security privatization plan. The members of our roundtable are Larry Jones, managing director of equity securities for NCM Capital Management Group Inc. in Durham, North Carolina, (which was ranked No. 7 on the BE ASSET MANAGERS list with $2.4 billion in assets); Michael Ray, vice president and head equity trader at Legg Mason Capital Management in Baltimore, the $44 billion manager of popular mutual funds such as the Legg Mason Value Trust fund; Ted Parrish, principal and portfolio manager for the $1 billion Henssler Financial Group in Kennesaw, Georgia, which offers the Henssler Equity Fund; and Brian Jeffries, CEO and president of Detroit-based Ambassador Capital Management, a fixed income-only shop with about $600 million under management.

BLACK ENTERPRISE: Social Security is a hot topic of discussion these days. If the Bush administration is successful in passing legislation allowing individuals to invest a portion of their Social Security funds, how does that change the markets and what investors should do with their money?

Larry Jones. The most direct beneficiaries of a change like that are publicly traded asset accumulators like Legg Mason, Franklin Resource, T. Rowe Price, and Janus. They will be managing the money, and their fees are based on the amount of assets under management. I would make sure I held a significant percentage of my portfolio in those companies.

More long term than that, we have a major issue: In 2018, the so-called Social Security fund goes negative, with more money going out than coming in. We're going to have to borrow money to make up that shortfall. That means taxes are going to be raised and benefits are going to be cut for at least some part of the population.

Brian Jeffries: To me, Bush's plan is akin to what we are seeing with a lot of public funds: the full transfer to defined contribution plans from defined benefit plans. There's a lot of emphasis going into education, and that's going to be an important aspect of his plan--to educate the participants about their options and some of the basic strategies of asset allocation and how to stick to a strategy.

How will it affect the market? There is going to be a great supply of money flying into the market, so you will probably see an initial pop. But everything comes back to the norm, so I would caution against investing for just the short term to get those market pops. You want to look for strong, solid companies, not market timing.

Ted Parrish: Consumers and investors should treat [these accounts] as a supplement to their current allocations. They should still max out their 401(k), or at least up their contributions to the level their company is matching, and contribute to their Roth IRA each year. Invest in high-quality, diversified companies and bonds.

Michael Ray: I probably look at this differently than most people. I don't believe that Social Security is all that big of a problem. Even when we start to experience a funding gap in 2017 or 2018, it's only because the number of workers--the Generation X and Y workers--won't be able to cover the number of retirees in the baby boom generation. But, there are multiple solutions that could possibly fix the problem. As far as the shortfall goes, we would still be able to cover approximately 75% of the current level of payouts with no change to the system. So, when people say the system is going bankrupt, that's actually not true. It's just that you won't be able to receive the same level payments that you receive currently.