| COMMENTARY ARCHIVE: NOV 13, 2008
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Opportunities in a Declining Stock Market
When the stock market goes up, life is less stressful and more fun. Remember what that was like?
The last year has been one of the most disturbing in my 30 years in the investment business. Portfolios are down 20-50%--in one year!! Yikes. The market is down 3% today; yesterday it was down 2%, as it was the day before. It makes you want to scream. Screaming may be therapeutic, but it won't fix the worldwide economic woes.
Someday those happy times will return, but when will that be? I wish I could say that those days are near, but I can't. Historically, when the market does start going up, it surprises even the "experts" and rises rapidly during the first few days and weeks. When this does happen, it is usually those with wisdom, patience, luck and cash who benefit most.
Until the turnaround starts, here are some things you can do to take advantage of the bull market:
1.Invest while the market is low. We don't know where the ultimate low is, but we do know that current stock prices are very low relative to a year ago. Investors are supposed to buy low and sell high, but few investors do As Warren Buffett says, "Be fearful when others are greedy, and be greedy when others are fearful."
2.Harvest tax losses. You can deduct $3,000 in capital losses after netting out any gains. Any leftover is carried forward to future years to offset future gains. Part of this strategy is to sell the stocks and mutual funds that you wanted to sell last year, but didn't because it would have generated large capital gains.
3.Convert your IRA or SEP to a Roth IRA. If you qualify to do this, it is an expensive strategy. In the short run you need to pay taxes on the full amount that you convert, but not with funds from the amount converted. This could be 10% to 40% of that total. This sounds crazy, but, if the money in the Roth grows back to where it was before, you won't pay any tax on the larger amount when you withdraw it. Check carefully with your tax advisor or me before using this strategy.
It's obviously better for your finances when the market is rising, but if you act prudently when the market is low, it can help offset market declines faster. |
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