In Perspectives

With the recent decline in the equity market, the time is ripe to discuss how to take this opportunity to turn a “lemon into lemonade”.

Nobody likes seeing a decrease in their portfolio value, even if it is just temporary.  However, at times this can indeed be an opportunity in disguise.  Here are four ideas to perhaps consider in this time of market decline.

1.  Increase your 401k/403b contributions
This goes for all pre-tax retirement plans.  When you purchase a mutual fund or a stock, you are purchasing shares of the investment.  When stock prices are lower, you can purchase more shares similar to deals at the grocery store when you can buy 5 apples for the price of 4.  This also follows the mantra of “buy low, sell high.”

2.  Gifts of Stock
Many of our clients have utilized this strategy recently.  When you have a taxable estate (for estate tax purposes), any sort of marginal difference adds up. Using your annual gift exclusion can remove assets from your estate, which can result in immediate tax savings for your estate.  An heir will always be willing to receive cash, but the gift of a stock could potentially provide greater benefits to the donor as well as the donee, especially if the donee is in a lower tax bracket.  Another concept to consider is gifting appreciated securities to an heir in a lower tax bracket.  The markets have essentially given you a gift because (for example), a stock that was worth $100,000 four months ago might now be valued at $80,000.  Why not gift this to an heir so they can pay the taxable gain or so they can realize the eventual growth of the stock?

3.  Roth Conversions
When you convert traditional, pre-tax IRA assets to Roth IRA assets, you have to recognize the amount you convert as current taxable income.  Following the same context as before, why not transfer assets at lower prices for the time being to realize the eventual long-term gains in a more favorable tax environment (most distributions from Roth IRA’s are tax-free versus distributions from IRA assets that are fully taxable)?  This can be very powerful if utilized over a long period of time because you could accumulate money in this tax-friendly account by way of contributions, growth and without tax consequences upon distribution.

4.  Purchase Stocks
Not everything “on-sale” is worthy of purchase.  Many values are lower for good reason.  However, there are also some high-quality, positive cash flow generating companies available at very attractive prices.  Unlike at Jos A. Bank, which is always running a sale, you do not get opportunities to purchase stocks at great values every day.

By no means are we calling a bottom on stock prices and we do not believe in market timing.  However, we are suggesting a proactive approach to try and create an opportunity out of the uncertainty that currently exists in the market.  Many things in life are out of our control, but the choice to make “lemonade out of lemons” is within our grasp.