|by Tenielle Shallman
What can you do now to position yourself for a market recovery?
Review your current overall allocation. With the decline in the market by almost 30% since January 1st (DJIA as of 10/31/08), you may find that your overall asset allocation has strayed from your optimal allocation based on your risk tolerance and investment objective. For example, you may have determined that an overall allocation of 80% equities and 20% fixed assets is appropriate for your situation, however, you may now find yourself at a 70% equities and 30% fixed overall asset allocation creating the need for re-balancing the portfolio.
Now is also a good time to re-evaluate the amount of volatility or risk that is acceptable to your situation. Determining your risk tolerance level is not an exact science, but there are many considerations when evaluating your level of risk tolerance. Items to consider are your age, time horizon & proximity to retirement, cash flow needs, experience with investing, net worth and investment objective.
Structure investments appropriately into short-term, mid-term and long term buckets. Generally, funds that you will need to access within five to seven years should be held in fairly liquid assets. The mid-term bucket should cover your needs from year 7 or so through about year 15 and funds for long term needs of 15 years or more. Funds for long term needs of 15 years or more might be positioned slightly more aggressive than the mid-term bucket of assets. Structuring assets appropriately can help alleviate concern about liquidating equities in a down market.
Consider harvesting the losses in non-qualified accounts and re-investing the funds. Losses in non-qualified accounts can offset current capital gains and up to $3,000 of ordinary income. Please discuss your particular situation with your tax advisor.
If you qualify, evaluate and consider a Roth Conversion of your IRA assets. In a Roth Conversion, you pay ordinary income taxes on your IRA assets now to convert the asset to a Roth IRA so that in the future you may receive tax-free distributions. The advantage of doing so now, if you qualify, is that the balance in your IRA may be substantially lower due to the market decline; therefore you pay tax now on a potentially lower amount.
If you wish to discuss these opportunities and others, please contact your Wealth Enhancement Group Team.