By Rick Rodgers, CFP
The stock market’s climb and the Dow Jones Industrial Average closing in March at its first new high since the Great Panic of 2008 prompted a lot of conflicting predictions from analysts.
Some say it marks the end of an impressive bull market, while others say it’s just the beginning of a much larger rally. These predictions may or may not turn out to be correct — and they leave the investor confused.
However, as with the downturn four years ago, there are smart financial moves everyone can make to potentially take advantage of the new stock market high.
Rebalance – Rebalancing is the process of correcting an asset allocation that has become over-weighted or under-weighted due to a market fluctuation. In layman’s terms, it is the process of bringing all your investments back into a predefined mix of equities and fixed income assets. This is an important part of creating an investment strategy. Your portfolio may be over-weighted in stocks because of the new market high. Rebalancing now would force you to harvest some of the gains. When the market is down, rebalancing would force you to buy at reduced prices. Although there are no guarantees, buying low and selling high is a terrific investment strategy!
Donate Appreciated Securities – Anyone charitable minded may have a perfect opportunity to meet donation goals and double their tax savings using appreciated securities. Provided you have owned the security for at least a year, you can donate the asset and use the current market value as a deduction on your taxes. You also avoid paying capital gains tax on the asset if you had sold it. This could be a significant tax savings on stocks purchased four years ago during the market low.
Exercise Stock Options – Stock compensation is an important tool of corporations today in attracting and retaining key employees. Many executives find a significant portion of their compensation being paid in the form of stock options. This may be an excellent time to exercise some of your vested stock options if your company stock participated in the market rally. Stock options come in two forms: non-qualified stock options (NQSOs) and incentive stock options (ISOs). Both forms come with expiration dates and price targets, but they differ significantly in their tax treatment. Be sure to consult your tax adviser before taking action.
Net Unrealized Appreciation (NUA) strategy – Withdraw company stock from your 401(k) and, instead of rolling it into an IRA, transfer it to a taxable brokerage account. This strategy avoids paying ordinary income taxes (maximum rate 39.6%) on the stock’s net unrealized appreciation and turns it into a capital gain (maximum rate of 20%). There are strict rules to follow so consult a financial adviser who is experienced with this transaction before proceeding.
Qualified Charitable Distribution (QCD) – The American Taxpayer Relief Act of 2012 reinstated the ability to make a QCD through Dec. 31, 2013. A QCD allows individuals over age 70½ to directly transfer up to $100,000 from an IRA account to one or more charities. These transfers can be done using appreciated securities and are credited toward the IRA owner’s required minimum distribution for the year.
Stop Timing the Market – The Great Panic in 2008 and 2009 scared many investors out of stocks entirely. The past four years may have been a missed opportunity as these investors waited on the sidelines for the right time to get back in. You will never know when the stock market is going to go down or when it will recover. The good news is you don’t have to know. Devise a solid financial plan using an asset-allocation strategy that divides your money between a diversified equity portfolio and fixed income. Rebalance your portfolio periodically to take advantage of stock market volatility. The famous investor Peter Lynch said “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”