In bad times, investors can still do well

By David McNaughton /Cox News Service
7-25-02

ATLANTA -- Wednesday's rebound aside, the stock market has been a downer for weeks -- and a loser since early 2000.

But there are ways to make the most of a poor market.

Financial experts in search of ways to beat the bear market suggest everything from tinkering with a retirement fund to swapping or selling investments for tax benefits.

For starters, consider converting a regular individual retirement account to a Roth IRA. A traditional IRA provides a deduction for tax purposes when contributions are made, but withdrawals are taxed.

Contributions to a Roth IRA are not deductible for tax purposes, but withdrawals are not taxed if the account is held for at least five years.

Investors would have to pay taxes on the money in an IRA to convert it to a Roth version, said Ed Slott, a certified public accountant and editor of Ed Slott's IRA Advisor in Rockville Centre , N.Y.

The worse a hit your IRA has taken, the bigger the advantage in making the switch. Not only would you pay taxes on a smaller contribution to a Roth IRA, but "all the appreciation you get [later] is tax-free," Slott said.

"I would urge people to take advantage of it while prices are low," he added.

A regular IRA can be converted to a Roth by notifying the institution where you keep the account. The institution will in turn send you a 1099 form next tax season, Slott said.

Best of all, he said, you can switch gears after completing the conversion. "You have until October 15 of the following year to change your mind."

That gives an investor more than a year, assuming the conversion was made now, to watch the market and decide if the move was right. If someone who has converted a regular IRA to a Roth changes their mind, they can file an amended tax return to recoup what they paid in the switch, Slott said.

Another way to salvage something is to do what certified financial planner David Polstra calls "tax-loss harvesting."

That involves selling a losing investment, say a growth stock fund, for another similar growth stock fund sold by a different mutual fund family. The funds have to be from different families in order for the sale to qualify as a tax loss, said Polstra, chairman of Polstra & Dardaman in Norcross.

The sale leaves the investor which a similar investment, and a loss for tax purposes, he noted.

There's a key thing to keep in mind when considering such a strategy.

"You don't want to sell a good fund to swap for a mediocre fund," Polstra said.

A third strategy in a down market involves diversification. If most of your holdings are in one stock, and it hasn't dropped as much as the overall market, now may be the time to sell, said Kyle H. Flynn, at the Financial Discovery Group in Atlanta .

Selling that stock would provide money for a more diversified portfolio, whether in stocks or mutual funds, said Flynn, a certified financial planner.

"If there's a gain in the sale of the stock, then the gain would be less -- thus less tax -- than when it was priced higher," he said. "If there's a loss, then you can take the loss and apply it to other gains. The benefit is getting out of a concentrated position and betting that the markets as a whole will rise. Individual stocks are more volatile that a diversified portfolio."

David McNaughton writes for The Atlanta Journal-Constitution