Published April 2003

‘Recovery plan’ keeps you moving toward goals

Over the past couple of years, we’ve had a long bear market and a period of low interest rates. Consequently, it has been tough for stock owners and income-oriented investors alike. If you fall into either of those groups — and most people do — you may be wondering what direction to move.

You can’t control market volatility or the movement of interest rates. But you can create a “recovery plan” that will allow you to make the best of your situation and, in the process, continue moving toward your financial goals.

What, specifically, can you do? Here are some suggestions:

Put your losses to work. Your investment losses are tax-deductible, to a point. You can use your capital losses to offset any capital gains you have, plus up to $3,000 of other income, including earned income. So, for example, if you realized a $1,000 capital gain this year from selling stocks or other appreciated investments, you could write off up to $4,000 in losses. And you can carry forward any “excess” losses to future years.

Rebalance your portfolio. Your investment portfolio may have become “unbalanced” — and you might not even be aware that it happened. For example, if your stocks have declined sharply, then bonds or other fixed-income instruments may now make up a larger percentage of your portfolio’s total value than you had originally intended. Consequently, you may be “out of position” to capitalize on growth opportunities, which is why you’ll need to rebalance your holdings to match your individual risk tolerance, goals and time horizon. (Keep in mind that there may be tax consequences associated with one’s rebalancing strategy.)

Stabilize your investment income. What should you do with your bonds or certificates of deposit that mature when market interest rates are low? You could “park” the funds in a money market account until interest rates rise again, but that might take a while — and, in the meantime, you will have almost certainly missed out on some better opportunities. You may be better off by building a “bond ladder.”

To create a bond ladder, you invest in an array of short-, intermediate- and long-term high-quality bonds. When rates are rising, you use the proceeds from your maturing bonds to buy new bonds at the higher levels. When market rates are falling, you’ll continue to benefit from the higher rates offered by your longer-term bonds. Over time, a well-structured bond ladder can help you stabilize the income you receive from your fixed-income portfolio.

Swap for quality. Over the long term, high-quality investments — such as stocks of well-run companies with solid business plans — will reward investors more than investments that run “hot” and “cold.” Look through your portfolio for opportunities to replace lower-quality investments for higher-quality ones that may now be attractively priced.

Be a “tax smart” investor. Taxes can significantly erode your overall investment returns. That’s why you need to look for tax-advantaged vehicles. Take full advantage of tax-deferred instruments such as your 401(k) and traditional IRA. You can get tax-free earnings growth from a Roth IRA, provided you meet certain conditions. Depending on your tax bracket, you may also be able to benefit from municipal bonds, whose interest is exempt from federal income taxes, and may be exempt from state and local taxes as well. (However, municipal bonds may incur the alternative minimum tax.)

Clearly, you’ve got many opportunities to create a recovery plan that can help keep you on track toward your long-term financial goals. Start exploring these possibilities soon.

Eric Cumley is an investment representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 8,000 locations nationwide.

Back to the top/April 2003 Main Menu