A useful year-end move to counteract capital gains.

Even though this has been a poor year for the market, you may realize short-term capital gains. What do you do about them? You could do what many savvy investors do - you could "cash in your losses" and practice tax loss harvesting.
Selling losers to offset winners. Tax loss harvesting means taking capital losses (you sell securities worth less than what you first paid for them) to offset the short-term capital gains you have amassed.

While this doesn't get rid of your losses, it can mean immediate tax savings. It can also help you diversify your portfolio. It may even help you to position yourself for improved long-term after-tax returns.

The tax-saving potential. Sure, you can use this technique to put your net gains at $0, but that's just a start. Up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.1

Are your choices based on evidence or emotion?

Information vs. instinct. When it comes to investing, many people believe they have a "knack" for choosing good investments. But what exactly is that "knack" based on? The fact is, the choices we make with our assets can be strongly influenced by factors, many of them emotional, that we many not even be aware of.

Deal du jour. You've heard the whispers, the "next greatest thing" is out there and YOU can get on board, but only if you hurry … sound familiar? The prospect of being on the ground floor of the next big thing can be thrilling. But while there really are great new opportunities out there once in a while, often those "hot new investments" can go south quickly. Jumping on board without all the information can be a bit like gambling in Vegas … the payoff could be huge, but so could the loss. A shrewd investor will turn away from spur-of-the-moment trends and seek out solid, proven investments with consistent returns.

Risky business. Many people claim NOT to be risk-takers, but that is not always the case. Most proficient investors aren't reluctant to take a risk, they are reluctant to accept a loss. Yes, there's a difference. The first step is to establish what constitutes an acceptable risk by determining what you're willing to lose. The second step is to always bear in mind the final outcome. If a taking a risk could help you retire five years sooner, would you take it? What if the loss involved working an extra ten years before retiring … is it still a good risk? By weighing both the potential gain AND the potential loss (while keeping your final goals in mind), you can more wisely assess what constitutes an acceptable risk.

What happened, how the markets came back, and the rewards for the patient investor.

The numbers. According to the National Bureau of Economic Research (which has made a point of chronicling all U.S. recessions), this downturn lasted from March to November of 2001.1 It is one of the milder recessions on record; in fact, real consumer disposable income actually grew during this eight-month period. Gross domestic product fluctuated across the year: GDP was -0.5% in the 1Q, +1.2 in the 2Q, -1.4 in the 3Q, and +1.6 in 4Q 2001.2 The Dow Jones Industrial Average fell 7.2% across 2001.3 Unemployment rose from 4.3% to 5.5% during this period, eventually cresting at 6.3% in June 2003.4 By the first half of the year, inflation had more than doubled from a 1998 low of 1.5%.5 It was the housing sector that kept the economy going - and in many respects, sparked growth and recovery. The Federal Reserve cut the federal funds rate 11 times during the year; it fell from 6.5% to 1.75%.6

The reasons. The tragedy of 9/11 had an effect on the markets, but it was just part of the economic story behind this downturn. The dot-com bust and the subsequent recoil of the NASDAQ had opened the door - that index continued its descent, dropping from 2,341 at the start of 2001 to 1,577 at the end of the year.7 Accounting scandals (most notably at Enron and WorldCom) didn't help either.

The rebound. The stock market struggled through 2001 and 2002, but proved its resilience. After the closure of the stock market following 9/11, the Dow fell 685 points to 8920 on September 17 and lost 14.26% in a week to close at 8,235 on September 21. But the DJIA closed 2001 at 10,021 - a 21% rebound in less than three months. On October 9, 2002, the Dow closed at 7,286. But then the index closed October at 8,397 - a 15.25% gain from the October 9 trough in 22 days, and a 10.6% rise for the month.8 Those who got out of stocks soon wanted back in: in 2003, the DJIA gained 25.3%, the S&P 500 26.4%, and the NASDAQ 50%.9

Dirk Dixon is a Representative with Ameritas Investment Corp and may be reached at 515-285-5546 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations. 1 nber.org/cycles.html [8/28/08]
2bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2001&LastYear=2001&3Place=N&Update=Update&JavaBox=no#Mid [8/28/08]
3 the-privateer.com/chart/dow-long.html [8/08]
4 sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/01/24/BUM3UKED0.DTL  [1/24/08]
5 realtor.org/intlprof.nsf/1c8e38bf483f911d8625681100462df1/b171ee782198e89e86256b10006a8c3c?OpenDocument  [2002]
7 the-privateer.com/rates.html [8/5/08]
7 finance.yahoo.com/q/hp?s=%5ENDX&a=00&b=1&c=2001&d=11&e=31&f=2001&g=m [8/28/08]
8 the-privateer.com/chart/dow-long.html [8/28/08]
9 upi.com/Business_News/2003/12/31/UPI_NewsTrack_Business/UPI-75601072911443/ [12/31/03]

This investment technique may help you take advantage of the downturn.

The central idea: buy low, and sell high. It's the oldest stock market adage, and in the wake of the recent selloff, dollar cost averaging may give you a method to capture lower prices today and come out ahead tomorrow.
How it works. Dollar cost averaging is a long-term investment strategy. It means investing in small increments. Through scheduled investments of as little as $50 or $100 per month, you buy investment shares over time, as opposed to pouring a big lump sum into the market. The method is often recommended to younger investors with longer time horizons, and investors who don't yet have great wealth.

Why it is worthwhile in a bear market. First of all, when the market drops, the investor practicing dollar cost averaging isn't hurt as much as the lump sum investor - as the lump sum investor holds many more shares of the declining fund or stock.

As a consequence of dollar cost averaging, you can now buy in at a lower price - and buy more shares for your money.

This year, you don't have to pull money out and pay the taxes.

You don't have to take RMDs from your traditional IRA this year. On December 23, President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008 into law, suspending all Required Minimum Distributions (RMDs) from IRAs, 401(k)s and 403(b)s for 2009.1

This is sweet relief for people 70½ or older, especially people that don't really need the IRA income. After all, no retiree wanted the "injury" of having to withdraw IRA assets already hurt by the recession plus the "insult" of having to pay taxes on the RMD. You can leave that money in your IRA in 2009 without incurring a tax penalty - and if the markets recover in 2009, those invested assets can grow and compound.2

So what if you turned 70½ in 2008? You still have to take your 2008 RMD by April 1, 2009. It should be calculated using your account balance as of Dec. 31, 2007.2 (This is assuming you haven't taken it already.)

Could it make the world a better place? Could it make sense financially?

A gift to charity may prove to be a great financial favor to you. Some charitable gifting methods offer you notable tax advantages. Here's a brief look at some popular options.

Charitable remainder trusts (CRTs). These trusts can be useful estate planning tools. People with highly appreciated assets - such as stocks or real estate - are often hesitant to sell those assets and reinvest the proceeds because of the capital gains taxes that could result from the sale. Could the CRT offer a solution to this problem?

CRTs are tax-exempt trusts. In transferring highly appreciated assets into a CRT, you get: a) a tax deduction for the present value of your future charitable gift, b) income payments from the CRT for up to 20 years, and c) tax-free compounding of the assets within the CRT. You avoid paying capital gains taxes on the amount of your gift, and you can exclude an otherwise taxable asset from your estate.1

The IRA charitable rollover is back for 2008 and 2009.

A time to "do well by doing good." If you dislike taking Required Minimum Distributions (RMDs) from your IRA or want to improve your tax situation, you might want to explore an IRA charitable rollover. It is back, as a bonus of the Emergency Economic Stabilization Act of 2008. The IRS officially calls it a Qualified Charitable Distribution (QCD).

An IRA charitable rollover lets an individual age 70½ or older withdraw up to $100,000 from an IRA and donate it directly to a charity, school, or other qualified non-profit organization. You can do this in tax years 2008 and 2009. (That's $100,000 per person, so if your spouse has an IRA with assets of over $100,000, you can collectively gift up to $200,000 annually using IRAs.)1

The big tax break attached. Imagine reducing your taxable income by as much as $100,000. The rollover amount is excluded from your adjusted gross income (AGI) for the year in which you make the gift. You can also use a QCD to reduce estate taxes and effectively increase your deduction capability.2

IRS rules say that you can only deduct the equivalent of 50% of your AGI in charitable gifts per year (although excess deductions may be carried forward for up to 5 years). But … gifts made directly from IRAs don't count toward this 50% limit.2