Enough with the negative newspaper headlines. While the sun’s unlikely to come out on the economic stage tomorrow, there are certainly some bright spots on the horizon and silver linings in the recession’s storm clouds. Sure, we’ve been dealt some bitter lemons, but I am passionate about making the best lemonade anyone has ever tasted. Accordingly, my firm is re-dedicating itself to doing what we do best—servicing the real needs of our clients with sound investment and wealth management strategies. We’re busy monitoring client portfolios to maintain target allocations, harvesting losses to reduce taxes and discussing other wealth management topics of concern to each client whether that is college funding, insurance planning, estate planning, charitable planning, etc. For our retirees, we’re also managing withdrawals to ensure their portfolios remain sustainable over the long run. In that regard, we also continue to evaluate investment alternatives to determine if something should be modified or added to the portfolio.
In addition, there are numerous planning opportunities in the down market. For example, it’s an ideal time for us to review your wealth transfer plan in search of tax-saving strategies. In short, depressed account values present an opportunity to minimize the current tax consequences of certain wealth transfer techniques. In fact, temporarily depressed asset prices combined with the current low IRS interest rates used to calculate gift taxes on some trusts together create the perfect storm of opportunity for gifting assets, especially as we expect your accounts to recover. Similarly, if a Roth IRA would fit into your diversified portfolio, now might be a good time to convert a Traditional IRA into a Roth IRA. While you’ll still pay income taxes on the amount being converted, lower account values now mean your tax liability will be lower. Although taxpayers with modified adjusted gross income of more than $100,000 are not eligible to do a conversion in 2008 or 2009, keep in mind that limit will be lifted for conversions beginning in 2010.
Of course, big picture, not all the numbers are bad. For example, for the second month in a row, the Conference Board reported a rise in the index of leading economic indicators (LEI). Although unexpected by many economists, January’s LEI rose an impressive 0.4% following a 0.2% rise in December. Notably, these increases followed declines of 1.0% in October and 0.7% in November. Specifically, five of the ten indicators that make up the leading economic index increased in January. The positive contributors—beginning with the largest positive contributor—were real money supply, the interest rate spread, index of consumer expectations, manufacturers’ new orders for nondefense capital goods, and manufacturers’ new orders for consumer goods and materials.
Additionally, it’s important to remember that, on average, a U.S. economic recession lasts only about 11 months and the stock market begins to recover about halfway through a recession. What’s the typical rebound? In “Advice to Investors: Sit Tight and Batten Down the Hatches” Wharton Professor Richard Marston notes gains from the market bottom of the recessions of 1982, 1991 and 2001were 59%, 34% and 39%, respectively. If you have a moment, I recommend that you click on this link to read more of the advice given in “Advice to Investors: Sit Tight and Batten Down the Hatches.”
To spark a much-needed infusion of positive thinking, I’d like to share a quote I recently came across from Bhaskar Chakravorti, a senior lecturer at Harvard Business School and a partner of the international management consulting firm McKinsey & Company: “Shortage and adversity are powerful stimuli for focusing the mind.” Chakravorti notes that if history is any guide, we can expect some significant industry shapers to emerge from the recession. In spite of the economic hardship of the 1930s, household names like Motorola, Hewlett-Packard, and Texas Instruments emerged as entrepreneurial start-ups. (You can visit the Harvard Business School website to read an interesting Q&A with Chakravorti where he explains how entrepreneurs systematically identify opportunities.)
In closing, I’d like to encourage you to cultivate your own entrepreneurial momentum. To nurture that positive, can-do spirit, rather than look back, I suggest we evaluate the here and now and look ahead to the future with confidence. In the financial realm, the diversification and asset allocation plan we have established for you means your portfolio did not fall as far as the Dow or S&P 500; and you still have the upside potential in the next growth cycle.
While any loss is difficult to stomach, it is my hope that your conversations with me and conversations with your family and friends about ensuring you have the resources to meet your life’s goals, have afforded you new perspective and strength to illuminate the many things that are right with your life.