Steps to Surviving the Recession

There’s no question that today’s economy is as difficult as any we’ve seen in our lifetimes. Rising unemployment in recent months is putting pressure on the Obama administration to repair credit markets to spur economic growth and boost the stock market. While many consumers may be confident that the market will recover, investors will likely experience continued volatility in the months ahead.

Consider the following steps to help adjust to the new economic environment:

Run your medical practice as efficiently as possible. If you hold office hours on weekends, how many patients are actually coming in during certain time periods? If revenues from these visits don’t exceed the cost of staying open, it may be time to trim those hours. Another area of possible savings: If you rent your office space and commercial rents have declined in your area, you might try negotiating your lease payments downward. If your rent is truly high for your particular real estate market, your landlord may be concerned that you might move your office to another location where the rent is lower when your lease expires.

Run your household as if it were a business. Consider how corporations operate. During profitable years raises, bonuses, promotions, and new investments abound. Unlike businesses, however, consumers can become too accustomed to a particular lifestyle and resist making changes in the expenditures department. Just as many American businesses are doing, American consumers are advised to adapt to this uncertain market by spending even more frugally and thinking of new ways to manage their households more efficiently. In some instances, this will mean small changes. In others, it may mean forgoing big-ticket items.

Plan to take advantage of down-market opportunities. Some physicians may want to plan to convert their Traditional IRAs into Roth IRAs. While holders must still pay income tax on the amount converted, lower account values mean that the tax liability on a conversion now may be lower. Although taxpayers with a modified adjusted gross income of more than $100,000 are not eligible to undertake a conversion in 2008 or 2009, that limit will be lifted for conversions beginning in 2010.

Another area of possible savings is tax-loss harvesting—the practice of taking income tax deductions on investment losses suffered that year. Remember, even if losses exceed the annual $3,000 allowable deduction limit, excess losses can be carried over to a future year.

Rely on reason. Behavioral finance literature suggests that investors experience more extreme emotions when they suffer losses than when they receive gains. Don’t let the recent market volatility play on your emotions and destroy the discipline necessary for successful investing. Remember, the average U.S. economic recession — defined as a period of significant decline in economic activity – has lasted about 11 months. Notably, on average, the stock market has begun to recover about halfway through recessions, with the typical rebound being about 25% in magnitude (from the market’s low point to end of recession).

One investment strategy that helps avoid emotional investing, called dollar-cost averaging, simply involves investing a set amount each month in a retirement account. Set contributions buy fewer shares when the market is up and more shares when the markets are down, resulting in an optimal average cost per share over time. Right now, the market is on sale. In this environment, a particularly attractive investment option may be the Roth or Roth 401(k). In addition to current income tax rates being at historic lows, the shares are available at low prices.

Adhering to an essential investing discipline also requires staying informed in this time of uncertainty by digging beneath the headlines. For example, though the $787 billion figure got all the press concerning the economic stimulus bill that Congress passed in February, the bill includes some lesser-known tax provisions. One of these is a measure to once again “patch” the alternative minimum tax (AMT). The patch increases the existing amounts exempt from taxable income when calculating AMT for the 2008 tax year to $70,950 for married couples filing jointly and $46,700 for single filers and heads of households. This higher exemption amount may help you avoid AMT and thus enable you to take deductions that the AMT would disallow.

Another provision that may affect a large number of taxpayers is the extension for 2008 and 2009 of the option to deduct state and local sales tax instead of state and local income tax. So anyone living in a state with little or no income tax who is already planning to purchase a big ticket item, such as a car, might want to do it before the end of this year.

With traffic on Yahoo! Finance (http://finance.yahoo.com) and Marketwatch.com burgeoning, some mutual fund companies are revamping their web sites to position themselves as a one-source stop for online financial information needs. For example, in addition to offering its own market insight, Fidelity now provides a real-time news section that culls stories from 19 media sources to deliver a wider range of personal finance news and advice, including budgeting tips, retirement planning, insight into individual stocks and easy-to-view market indices. Look around and find a favorite.

It’s time to move away from the alarming headlines and do something about the situation. Collectively, these action steps can help investors feel more in control as they move through 2009.

Terry Anderson, a Certified Financial Planner, is an investment advisor representative with Securities America Advisors and the founder of Wealth By Design and Management (www.wealthbydesignandmanagement.com). He specializes in strategies for preserving wealth and assisting with strategic financial transactions.