Contrarians, Take Note

October
19

Written by: Jon McGraw

market-uncertaintyHow quickly emotions have changed since August. Worry? Angst? It’s already priced into the markets, according to some experts.

Last week, Barron’s published the results of its Big Money Poll, a biannual survey of professional investors and money managers. A majority of those surveyed (55 percent) were bullish about U.S. markets’ prospects through June 2016, 29 percent were neutral, and 16 percent were bearish. That’s a big shift. Last spring, just 45 percent of those polled were bullish and nearly one-half were neutral. This time around, things are different:

“After a wild and crazy summer for U.S. stocks, marked by an 11 percent correction in August, Wall Street’s bulls are showing conviction again … the pros expect stocks to rise by as much as 7 percent through the middle of 2016, propelled by a growing economy and gains in corporate profit. The Big Money investors see fresh value in beaten-up energy stocks and financials, as well as dividend-paying blue chips. And, they don’t expect a likely interest-rate hike—when it comes —to break the bull’s stride for long.”

Investors who participated in the American Association of Individual Investors’ October 14 Sentiment Survey weren’t quite so optimistic. The survey showed just 34 percent of investors were bullish, 39 percent were neutral, and 27 percent were bearish. The bulls were down 3 percent from the previous week, and the bears gained a percent. Uncertainty seemed to be the name of the game, though, as the number of investors who held neutral opinions increased by 4 percent.

As an interesting side note, the professionals surveyed by Barron’s estimated the number of investors who weren’t sure where markets are headed was much larger—76 percent!

If you’re a contrarian—an investor who does not subscribe to popular opinion—there are a lot of opinions to consider.

Data as of 10/16/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.9% -1.3% 9.2% 11.8% 11.4% 5.5%
Dow Jones Global ex-U.S. 0.4 -3.1 -0.9 2.6 0.3 1.8
10-year Treasury Note (Yield Only) 2.0 NA 2.2 1.7 2.5 4.5
Gold (per ounce) 2.5 -1.5 -4.6 -12.2 -2.9 9.6
Bloomberg Commodity Index -1.4 -14.0 -23.6 -14.9 -9.3 -6.6
DJ Equity All REIT Total Return Index 1.2 1.2 10.7 10.7 11.7 7.9

Not Always the Best Strategy

It’s not always a good idea to roll over company stock from a 401(k) plan to an IRA. In fact, doing so might mean you pay more in taxes to Uncle Sam than necessary.

If company stock held in an employer-sponsored 401(k) plan has appreciated, the difference between the amount paid for shares (the cost basis) and the current value of those shares is known as net unrealized appreciation (NUA). For instance, if an investor paid $10 a share for 1,000 shares ($10,000) for stock that is now worth $15 a share, then the investment is worth $15,000, and the NUA is $5,000.

If the shareholder completes a rollover from a 401(k) plan to an IRA, those shares of company stock will be liquidated, along with the other assets in the account, and moved to an IRA where the assets will have an opportunity to continue growing tax-deferred. When the assets are distributed from the IRA, they may be taxed as ordinary income. If the investor is in the 28 percent tax bracket, the taxes owed would be about $4,200.

There is an alternative that could be a better choice tax-wise. An investor can request that company stock be distributed in-kind and sent to a taxable account. The stock is not liquidated. The shares are moved to the new account. The investor may owe ordinary income taxes (and penalties if he or she is not yet age 59½) on the cost basis ($10,000). However, the net unrealized appreciation ($5,000) will not be taxed until the shares are sold. Taxes on the cost basis would be about $2,800.

If the investor takes a distribution right away and the shares have been held for more than one year, the proceeds may be taxed at the long-term capital gains tax rate, which is currently lower than the ordinary income tax rate. If the investor is in the 15 percent capital gains tax bracket, an additional $750 would be owed in taxes. In this example, the investor could save about $650 in taxes overall.

Please keep in mind this is a hypothetical example and is not representative of any specific situation. Each investor is unique and your results may vary. Executing an NUA strategy seems straightforward, but it can be tricky and not everyone is eligible. If you would like to learn more, please give your tax professional a call.

Weekly Fun—Think About It

“If you wish to forget anything on the spot, make a note that this thing is to be remembered.”

Edgar Allan Poe, American author