Ross Levin: Four things you can do with your stocks in this bear market

When life hands you a lemon ... you can eat it but your face will scrunch up. Or you can make lemonade.

But sugar is not that great for you, so don't do that. Maybe you can drizzle it on fish or something. Regardless, when life hands you a lemon, you need to get creative.

This stock market has been a real lemon. If you fell in love with the highest value your portfolio has ever been, it is unrequited love. Rather than scrunch up your face at your investment statements as they come in, there are four things that you should be considering.

First, if you own underwater investments in taxable accounts, you shouldn't let those losses go to waste. Let's say you invested $10,000 in an S&P 500 fund that is now worth $8,000. If you just hold it until the market recovers, that loss disappears. A better strategy would be to swap into a similar, but not identical, investment such as a total stock market index. You obviously need to consider transaction costs, but if you do this that $2,000 loss can be used against this year's taxes (up to $3,000 of capital losses) or saved to be used against gains in the future. This is especially valuable if you plan on incorporating step two.

Rebalancing your portfolio is the second thing you want to do. Rather than make wholesale changes in your asset allocation, you want to move money back into your targets. Well-diversified portfolios should have set allocations between large stocks, small stocks, international stocks and bonds. Whenever a category gets out of whack, you should rebalance back to your targets. Again, you need to pay attention to tax and transaction costs. Virtually every investment class is cheaper than in January, but some have fallen more than others.

The third thing to consider, especially if you have a lump sum to invest, is to do so gradually. Since markets go up over two-thirds of the time, gradual investing may not pay off financially as much as dumping everything in, but it probably has a better psychological impact. When you consider gradual investing, use both date and price triggers.

For example, if you had $10,000 to invest, you can invest $2,000 every four weeks or every time the market falls by 3%. It is easy to set this up through a brokerage account by using a limit order with, for example, an S&P 500 exchange-traded fund (ETF). With a limit order, you put in a price at which you want to buy and if that price is hit, the order executes. In my example, you would invest $2,000 now and set four limit orders 3% below the current price and each other.

This works great if the markets are falling. You need to use date triggers to insure you get invested if the markets no longer fall. Every time a date trigger hits, make sure to cancel your lowest priced price market trigger. Use this strategy if the new money you are putting in the market is more than 20% of your overall market exposure.

The fourth thing to consider is converting some of your existing IRAs into Roth IRAs. This is only valuable if you expect to be in the same or higher tax bracket when you are spending your IRAs, want to reduce your required minimum distributions or hope to leave some of your assets to noncharity beneficiaries. Since your retirement plan has most likely dropped in value, you would be converting more cheaply and thereby paying less income tax.

Roth IRAs are completely tax free when you spend them, so the future growth on your conversion will bear no income tax. Remember, though, that taxable losses on your portfolio either offset portfolio gains or up to $3,000 of taxable income. Generating a lot of portfolio losses will probably offset only a portion of a conversion.

You have likely read that this is the worst six-month start to the year for the S&P 500 since 1970. What you may not have heard was that stocks ended positive for that year. This is not to say that stocks are going to turn around this year, but the next 100% movement in stocks will be up.

Bonus tip: The challenge with markets like this is managing your emotions even more than your portfolio. There are a lot of things you can do with lemons other than make lemonade. Be sure that what you are doing is ultimately good for you.

Ross Levin is founder of Accredited Investors Wealth Management in Edina. He can be reached at ross@accredited.com.