by Moe Zilla

Created on: August 25, 2010

If a stock's price falls, there's many ways to convert it into a liquid asset. And you can dramatically minimize your losses if you make the transition carefully. With some clever planning, it might even be possible to convert sunken equities into something far more valuable, so even your worst-performing shares can eventually earn a profit. But the first step is always to understand your options at the time that you're looking to make the conversion. Then you'll know which one offers the best potential return.

Obviously, there's one very easy way to convert sunken equity into liquid assets: sell them. There's always a buyer, and the real problem is usually that the current price is less than you're willing to accept. First calculate how much you'd make if you sold your equities at the current market price.  And remember that when you file your income taxes, you can report the loss against your income - so the total value of the transaction might be more than you're expecting.

If you consult a tax expert, they may know some other ways to maximize the value of your ailing equities. I always wondered if you could make a gift of your trouble assets, and then declare them at their long-term value rather than its current (lower) market valuation. Or imagine a scenario where you've set up a long-term portfolio which your children will be tapping for college when they reach the age of 18. In theory you could add your (currently low-performing) equities into the portfolio, in the hope that it'd regain its value over the next 18 years - and then take out some equities which are performing well today.

There's another tempting solution when the value of your stocks have dropped. In theory, it's possible to regain all your last value by swapping the low-performing equity for one that's about to take off. In practice, that's usually wishful thinking, since it's impossible to know which stocks will rise in advance. And following this strategy guarantees that you're committing the cardinal sin of investing: buying high, and then selling low.

But it's still a viable strategy if you're convinced that your stocks or mutual funds have a fundamental problem which will always hobble them through the years to come. Most mutual fund companies will let you swap shares from one of their funds for a pro-rated number of shares in another. Usually changing from one fund to another means you'll incur a capital gains tax as soon as you withdraw your money from the first fund. But if your shares have already fallen below their purchase price, then you've got nothing to lose!

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