For a lot of us, the ongoing saga in the news about the stock market might make for some sleepless nights, but let’s take a minute today to think about why you’re losing sleep…
Are you worried about the bear market? Congratulations! If you’re reading this, it means you’re alive and that the stock market volatility over the past month hasn’t put you in an early grave. Or at least it hasn’t yet.
Let’s call it a victory. Frankly, we should take what we can get. The U.S. stock markets just finished their worst month since the 2008 meltdown and effectively recorded their worst December since 1931, when America was in the pits of the Great Depression. The Nasdaq is already in a bear market, having dropped a little more than 20%, and the Standard & Poor’s 500-stock index is just 2 percentage points away from joining it.
A 20% drop is psychologically jarring. But a little perspective is needed here. As of Friday’s close, the S&P 500 has been knocked back down to May 2017 levels. If you’ve been invested for any length of time, losing 19 months of gains isn’t catastrophic. It isn’t fun, of course. But it also isn’t likely to make the difference between retiring in style and subsisting on beans and rice in your golden years.
The question is what do you do now?
Whenever the market hits a rough patch like this, there are generally two responses from the financial press. The more respectable voices urge you to tune out the noise, avoid panicking and stay the course. The less respectable voices will urge you to liquidate your stock portfolio; buy gold, canned goods and shotgun shells; and retreat to a bunker in Idaho to await the end of days. Figuratively speaking (mostly).
As a very general rule, the optimists are usually right. Most corrections and bear markets are over quickly, and it often makes sense to sit on your hands and ride it out. By the time you start to panic, the worst has already passed.
But there are times when that would be terrible advice.
There has yet to be a case where shotgun shells, canned good and Idaho bunkers were the right investments, but we have experienced several long stretches of time where buying and holding stocks was a losing proposition. Had you bought at the top in 2000, you wouldn’t have seen a return on your investment until 2013. Stocks also went nowhere between 1968 and 1982, and it took more than 25 years for investors to recover from the 1929 crash. In each of these cases, investors would have done well by cutting their losses and dumping their stocks after the first 20% drop.
So, what’s the right answer here? Do you ride it out, or do you cut your losses now and live to invest another day?
That’s going to depend on your situation. But my own investor guru gave me some great advice last week: If you can’t sleep with it, sell it.
Basically, if a particular area of your portfolio is causing you grief, then offload it.
If a bear market would legitimately put your retirement at risk, you’re no longer investing. You’re gambling.
There’s nothing inherently wrong with gambling – if it’s done for entertainment purposes and with a modest outlay of capital. We all dream of buying a lottery ticket for a dollar and walking away multimillionaires.
But when it’s your nest egg or the security of your cashflow at stake, that’s a very different story.
While shares of stocks may be little pieces of business ownership, owning stock is not the same thing as being a business owner. That’s because you’re a passive investor with no control over how the company is run. Apart from any dividend the stock pays – which is generally modest – the only way to profit is to sell to another investor at a higher price, and there’s no guarantee you’ll be able to do that on the timeframe you want.
So, again, consider reducing your exposure to stocks to a point that it no longer causes you anxiety. If you’re 30 years old and your nest egg is still very modest, you likely won’t lose sleep even if you’re 100% invested in stocks. If you’re 65 and staring retirement in the face, that number presumably will be much lower.
Now, before we get into the tax season and you really start to worry, take some time this month to consider your investment strategies and, of course, if you are worried about how those actions can impact your tax bill, then let’s sit down and have a conversation.
I may not put you to sleep, but I can help you sleep better.
If you have questions on taxes, please don’t hesitate to call me on my direct line at 909-570-1103 by email at Carlos@HealthcareTaxadvisor.com
Carlos Samaniego, EA
Licensed by The Department of Treasury to represent taxpayers
1255 W Colton Ave, Redlands, CA 92374