At times choppy market behavior and volatility can worry a new investor. Watching three big factors can reassure an investor and give investing confidence.
Three factors give investing confidence markets are going higher:
First, economic growth trends are up and continue to improve,
Second, tapering is many months off and,
Third, Fed tightening or rate increases remain years away.
Our last discussion, Investing Buy High, sell low true or false? introduced the idea that markets test an investor’s resolve. We learned that a stock price dip, downtrend or pause can be an opportunity.
That opportunity can happen even when there are short-term factors that bring selling pressure. Taxes are one reason that bring year-end selling.
The taxing matter of the calendar
Every year-end the taxman has a great influence on the market. Accepting or realising that you own a losing investment is never fun. But, as suggested in the Investor 10 point year-end checklist, selling losers helps offset taxes on our gains and thus minimises the total tax bill. So selling to harvest losses lets us pay lower taxes.
During most of the year there is no downward pressure from such tax loss selling. Naturally all astute investors want to clear out the losers before yearend. That collective selling action often tips the market down for a few days or at times a few weeks.
You can postpone such selling until the last week of the year and still qualify for the tax deduction. However, like everyone else, when you see a losing position falling further, you immediately sell to avoid a greater loss.
You, I and everyone else, including fund managers, do the same. By all hoping to get out before prices are lower yet, we push the market down.
We do it, we know it and so does every trader that wants to play the action. So we hold our noses, sell the losers and get it over with.
It always feels good to kick losers out of a portfolio. Then we can get the freed capital to work in a winning position to join the other stocks that we contentedly expect to ride higher.
Learn from tax loss selling
We can improve future performance and avoid year-end tax loss selling by making the necessary moves earlier in the year. Sell losers as soon as you realise you own a bad or losing position. Selling early avoids lower year-end prices and lets you quickly get the money into a rising stock.
Getting your capital out of losers as soon as possible improves returns in two ways. First, you stop the pain of losing money, second, you can get the freed capital profitably working by increasing your winning positions.
That straightforward strategy effectively compounds winners while eliminating losers. Getting more capital effectively working puts more in your pocket.
Next year tax loss selling will again be a factor after mid November. But now you know. So in the same circumstances you can simply avoid being affected by any tax loss selling price dip. Simply sell any losers early.
Take your pop quiz
When the market gives you a pop quiz, you need to be psychologically ready with the strength and resolve to weather a downturn. Having yourself ready for market dips lets you see a price drop as opportunity. After all, when stocks go on sale at a discounted price, seize the day! Buy!
In future discussions we will cover differences between a market dip or shower, squall, storm, gale or hurricane. We buy dips, showers or squalls can refresh, even riding through a little storm can prove an advantage and good move. However, we need to take cover from more serious downturns.
Are you ready for an investor pop quiz? Comment, ask a question, we can talk about it.
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