Financially Speaking: Wisdom Comes with Patience
I always like to finish the year leading up to the holidays on a positive note. Some years it is easier than others.
I’m writing this on Oct. 13, and 2022 has been a crazy year to date. COVID is still around, supply-chain demand still remains an issue, geopolitics with China and the Ukraine war are affecting global markets, and last but not least, inflation is center stage.
Thankfully, we are coming to the end of this very difficult year. There may be one gift that you can still give yourself before year-end to take advantage of the down markets. Harvest losses in your taxable (non-retirement) brokerage accounts. If you have an ETF (exchange-traded fund) or a mutual fund that is down, consider selling it for a loss and investing the proceeds in a similar one the same day. For example, if you are invested in a large-cap growth fund, look for a large-cap growth fund that owns many of the same stocks and has management track record and costs similar to the fund you are selling. This allows you to remain fully invested and take advantage of a tax write-off at year-end. If you have an individual stock, you may want to sell it and repurchase it after 30 days so you can harvest a loss.
Each year, you receive a Form-1099 for your investment account. If you have losses, it will offset your gains. A long-term gain or loss is for an investment you owned for more than 12 months. If you held the investment for less than 12 months, it will be considered a short-term gain or loss. If you have more losses than gains, you can use up to $3,000 to offset ordinary income (salary, hourly wage, etc.). If you still have losses after that, you can carry them forward until they are exhausted. Most of you know that the markets have cycles, and if you own good stocks, they generally will come back. Sometimes it is fairly quick, and sometimes it takes longer.
Every October you hear about Black Monday. On Monday, Oct. 19, 1987, the market fell 22.6% in one day, which was twice as bad as the worst day in 1929 at the start of the Great Depression. If you were invested in the market that day, you might have thought your hopes and dreams were coming to an end. As bad as that was, by year-end on Dec. 31, 1987, the market finished up 5.25% for the year. That was an example of a quick recovery.
Those who were investing around the turn of the century remember the tech bubble. The late ’90s were fabulous. The total S&P 500 return from Jan. 1, 1995 to Dec. 31, 1999 was 206.4%. The markets seemed to go up each and every day. Although day trading had been around since the 1800s, it truly came into vogue leading up to the tech bubble. This is when some people started quitting their full-time jobs to become day traders because investing was so easy. You may remember the commercials for companies that touted that they held the secret for investing. They showed testimonials of those who purchased their system stating they were making more money now, working two, three or four hours a day, than they did in their previous occupation. It did not end well for many day traders.
In 2000, the market finished down 9.10%, in 2001 it was down 11.89%, and in 2002 it was down 22.20%. The Total S&P return for that period was -41.14%. Many who were invested in the markets at that time might have been thinking that their hopes and dreams would never be realized. If you stayed fully invested in the S&P 500, it would have taken until April 2007 to get back to where you started in 2000. That’s an example of a long recovery.
No doubt some investors (or should I say speculators) at that time might have thought that investing was like gambling, and it was a mistake to invest in the market. It wouldn’t be crazy to say that day trading and gambling are very similar. Today, going into the holidays, investors might be facing similar feelings with an economic setback, health issues, or perhaps a personal loss. The markets being down for long stretches in the year can cause so much stress and anxiety that an investor might sell all of their holdings and lock in their losses. Maybe the day trader who lost everything back in 2000 or an investor locking in losses of their life savings today might have thought that they wished they had never been born.
Federal Reserve Chairman Jerome Powell has been warning us that the Fed’s mantra has been to bring down inflation, and they will keep at it until they get the job done. This means the Fed wants to get the inflation number back down to 2%. Powell, at the Jackson Hole meeting in August, had stated that it will bring “some pain to households and businesses.” He was right. Almost everyone looking at their investments is feeling pain.
Maybe we should think of Mr. Powell as “Old Man Potter” from that 1946 classic Frank Capra film, “It’s a Wonderful Life.” Mr. Potter, portrayed by Lionel Barrymore, is the main antagonist in the film, maybe similar to Mr. Powell with our economy. It is not a holiday season without our family watching the story of George Bailey (Jimmy Stewart), whose lifetime hopes and dreams seem to slip away, perhaps as some may be viewing their retirement. In the movie, George Bailey was given a tremendous gift to view what his world would have been like if he had never been born. There are some therapists who use what they call the George Bailey Effect when dealing with patients who say they wish they had never been born. You may know someone who has uttered those same words. But if that person can look at the full body of their work on this earth, then maybe, just maybe, they can see how much better the world is with them in it.
I believe with everything happening today that even though there is pain, we must practice patience. Patience as defined by the Oxford American dictionary as “the ability to stay calm and accept a delay or something annoying without complaining.” Well, the market gains have been delayed, which is annoying, but it’s important to stay the course and take advantage of the things that you can control, such as tax-loss harvesting for example. Historically, the markets have recovered, like after Black Monday and the dot-com bubble, so we must practice patience.
2022 is quickly coming to an end, so, remember, health is the first wealth: without it, money does not mean much. I would like to wish everyone a Merry Christmas, Happy Hannukah and that 2023 is one of good health, happiness, and of course, prosperity!
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc. He also offers securities through Commonwealth Financial Network, member FINRA/SIPC. Advisory services offered through Planning Directions, and fixed insurance products and services offered by Common Cents Planning, are separate and unrelated to Commonwealth. Fred may be contacted at 800-647-0762, by e-mail at fdunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342. He’s always happy to meet with you “down the shore” at 6606 Central Avenue N. Sea Isle City, NJ, 08243.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice. Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results.”
All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
S & P 500: The Standard & Poor’s (S & P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
