In this episode of the One for the Money podcast, I share a personal, financially painful experience that can serve as an example of why you should stay invested. Considering the stock market of late, this is quite a timely topic. Listen to the end when I share a strategy you can use some stock market losses in a non-retirement account to ultimately reduce your taxes.
In this episode...
- Unprecedented events [01:13]
- Locking in losses [03:42]
- Delusions in timing the markets [08:25]
- Aligning investment plans with goals [12:10]
- Tax-loss harvesting [13:35]
Don’t lock in losses
The last few years have offered more than enough unprecedented events, the stock market included. With the pandemic shutting the world down, we had the fastest bear market in history. In 2020 that took only sixteen days to happen, and then the market dropped further. A short time later, the stock market rocketed higher with the fastest fifty-day rally in history. In 2021 the stock market had more remarkable growth. However, the stock market in 2022 began the year with the worst start in half a century.
Seeing the value of your nest egg decrease can be incredibly disheartening. Sadly, far too many people succumb to these emotions and sell their investments. In fact, a study found that close to a third of investors over the age of 65 sold all of their stocks during the Coronavirus meltdown. Because they sold their investments, they missed out on these significant rallies to the upside, locking in their losses.
A cautionary tale of emotional selling
Many believe we are due for a recession, and they’ll be right eventually. There’s no way to know when it will occur or to what magnitude, let alone its impact on the stock market. What we do know is that succumbing to these fears is detrimental to building wealth and early retirement. For those nearing retirement, we will conservatively invest in the next few years. For those seven or more years from retirement, now is the time to keep buying periodically and not sell stocks. Selling leads to realized losses and missed out gains.
I know from personal experience the pain of selling an investment when I shouldn’t have. Years ago, I purchased stock in a company that was exploding in popularity. However, during the 2008 financial crisis, these stocks dropped 50%. I was scared to lose more, so I foolishly sold, guaranteeing my losses. The painful part of this story is that these stocks have since increased by over 7,500%. While I did use the proceeds of my sale to invest in some companies that worked out well for me, emotional selling was a huge mistake. I’ve learned a lot since then and invest much differently now, but my sad story illustrates the mistake of selling that many investors have made.
What is Tax-loss harvesting?
Tax-loss harvesting is a strategy that involves selling an asset or security at a net loss. The investor uses the proceeds to purchase a similar investment, maintaining the portfolio’s overall balance. The investor can continue to gain while paying fewer taxes. Essential to keep in mind is that the IRS has a rule that says you can’t just buy a substantially identical investment within thirty days, so you’ll have to wait.
What do you do if you have more than the maximum of $3,000 in losses? The good news is that you can use these losses to offset the ordinary income tax. The losses can carry over for the next two years to offset income taxes. Tax-loss harvesting can only be used in non-retirement accounts, and you can see the power of that strategy to offset taxes.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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