About the intelligent investor
The weekly column of The Intelligent Investor by Jason Zweig has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between good advice and one that only sounds good.”
About Jason Zweig
One of The Wall Street Journal’s top journalists. Author of “Your Money and Your Brain: How Neuroscience Can Help You Get Rich,” and editor of the updated best-selling version of “The Wise Investor,” which Warren Buffett described as “the best investment book ever written.”
Part of what makes bear markets so inexhaustibleTolerable is that no one – and I mean no one – knows how or when they will end.
It doesn’t stop any Wall Street activist from mentioning metrics, guesses and folklore stories that purport to predict when stocks will finally stop falling.
However, smart investors do not bother to try to predict the unpredictable; They focus on controlling what can be controlled. This is the psychological key to survival in this bear market – and in any bear market, no matter how long it lasts.
In order to see clearly why it is so important to prioritize correctly, let’s take a brief look at three beliefs about the time when bear markets end.
Ask any fox markets when stocks will start to recover, and you will probably hear something like this: bear markets do not end until private investors give up and sell, fear reaches new heights or stocks eventually become cheap.
We will examine these possibilities one by one, and see why these are myths.
● Private investors need to surrender – Financial professionals like to argue that bear markets reach the bottom when private investors give up stocks, crescendo or “surrender” of panic sales.
The only problem is that it did not happen in 1932, 1974, 1982 or 2002, and many more examples. Bear markets sometimes end in sales prey, but often fade into indifferent sensory obscuration.
● Fear must skyrocket – Many professionals agree that Cboe’s volatility index, known as VIX, is at a “too low” point right now, according to Nicholas Coles, co-founder of DataTrek Research, a New York investment journal.
The VIX, often referred to as the “Fear Index” Q.To Wall Street, it soared in October 2008 to levels then considered the pinnacle of the global financial crisis – but stocks continued to fall more than 19% before the bear market finally closed in March 2009.
“As markets try to re-price their expectations for the future, they are just gnawing even more really,” Coles said. There is no single indicator like the VIX that can capture the moment when these expectations are expected to change.
● Stocks must be much cheaper – Many investors believe that bear markets end only after overvalued stocks become a good buy again.
This is simply not true. In March 2009, at the low point of the global financial crisis, stocks traded more than 13 times their long-term earnings, calculated in line with inflation, according to data provided by Yale University Professor of Economics Robert Schiller. In all, the price was then only 20% cheaper than the average Schiller examined since 1881.
Although stocks did not look like a statistically good deal at the time, they rose about 15 percent a year, looking at the next decade.
All this shows the madness of trying to figure out when stocks reached the bottom.
Even if you have decided to own the property – it does not have to be a choking grip
What you should do is distinguish between the things over which you have control and the things over which you are helpless. Instead of wasting time trying to read tea leaves that will predict the market, take responsibility for the risks you take, the taxes you accumulate and the time horizon of your investments.
You can be the type of investor who buys and owns assets, but that does not require you to hold a stranglehold. If some of your stocks or funds have performed outrageously well in recent falls, you can sell them and make significant profits as a result.
First, selling the most losing assets will reduce the risk for you, and your anxiety about further losses in the future.
You probably look at your losses as a weakness because they can be so painful and embarrassing. In fact, you can easily turn them into assets.
Getting rid of your worst investments should allow you to record a loss. Later you can use it to balance taxes on capital gains from the investments you sell at a profit, this year or in the years to come.
You can also deduct $ 3,000 from these losses each year against your regular income and accrue any loss that exceeds the $ 3,000 threshold for the future, which will be used to offset the taxable income for years to come.
Another decisive step that investors can take in the bear market is to consider converting a traditional personal pension account to a Roth (IRA) account.
In such an account, the assets can grow without being subject to current taxation, just as in a regular retirement account. In addition, withdrawals from the Roth account are tax-exempt, unlike in the traditional account, where the payments are usually taxable at the regular income tax rate.
This means for you that a Ruth account can make sense if you expect your tax rates to be higher in the future.
The value of a private retirement account converted to a Roth account, “can flourish over time without any tax liability,” said Amy Barrett of Barrett Wealth Connection, an investment consulting firm from Spring Grove, Illinois.
Roth conversion – for those who can and know the consequences
You can also bequeath a Roth-type retirement account to your heirs, who can own it and make tax-free withdrawals from it, thus actually extending the life of your investments to a few years after your death.
The deterrent in converting a routine retirement account to a Roth-type account is that the conversion is taxable at the regular income tax level. However, “with so many investments down 10% to 20% or more, you will pay taxes on much lower amounts,” emphasizes Melissa Levant, CLA LLP Director of Taxation, a professional accounting and services firm from Arlington, Virginia.
Roth conversion is definitely not for everyone, and can involve complicated bureaucracy. Make sure you carefully go through all the implications with your accountant, tax advisor or financial planner before making the move.
But most importantly: Forget Acre solutions for predicting the end of the bear market. Instead, control what you can.