My recent column on investors seeking safety resulted in many questions on my Ask Terry blog at TerrySavage.com. Obviously, many of my readers are not sleeping well, thinking about the stock market. The questions were more revealing than any answers I could give. After all, a good answer would require knowing a broad range of information about the questioner.
That information includes the “big picture” of your financial situation — your age, total assets, percentage of assets invested in the stock market and your risk tolerance at this stage of life. It includes knowing your income and spending plans, now and in the future. That’s why a fiduciary financial planner (not a financial salesperson) can be so valuable at moments like this.
But here’s what your questions revealed:
1. You don’t know your own risk tolerance! That’s not surprising because most people don’t confront this question until they get scared about the possibility of losing money. So the first question to ask yourself is: How much of my money am I willing to lose? If your answer is “nothing,” then you don’t belong in the stock market. Period.
But please don’t answer that question out of emotion. Perspective is essential. If I told you there has never been a 20-year period when you would have lost money in a diversified portfolio of large company American stocks (the S&P 500 stock index),with dividends reinvested, then your answer might be different, depending on your age, time horizon and self-discipline.
2. You don’t really know what you own. In fact, many people can’t specify whether their stock investments are held inside a retirement plan — a 401(k), 403(b) or IRA — or in their own name.
The difference is enormous. If you sell stocks held in your own name, you need to be aware of the tax implications. Even if you have long-term capital gains, 20 percent of the profits could go to the government. If you die owning these stocks, your heirs will likely pay no taxes under current law — unless your estate is worth more than $11.2 million.
On the other hand, there is no tax consequence for trades made inside your retirement plan account since all withdrawals are taxed as ordinary income when the money is taken out.
Suppose you want to reduce your stock market exposure in your retirement accounts. With an IRA, it’s easy enough to move funds to a money market fund. But do you know the safest places to “hide” inside your 401(k)? You need to find out.
3. Another revelation: You don’t know whom to trust! That’s scary because these are the times you need advice that puts your interests first. There’s an old saying: “Never confuse a bull market with genius!” Every salesperson or adviser looks good when the market is going up. But do they have your best interests at heart when the market is falling? A bear market is a tough time to find out.
I truly hope that you have made a sensible investment plan and have both the perspective and self- discipline to stick with it. But scary times tempt all of us to deviate. So here’s one way to deal with the uncertainty. It’s not necessarily the best way, but it is guaranteed to make you feel only half as bad — or half as good — in the end.
Sell half your position! That way, you’ll only kick yourself half as hard in hindsight! Remember, no one has the answer for sure about whether any decline is just a temporary setback — or the beginning of a devastating bear market that could easily wipe out half of your stock market wealth.
There’s an old saying in the stock market: Sell down to the sleeping point! If your investments are keeping you awake at night, it’s time to act while there is still time.
Over the long run, I always believe in the future of America, and that the stock market will create wealth. But how long is YOUR long run? That’s the question to ask yourself now. And that’s The Savage Truth.