Today's newsletter is by Ethan Wolff-Mann, senior writer at Yahoo Finance. Follow him on Twitter @ewolffmann.
When this week began, the U.S. economy saw signs of hope. Gas prices had fallen around 10%, used cars prices dropped 4% — it looked like the Fed’s attempt to cool inflation might actually be working.
Unfortunately, August’s Consumer Price Index release said otherwise. The CPI had climbed 8.3% over the past year and 0.1% over the past month, surprising the expectations of decline, and still far from the Fed’s 2% target. The markets reacted poorly.
Immediately, the S&P 500 tumbled around 3%, and closed 4.3% down. (The Dow dropped 3.9% and the Nasdaq dropped 5.2%.)
This was a classic example of the market being taken by surprise, and now the Fed will likely react even more aggressively to tamp down inflation. Whenever events spook the market and its investors, it’s worth thinking about what you can actually control — or at least what you can see coming.
Those factors include your own spending; taxes; fees; and staying in the market for the long-haul.
The controllable (for the most part)
Most advisers will warn you against trying to time the market, but you probably do have insight into the timing of your spending. From a down payment to a college tuition check to a bathroom remodeling, our own spending behavior isn’t as mysterious as the market. If we know we need the money soon, and the market appears to be tanking, it might be wise to cash out. Of course, that will stop any gains — but it will stanch the losses.
And just as you can dollar-cost average when you buy stocks — purchasing shares at regular intervals to smooth out price differences — you can also do so when selling stocks.
Another expense you can see coming: taxes. You can even control them thanks to tax-loss harvesting. When the market is down, you can sell the losers to offset gains. Often, investors will trade the losers for similar index funds or ETFs so a person’s investment strategy doesn't change even though they have created a loss to minimize capital gains.
As Barry Ritholtz, founder of Ritholtz Wealth Management, puts it, Uncle Sam is essentially your “silent partner.” Thinking about taxes when you invest can save you a lot of money by delaying gains until you’re in a lower tax bracket later in life — or when you’ve moved to a no- or low-income tax state like Florida or New Hampshire.
When tax loss harvesting, you might sell one index fund and buy another similar one. This is a great opportunity to swap out one investment for another that has lower fees, which add up considerably over the long term. Vanguard points out that $100,000 invested earning 6% every year with 2% fees would result in $170,000 in fees after 25 years, reducing the final sum by 40%. While a few basis points might not make much difference, anything more can add up.
The last thing you can control is your participation in the market. If you feel, as Warren Buffett does, that the long arc of American stocks bends up and to the right, keeping the pedal down on your 401(k) contributions means you’re probably buying stocks at a great price — be it at a low or at the latest all-time high. Because in a few years from now, the market will probably be up. |
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