Investing for the Long Term
August 2015 was a brutal month for stocks. There were constant reports that the Dow Jones Industrial Average (DJIA) was down hundreds of points for the day, even down by 1000 points during one daily trading session. Ultimately, where do you think August 2015 wound up as far as historical comparisons? As bad as the crash of late 2008? Or even the subsequent bottom of early 2009?
Not exactly. August 2015 was the worst month for the DJIA since May 2010; it was the worst month for the S&P 500 index since May 2012. Thus, in the middle of a bull market that has lasted since 2009, there have been some severe ups and downs.
By the numbers
With that perspective, there are some points to keep in mind. For instance, don’t panic over what seem to be huge losses. Hearing that “the Dow is down by 1,000 points today” can be scary. However, when the Dow is over 18,000, as it was as recently as July 2015, a 1,000-point drop is less than a 6% loss. Indeed, the DJIA was down by 6.6% in August, while the S&P 500 lost 6.3%.
Now, losing 6% or 7% of your investment portfolio is hard to shrug off. It could be a precursor to a time like late 2008, when stocks continued to sink into the following year, and major U.S. indexes lost nearly 50% of their value.
On the other hand, the DJIA lost almost 8% in May 2010, and the S&P 500 fell by 6.3% in May 2012. Investors who sold during those pullbacks watched while stocks rebounded and continued to rise for years afterwards, reaching a succession of new highs.
The bottom line is that stocks can be volatile, on the way up or the way down. By the time you read this article, those indexes may have regained lost ground or dropped even lower.
Staying the course
Looking at the historical record, broad U.S. market indexes have always recovered from bear markets. That’s been true after the 1929 crash and the subsequent Great Depression; the stagnant stock market of the 1970s, stunted by inflation and unemployment, turned into a bull market lasting through the following two decades.
Basic strategies, such as building a diversified portfolio and investing regularly, are likely to prove profitable for investors with a long time horizon. However, if you are at a stage in your life where conservative investing is more appropriate—getting ready for retirement or building a college fund for your kids—you might want to talk with your investment advisor about the possibility of trimming stock market exposure now.
The worst recent stock market crashes (2000-02, 2008-09) have proven to be buying opportunities, as the market ascended to new highs both times. This might be the case again, especially if you’re periodically acquiring shares of stock funds in your 401(k) or a similar employer retirement plan.
Ironically, the August 2015 stock market stumble could also turn out to be a selling opportunity. If you are holding stocks or stock funds in a taxable account, consider selling any issues that now trade significantly below the price you’ve paid for them. In case of multiple purchases of the same security, specifically identify for sale the shares with the highest cost, which will generate the largest loss.
Once you’ve made the sales, you can deduct your net capital losses for the year 2015, up to $3,000. Excess losses can be carried forward and used to offset capital gains taken in the future. Therefore, harvesting losses can deliver tax savings in 2015 and the opportunity to take tax-free gains in future years.