3 winners and losers in the stock market decline | personal financing
The stock market has been on a downtrend since the beginning of 2022 Standard & Poor’s 500 Deal with a drop of 20%, which meets the dictionary definition of a bear market. While it can be painful to watch the value of your portfolio fall from month to month, not everyone is a loser when they experience a downturn in the stock market.
Here are three types of investors who often find ways to win in downturns, and two types that are unfortunately more likely to incur losses.
Young Investors: The Winners
If you are still at the beginning of your investing career, you have a long time to come back from the stock market crash. On top of that, you probably don’t have much of an investment yet, so the impact on your portfolio, in absolute terms, is much less than that of someone who’s invested consistently for decades.
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When stock prices go down, it’s an opportunity for young investors to buy more. It’s like putting the market up for sale. Over time, investors should expect the market to recover and continue posting new highs.
Tax Passionate Investors: The Winners
Investors who face significant paper losses in their portfolios after a market downturn may have a chance to do some tax loss harvesting. Tax loss harvesting is the practice of selling losing positions in order to realize the capital loss. You can then exchange the investment sold for another investment that is expected to provide similar or better returns in the future.
The reason why you can’t buy the same box again after the sale is because of the wash sale rule. The rule is that if you buy a substantially similar asset less than 30 days after selling it, it’s as if the sale never happened. As such, it would eliminate the tax advantage of selling for a loss. You should be aware of this rule as it applies to all of your accounts. So, if you sell shares in an S&P 500 Index Fund in your regular taxable account at a loss but consistently buy shares in an S&P 500 Index Fund in your 401(k), this will trigger a wash sale rule.
Once you realize the loss, you can use it to offset any capital gains for the year. If there are more losses than gains, you can offset up to $3,000 in personal income, which may have a higher tax rate than capital gains. Any unused loss is carried forward to future tax years.
Balanced Investors: The Winners
An investor with a proper asset allocation will emerge a winner from a market downturn. There are several reasons why they are considered winners.
First of all, proper asset allocation is likely to reduce their losses and keep them within their personal tolerance. A decline in stocks is often mitigated by an increase in bond prices, or at least a slight decrease.
Second, lower stock prices usually mean an opportunity to rebalance and buy stocks when they are cheap. Since bonds will likely become a larger part of your portfolio amid the stock market downturn, you have a chance to sell some bond positions and buy more shares on the cheap. Beware: this could potentially have tax consequences.
Two groups of investors are exposed to large losses in periods of market downturn
Retirees still usually do not add money to their portfolios and may not be able to purchase shares when they are put up for sale. In fact, they may have to sell shares at the most inopportune time.
Retirees can usually mitigate the impact of a stock market downturn by maintaining a diversified portfolio. If they need to make a withdrawal while the stock market is down, they may be able to hold most of their stock positions while maintaining their target asset allocation by withdrawing more bonds and other assets.
While the market downturn is certainly painful for retirees, proper investment management and a solid long-term plan will ensure that they have enough to live on for years to come.
2. Frightened investors
Fearful investors can suffer huge losses in a stock market downturn. One great investment tip from legendary investor Warren Buffett is to be afraid when others are greedy and greedy when others are afraid. Selling heavily in the stock market is exactly the wrong time to be afraid.
Fear can affect investors in many ways. Some may simply store cash, not add anything to their wallets. It’s not terrible, but you will likely miss out on returns. Waiting for the right time to invest is rarely a winning strategy.
Even worse are those who see the market collapse and sell everything they own. These investors are then left with a large amount of cash, and they likely have no strategy as to when they will reinvest those savings. Moreover, they may have just caused a huge tax burden, which will significantly reduce the long-term returns of their savings.
If you can keep your wits about you in the event of a stock market downturn, you will likely be able to move forward, or at least be able to minimize the damage. If you let fear overtake you, you are bound to miss out on returns.
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