By: Larry MacDonald
Investors are paralyzed. They need to do three things right now.
Yes, it’s time to stop acting like a deer in the headlights. While one shouldn’t be checking their account everyday during a bear market, they still need to review their portfolio to take steps to position it for the future.
“It’s not the time for inaction,” Warren MacKenzie, President of Second Opinion Investor Services Inc., states emphatically. Here are three things to do:
1. Harvest tax losses in taxable accounts to claim against past/future capital gains for tax purposes
2. Rebalance portfolio since your asset allocation has likely moved considerably off target (buy low and sell high principle)
3. “Look across the valley and remember … have the courage to invest,” as Mr. MacKenzie notes.
Bear markets are also times when investors begin to think about switching advisors. Does your advisor seem to be hiding from you and is your portfolio down a lot more than expected? That could show your advisor has put you into the wrong investments for your risk tolerances or that they did not explain the risks to you well.
“There is a natural tendency for advisors to “let the winners ride” instead of rebalancing during a bull market,” says Mr. MacKenzie. “And with such a long and strong bull market coming to an end, it’s possible you went into the bear market with an asset allocation that was not the right one for you.”
7 Responses to “ Investors in the headlights ”
Harvesting tax losses only works for stocks you don’t want to hold any more. I’m not sure it is a good idea to sell a stock just to harvest a tax loss. A lot can happen in 30 days, especially in volatile markets such as this.
I do agree with rebalancing. Though it is hard to go against the grain, sell bonds and buy stocks, it pays to be disciplined.
By Canadian Capitalist on Oct 16, 2008
CC
I was going to mention in the post that one way some investors harvest tax losses for positions they want to keep is to buy a proxy for the 30-day period, i.e. a similar stock or ETF.
By Larry MacDonald on Oct 16, 2008
What kind of a proxy keeps you on the right side of the CRA? For example I sold Vanguards emerging markets (VWO) but bought Claymore’s BRIC ETF … this that too similar? Any opinions?
By Just Wondering on Oct 16, 2008
Just W.
Yes, the proxy can’t be too similar. My guess is that Claymore’s BRIC is a good proxy for this purpose — given the differences in coverage and currencies.But I would like to look into this issue more and get a better feel for it.
By Larry MacDonald on Oct 17, 2008