Freeus re How are you saving your wealth from being lost in this correction?I've lost about 20%. What should I be doing that I'm not?
I distinguish between tax-sheltered and taxable accounts; in the case of tax-sheltered accounts, I liquidated all positions prior to the recent correction. My rationale for doing so was that I had achieved a close to 50% return since the start of the year -- and I was more than content with that return. From a purely rational stand-point, in a somewhat irrational market, I was convinced that this rate of return was not sustainable. I was confident that I would have the opportunity of re-entering at some point at better entry levels -- I will admit that I did not expect the opportunity to arise so soon or for the decline to be as severe.
In the case of taxable accounts --which represents a significant portion of my assets -- it is a lot more complicated because of the tax effect of recognizing gains -- and thereafter the incremental return that would need to be achieved to make up for the taxes. There is also the issue of short versus long term gains. Regrettably, I was hedged to only a minimal degree and so I have seen the same adverse impact on my equity that you have.
The tax effect is a real one -- and cannot be ignored; however, there is a well-known axiom that one should not make investing/trading decisions primarily based on the tax ramifications. The most expensive lesson that I ever learned in this regard occurred in 1996 when a start-up company that I had invested with, in the late 80s, went public. I could not sell any of the shares initially because of lock-up provisions -- by the time that I was free to sell the shares, the price was substantially higher -- and it was in the fourth quarter of the calendar year -- so I decided that I might as well wait until the commencement of the next year. There was also talk about a reduction in the long term capital gains rate. Needless to say, a combination of events caused the price of the stock to decline sharply before the end of the year and the amount that I lost as a result exceeded by many times the savings that I would have achieved in taxes. It was a very expensive lesson.
In summary, I will take profits in tax-sheltered accounts from time to time -- especially when I have achieved returns on a particular stock that seems like a wind-fall. On taxable accounts, although I am still cognizant of the tax implications, when things get frenzied or the market seems vulnerable I would consider reducing my exposure. How to best reduce that exposure, without full-blown liquidation of positions, remains my challenge. |
