Advice for Monday...
I can't tell you what will happen tomorrow (Monday). However, I can offer some strategies that could make the day a non-event (no loss, no gain) for you personally, even if the decline accelerates.
First, if you are a long-term investor, you are facing a difficult decision right now. The NASDAQ is down 35%. It could drop another 35% from here. What do you do?
As a long-term investor, tax considerations are paramount. If you want to sell, sell anything where you have only a very small gain or a loss. If you sell a stock where you have a big profit, look what happens. Assume you bought SUNW at a split-adjusted $15. If you sell tomorrow at $65 after a big downturn, you have a $50 taxable profit. You will pay 20% tax on these gains if you bought the stock more than one year ago; you'll pay your marginal tax rate (28% or more?) if you bought the stock less than a year ago. If you bought more than a year ago, to break even on your sale you will have to buy back in to SUNW at $55 or lower. So, you wouldn't want to sell SUNW at $65 tomorrow unless you felt pretty confident you could buy back in at $55 or less. But how sure can you be that you'll be able to buy in at $55?
That's what makes selling tomorrow a high-risk tactic for a long-term investor. It's so easy for you to wipe out a portion of your long-term assets. If you guess wrong, you may take a big tax charge and also have to buy back in at a higher price than where you sold. So, if you feel you must sell, sell anything where your profits to date are small or negative.
However, depending on your situation, there may be ways to avoid whatever happens tomorrow even without selling stock, without exposing yourself to a hefty tax charge. You can effectively isolate yourself from whatever happens tomorrow if you have excess cash in your broker account or if you have a margin account. What you would need to do is sell a market index substitute short in an amount that matches your stock ownership. In other words, if you own $40,000 of stock, sell short $40,000 of market indices, either SPY (S&P 500) or QQQ (NASDAQ 100) or some combination of these. Note that these can be sold short even on a downtick, unlike company stocks.
If you don't have a margin account, but you can purchase options, you could purchase index put options (for example OEX) in an amount that accurately represents your stock portfolio. If the market falls substantially, your gains from the puts would offset your stock losses.
Kevin |
