It really all boils down to the individual. For some, they may make a nice salary from their regular dayjobs and dabble in the market making more. How much more in the markets could adversely effect their tax bracket.
For others, they have been in the markets for many moons holding their 5000 shares of Home Depot, or 1000 shares of Cisco from way back then and now have a wonderful problem of how they are going to get out of paying mucho dinero for their success!
It also can be looked upon as individual trader makeup and what one was taught. That is, what style best fits them and what they had heard about that thing we call "the markets". Some may love to hold for years on end, some may be a bit more antsy and go with the flow trading in and out at will. Certainly, today's market environment has changed into a more volatile, trader-like mentality rather than a hold-for-years mentality. Lend that to the online brokerage sites that are available to every Internet connected household.
We all can now jump in and out of our positions in minutes, days, or whenever we want to. In effect, the psychological makeup of the market has changed where there are more people in the markets who are speculating. This means more emotions coming into play and unfortunately, as we seen, peculiar behavior.
Knowing what kind of style suits your makeup is important if you want to succeed in the market as well.
The Investor
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If you were an investor who is in for the long haul (i.e. retirement, home, kids college), you shouldn't be worried at all with the recent fall. Why? Because if you were in your portfolio well before 1999's runup, you should still be a good deal ahead. You may have saw a huge run up and said to yourself "gee, i should have sold it back then". But the question is, would you be nimble to do that time and time again for the next 25+ years of your life?
If you pulled out, you just took a 28%+ hit on your gains and handed it over to Uncle Sam - money that will take time to recover too.
If one was investing with a purpose in mind and hit their goal, then terrific and congratulations!
But for those who are in for the long haul and choose to time the market, one has to be quite nimble and have a little bit of luck for reentry. Not to say it can't be done consistently, but it does require quite a bit of effort day in and day out to do so.
Lets say one started out with $100K in a mutual fund portfolio and made a nice $50,000 last year (a 50% profit). You chose a mutual fund because of the diversification, the seemingly reduction in risk, etc. etc. And that after selling, you had to fork up 38% of that ($19K) to Uncle Sam. You now have $131K to work with and effectively made 31% for the year after taxes.
To make up for that 19K, you now need to turn a 12% profit the next year to recover that (you do want to make more, right?!). That's quite a bit of a gain to suck up if you are in for the long haul. Over the lifetime of your mutual fund, you will be getting 18% or less on average. On average, the next year you will need to make 6% to keep up with that average. Don't forget that point! Over the long run, things find a way to balance themselves out. What is one years incredible surge, will be the next years dog. But most importantly, you lost the ability to compound that 19K into the years ahead! That's often something to ponder if you truly do believe that the world wont' blow up and that you will be there to enjoy it in your old age.
Now, what if you were a Home Depot shareholder. You chose this company because you felt it was a solid one, and has long lasting power to survive until you decide to pull out (yes, you do have to sell someday). From 1999 into this year, your stock rose 70%+ percent at its peak. The question you have to ask is, did I reach my goal? Is Home Depot still a good stock after taking a further look at its fundamentals? Does the stock chart pattern still look strong? Etc.? Do I even have time in my busy life to even monitor my investments every single day? Why did I buy this thing in the first place?
Fufilling one's expectations that were set out before pressing the buy button is often times more important than realizing you missed selling the top.
The DayTrader
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If you are a daytrader, you shouldn't care about the recent market drop - you only see 8 hours a day to trade in and what happens in that time span has nothing to do with what happened in the past. A daytrader lives the moment. If the market heads down, hopefully he/she is short. If heading up, being long is the way to go. And at times, in a sideways market, it can get a little more challenging. You reap the rewards, suffer the pain, and choose to do so because its your style of game. You live on the edge and thrive on chaos.
You also don't care about taxes either - thats part of the job. Your goal is to make money as efficiently as you can in the least amount of time. You still, however once again, need to know how much that is to meet your goals and expectations.
Position Trader
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If you are a position trader, your time span is days, weeks, months, maybe years. A good position trader, would discipline oneself to set stop limits and taken little losses quickly and to protect profits. Monitoring one's position can be a end of day thing, maybe end of week also depending on the stock. Capital gains becomes secondary - profit/loss and risk vs reward should be more important because the situation of the company whom you hold can change at any moment.
Most position traders don't hold for years in stocks. Many exit their position in less than a month. Given that frame of mind, capital gains are intrinsic to it all. Whether you want your money now or later, you still have to pay up. Hopefully you realize that having your money work for you, rather than you having to work too hard for it will overcome it all.
In a lot of ways, we all are daytraders. It is our money and we should watch and be concerned about our investments. Of course, the more daytrader you are, the more time you need to spend in front of the screen monitoring your stocks. For those who don't have the luxury or like to sleep at nights, thats a matter of style - investing maybe better suited for you.
Realize the more you get involved into the markets, the more you will have to learn. For some, that price to pay could be their last as the losses can and do happen faster than one believes. For others, it can be a fantastic education in learning more about oneself - because in a lot of ways, its not about making money, but about learning who you are, enjoying what you are doing, and taking the many mistakes made as opportunities to improve yourself for the long haul.
Having taxes from successful trading is a good thing!
MrBuzz |
