Money Moves to Make When the Stock Market Drops
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What is the main topic discussed in this episode?
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Here's your Money Briefing for Wednesday, August 7th. I'm J.R. Whelan for The Wall Street Journal.
Why do investors feel compelled to sell when the market drops?
Watching the Dow Jones Industrial Average lose 1,600 points Friday and Monday caused many individual investors to hit the sell button or make significant changes to their portfolio.
It's better to make a plan in advance for times like this than to rapidly and frantically try to adjust course in the moment. The financial plans that we set up in calmer times, those are likely going to be wiser than any rash decisions that we make in anxious moments.
But there are exceptions to the rule. We'll talk to personal finance reporter Joe Pinsker about that after the break.
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What reasons do advisers give for recommending ‘do nothing’ during sell-offs?
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With all the stock market volatility over the past week, individual investors have the urge to sell, despite what many financial advisors recommend. Wall Street Journal personal finance reporter Joe Pinsker joins me. Joe, why is the advice to not sell after a series of declines so unsatisfying to some people?
When something bad happens in the world, we like to do something. We like to feel like we have some sort of agency and some control.
When can a market drop be the catalyst to create a better financial plan?
And a lot of people see bad news and feel compelled to take action. Personally, I've always actually kind of found the advice to do nothing a little bit liberating because messing with my portfolio is one thing I can take off my to-do list, one thing fewer I have to worry about. But maybe that's just me.
And if you've got a financial advisor, it's like someone else making the decision for you.
There you go. Even better.
What is it about people's portfolios that leads many advisors to say, just sit tight?
The idea here is that it's better to make a plan in advance for times like this than to rapidly and frantically try to adjust course in the moment. The financial plans that we set up in calmer times, whether we're the ones doing it or with the help of a financial advisor, those are likely going to be wiser than any rash decisions that we make in anxious moments. And I'd say that if there is a silver lining to a big drop in stock prices, maybe it's that this is the jolt that some people need to make a plan for next time. That feeling of anxiety and lack of preparedness right now, maybe that's the inspiration that has people set up a plan to be less stressed next time something like this happens.
But in the story that you and the personal finance team wrote, you say that there are some moves that people could consider. Let's start with an opportunity to lower your tax bill. How would stocks work into that?
One thing people might think about at a moment when stock prices have increased gone down is a strategy called tax loss harvesting. The idea is that if you sell a stock at a lower price than you bought it for, that's bad. But you can, if you sell it, record it as a loss for tax purposes, and you can apply that loss against other investment gains.
How can tax-loss harvesting lower your tax bill after stocks fall?
So to put this in basic terms, if you had a $1,000 loss on one stock and a $1,000 gain on another stock, those would cancel each other out and you wouldn't owe taxes on the gain. As I said, we aren't exactly rooting for losses in our portfolio, but if there are underperforming stocks that you hold and that you've been meaning to sell, a moment when stock prices are down could give you a bit of a tax benefit.
How would a sell-off factor into moves people might want to make with their retirement accounts?
This is where something called a Roth conversion enters the picture.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:00–0:42
2
Why do investors feel compelled to sell when the market drops?
0:42–1:28
3
What reasons do advisers give for recommending ‘do nothing’ during sell-offs?
1:28–2:12
4
When can a market drop be the catalyst to create a better financial plan?
2:12–4:05
5
How can tax-loss harvesting lower your tax bill after stocks fall?
4:05–6:13
6
Why does a market sell-off make Roth conversions more affordable?
6:13–7:57
7
What buying strategies should investors consider when sitting on cash?
7:57–8:18
Speakers
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