New Market Highs: Time to Sell?

The Dow, which serves as a proxy of the stock market overall, just set a new nominal record today. Obviously, the market will do this often over time (assuming it always continued to go up over the long-run). However, each time that it reaches a higher after being significantly below that, it tends to make headlines.

When the market is reaching a new high, people typically have one of two reactions:
1. Wow, the stock market sure has risen a lot. Maybe it’s time that I sell some of my stocks to capture my gains.
2. The stock market sure has been climbing! Maybe I should change my allocation to give a heavier weighting to stocks to take advantage of the climb.

It’s natural to have these reactions. Every time the media reports on a new high or low I think “Should I buy? Should I sell?” But then I settle down and realize that there’s absolutely nothing that I need to do. The portfolio allocation that worked yesterday will work today. Let’s briefly look at why it’s difficult to time the market and why it typically doesn’t work out.

  • If market professionals aren’t able to time the market, then why do you think you can? Each time you buy a stock, someone else is selling. With the volume traded by professionals, chances are high that the person on the other end of the transaction is a professional who dedicates all of his time to following the market.
  • The returns of the market are attributed to just a handful of the total days. In one study, the 100 best days out of the previous 100 years accounted for more than 99% of the returns in the market.
  • You have to be right…twice. Not only do you have to change your allocation at the correct moment the first time, but you have to switch it back at the right time later. That’s placing a lot of confidence in your timing abilities.

But don’t just listen to me. Check out how some of the greatest investors feel about trying to time the market.

Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient. – Warren Buffett

Whenever some analyst seems to know what he’s talking about, remember that pigs will fly before he’ll ever release a full list of his past forecasts, including the bloopers. – Jason Zweig

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. – Peter Lynch

Only liars manage to always be out during bad times and in during good times. – Bernard Baruch

Do you know what investing for the long run but listening to market news everyday is like? It’s like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill. – Alan Abelson

Do your future a favor and stay put. Sure the market may decline 15% this year. It might rise 20%. Or it might finish flat. Nobody knows. But 10,000 pundits will make predictions and some % will be right. And next year, when they’re on TV, they’ll talk about how they were right in 2013, which is of course why you need to listen to them now. No thanks. I’ll stick to the allocation that I determined based on my needed returns and willingness to accept risk. Hopefully you’ll choose to do the same.

Personal Balance Sheet – February 2013

Things didn’t turn out as well in February as they did in January, largely because I owed almost $5k in taxes and had previously anticipated/saved only $1.5k. This is the reason our net worth remained flat, yet we were able to continue to contribute to our goals.

Personal Balance Sheet Feb 2013

During February my weight loss didn’t progress at all how I’d hoped. However, the positive side is that I am definitely working out more now than I was in January. I went to the gym eight times during the month and I am contemplating signing up for a 5K in May to give me a definitive goal. Also, if you’ll notice below, I didn’t weight myself as much in February as I did in January. I think this allowed me to be less accountable. In March I’ll definitely be weighing myself more frequently.

I failed again at my blog goals. I really need to make posting a priority. I love this blog, yet something “always comes up.” I need to make sure that its priority on my list of “things to do” reflects how much I enjoy writing here.

Pretty quick update, but mostly because I’m reporting on a number of failings, and I don’t like to dwell on them. I’d rather spend time working to correct them. Talk to you soon!

Some of the Most Overlooked Tax Deductions

Taxes Overlooked DeductionsA tax deduction reduces your taxable income by the amount of the deduction. So if you receive a $5,000 deduction, then your taxable income is reduced by $5,000. The tax savings is the product of the deduction and your marginal tax rate, so if your tax rate would have been 25%, then you save $1,250 in taxes with a $5,000 deduction. Some deductions are common and any preparer or tax software will remind you to claim them. But others might involve some thinking on your part. Here are some of the most overlooked tax deductions.

Student Loan Interest Paid by Parents
You can typically only deduct mortgage and student loan interest your are obligated to pay. However, if your parents pay interest on a student loan that’s in your name, you will be able to claim the deduction for the interest paid, assuming you’re not being claimed as a dependent. The payment is treated as if your parents gifted you the money, and then you used that money to pay your student loan interest.

Moving Expenses for a New Job or First Job
If you took a new or first job during the year, and your new job was more than 50 miles from your previous residence, you can take a deduction for the expenses related to your move. This includes the cost of getting yourself and your possessions to the new home. You can even deduct the mileage it takes to get there. For more information, refer to Pub 521.

State Sales Tax
Each taxpayer can choose between deducting either state and local income tax or state and local sales tax paid. For most people, it’s going to make sense to deduct their state and local income taxes. But for those who live in states with no income tax, it will make sense to deduct the sales tax paid throughout the year. The IRS allows you to use a table to estimate this deduction. But if you purchased big ticket items such as a vehicle or boat, don’t forget to include this amount as a separate entry.

Child Care Credit
Although it’s not a deduction, the child care credit is even better! That’s because a credit is a dollar-for-dollar decrease in your tax bill. The costs of daycare, preschool, babysitters, or even summer camps can qualify. Families earning more than $43k get a credit for 20% of their eligible costs (up to $3k for one child, and $6k for two).

If you think that any of these apply to you, make sure to visit that section of your preferred tax software if you’re doing your own taxes, or discuss them with your tax professional. In 2002, the Government Accountability Office performed a study and estimated that Americans overpaid their taxes by $945 million. But don’t scare this into going out and hiring a tax professional. The GOA also determined that 49% of the tax returns where people overpaid had been prepared by a third party.

(Photo courtesy of Flickr)