Does a market “selloff” mean long-term investors should sell?

Matthew de Silva
Covered finance for Quartz, former SEC intern. BS, Georgetown University.
Takeaway
  • Depending on how long they plan to invest, younger investors may have more time to recover from market downturns
  • Keeping investments for a longer period of time (generally over a year) may reduce a person’s tax burden
  • The longer period of time you invest, the less chance you have of experiencing market losses for that period—and the greater the chance of experiencing gains

“If you're going through hell, keep going.” This apocryphal quote, often attributed to Winston Churchill, might be helpful to keep in mind during the devastating coronavirus (COVID-19) outbreak. Today, as the health care system, families, and caretakers around the world face a momentous challenge, investors are also facing a test.

The financial fallout from the novel coronavirus has been swift. In just one month, the S&P 500 plummeted roughly 30%, triggered by concerns that the disease may seriously slow global business. Now, we’re in a bear market—with a large portion of the population unable to work remotely—causing the public mood to shift dramatically. Already, US officials have passed a $2 trillion-dollar economic stimulus package, and the country’s five largest airlines are seeking bailouts of more than $50 billion.

With thousands under quarantine globally—and millions more sheltering in place—the world may feel, well, scary. The uncertainty might even feel overwhelming. Nobody knows when the outbreak will end, or how markets will react. But over the long term, there is reason to be hopeful about recovery. At some point, researchers could develop a COVID-19 vaccine. And eventually, the stock market could rebound. (The operative word here is “could,” as it could also be the first step to more medical and market turmoil.)

For long-term investors, the sudden selloff doesn’t necessarily mean you should change your strategy. In fact, many financial advisors recommend not taking any immediate action. For some aggressive investors, this might be a time that they increase their exposure. But we would be remiss here if we didn’t mention that for a few they may find out investing in the stock market is not for them. Here are a few factors to consider as you review your plan:

What’s your time horizon?

Many investors still have years ahead of them. That means there’s time to continue your contributions as you seek to systematically smooth the stock market’s volatility. You might be 20 or 30 years away from retirement, which, based on previous recoveries, can give you the opportunity to heal from the downturn. Decades from now, this period might be just a blip on the graphs. (Just consider how December 2018’s correction is already in the rearview mirror.) While it’s often difficult to handle a turbulent market in the moment, you might find solace by taking a 30,000-foot view. And not to add to the stress, but in the here and now, you won’t know if the downturn is more like 2018 or 2008.

With a decade or more to invest, you may be comforted by your professional potential (think of the raises you’ll earn over your lifetime). What’s happening in the stock market right now may dominate the news today. But it’s quite unlikely to upend the rest of your life. That’s not a guarantee, but history is certainly on your side.

Bear in mind, people who require cash in the near future or are more risk-averse may prefer a more conservative investing approach. You have to determine what’s right for you. For near-term goals, like going on vacation, making a downpayment on a house, or paying off student loans, it could make sense to allocate your finances differently. That’s why it’s important to invest only what you can afford.

Long-term investing is kind of like seeking cover during an earthquake…

To improve their odds of survival, many people take shelter. It’s hard to know when, where, how long, or how severe an earthquake will be (or if there will be aftershocks), even with predictive models. But the fundamentals can help keep you strong during a difficult time: Staying indoors, avoiding windows and heavy furniture, and being mindful about the stability of your surroundings. In a similar sense, long-term investing usually requires calm and caution.

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How can investment gains or losses impact taxes?

As you contemplate how to react to the market selloff, keep in mind that there are some other consequences to selling investments. The IRS treats short term gains and losses (i.e., returns on investments held for less than one year) like regular income. And based on your tax bracket, that might be something to consider as you analyze your trading activity. For instance, if your taxable income is between $39,476–$84,200, you may face a 22% tax on your short-term capital gains. (That’s assuming you’re a single filer for 2019.)

If you kept your holdings for at least a year, any profits would likely be treated as “long-term capital gains.” For these profits, taxes vary based on your total income, but the long term capital gains tax is conveniently capped at 20%. According to the IRS, the majority of investors enjoy a long term capital gains tax rate of just 15%. Most financial advisors do not suggest letting taxes determine your investing choices, but consider the effect of what excessive short-term trading might mean to your overall investment strategy and goals.

Robinhood does not provide tax advice. For specific questions, you should consult a tax professional. (The IRS offers resources on how to find and evaluate a tax preparer on its website here: https://www.irs.gov/tax-professionals/choosing-a-tax-professional)

What are some of the risks of trying to “time the market”?

During this downturn, the markets have been unusually choppy, with some daily rises and falls exceeding 9%. (That degree of volatility hasn’t been seen since 1929.) While it could be tempting to try buying during declines and selling after rallies, that’s rarely a winning strategy—not least of all because emotions may get the better of you. Nobody can say whether the peaks or troughs will be larger. So, in addition to subjecting themselves to potentially higher tax rates (if they’re skilled or lucky enough to time the market correctly), frequent traders could be prone to missing out on a potential long-term recovery.

Given the dire attitudes that are prevalent right now—one hedge fund manager, Bill Ackman, actually said, “Hell is coming”—it seems like everyone is begging for some good news. It’s possible that a breakthrough in vaccine development, or a reduction in confirmed positive COVID-19 patients, could encourage a stock market turnaround. But trying to time or predict a choppy market is mostly speculation.

Prices are always changing

Here’s another way to think about your investments. Prices are always changing. With stocks, those fluctuations are simply front of mind. You can see minute-by-minute, or even second -by-second, what the market rate is for a given security. But arguably, the same goes for your other investments, too. For instance, the value of your car or home probably changes, too, rising or falling on a monthly basis as determined by real estate companies and car dealerships.

That said, unless you’re a house flipper or car collector, interim prices probably don’t matter too much. They’re just what the market claims your investments are worth at individual points in time. It only starts to matter when you want to sell. You can decide for yourself—is that a fair price? If not, it’s well within your rights to stand pat (if you have the ability to postpone the sale). Indeed, don’t mistake activity with accomplishment.

By zooming out and forming a long-term strategy, you can often enhance your financial acumen, maintain perspective, and help your investment actions support your goals.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory.

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