There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons for investors:
1) Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street’s 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor’s 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.
Reality: the S&P closed the year at 903, with reported earnings estimated at $50.
Strategists aren’t always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003.
Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street’s payroll don’t survive for long.
Read the rest of John Bogle’s column here.
Matt / Google+
Please explain to me in layman’s terms what capital gains taxes are and if there is a way to get around them at all legally. Thanks! – Henry
Capital gains occur when the shares of a personâ€™s stock appreciate in value. The monetary difference between what the shareholder originally paid and the value of the shares when sold are the capital gains.
For example, at the beginning of 2003, Henry purchased 100 shares of Exxon Mobil (no investment recommendation intended) for $25 apiece. At the end of 2006, Henryâ€™s shares are now worth $75 each, resulting in an increase of $50 per share. Because of his investment acumen, Henry finds himself with $5,000 ($50*100 shares) in capital gains.
To answer the second part of the question, there are a couple of scenarios where one can reduce the tax burden. The first involves holding shares for over a year in order to pay the current capital gains tax rate, which ranges from 5% to 28%. If a person decided to sell his shares after only three months, he would pay capital gains at his current income tax rate, which is usually significantly higher than the capital gains rate. Click here for more information about capital gains.
The second way to reduce the tax burden is by offsetting the gains with the sale of shares that currently have unrealized or paper losses. Selling your â€œlosersâ€ during the same year you sell your winners will help offset the tax liability. However, be careful not to sell a stock that has decreased in value solely to help offset capital gains. This advice is especially true if the company that currently has a paper loss has bright prospects for future gains!
Matt / Google+