FULL DISCLOSURE:
I am not a financial advisor. This post is to provide information and not provide financial product advice. I discuss why I personally chose to invest in a stock, ETF, ETNs, CEF, REIT, investment fund or cryptocurrency (which I have held for over a week) and also share information that is public about the following stock, ETF, ETN, CEF, REIT, investment fund or cryptocurrency and they are based on my own personal opinion.
I will not blog about any positions of stocks, ETFs, ETNs, CEFs or REITS and cryptocurrency which were initiated just within the last 72 hours of posting this blog article.
It is recommended that you should always consider visiting a financial advisor for independent financial advice before making investment decisions.
I do not work in the financial industry, so just because I write about it, doesn’t mean you should own it. So, consult with a financial advisor and do your due diligence, RESEARCH!
I am not receiving compensation by the company for this blog post.
I have no working relationship with any company whose stock, ETF, ETN, CEF, REIT or cryptocurrency mentioned in this blog post. Nor do I have a family member or friend who works with the company.
As an investor with over a hundred total holdings in my portfolio, sure, things are great when we see our positions in green and a + symbol of showing that stock’s growth.
But unfortunately, like a sports game and following your favorite team, you’re going to have games where there are wins and losses.
For stocks, some weeks, you will have days of growth, but it works the other way as well. You’ll have days of losses. And those days of losses will test you as an investor, especially when you are just starting out.
One thing when viewing a company’s chart, may it be for the month, a year or a decade, you’ll eventually see a rollercoaster of highs and lows and during market crashes or last year’s pandemic, things falling worse than expected.
If you are prepared and understand there will be wins and losses, then that’s good. Unfortunately, those new to investing tend to get freaked out when they see something they spent on, losing money. No one likes to lose money.
Watching a stock lose $5-$10 is tough (especially crypto owners seeing their crypto go from extreme highs to extreme lows is often a gamble). It’s even tougher when you lost $50-$100 or more!
But these are tips on how to approach a loss.
- EVALUATE – Evaluate why the stock lost money. Looking at the S&P 500, looking at the Sector SPDR and see if there was a loss not just to my stock, but also similar stocks. You need to understand why there was a loss. For example, did I buy in when the stock shot up and then it went back down to its average? Did something happen in the news? Fortunately, major brokerages have a news section of a stock and you can research immediately and evaluate what may have happened. For example, why did shares of Coca-Cola drop in price? Looking online, soccer star Ronaldo shrugged Coca-Cola and told everyone to drink water.
- CAPITAL LOSSES – So, you sold stocks which you owned less than a year that had growth and made money (known as capital gains). How do you offset those capital gains? Well, you use your capital loss, in which you sold a capital asset less than the cost of purchasing it. So, my biggest lost was investing in GME (Gamestop) earlier this year. The stocks hit my stop loss, when it fell down in price and it sold and I lost a lot of money. While I was disappointed, I did have some gains selling other stocks, and so the losses offset my gains.
- DOLLAR-COST AVERAGING – If you are in it for the long-haul. You bought a stock too high at one point, well, as you continue to build your shares on a stock, more than likely you will buy it on dip (not when it’s super high) and when you do that, you will see your average cost start to drop. This is a common thing for 401(k) plans. For stocks, I just put in dollar amounts and keep adding along the way. I am investing dollar amounts each month or so (BUT I ONLY BUY ON THE DIP). So, let’s say my first purchase of a stock was higher than I would like and then it dropped a little. It’s OK, I’m not going to panic, because when I buy it again during a dip, the average dollar will adjust overtime. This really does work in reducing the overall impact of volatility on the price of a target asset. I already know I’m going to purchase this stock for the long run, so the first share price doesn’t bug me so much but knowing that once I start compounding, I get a better idea of what price I will purchase more shares. You’ll need to keep an eye out on your investment.
- The 7-8% RULE – There is acceptable losses, especially for short-term investors, if a stock drops past 7-8% of your purchase price, you let it drop to far. Do not take large losses. Sell your stock if it drops at 7-8%. If it drops that low, that tells you that you may have bought too high. You can then claim the loss as a capital loss/loss. I’m not a growth investor, I’m a dividend investor. So, for example. I recently purchased NUCOR CRRP (NUE) for $103.46 and the share price dropped two days later to $95.25. That was nearly an $8.21 loss (-7.94% loss). But NUCOR is not a short-term investment, yes, the drop of -7.94% sucks, because I purchased at the wrong entry. But since it’s a long term investment and if I purchase it tomorrow at $95.25, then it brings down the average cost. If it shoots up to $125 next week, it’s a gain. So, I’m not to worried that it’s red right now, but for short-term investors, the 7-8% is important.
- KNOW THE WASH-RULE (READ BELOW)
I’m going to discuss this on its own because it’s a common mistake with people starting out in investing and something many not be familiar with.
Some brokerages will contact the seller and let them know they can’t purchase any stock after a few months as a penalty or let them know they understand what a Wash-Rule is, so they don’t have this problem again. Others find out through their 1109-B tax form.
IMPORTANT!!!! Here is a common mistake which many people make…Some may sell their stock and immediately repurchase it at the cheaper price, so instead of being in the red, they are in the green! Some feel it may be a psychological thing to make their stock listings in the green and no longer show red or to not show a loss. But unfortunately, this is in violation of the WASH-SALE RULE!
Another, if you purchase the stock on your brokerage and then repurchased it within 61 days on another brokerage or an IRA account. That is also not good and violation of the WASH-SALE RULE. IRS “Revenue Ruling 2008-5” prevents investors from using the cloak of a tax-deferred account type such as an IRA to circumvent the wash-sale rule. It applies to traditional and Roth IRAs, regardless of whether the IRAs are held at different financial institutions.
According to the IRS:
The wash-sale rule is an Internal Revenue Service (IRS) regulation that prevents a taxpayer from taking a tax deduction for a security sold in a wash sale. The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss and, within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so. A wash sale also results if an individual sells a security, and the individual’s spouse or a company controlled by the individual buys a substantially equivalent security.
The wash-sale rule prevents taxpayers from deducting a capital loss on the sale against the capital gain.
According to Fidelity:
When you sell an investment that has lost money in a taxable account, you can get a tax benefit. The wash-sale rule keeps investors from selling at a loss, buying the same (or “substantially identical”) investment back within a 61-day window, and claiming the tax benefit. It applies to most of the investments you could hold in a typical brokerage account or IRA, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and options.
More specifically, the wash-sale rule states that the tax loss will be disallowed if you buy the same security, a contract or option to buy the security, or a “substantially identical” security, within 30 days before or after the date you sold the loss-generating investment (it’s a 61-day window).
It’s important to note that you cannot get around the wash-sale rule by selling an investment at a loss in a taxable account, and then buying it back in a tax-advantaged account. Also, the IRS has stated it believes a stock sold by one spouse at a loss and purchased within the restricted time period by the other spouse is a wash sale. Check with your tax advisor regarding your personal situation.
So, what if you did a wash-sale?
- If you do have a wash sale, the IRS will not allow you to write off the investment loss.
- Report the wash-sale on Part I of Form 8949, which feeds into Schedule D, since it was a short-term transaction (See the Schedule D instructions for full details on reporting wash-sales), Form 8929 OR if you receive a 1099-B, it will need to be reported in box 1g.
So, when things are in the red, you’ll need to make sure you do your research to find out why there was a drop. The image you see above was after Powell gave his speech on the state of the economy and there were fears that interest rates will be going higher.
There are also many things that can trigger so many stocks in many sectors to go down. But it’s important to decide what kind of investor you want to be. Those who invest short-term or an investor investing for their retirement?
I’m not a financial advisor, but this is common sense. If you are going to invest your money, you will always want to do your research. And as always, perform your due diligence. Also, talk to a financial advisor and find out if investing is for you. Do know the “Wash Rule”, as one can make the mistake of having done it without knowing about the rule.
