Oh Behave Yourself…In the Stock Market
Oh Behave Yourself… In the Stock Market
Sir John Templeton once stated on the Louis Rukeyser Show ‘Wall Street Week,’ “I may not know which direction the next 1000 points in the Dow Jones Industrial Average will move, but I believe the next 10,000 points will move higher.”
Market sentiment is often a contrary indicator. High levels of anxiety and volatility sometimes appear in close proximity to cyclical bottoms in the stock market. On the contrary, greed and complacency sometimes appear in close proximity to cyclical tops. Behavioral Economics has concluded that people are more likely to buy high and sell low because at those points, anxiety and greed make them behave irrationally.
Rather than having anxiety and greed dictate our financial decisions, let’s consider the effect of taxation and dividends. When you sell, you owe a minimum of 20% capital gains tax. Therefore, the market must go down by 20% of more before you can buy it back at a net gain. In addition, dividends that have increased annually over the long-term can easily pay out 10% or more as a percent of your cost basis, annually.
Who wants to give up 10% in dividend income on a bet that they can time the market correctly? (Most dividends are taxed at the relatively low rate of 20%, compared to marginal income tax rates).
Wouldn’t you rather let all those dividends pile up in cash and buy great companies when there is blood in the streets?
Richard W. Gayton, CEO and President of Lakeside Virtual Family Office (LVFO), advises investors on how to behave in response to economic changes and conditions that can influence and impact their investments. His blogs offer timeless advice on how one can avoid common mistakes in investing. This is the trademark of how Mr. Gayton and LVFO map out a strategy to protect their clients’ wealth. For more information, please visit: www.lakesidevfo.com.