Lanny Gilbert: ‘I have followed your common sense approach since about 1985 when I got a copy of [your book]. Well, I departed from that fundamental advice and put about $25,000 into two ‘hi-tech’ mutual funds in February 1999, just before the bubble broke. These two funds together are worth about $5000. So, should I try and ride this out, or just sell and take the tax loss and the lesson learned the hard way? All of my other investments are in much more conservative funds and index funds.’
☞ I would sell for the tax loss and put the $5,000 in a different hi-tech fund (or at least high-volatility fund, like American Century Growth) . . . or possibly even, if you can afford it, $10,000. If that $10,000 then drops to $2,500, say, sell for a loss and find another $10,000 to do the same. Sooner or later, the tech sector will bottom, and you’ll probably recoup much of what you lost – not because we will ever go back to the same crazy heights, which we will not in our lifetime, but because going 20% of the way back up, in this fanciful example, would give you an overall profit. (For the sake of the math, assume the funds you bought were selling for $1,000 a share and you bought 25 shares. They dropped 80% from $25,000 to $5,000, and then a further 75% in this example. You’ve put in $25,000, added $5,000, and then $7,500, for a total of $37,500 . . . less the tax benefit from switching among funds and taking $27,500 in losses. Now, years later, the $1,000 fund, which after the 80% drop was $200 a share, and after the subsequent 75% drop was $50 a share, has struggled 20% of the way back up from $50 to its one-time $1,000 peak, which puts it at $240. At $50, you were able to buy 200 shares with your $10,000, and now, at $240, you have $48,000 worth. Yes, you have a hefty taxable gain if you sell. But no one says you have to sell. And if you do, the gain will be lightly taxed as long-term.)
Note that doing this with mutual funds is less risky than doing it with individual stocks. It is not at all improbable that high-flying stock after high-flying stock might go all the way to zero. I have had several do this already. But it’s dramatically less likely the American Century Growth fund would ever go to zero.
Tomorrow: Take Heart!
Quote of the Day
Very few American investors buy any stock for the sake of something which is going to happen more than six months hence, even though its probability is exceedingly high; and it is out of taking advantage of this psychological peculiarity of theirs that most money is made.~John Maynard Keynes
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