Trust Your Common Sense March 12, 2007January 8, 2017 I’m basically taking the day off – read Krugman! read Rich! But two of you asked questions that won’t take long to answer, and in the answers to which I discern this common thread: when it comes to money, don’t be afraid to trust your common sense. Abe: ‘I’ve written to you and to the Magic Formula guys and no one seems to read my mail. Maybe it’s just me. I’ve read the book twice completely. I am willing to give it a try BUT I would like to get an answer to one question: At Step 6 on page 135 it tells me to sell each stock after one year. No problem, except why would I sell winners in a taxable account IF THEY ARE STILL ON THE LIST OF TOP RANKED COMPANIES and then be forced to pay Uncle Sugar any taxes at all? Please help me out here.’ ☞ If they are still top values, there is, of course, no reason to sell and then buy them back. (It’s a magic formula, not a robotic one.) George: ‘You write: ‘If you’re in the market with money you’ll likely need to draw on in the next two or three years, remember that you shouldn’t be in the market at all.’ I don’t understand this. Suppose I have a million dollars and I want to retire in two years, and I want to withdraw $40,000 a year when I retire. How should I plan my withdrawals? Do you mean I should just put the full million in the bank now and withdraw my $40K a year from there? [No!] Since I need $40K in two years, should I take it out of the stock market today and put it in the bank to use two years from now? [Exactly.] Then another $40K next year? [Right.] Then each subsequent year should I spend $40K from the bank and pull $40K from the market and put it in the bank? [Yep.] Wouldn’t that be equivalent to putting $80,000 in the bank and then pulling the $40K from the market each year? [Uh, huh.] And wouldn’t that $80,000 provide a better return if I just left it in the market?’ [Not in years the market gets creamed.] ☞ All I’m really saying is that, over any given year or two or three, the market is quite risky – and for many people, that risk is not advisable to take. The market occasionally drops sharply. In the U.S., it has always recovered, generally within just a few years, and eventually gone on to attain new heights. I’m hopeful that pattern will continue. (And no one says you need to limit your investments to the U.S. market alone.) But if your portfolio fell 40% – say – wouldn’t it be easier to cope with, financially and psychologically, if you had no need to sell anything for at least a few years? Better, I think, to be satisfied with a guaranteed 3% or 4% after tax on money you’re going to need when your car dies or your roof leaks or the tuition bill arrives. # Now, let’s go fishing (or ice fishing, as the case may be).