The stock market closed up today after Capitol Hill reached an agreement on "bailout fundamentals." Why does that phrase sound like a class that business and political schools now will be adding to their curricula?
Did you restrain yourself during all this recent financial turmoil? That was probably a wise move.
I know it's easy to say don't panic when it's not your money, but the truth is that if your holdings are appropriate for your financial situation, you should do OK when then market settles down.
But what if you couldn't resist? What if you closed out some stock accounts and ended up taking a loss?
Unlike your asset's value, all hope is not lost when it comes to taxes.
My tax blogging colleague William Perez at About.com: Tax Planning: U.S. points out that stocks, bonds and mutual funds sold at a loss are capital losses. They can offset first any capital gains you might have, then up to $3,000 in excess capital loss can be used to reduce your ordinary income.
William has details here. You also can read about making investment losses pay off at tax-filing time in this Bankrate.com story, (by moi), Gina's advice at Tax Tips Blog and Personal Finance Start-Up Blog's look at tax-loss harvesting.
Another tax-blogging buddy, however, is a little less sanguine about the tax silver lining of capital losses. Joe Kristan, who pens the Tax Update Blog for Roth & Company, explains in Capital Losses Don't Help at Sentencing Either.
Coping with market turmoil: In today's Wall Street Journal, some investment pros offer advice on how to handle the current market.
A few weeks ago, I spoke with Melody Kump of the Raymond James & Associates office here in Austin. Here's what she had to say about dealing with market volatility.
Don't put all your eggs in one basket. Diversifying your portfolio is a key way to handle market volatility. Because different sectors perform well under different market conditions, spreading your holdings across different types of assets such as stocks, bonds and cash equivalents can help prevent your holdings from taking a simultaneous hit when the market stumbles.
Look before you leap. When the market goes down, avoid temptation to leave it altogether for other, less volatile investments. The problem here is that such investments usually produce smaller returns. Stocks, despite the frustrations and fear they often cause, have historically outperformed stable investments over time. So if your investments are for long-term goals, your portfolio should weather periodic downturns just fine.
Focus on the future. Watching the value of your stocks go down is never fun. But you might be able to pick up some similarly undervalued assets during a down cycle. Whether you're buying new stocks or additional shares of assets you already own, purchasing them at a lower price means you get more shares for your investment dollar. And when the asset rebounds, your gain will be greater.