How short-term investment decisions now can go against your long-term interests

There is a lot of noise in the stock market. You have daily price fluctuations, quarterly earnings calls, estimates, and smartphones that make it easy to have it all in your face at all times. The problem with taking in too much noise from the stock market is that it can cause you to make short-term decisions that go against your best long-term interests, and that’s never a good thing.

It can be more expensive than you think

A common mistake people make during a bear market is to quickly cut their “losses” or take as much profit as possible when stock prices begin to fall and sell their shares prematurely. The thing about losses in your portfolio is that they are unrealized losses, meaning they only exist on paper. If you buy a share for $100 and the price falls to $80, if you sell it you have lost $20. If the price rises to $120, that decline to $80 becomes irrelevant.

If you’re selling in a hurry and locking in a profit before prices drop, one thing you don’t want to do is forget about Uncle Sam because he certainly won’t forget you. Selling the stock for a profit will trigger a tax bill. If you hold the stock for less than a year, it will be taxed at your income tax rate. If you hold it for a year or more, it will be taxed at a more favorable capital gains rate. Here are the capital gains rates for 2022:

Capital gains rate Annual Income (Single) Annual Income (Married, Filing Jointly) Annual Income (married, filing separately)
0% $0 to $41,675 $0 to $83,350 $0 to $41,675
15% $41,676 to $459,760 $83,351 to $517,200 $41,676 to $258,600
20% $459,761 or more $517,201 or more $258,601 or more

Data source: IRS.

Depending on how much you earn in capital gains, you may find that the tax bill is more expensive than you realize.

For example, imagine if you buy 100 shares Netflix (NFLX -0.88%) In 2017 when the stock price was $170 ($17,000). In October 2021, the stock price was over $690, but it fell over 65%. If you see prices drop and sell 100 of your shares at $500 per share, you will make $33,000 in capital gains ($50,000-$17,000). Assuming you’re in the 15% capital gains bracket, that’s $4,950 in taxes.

Think about future value

A short-term decision such as panic-selling may not only have current consequences (such as a potential tax bill), but it may also take away from future value. Any shares you sell now are not giving you a chance to grow. let’s take American Express (Amex) (AXP -0.23%), for example. In February 2020, AMEX’s stock price reached $135. However, from February 14, 2020 to March 20, 2020, the stock price only fell to $74.

Let’s say someone owns 100 shares of AMEX, notices that prices are falling rapidly, and decides to sell their stake at $100 per share ($10,000). Those same shares would be worth more than $16,000 as of August 22.

That’s not to say that selling stocks is inherently bad, because it isn’t. Sometimes it really is the best choice. However, being a long-term investor means understanding that ups and downs in the stock market are inevitable. Once you fully understand that, you’ll begin to look down on periods as opportunities to double up instead of shame. Instead of selling your shares, you’ll find great stocks at low prices.

You can be very confident

Doubtful short-term decisions are not reserved for periods in the stock market or prematurely selling stocks; It can also come from overconfidence during bull markets when stock prices are rising. It’s not always easy to convince someone to invest when the stock price drops because they think they can just wait and get the same shares cheaper. However, when the stock price rises, people rush to put money in the stock market to reap the benefits.

“Everyone is a genius in a bull market” is the harsh truth. During bull markets, many investors stray from conventional investment wisdom—sometimes without even realizing it—because even flawed businesses manage to produce good returns. This is more than expected real Investments, which rarely end well. You don’t want to buy stocks because you believe the price will produce X% returns in X years; You want to buy them because you believe in the companies and their long-term potential.

American Express is an advertising partner of The Ascent, the Motley Fool Company. Stephen Walters has no position in any of the stocks mentioned. The Motley Fool positions and recommends Netflix. Motley Fool has a disclosure policy.

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