# Riding the Market Weather

October 19th, 2015 by
CameronDaniels

"Aunt" Janet Yellen, Chair of the Board of the Governors of the Federal Reserve (IMF Photo)

June 29th, 2006.

It was an innocuous day as the stock market was booming in the post-9/11 recovery. The economy was torrid and the unemployment rate was 4.6% in the USA.

That fall, I opened up my checking account with Charles Schwab with their floating-rate free checking account (with no minimums or ATM fees) was paying 4.50% interest. That date was the most recent time the FOMC voted to raise interest rates, settling in at 5.25%. An estimated 36% of the workforce is comprised of millennials, which presumably entered the workforce in the 2005-2006 area at earliest. That means that almost 2 in 5 employees in Wall Street have not experienced a rate hike (probably more considering the young skew of the profession, I'd venture around 45-50%)

I admit it. I am one of the generation who has never been in the workforce during a rate hike. My long term plans, however, are completely unaffected by anything the Federal Reserve does. I am going long equities in a diversified, global portfolio. I am using my salary periodically invest into both my taxable account (more below) and my tax-advantaged accounts like 401(k) and Roth IRA.

### How to React to Market Volatility

In short, you don't.

I'm still chipping away into my investments, despite the graph over here to the right starting to look a< little scary. This is the first time in my career that a little market volatility made a real shock to my net worth. But, would you react differently if the previous month had, instead, the shock on the left?

What did you do here? (Google Finance)

Looks a little rosier. (Google Finance)

If it is unclear from the two graphs, the downward graph was from 7/20/2015 - 8/25/2015 where SPY saw a price decrease of 12.18% and the other graph is from 9/29/2015 - 10/16/2015 where SPY saw growth of 8.04%. For those like our friend Allison Schrager who though volatility implies a need to sell at the top, it was perhaps a little disheartening to see the market recover so quickly.

So, did this volatility do anything?

### Enter U.S. Code § 1211

Not a new concept to many interested in financial independence but an eye-opener to those who have not seen the advantages before, tax-loss harvesting is a technique used by long-term investors to limit their total tax liability. The intent is to take advantage of short-term decreases to get money back at tax season (or to counteract other gains) and to shift the eventual gains from a recovery into long-term capital gains. This is usually accomplished by swapping very similar ETFs (to maintain the exact same diversification) with each other after a drop to realize a loss.

Example:

You own 100 Shares SPY on 7/20/2015 @ $212.59 each You sell 100 Shares SPY on 8/25/2015 @$187.27 each

100 x ($187.27 -$212.59) = -$2,532 You buy 100 Shares VTI (essentially the same ETF) on 8/25/2015 @$96.95

According to the IRS, this is a loss of $2,532 this year. When the VTI eventually recovers, the optimal tax strategy is to hold for longer than a year so it is realized as long-term capital gains (which are taxed at 0% or 15% as opposed to your personal income tax rate). For example, if you live in California as a single earner making >$90,000: your Federal Marginal Income Tax rate is 28.0% and your CA Marginal Income Tax rate is 9.3%. This means that above ~$21,259 investment and the maneuver pulled will net you (0.373 *$2,532 = \$944.44) back at tax season. Not bad!

The cool part about the above is you don't need to do it when the stocks return. You just wait and hold until they roll into long-term capital gains. Isn't long-term investing sweet?

Cheers,

Cameron Daniels

### Don't Quit Your Day Job...

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