University of Illinois Extension

Saving and Investing in Turbulent Times

Consider

After evaluating your net worth, your asset allocation, there are still several points to consider before taking action.

  • Income taxes: You can buy and sell investments within a retirement account without tax consequences. But if you sell an investment at a profit that’s in a taxable account, you will have either a taxable gain to report on your income taxes, or a loss that you can use to offset other gains or, with certain limitations, regular income. For more information, see IRS Publication 550, Investment Income and Expenses (http://www.irs.gov/pub/irs-pdf/p550.pdf).
  • Missed opportunities: When stock prices begin to recover, they often increase in price very rapidly. If you have sold your investment and plan to re-invest when things are safer, it’s likely that you will miss out on those substantial gains. If you sell investments now, especially if you use the money to cover current expenses, you may be compromising your future financial security.
  • Transaction costs: For certain types of investments, there are fees for purchases or sales, penalties for taking money out or closing accounts. Examples include:
    • Commissions or broker fees for buying or selling stocks and bonds.
    • Loads for purchasing certain mutual funds (A shares), or back-end loads for selling them before a certain number of years have passed (B shares).
    • Surrender charges for taking money out of annuities before a certain number of years have passed.
    • Early withdrawal penalty taxes for taking money out of retirement accounts before age 59 ½. For rules and exceptions, see Rules for Taking Distributions from Tax-Deferred Retirement Plans at http://cfe.ace.illinois.edu/retirement/takingdistributions2007.PDF.)  
    • Frequent-trading fees: Some retirement plans impose fees on investors who exceed the allowed number of transfers.  Certain mutual funds assess a charge if you transfer money out too quickly. Check your plan documents or mutual fund prospectus.
  • A single transaction versus a series of smaller ones: If you decide to buy or sell substantial amounts of any one investment (for example, to reduce the amount of money invested in your employer’s stock, or to rebalance after major shifts in stock or bond prices), the costs, if any, may be lower if you do it all in a single transaction. But selling a set number of shares or transferring a set dollar amount from one investment to another on a regular schedule over a period of time removes the risk that you’ll buy or sell the entire amount at the exact worst time.
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