baird logo

Investment Advice & Risk

Capital Gain Exclusion from Sale of Residence | Baird Retirement Management

Retire 6
April 27, 2016

Apr 27, 2016

6:31 AM America/Chicago

Given recent stock market turbulence and uncertainty, you may have doubts about your long-term investment strategy. Here are some tips to help you avoid common pitfalls and stay on track toward achieving your financial goals.

Declines Have Been Common and Temporary Occurrences

Problem:Declines can cause imprudent behavior by filling investors with dread and panic.

Solution:Realize that declines are inevitable and have not lasted forever.

History has shown that stock market declines are a natural part of investing. While declines have varied in intensity and frequency, they have been somewhat regular events.

It may also reassure you to know that the market has always recovered from declines. Although past results don’t guarantee future results, remembering that downturns have been temporary may help assuage your fears.

The bottom line? Accept declines as a normal part of the investment cycle.

A History of Market Declines

Dow Jones Industrial Average, 1900–2014

Type of decline Average frequency Average length Last occurrence

–5% or more

About three times a year

46 days

December 2014

–10% or more

About once a year

115 days

October 2011

–15% or more

About once every two years

216 days

October 2011

–20% or more

About once every 3-1/2 years

338 days

March 2009

Average frequency: Assumes 50% recovery of lost value

Average length: Measures market high to market low

The Dow Jones Industrial Average is an unmanaged, price-weighted average of 30 actively traded industrial and service-oriented blue chip stocks. Past results are not predictive of results in future periods.

Past results are not predictive of results in future periods.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Proper Perspective Can Help You Remain Calm

Problem: Studies show that people place too much emphasis on recent events and disregard long-term realities.

Solution: Even amidst a market downturn, remember that stocks have rewarded investors over time.

The stock market has a reassuring history of recoveries. After hitting lows in August 1939 and September 1974, the Standard & Poor’s 500 Composite Index bounced back strong, averaging returns of more than 15% over the next 10 rolling 10-year periods in both cases.

Long-term investors have been rewarded. Even including downturns, the S&P 500’s mean return over all rolling 10-year periods from 1927 to 2014 was 10.54%.

The bottom line? A long-term perspective can help you prevail through challenging times.

Source: Thomson InvestmentView

Results are calculated on a monthly basis. The index is unmanaged and, therefore, has no expenses. Investors cannot invest directly in an index. Past results are not predictive of results in future periods. Standard & Poor’s 500 Composite Index is a market capitalization-weighted index based on the results of 500 widely held common stocks.

Don’t Try to Time the Market

Problem: Research has shown that losses feel twice as bad as gains feel good.

Solution: Keep in mind that fleeing the market to reduce losses could mean losing out on gains when stocks recover.

The market has shown resilience. Every S&P 500 downturn of about 15% or more since the 1930s has been followed by a recovery.

Recoveries have been strong. Returns in the first year after each market decline ranged from 18.76% to 137.60%, and averaged 54.78%. Over a longer term, the average value of an investment more than doubled over the five years after each market low.

Don’t miss out on potential market rebounds. Although recoveries aren’t guaranteed, taking your money out of the market during declines means that if you don’t get back in at the right time, you’ll miss the full benefit of market recoveries.

The bottom line? Consider staying invested and not trying to time the market.

Market downturns are based on the five largest declines in the S&P 500’s value (excluding dividends and/or distributions) with 50% recovery after each decline.

The return for each of the five years after a low is a 12-month return based on the date of the low. For example, the first year is the 12-month period from 3/9/09 to 3/9/10.

The percent decline is based on the index value of the unmanaged S&P 500 excluding dividends and/or distributions. Each market decline reflects a period of more than 80 days with 100% recovery after each decline (except for a 77% recovery between 3/9/09 and 4/29/11). The average annual total returns and hypothetical investment results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or taxes. Standard & Poor’s 500 Composite Index is a market capitalization-weighted index based on the results of 500 widely held common stocks.

American Funds Has Helped Investors Prevail Through Market Declines

Problem: Market indexes don’t tell the whole story, and can needlessly alarm investors.

Solution: Consider investing in funds run by select active managers who have proven long-term track records.

Select skilled active managers have superior long-term track records. American Funds is among those proven managers, with a long history of success, stemming from our long-term perspective and our emphasis on producing results that are less volatile than the broad market.

Our funds have beaten their Lipper peer indexes in 79% of 10-year periods (91% for equity funds and 54% for fixed-income funds).* These periods include good times and bad.

The bottom line? Invest for the long-term with an active manager that has a proven track record of success — in downturns as well as in bull markets.

Based on results calculated at net asset value with all distributions reinvested. Reflects applicable fees and expenses. Only American Funds with a track record of at least 10 years are included in this table.

Based on Class A share results for rolling periods through December 31, 2014. Periods covered are the shorter of the fund’s lifetime or since the comparable Lipper index inception date (except SMALLCAP World Fund, for which the Lipper average was used).

Strategies to Get Through Turbulent Times

It’s difficult to see the value of your investments fall. But during challenging times, try to keep some fundamental investing principles in mind:

  • Look beyond the headlines. Sensational news headlines are meant to grab your attention, but it can be dangerous to let the media influence your investment decisions. Ignore the noise and stay focused on your goals.
  • Don’t forget history. Market declines are part of the economic cycle. Historically, recoveries have followed downturns.
  • Maintain a diversified portfolio. Different investments may go up and down at different times. Spreading your money over a variety of investment types and regions can help reduce volatility in your overall portfolio.
  • Don’t try to time the market. No one knows the perfect times to get in and out of the market. Consider holding quality investments with the potential to rise in value over the long term.
  • Invest regularly, even when the market is falling. Instead of fearing down markets, think of them as opportunities to invest at lower prices.
  • Keep in touch with your financial professional.Your financial advisor can help you avoid making decisions that could jeopardize your long-term investment goals, which often remain unchanged during market declines.

Like this? Subscribe to read more retirement insights

Subscribe to get Retirement Insights