Friday, March 27, 2015

Resilient markets may present an even greater opportunity soon

This has been a noticeable week of correction for the U.S. equity markets.  There may be more of a correction soon that will just be a fake fade, and then lead to a better time to look for broad buying opportunities.

This is based on an observation of behavior here, so beware this self-centered analysis.  In general the approach to capital gains here is to balance them to minimize tax consequences.  There have been a couple of years when defensive or forced selling led to an imbalanced year, but the carry forwards from those two years, 2001 and 2008 roughly, led to easily maintaining that balance in a few years that immediately followed.  This year there will be more capital gains here than ever reported.

Why?  It simply became an awareness of the need for diversification and more liquidity as we inevitably get older.  It also seemed like common sense.  As we entered 2014 there were a handful of mid-cap and small-cap stocks that had gains of 500% or more over the past five years.  By any relative measure this had led to outsized positions, whether they had more potential or not.  The decision was made to cut those positions in half carefully during the year while continuing to manage the rest of the portfolio as usual.

So for this year capital gains will be much higher than ever before.  Everyone likes to think that they are a market experts or have some special sauce, but that is rarely the case.  If that was my behavior in 2014, the assumption can be made that it was the same for many others.  Being unaccustomed to this, the estimated tax will lag the need.  Some investors may find the need to raise liquidity as this process unfolds.  That means sell stocks. That means pressure on the market that will soon pass.

This is of course totally hypothetical.  Having not seen the thought written by others, the motivation to do so here arrived.


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