“When it gets back to break-even I’ll sell it.”
That’s what a lot of people say when faced with a market downturn–whether it’s individual equity holdings or the entire market. But how do you tell that you’ve broken even?
By most people’s estimates, the market is about 10% below its high point. Back in late 2007, the Dow hit 14,100 and now its 12,600. But that ignores dividends. If you reinvested your dividends back into the market, the Dow is basically back to its 2007 levels—the S&P is a little below there. Then again, there’s inflation. Gas prices and food have driven up prices about 9% in the three-and-a-half years since the market’s high. So, adjusting for inflation, the market is still down some 10%
But waiting break-even isn’t a sound way to manage a portfolio. A stock doesn’t know you own it, and it certainly doesn’t understand what your cost-basis is. In fact, the only folks that care about what you paid are Uncle Sam and your accountant. Taxes are the only real reason to consider what a stock cost—an historical artifact.
What really matters is the future—what a stock is going to do, if they can continue to increase their dividends, if their business is going to expand. Where an investor bought a stock doesn’t help in figuring those things out.
Getting back to break-even is a natural feeling, especially if a stock goes down right after you buy. But what matters is the future. And history doesn’t tell you that.
Douglas R. Tengdin, CFA
Chief Investment Officer
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