“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.”

― John F. Kennedy

When markets tumble, the tone of CNBC’s programming gets somber.  Their background music becomes ominous, and they begin to air special reports like “Markets in Turmoil.” CNBC seeks to maximize clicks and eyeballs, and they don’t miss a chance to capitalize on investor fear in times like this. While they fan the flames of fear, whenever CNBC gets somber, it usually marks a good buying opportunity.  I would wager that the Brexit-driven market correction is likely another buying opportunity.

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Perhaps investors should actually be thanking the short-sighted folks in England who just shot themselves in the foot.  They just provided investors with an opportunity to invest cash into global markets at a much cheaper price.  Also, bonds have just skyrocketed in value in response to the Brexit vote.  This temporary boost in bond prices provides an opportunity to sell high and buy low.  In other words, rebalance by selling bonds and buying cheaper global equities

“Be greedy when others are fearful.”

-Warren Buffett

For example, Vanguard All-World ex-US ETF (VEU) costs $41 and pays out $1.24 annually. It doesn’t sound like much, but over 30 years, that $1.24 compounds to a 145% increase in value, even if the share price never increases.  This doesn’t mean that you shouldn’t prepare for an apocalyptic outcome by hoarding canned goods, but I would still rather own 1 share of Hormel Foods (the maker of SPAM) than 8 cans of the savory pork product, even if it is a treasured treat in South Korea.

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Finally, if you own stocks, ETFs, or mutual funds in a taxable account that have capital losses, you should jump at the opportunity to harvest those losses and immediately reinvest the cash in better investments (like low-cost index funds).  The only stipulation is that the new investments cannot be identical to what was just sold due to the Wash Sale rule.

  • Capital losses are tax deductible, up to $3,000 per year.
  • Capital losses exceeding $3,000 are carried over and deductible in future years.
  • Capital losses offset both short-term and long-term capital gains.
  • Capital losses are especially valuable in offsetting short-term capital gains, as they would otherwise be heavily taxed as income.

So, if you have a crappy stock or expensive mutual fund in your portfolio that you’ve held onto simply to avoid paying taxes on the capital gain, corrections like this are a chance to unload these appreciated assets without paying a thin dime in taxes.

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-AK

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