What is capitulation? Its definition is to surrender or give up.

However, when we look at the meaning of capitulation in relation to stock market results, the definition changes slightly.

• Capitulation in the stock market is a point in time when investors have decided to give up trying to recapture previous gains in their portfolios. Instead, they have decided to sell their stocks and bonds and invest the proceeds in cash equivalents (CDs, T-Bills, Money Market Funds). They hope they will reinvest in the securities markets at some future date when they have a better chance of producing positive returns.

The stock market is a lot like a roller coaster…lots of highs, followed by lows. Right now the markets are very volatile, with one recent day producing a 1200-point drop in the Dow, followed by a 600-point increase just a few days later.

So, as an investor, trying to earn a reasonable return in the securities markets, how can you effectively survive such big swings in the stock market?

You should consider hiring a financial advisor in Greeneville, TN, who holds a CFP®  certification. This professional can provide the discipline and expertise you need to make the right decisions during periods of excessive market volatility.

Let’s explore the effects of capitulation in more detail in relation to your current financial circumstances and longer-term goals.

Is capitulation the best financial strategy for you?

You’ve heard this saying many times:  Quitters never win. This is particularly true of investors who are weary of the turbulent markets and decide to cash out.

What is the problem? At some point, they have to get back into the market to produce better returns. Since no one rings a bell at the bottom of the market they will probably be late to the party. No one has a crystal ball for timing the market.

Some observations: 

1. Markets move in short spurts. There is a good chance you will get out late and get back in late. Let’s call this the double whammy.
2. Large institutions don’t capitulate. Their decisions are based on long-term investment horizons. This is one reason they tend to outperform individual investors who make emotion-backed decisions for their assets.
3. Selling and going to cash may sound like the right thing to do, but you are ignoring the long-term results that have been produced by the securities markets.
4. Historically, the events that cause broad market declines are temporary.
5. Consider a sports team that refuses to come out of the locker room after half-time. They are forfeiting, with no way to win, because they took themselves out of the game.

What if I am losing money?

The stock market, over the past 10 years, has been on an amazing bull run. Since 2009 the Dow Jones Industrial Average has gone from 7,000 to 30,000, with an all-time high of 36,585, on January 3rd of this year (2022).

Some observations:

1. You are not losing money. You are experiencing normal market fluctuations that are based on our economy and companies’ earnings.
2. Market “pullbacks” typically occur six times a year, with a drop of 9% or less in value.
3. Market “corrections” typically occur once a year with a drop of 10%-19% in value.
4. Bear markets typically occur once every six years or so with a drop of 20% or more.
5. You’ve been through Bull markets, Bear markets, pullbacks, and corrections dozens of times, and typically you recover the losses over longer time periods.  Too much worry doesn’t do anything other than give you a painful ulcer.
6. You may be measuring your results based on your highest balance versus the amount of money you have originally invested in your accounts. For example, you invested $100,000 and it grew to $250,000. Then a market correction reduced the amount to $200,000. You still have a 100% unrealized gain.
7. You achieved your highest balance by staying invested, not by selling and reinvesting at a later date. You can do it again if you stay invested.

What about selling at a loss?

When you sell, you may be giving up any possibility of recovering the lost performance from a correction or a Bear Market.

Some considerations:

1. Your home may have lost 45% of its value in 2008. Given the need to have a place to live, you more than likely opted to retain your home. But if you had sold your home, and rented an apartment, you would have locked in a loss from which you would be hard-pressed to recover from, especially given the strength of the housing market after the crash. Now you have an asset that has recovered from that drop and more than likely has appreciated even more.
2. Many Americans buy new cars every three years. Yes, the car loses roughly 25-50% of its value when you drive it off the lot; however, you keep the car because you need it.
3. Like your home, you need your investments to work for you (produce income) until the day you die. If you didn’t sell your car or home, why would you sell your investments?

The bank will help manage my assets

While you never know exactly how much time you have left in this amazing experience we call life, you should plan for a long-fruitful life. Advancements in medical science and healthier lifestyles mean your assets have to last even longer.  In modern times, you could retire at 65 and live another 30 or 40 years – your children and grandchildren even longer.

Some considerations:

1. Again, a crystal ball is required because longevity is unpredictable.
2. Time is on your side, which means that you have a long-term investment horizon for your investments to work for you.
3. Sure, a bank can pay you small amounts of interest, but your earnings will not offset the various forms of erosion. Moving your funds to a bank is self-defeating.
   1. Erosion number one is inflation which impacts the purchasing power of your assets. Let’s assume inflation is 10% and the bank is paying you 4%. That means that you’re losing 6% of your purchasing power every year, and then add compounding to that! Next year your dollars will only be worth $0.94. The year after, it will only be worth $0.84 and in five years, it will only be worth $0.61.
   2. There is no upside to this strategy…only a guaranteed real loss.

How does buying low and selling high impact me? 

Everyone, especially investors, knows the old saying:  “Buy low and sell high”.  It requires a lot of investment discipline for individual investors to make this happen. However, institutions have a lot more success with this discipline because they are less inclined to make emotional decisions. They view down markets as buying opportunities when prices are lower.

So how should everyday investors take advantage of this opportunity?

Some considerations:

1. Make buying when prices are lower your new investment discipline.
2. Use your cash to make purchases during down markets.
3. Use down markets to sell weak, taxable investments. Reinvest the proceeds in higher-performing assets.
4. You still should always keep a minimum of six months of cash on hand for emergencies.
5. Increase your contributions to tax-deferred accounts (401(k), IRAs) to your maximum limits. This will give you more buying reserves when securities prices are lower. You can always lower your contributions when the markets recover, but increasing your contributions now will allow you to buy when prices are lower.
6. Any money that is left over can be used to make additional purchases while prices are lower.

Should I invest in digital assets?

Digital assets, like Bitcoin and Ethereum, are down more than 50% right now. If you’ve been thinking about investing in digital assets, now could be the right time. The risk of investing in these types of assets is greatly reduced when their prices are lower.

Some considerations:

1. Make sure you are getting expert advice when you make these investments.
2. You may want to buy more if their prices continue to decline.

What about reallocating my assets?

When markets are as volatile as they have been recently, it is a good idea for investors to reallocate their existing portfolios to position themselves for what they anticipate will be happening over the next three to five years.

As another old saying goes, you invest your money looking out the windshield (what is coming) and not the rearview mirror (where you have been). The future may not be like the past.

Some considerations:

1. Invest in the future and not in what has worked in the past. Be forward thinking and position your portfolio to include holdings in those companies that expect to see tremendous growth as well as those companies that dominate their industries with superior products and management.
2. Because prices are lower, a down market is a good time to go bargain shopping. Look for good companies that have attractive prices, strong balance sheets, and dominant market shares.
3. Bear markets, historically, end with sudden, unexpected growth so you must be ready to take advantage of these short spurts.
4. When markets are down they can impact weak and strong companies. Buying strong companies at lower prices is an opportunity that does not come along that frequently.
5. Consider new technologies, like electric vehicles, self-driving cars, digital assets, artificial intelligence, robotics, nanomedicine, etc. Whether you agree with these technological advancements or not, they are viable investment opportunities. What matters most is investing in companies based on advances that are happening in their respective industries.
6. As the housing market tightens with inflation and rising interest rates, this drives rents indexed to inflation to record highs. This means there are opportunities to invest in REITs that have the potential to produce exceptional returns.
7. Speaking of banks -they are also poised to take advantage of rising interest rates. Consider buying bank stocks before rising interest rates hit their bottom line as the Fed continues to raise its interest rates.
8. Which companies have large sums of cash and/or crypto on their balance sheets? They’ll make substantial profits from rising interest rates and a recovery in the crypto markets. Consider buying during the down market, because once it starts to recover then it will be too late to get the best prices.
9. You can also buy low by identifying various industry leaders as well as up-and-comers/start-ups. The key here is remaining well diversified so you aren’t over-exposed to one particular industry or investment.
10. When interest rates rise, bond prices go down, so consider minimizing fixed-income investments until interest rates have normalized.
11. Bottom line: there are lots of opportunities for you to “buy low” but you should work with a highly experienced financial advisor to help you execute your financial plan.

What about tax loss harvesting?

When you own something in a taxable account that is currently selling for less than you paid for it, you may want to consider selling it. When you sell, you lock in the loss for tax purposes.

Some additional considerations:

1. You can use the loss to offset gains you may have taken on the sale of other assets so you minimize or eliminate taxes on those gains.
2. You can also carry the loss over to future years to offset future gains.
3. You can use the loss to reduce taxes on your earned income.
4. With that said…taxes should never be the sole reason to sell or influence when you sell. , But taxes can play an important role in reducing your tax liability.
5. If your eyes are glazing over…have no fear. Consult your financial planner in Greeneville, TN, or CPA. Their expert advice will help you make the right financial decision.
6. This strategy is used by successful investors who are earning larger profits:
   1. Don’t quit and don’t try to time the market.
   2. Buy low when the right opportunities are available and sell to realize your profit.
   3. Reallocate your investments based on what you think will happen in the future.
   4. Harvest tax losses, for underperforming investments, whenever you can. The losses have value.
   5. Remember, it’s better to be disciplined than lucky when your goal is the accumulation of substantial wealth.

Why does financial planning matter?

Every successful sports coach views tapes of their upcoming opponents and makes plans for their gameday strategies. Successful investors use a similar process for developing their financial plans for their working and retirement years.

Our founding fathers talked about the importance of planning. Benjamin Franklin was quoted as saying: “A failure to plan is a plan to fail”.

The Bible states that even Jesus preached the importance of planning (Luke 14).

In other words: You need a financial plan that will help you achieve your financial and life goals. 

It’s always surprised me how much time people will spend planning for a one-week vacation, but they won’t spend a few hours a year planning for their 30-year retirement which includes a lot of trips to foreign lands!

That is one of the major reasons individual investors earn so much less than institutions and wealthier investors; remember, every year they earn 3x-4x as much profit as you.

Some additional considerations:

1. Successful investors have a detailed financial plan that they review on a regular basis.
2. Financial plans are not just for the wealthy. Everyone should have a financial plan.
3. Every plan starts with establishing and prioritizing your goals for retirement, educating the kids or grandkids, building a vacation home, traveling, and so forth.
4. Every plan has multiple time horizons; when do you want to achieve each of your goals; next year, 5 years, 10 years, 20 years, end of life? There is no way to plan without having a timeline.
5. Every plan accounts for current and expected future resources; earned income, rental income, pensions, and social security – cash, investments, real estate, future inheritance, etc.
6. A good financial planner can tell you what you need to do, how you need to do it,  and when you need to do it.
7. Your plan then becomes your road map to success. You’ll know how much you need to be saving and investing, how you need to invest, how much risk you can take, what you need to do about debt, what schools you can afford to send the kids to, whether or not you can afford a second home and everything else you need to know.

Conclusions… 

Rather than being content with whatever happens, be proactive. It only takes a few hours a year to develop a comprehensive financial plan that will serve you well for the rest of your life and the life of your spouse.

• Buy low whenever the opportunity presents itself
• Reallocate to maximize your future returns
• Harvest tax losses when it is the right thing to do
• Plan your financial future: working years, transition years, retirement years
• Don’t quit when markets are volatile; look for ways to improve your future results

Talk to a CERTIFIED FINANCIAL PLANNER™ Professional at Sapiat Asset Management to achieve a  brighter tomorrow. 

Sapiat Asset Management is a Fee-Only, Independent, Registered Investment Advisor (RIA), specializing in goal-oriented financial planning and investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them.