If you fear a plunge, sell half of your big holdings

The Ticker

November 29, 1996|By Julius Westheimer

DOES THIS extraordinarily high stock market frighten you? There is a way to relieve your anxieties.

First, the facts. On Thanksgiving Day three years ago, the Dow Jones industrial average stood at 3,687.58. Five years ago, it was at 2,900.04. Ten years ago, it was at 1,916.76. Today, the Dow is up 76, 124 and 239 percent, respectively, over those spans.

At this morning's level -- 6,499.34, up 1,382.22 points, or 27.01 percent this year -- should you peel off some stocks?

Ask yourself, "Will I eat four meals a day and take one more trip if my stocks go still higher?" Probably not. "Will I feel devastated if my portfolio drops, say, 30 percent (about 1,950 Dow Jones points) from this level?" Probably yes.

Although stocks may be fairly valued and the economic climate favorable -- moderate growth, mild inflation, strong job creation, low interest rates, a balanced Congress, etc. -- isn't all that good news packed into today's lofty stock prices?

Asked another way, isn't today's risk greater than the reward?

Here's a solution: Sell half of your big holdings. Then, if your stocks continue to rise you'll be sitting pretty with the half you've kept.

But if your stock or stocks plunge sharply, you won't suffer a bloodbath.

Over the years, I've learned that, although it's no fun to have 5 percent of your holdings drop sharply, you can live through it. But if half of your portfolio plummets 50 or 60 percent, that freefall can devastate you financially and emotionally.

For example, some Maryland families suffered severely six years ago when their huge USF&G and Maryland National Bank holdings plunged about 75 percent.

And, although it's improbable, a Wall Street crash today is a possibility. In 1973-1974, several representative indices dropped more than 50 percent as many so-called "one-decision" growth stocks, such as Polaroid, Xerox and Texas Instruments, unexpectedly slumped 65 percent to 80 percent.

And in 1987, the Dow Jones industrial average plunged 508 points, or 22.5 percent, in one day. It recovered in about 16 months.

Be sure not to allow capital gains taxes to stop you from selling. Bite the bullet, cut back, pay the tax and move on. If your boss offers you a big raise, you won't turn it down because you'll pay more taxes, will you?

And in a tax-deferred retirement program -- such as a 401(k), 403 (b) or self-directed IRA -- there are no capital gains taxes to worry about.

Other ways to reduce your holdings:

Instead of giving cash, donate appreciated stocks to charity. You still get the tax deduction and also escape capital gains taxes.

Give stocks to children and grandchildren. You're allowed to give $10,000 a year -- couples can give $20,000 a year -- to as many people as you wish without paying a gift tax.

Also, today is the last day for "doubling up" to take a tax loss this year and buy the same shares back, but there is a short stock market session. The markets will close at 1 p.m.

Pub Date: 11/29/96

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