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Profitable Investing Tips has been a member since April 20th 2008, and has created 275 posts from scratch.

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Stock Market Correction, Crash or Bear Market

The stock market goes up and it goes down. Many times your investments rise and fall as much from overall market activity as from specific intrinsic stock value factors. How much and for how long the stock market goes down can be a stock market correction, crash or bear market. Since 1950 temporary stock market drops of more than 10% have happened on the average every 23 months! Because at any time a stock market correction, crash or bear market may be just around the corner, investors need to be prepared.

What Is a Stock Market Correction?

When the stock market goes down ten percent or more over several days to a week, or even a month, that is a correction. This happens in US markets a bit more often than every two years on the average. Usually, the market recovers over the next few months. That is because there is quite a bit of panic selling when a correction occurs. There may even be instances of speculators being caught in a short squeeze as well. Because the fundamentals of the market are generally sound, corrections recover.

Stock Market Correction, Crash or Bear Market - Corrections
Stock Market Correction Example

What Is a Stock Market Crash?

In a stock market crash stocks fall by ten percent or more but it all happens in a single day. When the market crashes there is a widespread loss of confidence. The most devastating stock market crash in US history was Black Thursday, October 24, 1929. This was the beginning of the gigantic slide in the market that brought on the Great Depression. But, the 1987 Black Monday crash began to recover the next day and the total market came back by 1989. Although the initial damage of a crash may be no worse than a correction, it happens a lot faster and tends to be associated with further problems in the market, sometimes for years.

Stock Market Correction, Crash or Bear Market - Crash
Stock Market Crash Example

What Is a Bear Market?

A bear market may start with a slow correction or a rapid crash but in this case the market falls by more than 20%. Bear markets occur market sentiment expects long term, fundamental problems and a prolonged fall in cash flow. This happens when there is a severe economic recession. While individual stocks may enter their own bear market, the term is generally used for the whole market and affects the whole economy. In fact, some selected stocks may do very well during a bear market. Many investors pivot into consumer stocks or even stock like beer companies as these businesses keep making money even in a weak economy.

Stock Market Correction, Crash or Bear Market - Bear Market
Bear Market Example

Is a Stock Market Crash Coming?

The stock market has been going up ever since the depths of the Financial Crisis. Over the last dozen years there have been a few corrections but always recoveries. Those who have predicted a severe, prolonged bear market had been wrong until the Covid-19 crisis and then they were only partially right as the shape of the recovery turned into a K-shape that allowed tech to prosper while transportation, hospitality, and other sectors languished. But, as the Covid-19 crisis promises to improve, the issue is still here. Is a stock market crash coming?

What Is the CAPE Ratio?

As noted by The Motley Fool, the persistently high CAPE ratio is the leading indicator of a coming stock market crash. The CAPE ratio is the P/E ratio averaged out over the preceding ten years. It provides a longer-term view of stock prices and their relation to earnings. The CAPE is currently greater than 30 and the last four times it remained in that region, the S&P 500 suffered losses between 20% and 80%. If you believe that the high CAPE ratio is of concern the answer is not to put all of your money under a mattress but to prepare. How can you prepare for a stock market correction, crash or bear market’

How Can You Prepare for a Stock Market Correction, Crash or Bear Market?

The Fool gives us five suggestions for how to prepare for a down market. These are generally good investment suggestions to keep in mind at all times.

  • Assess and understand your risk tolerance
  • Review your portfolio with a down market in mind
  • Hold some cash
  • Consider dividend stocks
  • Focus on value when searching for bargains and in the early stages of a recovery

There is a mindlessness that creeps into one’s investing as a bull market continues. There comes a point at which no matter where you put your money it grows. And, then it doesn’t. Don’t gamble with money that you cannot afford to lose and have a plan for when you will start taking profits and rotating into safe value investments.

Warren Buffett famously got out of the market in the run up to the dot com crash as he said the market no longer made sense. Thus he was sitting on a pile of cash that he employed to pick up bargains afterward. This has, in fact, been what he has done in virtually every crash and bear market for decades. His example is a good one to follow.

Folks nearing or in retirement typically need or at least like a steady income stream. Dividend stocks are always good to have in your portfolio and this is especially true when there is a risk of a stock market correction, crash or bear market.

Every time that the market corrects, smart investors buy the dip on solid investments. Having cash on hand gives you power when the market weakens. Couple with this the realization that you have not made a true profit from your investments in a soaring market until you have taken a profit and you have another reason to have cash on hand.

Tech Stock Selloff

After rallying once again to new highs, the stock market is selling the same tech stocks that drove the pandemic stock rally. Many have been waiting for something to change the positive market sentiment that has made the stock market diverge from the economy. As the wider economy starts to regain strength there is a concern among tech investors that many of the work-from-home and other factors that have supported big tech in the last year will fade along with Covid-19 restrictions now that the vaccination campaign is protecting more and more Americans. What does the current tech stock selloff mean?

What Is the Meaning of the Tech Stock Selloff?

A selloff in big tech stocks including the FAANG darlings has been repeatedly predicted for years. But, these money-making machines keeping going up in price as their earnings keep rising. After an initial scare at the beginning of the Covid-19 pandemic these companies saw higher stock prices as Covid-19 restrictions drove so much of our lives online. These companies have become what IBM and Phillip Morris once were, reliable investments that just seem to keep growing and growing.  So, what does the current tech stock selloff mean? Is the long-anticipated correction in the works? Is this just another “buy the dip” moment?

Why Is There a Tech Selloff Now?

Treasury Secretary Janet Yellen just said that a slight rise in interest rates may be necessary to stem inflation. Because low interest rates have been a major driver of the stock market it is a reasonable assumption that farsighted investors are rotating their portfolios out of high tech and into companies that serve the general economy. And, since no stock rally lasts forever, it was reasonable to expect corrections in tech from time to time. A long term underlying concern is that the government may decide to treat big tech companies like utilities because they are so basic and so central to the economy and our way of life. When companies like Amazon.com, Alphabet, Microsoft, and Facebook become so dominant in their market niches, antitrust concerns arise which could lead to the breaking up some of these tech giants. All of that having been said, the market was probably just looking for a reason for a selloff and used Janet Yellen’s comments as an excuse.

Tech Stock Selloff
Where Is the Tech Stock Selloff Going?

When Will the Tech Selloff End?

.This is really is the question that investors want answered. Do these stocks have some sort of intrinsic weakness that has been ignored? Are their prices really beyond reason considering that they really are part of the technological backbone of the country? Investors who use intrinsic stock value as a guide will probably be buying the dip in the coming days. Their underlying assumption will be that these companies are central to our economy and will remain so well into the 21st century. These investors will consider a possible bump up in interest rates, how fast the economy will recover from the Covid-19 crisis, and whether or not Biden’s infrastructure proposal will come to fruition and drive both the creation of jobs and higher stock prices for years to come.

Will Higher Capital Gains Taxes Hurt Your Investments?

Whenever taxes go up there is a concern that investment will go down. Such is the case with President Biden’s plan to increase taxes on capital gains. Will higher capital gains taxes hurt your investments? It will depend on how much money you make with your investments. It will depend on what vehicles you use to invest such as through an IRA. And, it will depend on how often you buy and sell stocks and other investments. First, let’s take a look at Biden’s plan.

Biden’s Capital Gains Tax Plan

President Joe Biden’s current proposal is to nearly double capital gains taxes for taxpayers who make more than $1 million a year. The immediate concern of some investors is that they will need to sell assets sooner than they expected in order to qualify for the current rates for short and long term capital gains. This could cause a stock selloff. Alternatively, investors will look to other strategies to avoid what appear to be confiscatory tax rates.

How Will Biden’s Capital Gains Plan Affect Your Investments?

In his speech to Congress, the President proposed upping the highest capital gains tax rate to 39.6% from the current 20% for long term capital gains. He also spoke about closing “loopholes” that let high earners pay lower tax rates than the average taxpayer. It is important to remember that, as proposed, this capital gains tax increase, would only apply to about 0.3% of taxpayers. Because short term gains are taxed as ordinary income, the proposal would bring long term gains to the same level and remove any incentive to hold on to an investment or more than a year in order to save on capital gains taxes. However, the current proposal only applies to those earning more than $1 million a year. If your investments don’t fall into this range you have less to worry about. And, the tax does not apply to investments that you are still holding. If you choose to see assets gradually you could probably avoid the worst of this plan by keeping your investment income below the $1 million threshold.

Will Higher Capital Gains Taxes Hurt Your Investments?

Ways to Reduce Capital Gains Taxes on Your Investments

There are four practical ways to reduce capital gains taxes now and should the Biden proposal become law. The first is to space out your asset sales. By simply keeping your yearly capital gains below the $1 million threshold you come out ahead. Time your asset sales and capital gains to coincide with losses. In other words, sell your losers at the same time that you sell your winners. Because you can carry losses forward, you may be able to do this more than once. A good strategy that works for any level of capital gains is to contribute to an IRA and 401 (k). Taxes are deferred until you take money out although at that time it is taxed as ordinary income but not capitals. Do this after retirement and you will typically be paying a lower rate. And, by taking money from your retirement plan in smaller amounts over the years you will be able to take advantage of lower rates.

Why Biden’s Tax Plan Is Not Hurting Stocks

As noted by The New York Times, Biden’s proposal is not hurting stocks which are rallying. Considering that Biden also wants to raise corporate taxes, this might be surprising. However, investors seem to be more interested in earnings, current economic data, and the likelihood of an economic boom tied to infrastructure investment. As they note, when the capital gains tax has gone up before it has typically been followed by a stock market rally!

How Far Could Cryptocurrencies Fall?

When we wrote recently about the crypto with the best profit potential, we noted that many old school investors think that cryptocurrencies are a huge bubble ready to pop. But, that thought applies to any investment in the midst of a bear market. The first thing different about crypto is that there is no way to determine intrinsic value. The other is that cryptocurrencies can be are used to hide transactions and wealth and as such will eventually be subject to a higher degree of regulation. That appears to already be the case with the U.S. Treasury and the largest intraday drop in bitcoin for months.

Will Bitcoins Drop Again in 2021?

The story of bitcoin and other cryptocurrencies over the last few has been rallies followed by retreats followed by rallies. We have seen an impressive rally recently and now, as news of U.S. Treasury investigations arises, a fall. Yahoo Finance writes about U.S. crackdown reports.

Bitcoin (BTC-USD) is experiencing a massive sell-off, shedding almost 15% in the last 24 hours, the biggest intraday drop since February. The drop appears to coincide with reports that the US Treasury is planning to tackle financial institutions for money laundering carried out through digital assets. On Sunday, the flagship crypto shed nearly $8,000 and was trading 12% lower at $54,900 around 12PM in London, down from a day high of $61,293.

More than a million bitcoin positions have been liquidated in this correction amounting to more than $10 billion. Ethereum, which has outpaced bitcoin recently fell by 17%, double to drop in bitcoin. It remains to be seen if this is a correction or the beginning of a freefall in cryptocurrencies during 2021.

Will Regulation Kill the Crypto Boom?

This is a major question overhanging the rally in bitcoin and other cryptocurrencies. Like with every past rally, there comes a time when FOMO, fear of missing out, drives new money into a stock, market, or cryptocurrency. In our recent article about the crypto with the best profit potential, we looked at the “minor” cryptocurrencies and suggested that they had more room to run than bitcoin. However, if the U.S. Treasury starts tracking down folks who are using cryptocurrencies for money laundering, they will be casting a wide net. As we noted in our article, Buying Cryptocurrency 101, Cryptocurrency exchanges in the USA now need to report to the IRS (IRS Form 8949, Schedule D). Anyone who has been buying and selling and making a nice profit from the peaks and valleys of cryptocurrency trading may end up in trouble with the IRS and having to pay back taxes and penalties. As this sort of thing comes to light, it could occasion a stampede out of cryptocurrencies. We noted in the news that the country of Turkey has just banned the use of cryptocurrencies for payment due to the difficulty in regulating them and ensuring the safety of payment systems.

How Far Could Cryptocurrencies Fall?

What Will Bitcoin Be Worth in 2030?

If you read the hype about bitcoin and other cryptocurrencies, you are told that bitcoin could rise without limits to maybe a million dollars for each digital token. Although a bull market could take bitcoin and others much higher, with each step upward, the likelihood of regulation increases. When we look back at the dot com bubble, we remember folks saying that the stock market had changed forever and would just keep going up. The same happened when the Hunt brothers tried to corner the silver market. When FOMO takes over, fresh money jumps into a market drives things up one more step before all of the old money gets out and there is no bottom to how far an asset, like bitcoin, can fall.

Long Term Place for Cryptocurrencies

The original idea for bitcoin, as a medium for exchange is a good one. We expect governments to try to lead cryptocurrencies in this direction and away from being speculative assets. To do this, there will be regulation. There may be a way to tie crypto prices to something more tangible than hope of future rallies. If bitcoin is still around in 2030, we expect it to be a totally different animal than it is today. How about a medium of exchange tied to a basket of currencies and worth $5,000 each?

How Far Could Cryptocurrencies Fall?- DOC

How Far Could Cryptocurrencies Fall? – PDF

How Far Could Cryptocurrencies Fall? – Slideshare Version

Crypto With Best Profit Potential

Who would have thought back in 2013 when bitcoin sold for a little over a dollar that it would be worth $60,000 today? While a lot of old-school investors think that bitcoin is a giant bubble waiting to pop, others have gained impressively by putting moderate investments to work in cryptocurrencies. Assuming that the crypto niche will not collapse and that it will continue to be viewed as a store of value, what is the crypto with the best profit potential? Do you really want to buy a bitcoin for more than $60,000 in hopes that it will double in price or would you rather buy one ETH (ethereum) for a little more than $2,000 with the rationale that ETH has better profit potential at this point?

What Are Cryptocurrencies?

Cryptocurrencies date back to 2009 when bitcoin was invented. Cryptocurrencies are virtual or digital currencies which are attractive to investors because they are essentially impossible to counterfeit. They are usually based on blockchain technology in decentralized networks. The ledgers for such systems are decentralized so that information is spread across multiple computer systems. Because of this setup cryptocurrencies are considered to be safe from government oversight, interference, or manipulation.

The original purpose of setting up bitcoin was to have an electronic means of buying and selling things and sending money. And, in the early years bitcoin was worth a few cents and then a dollar around 2013. As bitcoin took hold two things happened. Other cryptocurrencies were invented and investors started to buy bitcoin with the hope that they would make a profit. Bitcoin and other cryptocurrencies came to be seen as digital gold and an alternative to holding traditional currencies.

What Are Some Cryptocurrencies?

Following the growing success of bitcoin, other cryptocurrencies have come into being. Here are ten more cryptocurrencies to add to bitcoin.

  • Ethereum (ETH)
  • Litecoin (LTC)
  • Cardano (ADA)
  • Polkadot (DOT)
  • Bitcoin Cash (BCH)
  • Stellar (XLM)
  • Chainlink
  • Binance Coin (BNB)
  • Tether (USDT)
  • Monero (XRM)

Each of these has features that are somewhat different than bitcoin and some fill “gaps” in the cryptocurrency system. All of them are substantially cheaper than bitcoin. Investopedia has a nice, short review of these non-bitcoin cryptocurrencies.

Coinranking has a current list of cryptocurrency prices for more than 200 of these.

  • Bitcoin: $61,165
  • Ethereum: $2,394
  • XRP: $1.66
  • Binance Coin: $520
  • Tether USD: $1
  • Polkadot: $44
  • Cardano: $1.40
  • Dogecoin: $0.27
  • Litecoin: $314
  • Bitcoin Cash: $1,070
  • Uniswap: $35
  • Chainlink: $41

The list goes on and on but, as you can see, none of these sells for the same price as bitcoin. So, how have these done in comparison to bitcoin?

Crypto With Best Profit Potential
Courtesy MoneyWeb

Crypto With Best Profit Potential

The point of investing is to gain profit and to protect your gains. You can buy one bitcoin or you can buy 30 ethereum for about the same price. What does the history of these cryptocurrencies tell us about what to expect? Seeking Alpha published an article saying that ethereum could eclipse bitcoin.

Ethereum is working off a smaller base which makes it more likely to outperform its larger peer. This is clear from the recent bull run. Bitcoin’s price is up 730% over the past 12 months, while Ether is up 1,290% over the same period. Bitcoin’s market cap has already surged past $1 trillion while Ether’s aggregate value is $242 billion.

They note that while ethereum has tended to track closely with bitcoin, it has more room to grow in terms of the value of one “coin” and in terms of total value. The same could be said for other “minor” members of the cryptocurrency field. MoneyWeb published a list of cryptocurrencies and their performance in the twelve months leading up to February of 2021. While Bitcoin went up threefold, Cardona went up twelvefold, Polkadot went up sevenfold, and both Chainlink and Ethereum went up by just under sevenfold.

Some of this likely has to do with the various useful features of some of the non-bitcoin cryptocurrencies. But, the “smaller” cryptocurrencies have more room to grow and have prices that will make them more attractive to the average investor.

Are Cryptocurrencies Safe?

The idea of having a blockchain-based medium of exchange is attractive and many banks and other institutions have been adopting blockchain technology. This will not go away even if the apparent bitcoin bubble bursts. It would seem that much if not the majority of the price of bitcoin is based on the belief that it is a profitable and safe investment. As the leader of the pack by such a large margin we think that it has more to lose if government regulation or other factors bring its price back down to earth.

We think that bitcoin and other cryptocurrencies as a medium of exchange (the original purpose) is valid and will continue. In order to protect consumers, there will be some degree of regulation and taxation of profits as we noted in an article about buying cryptocurrency. As the system matures society will demand that the various systems are accountable. Along the line we expect to see some of the “smaller” members of this group make up ground against bitcoin. This will largely be based on how well they fulfill their purpose as a medium of exchange but also on how good of a store of value they turn out to be. The take-home lesson is that there are a lot more cryptocurrencies to invest in than bitcoin.

If you want to try trading any of these to cash in on short term moves, your best bet is track market sentiment data as none of these has any measurable way to assess intrinsic value.

Crypto With Best Profit Potential- DOC

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