Easing Your Financial Worries During These Trying TimesBrian Jang ON May 26, 2020
You may have heard the expression, “your health is your wealth.” While this is definitely true, it is certainly understandable if you are concerned not only with your physical health, but your financial health as well during these unprecedented times. Another expression that you may have heard of is “panic selling,” which is precisely what it sounds like: selling in a panic.
As each new day passes, watching the stock market continue to drop can be a frightening thing. Usually, the first thing to come to mind is a desire to sell immediately, before the value of your investments can plummet even further. Instinct tells us to get what we can while we can, before things get worse. But while this may seem reasonable, even logical, is it the correct thing to do?
A common bit of advice that many of us receive at some point in our lifetime is to avoid making rash decisions. When we examine long-term returns from the stock market, we see that this advice is applicable here. As history has shown, your best bet is to wait for better days.
One fine example of how not panicking can have a huge effect is seen in the period from 1996-2016. By missing the 20 best trading days (US S&P 500) during that time, you would experience a drop in your annualized returns from 7.7% to 1.6%. This is considering events such as the dotcom crash and the great recession. The lesson learned is that trusting in the market over the long term is of greater benefit than panic selling.
The Impact of Panic Selling on Your Taxes
Depending on where your investments are held, the impact upon your taxes will vary. For example, if you have your investments in non-registered accounts (meaning no RRSPs or TFSAs), you will be able to deduct your losing investments from your taxable capital gains earned for the year, as they will be considered capital losses.
On the other hand, if your investments are in tax-sheltered accounts, you will not be able to deduct your losing investments, as these funds are sheltered from taxation, either tax-free (TFSA) or tax deferred (RRSP).
What to Do If You Have Already Sold
In the event that you already gave in to panic and sold at a loss, it is important that you (or your spouse) wait 30 days to buy back the same stock in a non-registered account. This is to avoid a superficial loss. After 30 days, you will be able to deduct your capital loss as detailed above.
If you do not happen to have taxable capital gains from the year, you may also carry back your capital losses to the three previous years to deduct them retroactively, provided you had taxable capital gains in those years.
Additionally, you may optimize your losing investments from non-registered accounts by using the funds received to buy into the market again, this time in an RRSP, TFSA, or similarly tax-sheltered account. Doing so permits you to use the available cash for a tax-deductible contribution (RRSP) or ensure that future gains are exempt from taxes (TFSA).
Do not allow panic to make decisions for you. While this article is not meant as a replacement for professional investment advice, it may give you reason to pause and think before making hasty decisions.