In 2008, one-third of investors over 65 had reportable capital gains, and 40% of investors between the ages of 45 and 65 had reportable capital gains. Both facts were reported by the IRS and highlighted in a report by the Tax Foundation. Here are my takeaways:
1. Obviously both age groups headed for the exits too soon, selling in a year when the S&P 500 was down 37%.
2. But that’s what happens when stocks are too heavily relied upon, as they were by investors trying to make up for the devastating losses from the tech bubble in the early 2000s.
3. Yes, 2000–2010 may have been the lost decade for stocks, but leading up to 2008, the S&P 500 was up: 29% in 2003, 11% in 2004, 5% in 2005, 16% in 2006, and 5% in 2007. Investors were investing through the rearview mirror and, not surprisingly, were caught off guard.
4. Greed comes to mind, too. How does a 5% risk-free rate of return sound to you? It sounds good to me. But when T-bills were yielding 5% in January of 2007, many investors scoffed at Treasuries.
5. How times have changed. In 2008, as the market crashed, investors fled to T-bills, driving rates down from 3.26% in January 2008 to 0.11% by year-end.
6. You can be sure that with the market up 26% in 2009 and 15% in 2010, a significant portion of these gains were missed by those who sold in 2008.
7. Yet that doesn’t mean they haven’t waded back into stocks just as they did before the 2008 crash. In fact, with the Dow up 22.6% since August, it’s likely they’ve waded back in too deep.
8. It’s no surprise investors are dreaming again about capital gains, especially with T-bill yields at 0.10%. Who can retire on that, right?
9. Once again, the problem, especially for those over 65, may be depending too heavily on capital gains, much as they seem to have done back in 2008.
10. So don’t let the seduction of a low-cap-gains rate and a rising stock market blind you to the importance of blue-chip dividend stocks. Dividends must be your driving theme with stocks.