During a recent conversation with fellow board members of a not-for-profit organization the topic of “unrealized” gains came up while reviewing financial statements. In discussing how this number (a big unrealized gain in 2016) was mostly irrelevant to our operating budget, it was interesting to see the different responses. It occurred to me that this topic is relevant to individual investors and complimentary to the last Invest-Notes post on calculating investment returns. When is a profit or a loss not really either one?
An unfortunately common story heard from investment managers is about the tendency for people to panic during market drops. The problem is multifaceted with otherwise sober investors suddenly trying to time the market, taking losses on stocks, giving up dividend income and often generating unnecessary tax bills. And when the panic ends? How to determine when to start purchasing equities again, yet another opportunity for market timing – an activity long demonstrated to be harmful for your portfolio.
Now this is not to say that an investor should never sell, just that any decision to make changes in the holdings of an IRA or other investment accounts should be done deliberately and with intention. Not during a time of emotional and financial stress. As the Boys from Bespoke pointed out recently (www.bespokepremium.com, highly recommended) eight years after the market crash of 2008-2009 only 16 of the stocks that were in the S&P 500 at that time are down. In contrast, 39 stocks in the S&P have seen gains of 1,000%, or more, over the same period.
So let’s do a thought experiment today. We’re going to look at a gold coin (let’s make it a one-ounce Gold American Eagle) and ten shares of Apple stock (AAPL). Let’s assume that these assets are in a retirement account that is unlikely to see any withdrawals for another decade. Today that gold coin is worth about $1,250, and the ten AAPL shares around $1,400. Now for the fun…
In 2015 that gold coin was worth $1,000, and in 2012 it was worth about $1,700. It is the same coin and has never been removed from the safe deposit box since 2006 when you originally purchased it. With a current value of $1,200, have you made $200 or lost $500? Yes, a trick question, since you paid $600 in 2006. Same with AAPL; in 2015 the shares were valued at about $1,000 and in 2012 they were worth $750. But in 2006 you paid $150 – yes, one hundred and fifty dollars for ten shares.
Until you sell an asset it is only worth whatever anyone will pay for it. Gold has demonstrated an ability over very, very long periods of time to be an asset that holds it value. Consider that Benjamin Franklin wrote that in his lifetime an ounce of gold would buy a very nice suit. And a bespoke suit can be had today for $1,250. As for AAPL, well, the first iPhone was sold in 2007 spurring a revolution in communication that led AAPL to become the most valuable company on the planet. But whether a share costs $12 or $140, it still represents only a miniscule ownership of a publicly held company, and a stake you have absolutely no control over in terms of pricing.
Successful investing is almost always a result of critical thinking (don’t panic as markets move dramatically up or down) and patience (it’s a marathon, not a sprint). Heaven is not the day after tomorrow.