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Bear market defined
THE MOTLEY FOOL
Ask the Fool
Published: April 9, 2020
Q: I hear the stock market entered a "bear market" -- how is that determined? -- C.M., Cincinnati
A: It's all a matter of degree. When the stock market's overall value drops (from its high point) by 10%, that's considered a "correction," suggesting that the market had gotten ahead of itself and has self-corrected. When the overall value falls by 20% or more, that's a bear market.
Bear markets can last from weeks to years, so money you'll need within a few years shouldn't be held in stocks. As a long-term investor, you can wait for the recovery that (historically speaking) always follows. You might even buy more stock while prices are low.
Q: If I'm in the 22% tax bracket, I'm not paying 22% on all my income, am I? -- P.Z., online
A: Not at all. That's your "marginal" tax bracket, meaning that your next dollar of income will be taxed at that rate. Federal tax brackets change over time, but for the 2019 and 2020 tax years, there are seven; they tax income at 10%, 12%, 22%, 24%, 32%, 35% and 37%.
So if you're single and your taxable income for 2019 is $55,000, you'd pay 10% on your first $9,700 of income (that's $970), 12% on your income from $9,701 to $39,475 ($3,573), and 22% on your income from $39,476 to $55,000 ($3,415). (That 22% bracket covers income up to $84,200, by the way.) Add those three sums, and they come to a total tax of $7,958. Divide that by your taxable income of $55,000, and you'll see that you paid 14.5% of your income in federal taxes. That's your effective tax rate, reflecting your total taxation, and it's more meaningful than your marginal rate.
Fool's School
Meet the Taxpayer Bill of Rights
When April rolls around each year -- or July, this year -- you might feel like it's just you, alone, against the massive Internal Revenue Service, and that you're powerless if you have any problems or grievances. Not so -- you have the Taxpayer Bill of Rights!
As the IRS explains: "Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. Explore your rights and our obligations to protect them." Here are the 10 rights you have, with a few excerpts from explanations:
-- The right to be informed: "Taxpayers ... are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices and correspondence."
-- The right to quality service: "Taxpayers have the right to receive prompt, courteous and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications ..."
-- The right to pay no more than the correct amount of tax.
-- The right to challenge the IRS' position and be heard.
-- The right to appeal an IRS decision in an independent forum.
-- The right to finality: "Taxpayers have the right to know the maximum amount of time they have to challenge the IRS' position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt."
-- The right to privacy.
-- The right to confidentiality.
-- The right to retain representation.
-- The right to a fair and just tax system: "Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay or ability to provide information (in a) timely (manner). Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly ..."
Know your rights!
My Dumbest Investment
Get a Load of This
My dumbest investment was when I got talked into buying shares of a mutual fund with a 5% load and a 1.25% annual fee. I did the math after few years, comparing the large-cap mutual fund to a simple index fund based on the S&P 500, and learned that I'd given away thousands of dollars.
I'm glad I learned those lessons in my mid-20s. Now I don't trust anyone trying to sell me anything. -- C.B., online
The Fool responds: Over long periods, most actively managed mutual funds (those with highly paid professionals choosing what to buy and sell, and when) underperform the overall market. It makes more sense for most of us to just stick with index funds, which tend to perform better for lower fees.
Whatever kind of mutual fund you buy into, it's also best to avoid those charging a "load," which is a sales fee that can be front-loaded (you pay it when buying shares), back-loaded (you pay when you sell) or even ongoing (you pay each year). Loads can be as high as 8.5%. If you plunk $3,000 into a fund with a 5% front-end load, $150 will be lopped off in fees, with only $2,850 going into the fund on your behalf.
There are lots of good no-load funds, so give them preference. And look for low annual fees, too -- ideally well under 1%. Many index funds charge less than 0.2%.
Foolish Trivia
Name That Company
I trace my roots back to the 1964 founding in Oregon of Blue Ribbon Sports, my precursor, by an accomplished coach and one of his athletes. My first store opened in 1966, and by the early 1970s, I was selling innovative track shoes bearing the name of the Greek goddess of victory. A waffle maker inspired my early soles. Today I'm a global giant focused on athletic footwear, apparel and more. I rake in more than $40 billion annually, employ more than 70,000 people worldwide, and own brands such as Converse, Hurley and Jordan. Who am I?
Last Week's Trivia Answer
I trace my roots way back to 1816, when some businessmen met in a tavern and formed a company to build a public water supply -- for homes and for fighting fires. I first used bored-out logs as pipes, later switching to cast iron. Still based in York, Pennsylvania, I sport a market value recently around $500 million. I've paid 596 consecutive dividends, never missing one in more than 200 years -- possibly the longest record of consecutive dividends in the U.S. I'm also the oldest publicly traded company in the nation. Who am I? (Answer: York Water)
The Motley Fool Take
Underwear for Your Portfolio?
Shares of Hanesbrands (NYSE: HBI) were recently down more than 50% from their 52-week high, presenting a buying opportunity for long-term investors.
The market may be worried about the sluggish innerwear segment (not to mention the COVID-19 pandemic disrupting economies globally), but the innerwear and activewear company has been growing, not shrinking, with total sales up by 2% in 2019.
Management has spent the last few years stabilizing the weak performance of the innerwear business while focusing on where to improve sales growth and drive faster growth. It has been controlling costs and allocating resources to drive better returns for investors -- reflected in the 13% year-over-year increase in adjusted earnings in its fourth quarter. Future performance is expected to be even better.
The highlight of the business is the Champion brand, with sales up 22% year over year in the fourth quarter. It's now a $1.9 billion brand (roughly a quarter of total revenue) and still has tremendous potential for long-term growth. From 2013 to 2018, international revenue rose from 11% of total sales to 34%, while consumer-direct sales jumped 9% to 22%.
Hanesbrands' stock offers a solid dividend that recently yielded 6.5%, and its price-to-earnings (P/E) ratio was a low 5.5. The recent sell-off offers a good chance to buy this value stock at rock-bottom prices.
COPYRIGHT 2020 THE MOTLEY FOOL, DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION, 1130 Walnut, Kansas City, MO 64106; 816-581-7500.