There are lots of things that can affect the market during the holiday season and the end of the year. There is no doubt that your favorite financial news channel will try to explain the movements of the market at this time of year. You will hear stories about disappointing sales during the holiday season affecting the market because it shows that consumer confidence is not where a financial analyst predicted, or that there will be a Santa Claus rally because investors want to invest their holiday bonus and there’s euphoria about Christmas. If the market doesn’t perform as well at the end of the year it will be blamed on investors selling off their stocks for tax purposes. Needless to say, every scenario will be covered and explained by some generalized short term phenomenon that probably shouldn’t factor at all in to your investment decisions.
We will not pretend to be able to predict which news story will be the dominant one in the market, whether it’s one of investor euphoria or a gloomy market, but we will tell you that it is a good time to reassess your portfolio to make sure that it still lines up with your objectives and goals. And if there are stocks in your portfolio that no longer meet the criteria for a quality company that you’re holding it may make sense to sell it if you can claim a capital loss for tax purposes. As with any investment each individual will have unique circumstances when it comes to taxes and you should always consult a tax professional before making such trades.
Tax Loss Harvesting
Tax loss harvesting is an investing strategy to maximize your tax write offs while remaining invested in the market. The basic principle is that you would sell a security that has had a loss and you purchase a similar security with the proceeds from your sale. This would allow you to have the same asset allocation, while allowing you to claim a loss for tax purposes. The easiest way to do this is if you hold an Index ETF or Mutual Fund that tracks one of the major indices like the S&P 500. Since there are lots of options for index funds and ETFs it is easy to pick one to replace what you already had in your portfolio. The rule of thumb is that when you make this transaction that you make sure you don’t purchase a fund with a much higher expense ratio. If you end up having to hold that fund for a long time you want to make sure that the fees don’t erode your potential gains and eliminate the tax savings that you claimed.
Calculating Gains and Losses
Selling stocks will almost always lead to a taxable event and you should be clear on what the implications are to make sure you minimize taxes due, especially at the end of the year. You can use our new Gain/Loss Calculator to calculate what your potential tax implications as a result of a capital gain or loss resulting from Selling stocks.
Your outlook shouldn’t be any different than it is the rest of the year. Talk about interest rate hikes, terrorism, or other external factors that are out of your control should not be the driver for how you evaluate a company. In any case the outlook for the holidays should be taken as an opportunity and reminder that investing is a continuous assessment of companies, and it never hurts to review what’s in your portfolio and what companies could be good targets for you to acquire.