Waiting till after Jan. 1 to cash out means a whole year to harvest losses, experts say
Eleven months of stock market momentum can be a powerful thing, which is why some advisers believe it is more prudent to ride the wave — at least through the final month of the year.
With the S&P 500 up more than 29% from the start of the year, on the heels of a 15% gain last year, it is a safe bet that there are plenty of taxable gains sitting inside client portfolios. But even if you feel the market is getting rich, it might be worth waiting until after Jan. 1 to cash out.
“I certainly see the merit behind waiting until at least January to sell and take some profits,” said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
“It's unlikely that 2014 will be as good as 2013 has been, and waiting until January to sell gives you a whole year to find ways to offset the gains.”
While some would argue that gains are gains, and taxes are difficult to avoid, the strategy of delaying any sales until the conclusion of a strong year for the markets can be so pervasive that it virtually guarantees a positive December.
That, in turn, becomes another reason to sit tight for the rest of the month.
Including this year, there have been 15 years since 1995 that the S&P has been positive through November. And of those years, only twice did the index register a decline in December.
In 1996, the S&P was up 25.4% during the first 11 months, then declined by 1.9% in December.
The other example is 2007, when the index gained 6.2% through November, and fell by 0.7% in December.
“We believe the December effect, whereby investors choose to defer paying taxes on equity market gains until the following year, will provide additional support to the equity markets as we close out the year,” said Charles Gradante, co-founder of hedge fund advisory firm Hennessee Group.
Of course, holding stocks for tax purposes doesn't fly with everyone.
“One of the biggest mistakes investors make is judging the merit of an investment based on the tax consequences, rather than treating it as an investment,” said Paul Schatz, president of Heritage Capital.
“Riding something up and down because you don't want to pay taxes on it is ridiculous,” he added. “People do that either out of complacency or they're hoping and praying a stock will come back, but to me, if it's time to sell, I'm getting out.”
Mr. Schatz admits he does a lot of tax-loss harvesting this time of year, which typically involves registering a loss for tax purposes and then immediately buying a comparable investment to maintain the portfolio allocation.
But if historical performance can be used as any kind of guide, most investors will stick with their winners through at least the end of the year, giving that extra boost to December market performance.
The last time the S&P came into December with such strong performance was 2009, when it had gained more than 24% through November.
That December the index gained just under 2%.
But, as Mr. Rosenbluth pointed out, 2009 was a strong year for stocks on the heels of a 38% drop in 2008, which could have led to more tax-management selling at the end of 2009.
“Coming off back-to-back strong years at this point means investors who were patient are sitting on gains from multiple years,” he said. “There's just less to offset from a tax standpoint.”
