In the investment world there are certain things you can set your clock to. You may make contributions to IRA's by April 15. Perhaps you and your advisor rebalance your portfolio at the same time each year. The end of the year, near December, is a popular time to review investments in taxable accounts to determine if tax-loss selling would be appropriate for certain positions. Just watch personal finance websites for year-end lists of investment housekeeping and you'll see their popularity.
When you look at the calendar, this timing makes sense. The deadline for a capital loss transaction on current-year tax returns is Dec. 31st. It's human nature for many of us to put things off until the last minute. This is reinforced because the last six weeks of each year are often the heaviest time periods for distributions from pooled investments returning gains.
But wait! The end of the year isn't necessarily the best time for maximizing tax-loss selling:
- Studies show that the 4th quarter is the best performing period for investments (see my recent blog on history lessons of investing in the 4th quarter).
- Yale Hirsch, author of the Stock Trader's Almanac, has identified the Santa Claus rally or December Effect -- a tendency for stocks to rise in December, particularly in the last week.
- An analysis of annual S&P 500 returns shows the volatility of markets (even in normal times).
Whether looking to maximize losses or trying to capitalize on the best times to invest, this seems to present arguments against the end of year rule-of-thumb for tax-loss selling. This may not always result in maximization of capital losses.
When working with your financial planner, a regular discussion of philosophy on tax-loss selling is important. If your tax bracket is especially low, tax-loss selling may not offer tax savings. Coordination with your accountant to ensure that tax-loss selling is appropriate is also a best practice.
Let's be honest, all things being equal, a world where investments always exceed your initial cost basis is what we're working for. More often than not there are bumps along this road. When looking for a comprehensive tax-loss strategy, the right time may not be the last minute.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transactions costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional.