One advisor sees December as a time to capitalize on buying losing stocks. He adds that statistically speaking, the worst time of year to sell these stocks is between the middle of November and middle of December.FreshSplash/iStockPhoto / Getty Images
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Although portfolio managers have until Dec. 27 to execute year-end tax loss harvesting strategies, some say the last-minute selling of individual stock positions to offset capital gains is poor practice.
While there’s a natural temptation to sell “losing stocks” to capitalize on the tax savings, portfolio managers who do so could be missing out on a big opportunity, says David LePoidevin, senior portfolio manager and senior investment advisor with LePoidevin Group at Canaccord Genuity Wealth Management Canada in Vancouver.
Instead, he sees December as a time to capitalize on buying those stocks.
“Statistically speaking, the worst time of year to sell your losers is between the middle of November and middle of December,” Mr. LePoidevin says, noting that the Stock Trader’s Almanac calls the period “the only free lunch on Wall Street.”
“If you buy stocks that are at or near their 52-week lows, you outperform the market by a significant margin between now and Feb. 15. So, no, we’re not selling any stocks. We would not do that in December.”
Mr. LePoidevin gives the example of owning a stock purchased at $30 that has dropped to $10. Some investors may see the benefit of unloading that stock, believing it isn’t going back up to $30 anytime soon. But Mr. LePoidevin says if he buys the stock at $10 and sells it a few months later for $12, “that’s a really good return.”
He advises clients to take their tax losses earlier in the year, such as in February, where possible.
“They would still be mathematically ahead by taking their loss 60 days from now and then … to apply that loss, maybe they have gains in 2024,” he says. “I get that clients feel like they are paying unnecessary taxes. Well, not true, because that loss is still good next year.”
Colin White, portfolio manager at Verecan Capital Management Inc. in Dartmouth, says portfolio managers need to communicate to clients a well-defined strategy for when to exit any stock purchases. Too often, tax savings are positioned to clients as the only consideration instead of examining if a particular stock is worth holding onto at a given point in time.
“Tax-loss harvesting should form just part of the broader framework as to when you sell,” he says. “Most people forget that a capital gain is just a timing issue. You pay the tax now or you pay the tax later.”
Mr. White adds that he does consider harvesting for those in certain situations, such as offsetting higher-than-average capital gains that will push a client into a higher tax rate.
“If there is something anomalous about this year, we absolutely will do year-end tax planning in which we look at gains, losses and incomes,” he says. “But when it comes to individual positions within the portfolio, it’s more about the investment merits. Over the long haul, the investment merits of those positions are way more important than the tax planning.”
Mr. White says some investors might consider selling now for tax reasons and then buying back the stock again, without triggering a superficial loss. It’s not something he advocates because the price of the stock could be higher once they repurchase it, meaning they would miss out on the gain.
“It goes back to the quality of the holding. You’re taking a big investment risk,” he says, pointing to rising stock markets in recent months.
Nigel Roberts, president and portfolio manager at Bluenose Investment Management Inc. in Kelowna, B.C., also isn’t a fan of selling and then buying the same stock quickly. For someone who is looking to take advantage of tax-loss selling and wants to avoid taking a superficial loss, he advises they buy back a similar stock or fund.
Mr. Roberts also suggests looking at selling stocks as a way to rebalance portfolios.
“If a client is overweight in a certain sector, could be a good time to trigger some of those losses,” he notes.
But even then, he tries not to leave any harvesting strategies until the last minute.
“So, if you’re trying to realize capital gains or capital losses, especially on smaller cap stocks, the liquidity tends to evaporate starting around mid-December,” he says.
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