Holding stocks over New Years

[Leaira]

I have heard it said that the market always gows down New Years Eve and the first week of January because of everyone selling for tax reasons.  New Years Eve they sell with losses to take the tax deduction.  First week of January they sell with gains so they can wait another year before they have to pay taxes. 

With all this in mind, would you recommend that I sell all my stocks on December 30, then buy the ones back on January 9 that I'm still bullish on?  This will be my first Christmas and New Years as an investor.

Thanks,
Leaira

[fous]

Im curious about this as well as this is also my first new years as an investor as well...... any info anyone?

-fousc

[1reilly]

Let me give you my take on this. I spent 35yrs in the securities business so I hope my comments will help. First, most sophisticated tax trades are executed by Nov. The thirty day wash rule creates the need for an earlier tax trade. Second, there will be last minute sales but because of the thirty day rule you will also see repurchases in late Dec.. Third remember that Mutual Funds and hedge funds are done for accounting purposes Nov 30th. Now what I think is most important and that is your personal portfolio. I've seen so much money lost because an investor worried about tax consequences. If you have a stock that has broken down take the loss. If you have a stock that is in an uptrend ride the stock. If a stock reaches your target take your profit and pay the taxes. You won't find any pros holding a stock till Jan 3rd if they have reached their target. I'm not saying there are not sophisticated ways to lock in your profit for 2006 but unless its significant, trade the position not the tax consequence. Let me give you an example of a tax trade a pro would make if he had to control a significant tax . Let's say ABC stock hit your trading target and that it's Dec 23rd. If you sell the stock you incur a 25,000 profit. It's simple you simply sell the stock against the box wait till next year and complete both sides of the trade within the wash rule guidelines. From Dec23 till your cover date you have no risk in the stock. Now let's say you don't do this but instead say you will wait until Jan 3rd to sell the stock and the stock goes down 3 points. You have lost what you might have paid in taxes. What I'm telling you is tax positioning creates both the need for sales and purchases and that this planning is done throughout the year. Don't manage your portfolio for a two week period because of this issue. Just one last example to maybe highlight this for you. Let's say Monday David recommends ABC at 3 and you buy it. Lets say the stock runs to 5 and David says sell it are you going to worry about paying the taxes or are you going to take the profit. I'll take the profit and pay the taxes. I also don't think some one is going to sell a stock in an uptrend because he's worried about tax trades over the next three weeks. Good luck with your trades. Let the stock tell you when to sell.

[tommyt]

I  agree with 1Reilly +100%. I would only and that bigger portfolios may require more sophisticated transactions to aggressively manage tax liabilities. Many use options of a security as a way to maintain a postion while utilizing a tax advantage from a loss or gain. Then swap back after wash rule expires. Personally, I'm not a republican so I don't mind paying my taxes.

[rickjust]

can someone explain the wash rule?
thanks,
max

[1reilly]

It's pretty simple. If you hold a stock with a loss and wish to take that loss for tax purposes you must: sell the stock and wait 30 days to repurchase it. One way to accomplish a loss in a security you don't want to be out of but want to bank your loss is to double up your position  wait 30 days and then sell 1/2 of your holdings you are allowed to apply that sale against any purchase date, which in this case would be against your highest cost basis. If you sell a stock for a loss and repurchase that stock within 30 days you are forced to apply the sale against the latest purchase losing your ability to apply the sale against a former purchase of your choice. Obviously to accomplish the double up strategy the purchase must be done in Nov at the very lastest.