After huge losses in 2008 and equally impressive gains in 2009,
stocks have largely taken a breather so far this year. Yet for many
companies, 2010 can't end soon enough -- and unfortunately, some of
them are likely to take another few lumps before the ball drops in
'Tis the season
Every year around this time
, investors go into a mini-panic. As you look at your income for
the year and weigh gains, losses, and taxable investment income
from your portfolio, you may start frantically looking for ways to
cut the inevitable tax bill that you'll have to pay in April.
That inevitably leads to taking a hard look at your portfolio's
losing stocks for the year.
Harvesting tax losses
is a time-honored tradition, and it can save you a ton of taxes.
You're allowed to use capital losses on falling stocks, bonds,
mutual funds, or other investments to offset any and all gains
you've earned on sales of winners. In addition, if you have more
losses than gains, you can use up to $3,000 of additional capital
losses each year to cancel out regular income, including your
salary or any interest and dividends you may have received during
No one likes to pay taxes, so you can expect millions of your
fellow investors to go through the same thought process you will in
trying to find cost-cutting moves against Uncle Sam's grabby fist.
Often, the wave of negative sentiment that results from tax-loss
harvesting can add insult to injury by pushing the share value of
losing stocks down even further to salvage what they can from
investments that went wrong.
This year's candidates
Let's take a look at some of the stocks that are likely to feel the
effect of tax-loss harvesting this year:
Selling $10,000 in Shares Could Generate Tax Savings of
as Much as
Source: Yahoo! Finance and author's calculations. Tax savings
assume 35% tax rate applies.
The reasons for these drops are as varied as the stocks
themselves. In some cases, extraordinary events have caused
problems. BP's disaster is well-known, and it also helped bring
peers such as
down in sympathy
. Apollo Group has faced
scrutiny from federal regulators
who are critical of the school's use of student loan funds.
Monsanto faced the double-punch of generic competition to its
Roundup herbicide as well as backlash from the farmers who are its
On other cases, the causes are more pedestrian. Adobe recently
guided its future earnings lower based on pessimistic projections,
despite posting impressive growth. Defensive plays like utility
Exelon simply haven't interested investors who got used to much
stronger gains from faster-growing companies. And Medtronic is
simply suffering from
recession-related lack of demand
for its medical equipment.
How to handle year-end doldrums
What you need to do to protect yourself depends on whether these
stocks are already in your portfolio. If you own shares, then
joining the mass of tax-loss sellers might be the only way you can
get a benefit from the money you've lost. Unfortunately, even if
you like the stocks as a long-term investment,
wash sale rules
force you to wait 30 days before you can buy back shares after you
sell them at a loss. That leaves you vulnerable to a potential
rebound, which often comes in January. So if you intend to buy back
the shares you're selling for tax purposes, do it sooner rather
In contrast, if you don't own these shares but are considering a
purchase, you don't necessarily have to hurry to buy. Sure, a Santa
Claus rally might well lift share prices across the board. But all
other things being equal, selling pressure for tax-loss harvesters
could give you even better bargains in the coming weeks. The low
price you get may well make a great Christmas present to
Be careful out there
Events like tax-loss selling show just how inefficient the
financial markets can be. By being aware of the phenomenon, though,
you can turn it to your advantage.
Get rid of losers and start looking for winning stocks.
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