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VERSACE: It’s time for investors to take stock of their portfolio
Question of the Day
Last week closed out the month of November for the stock market and a quick glance at all the major market indices – the Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index – showed modest movement in the month. That's not surprising as we traded the presidential election earlier in the month for the spotlight on the "fiscal cliff." The first few days of December have brought little change on the fiscal cliff with both sides – Democrat and Republican, White House and the House, President Obama and conservatives – digging in their heels.
Like a pot with a slow boil, it eventually comes to a rolling boil and we are starting to see that happen as chief executive officers from the likes of Caterpillar Inc. voice their concerns not only about the fiscal cliff but what could happen if we indeed go over it. Not only has that uncertainty resulted in businesses slowing hiring and cutting capital spending, but in recent weeks public companies have announced special dividends or accelerated dividend payments.
After this week, we will have 15 more trading days left not only in December and the current quarter, but for the rest of 2012. That means two things to investors.
First, it's time to check in on the consensus expectations for current-quarter operating earnings from S&P 500 companies. Surprisingly, the average consensus figure of $26.50 per share is unchanged over the past 30 days. Over that period, we've experienced Superstorm Sandy, seen a rebound in layoffs and watched more companies cut forward guidance than we have in some time.
Second, it's time for investors to take stock of their portfolio to decide what companies and positions they should continue to own into 2013 versus those that should be jettisoned before we get there.
Now you may read this and say, this sure sounds like window dressing, but it's not. For those not familiar with the term, window dressing is a strategy used by mutual fund and hedge fund portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, a fund manager will sell stocks with large losses and purchase high-flying stocks near the end of the quarter. These securities are then reported as part of the fund's holdings.
Rather, what I am talking about is more in tune with cleaning out the dogs of your portfolio to not only make room and capital for new ideas, but also to maximize your tax position especially if you have booked any gains during the year. For many investors, tax gain/loss harvesting is one of the single most important tools for reducing taxes. Although it can't restore losses, it certainly can soften the blow as an investor can use offset capital gains and therefore lower personal tax liability. Remember, a capital gain or loss is not recognized until the asset is sold.
While this applies to individual stocks as well as mutual funds, there are some rules to keep in mind. A capital gain or loss can be categorized as either short term (one year or less) or long term (more than one year). Securities held longer than one year are considered long term for the treatment of any capital gains, and are taxed a maximum of 15 percent depending on the investor's tax bracket. Stocks held less than one year are subject to capital gains taxes at a maximum rate of 35 percent depending again on the investor's tax bracket. One key aspect of this is to match up short-term gains with short-term losses and long-term gains with long-term losses in order to reduce appropriate gain or loss. Short-term losses cannot be used to offset long-term gains and so on.
Aside from proper matching, one has to remember to follow the wash-sale rule, which disallows deductions if you purchase the security within 30 days of selling it. If investors would like to repurchase the shares sold for a loss, they can do so after the 30-day wash sale rule no longer applies.
• Chris Versace is the Editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.
© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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