Every fall, especially in opportunity rich markets like this, I encourage investors to think about some year-end strategies that make the final calendar quarter a special time in all markets. Several forces are at work, all of which have links to conventional Wall Street wisdom; none of which promote good long-term investment decision-making.
This year, we have the added excitement of anticipating a new, perhaps economically too liberal, administration taking over with an already implanted, and demonstatably inept, congress. The markets are in a truly unprecedented state of "uncertainty overload". What's an investor to do--- or not to do?
Typically, the November syndrome has features that impact in both directions. It causes weak prices to fall even further and strong prices to climb higher. This year, the strong category requires a microscope for candidate viewing, while the weak seem to have inherited the listings. Money Market funds and Treasury securities are the low yielding, lower-risk, depositories of choice.
At the individual investor level, the mad dash to lose money on equity securities has begun. The idea that this is somehow a good thing is an anomaly created by a counter productive tax code and an industry that has a vested interest in perpetuating the absurdities it (the IRC) creates.
Assuming that we are dealing with investment grade securities, lower prices should most logically be seen as an opportunity to add to positions cheaply--- not as an opportunity to reduce one's tax liability on investment earnings. There is, and never will be, a good loss or a bad---.
Naturally, both you and your CPA feel better with lower tax bills, but why sell a perfectly good security at a loss to produce pennies on the dollar in tax relief? Speculations, sure, valueless securities, why not? But when nearly all IGVSI stocks are at their lowest levels in decades, selling for losses should be the last thing on your mind.
Most IGVS companies remain profitable. Less profitable, for sure, but few have cut dividends and nearly all will survive and prosper when the economy recovers. Would your CPA accept just half his fee to save on his own taxes? Would you barge into your boss' office and demand a pay cut?
In the old days, when markets moved slowly and buy-and-hold was the investment strategy of choice, the 30-day, buy-it-back, tactic was an effective way of having your tax break cake and maintaining your portfolio as well. But with 1,000-point weekly swings, there are no guarantees that the markets will tread water for your personal tax convenience.
In fact, more often than not, major corrections such as this one produce either a Santa Clause rally or "January Affect" that is far more profitable for November-low buyers than for tax-motivated sellers.
Similarly, "letting your profits run" to push the dreaded taxes into next year is foolishness. Talk to the geniuses that didn't take profits in 1999, or in the '87 or '07 summers. The objective of the equity investing exercise is to take profits--- the more quickly and more frequently, the better. This year's volatility has produced hundreds of profit taking opportunities.
Another popular year-end shell game is the "bond swap", which preys on the fear most income investors experience when their somewhat guaranteed, income securities, fall in market value. This is the same absurdity that allowed "mark-to-market" accounting rules to crack the foundations of financial institutions around the world.
A contract (from a quality borrower) to pay a fixed rate of interest, and full principal at maturity will vary in price throughout its existence. It's nothing to be particularly anxious about. Junk bonds are for speculators, not for those of us with gray-templed children.
Bond swaps allow an advisor to pick your pocket by exchanging them at a "nice tax loss" for another bond with "about the same yield". He gets a double dip (invisible) commission and you get a bond of longer duration or lower quality.
On the same page, the idea of exchanging a steady, much-higher-than-normal-yield, closed-end-fund (CEF) cash flow for an overpriced T-Bill yielding less than 1% is above Emperor's New Clothes absurdity levels.
But there are even more year-end games going on to take advantage of your confusion. Wall Street gangs up on you with a self-serving strategy blithely referred to by the media as "Institutional Year End Window Dressing"--- a euphemism for consumer fraud.
In this annual ritual, mutual fund and other institutional money managers unload stocks (and CEFs) that have been weak and (usually) load up on those that are at their highest prices of the year. This year, they'll be holding cash and Treasuries.
Always keep in mind that (a) Wall Street has no respect for your intelligence and (b) the media "talking heads" are entertainers, not investors. Institutions must paint a picture of brilliance in their annual glossies. This year, a panic-stricken Main Street is helping them with their annual "sell low" hypocrisy.
It would be an understatement to say that these year-end tax and face saving activities are misguided and unnecessary. But this year's "November Syndrome" is an unprecedented investment opportunity that most people are too confused to appreciate.
Simply put, get out there and buy the (high quality) November lows, both equity and fixed income. Establish new positions for diversity, and add to old ones without surpassing "working capital model" diversification limits. Keep appendages crossed for a therapeutic dose of "January Affect" elixir, as you reaffirm your understanding of long-term investment strategy.
The media will talk about this New Year phenomenon with wide-eyed amazement. Most of those terrible losers (you just sold?) begin to rise from the ashes, as the professional window dressers repurchase the solid companies they just sold for losses--- interesting place Wall Street.
One last thought; if you have taxable profits that you can't bear the thought of holding on to, just send the profit portion to me. I'll pay the terrible taxes.