Have you ever heard of the “Halloween Strategy” for your investments? What about terms like “harvesting” or “rebalancing”? Notable names aside, there are all kinds of ways that you can benefit from year-end trends to fine-tune your investment portfolio. Although not all of these investing tips will apply to every investor, at least a few of them should be able to benefit your individual portfolio. If you’re looking tips on how to invest your money before year-end, take a look at the investment options and strategies here.
Observe the Halloween Strategy
The so-called “Halloween Strategy” is a slick name for an old investing mantra: “Sell in May and go away.” Although no investing strategy works every year, over the long haul, most stock market gains have been generated in the November-through-April time period. If you did sell in May and are sitting on a pile of cash, the “Halloween Strategy” suggests you should hop back in as soon as you start planning your Halloween costume.
Harvest Tax Losses
Tax-loss harvesting refers to the selling of stock market losers to realize their capital losses. The losses can then be used to offset taxable capital gains. Although you shouldn’t ever sell a stock simply for tax reasons, this strategy can help keep more money in your pocket at tax time. Just avoid a wash sale, which is the buying of a substantially similar security 30 days before or after your tax-loss sale.
One seasonal strategy as you head into the end of the year is to sell stocks that are trading at a loss — but not for tax reasons. Because portfolio managers have to report on the stocks they own every quarter, most don’t want to be seen holding on to stocks that have generated big losses. Thus, losing stocks are often jettisoned before the year-end reporting period. If you own these types of stocks, they might trade down even more in the fourth quarter.
Rebalance Your Portfolio
Rebalancing your portfolio means selling enough of your winners and buying enough of your losers to bring your allocation back to its original state. For example, with the broad U.S. stock market up over 4 percent YTD and bonds on average down more than 2 percent as of Oct. 12, your portfolio is likely stock-heavy and bond-light. Use this time as a chance to get your allocations back in line.
Averaging down means to buy more shares of a stock you like that has traded down. Then, you’ll have an average cost that is lower than your original purchase price. For example, if you were heavy into tech stocks in early October, you’ve likely taken a hit. If you buy stocks that have traded down now, you can get more shares at the current lower price, which is likely well below the recent highs. Averaging down is a good strategy for long-term stock holders, not necessarily for traders.
Invest for the Santa Claus Rally
One of the most famous seasonal trends in the stock market is the annual “Santa Claus Rally.” Whether due to the dearth of traders actually working at the end of the year, or just the overall optimistic feeling that the holidays bring, stocks tend to have a late-December-into-early-January rally, dubbed the “Santa Claus Rally.” Although only a short-term trend — and not one that is by any means guaranteed — it’s a pretty common phenomenon that you might be able to benefit from.
Go Small for the January Effect
After the overall stock market rises during the Santa Claus Rally, some traders position themselves for the January Effect. Traditionally, in the first few days of the new year, the market as a whole continues to trade up, and small stocks outperform large stocks. Again, this is more market lore than scientific phenomenon — meaning, it doesn’t always work — but you’ll certainly hear about the January Effect at this time of year.
Pick This Year's "Dogs of the Dow"
The “Dogs of the Dow” are the 10 highest-yielding stocks in the Dow Jones Industrial Average, which is comprised of 30 stocks. The idea behind this investment philosophy is that stocks in the DJIA that are high-yielding are the ones that have traded down in price, thereby raising their yield. Because DJIA stocks are considered industry stalwarts that can survive bad times and recover in price, this strategy is a version of “buy low, sell high.”
Shop Around for Savings Rates
This advice is always sound, but with the Federal Reserve recently raising interest rates — and looking like they will again in December — it’s more timely than ever. Online savings banks are now paying interest rates of more than 2 percent, and those rates are trending higher. Check the current rate on the savings account at your bank — many old-line, traditional banks like Chase are still paying rates as low as 0.01% APY.
Watch Year-End Mutual Fund Purchases
Many mutual funds make year-end distributions of income and capital gains. When these distributions occur, the mutual fund share price drops by the amount of the distribution. If you buy a fund right before a distribution, you’ll receive just as much in cash as you lose on your investment — but you’ll owe taxes on the distribution, leaving you in a worse position than if you had done nothing.
More From GOBankingRates
About the Author
After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.