Year-end investing decisions: tax-loss selling, bouncebacks and dogs

Given the rocky road of 2015’s schizoid markets, it’s time to dump a few losing stocks to offset gains. But investors shouldn’t go overboard on the selling.

It's the time of the year for investors to consider tax-loss selling, bouncebacks, and Dow Dogs. (Edited collage via Wikipedia)

WASHINGTON, Dec. 10, 2015 – For now and perhaps for a week more, our investment ideas and trading tips are going to be few and far between. The reason is simple. A 2015 Santa Claus Rally has yet to catch fire, and time is rapidly running out for those quick, profitable trades that usually characterize this generally positive trading environment.

We’ve explored in our columns the reasons why this might be, and who knows? Markets could surprise us with an extended rally yet. But given the upcoming year-end pair of federal holidays, plus holiday travel, which removes many traders from the market for a couple of weeks, any rally we get this December is likely to be of limited breadth and duration.

For this reason, it’s probably better to start looking toward positioning for a better 2016, even though a majority of analysts seem to think the new year will be an even greater stinker than this one.

Read also: Oversold stocks attempt Thursday rally. Dead cat bounce?

At this time of year, barring a big, intense upside move, it’s time for individual investors to look at three things: tax-loss selling, year-end bounceback candidates, and the legendary “Dogs of the Dow” as well as the “dogs” of other averages.

Tax-loss selling is a given near the end of each year. December is generally the time when investors take a close look at their long- and short-term capital gains. If such gains are likely to take some of these investors into higher tax brackets and/or AMT (Alternative Minimum Income) territory, selling off one’s 2015 dogs is a way to offset part of this gain, perhaps minimizing the resulting tax hit.

There’s evidence that a fair bit of tax-loss selling has actually been going on for much of 2015’s second half. But investors now have roughly three weeks to conclude tax-loss selling before the new year begins.

Year-end bounceback candidates are a related issue. Around this time of year, analysts start compiling a list of stocks that have sold off heavily—but perhaps unjustifiably—in 2015. The hard selling of these stocks generally persists until the very end of a given year.

The theory of year-end bounceback candidates is this: Given that a number of stocks that are heavily dumped are either doing good business or are likely to do so in early 2016, the tax-loss selling and portfolio adjusting can lead some of them to an “oversold” condition, meaning that they’re selling below or considerably below fair market value.

Buying a carefully selected basket of these stocks during the last few trading days of the year, even as they continue to sink under selling pressure, can be quite rewarding as trading resumes on Jan. 2 of the new year. With the tax-loss selling pressure now off, a carefully selected group of these securities each year can “bounce” up as much as 10 percent in the first month of the year, a quick and handsome reward for taking the chance.

Nothing is guaranteed, of course. But we’ll be sizing up various bounceback lists and will tell you what we’ve learned before the last day of 2015 rolls around.

Finally, there’s those “Dogs of the Dow.” Dow Dogs are determined as of the closing price of the last trading day of the year, which this year falls on Dec. 31. Each year’s new Dow Dogs list consists of the five to 10 large Dow Jones Industrial Average stocks paying the highest dividend percentage as of Dec. 31.

So the theory goes, if you simply invest in these stocks in early 2016, the combination of high dividend payouts and likely bounceback characteristics should result in a better than average 2016 return. Historically, however, returns on each year’s Dow Dogs, while not bad, are not always record-breaking and can often prove sub-par. That said, it’s still a popular theory, and at least the base yield tends to be good and the stocks tend to be reasonably secure no matter which way they eventually end up.

In recent years, other “dogs” lists have been touted, including NASDAQ dogs, tech dogs, etc. We’ll take a look at these lists as well as the Dow and come up with our thoughts around the first of the new year.

Meanwhile, our trading tips will remain few and far between. Like many individual investors, this has been a subpar year for us, and we’re going to be a lot more cautious before we tiptoe into Investing 2016. It’s an election year, and this one will very likely be a donnybrook. This kind of danger—perhaps already being signaled by 2015’s nasty markets—is best to avoid lest the small investor, clearly no longer protected by the SEC, get completely crushed.

Stay tuned, and we’ll update these three investment areas for you when the smoke starts clearing.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17