There’s a Thin Line Between December and January on Wall Street. Here’s How to Approach it in Your Portfolio.
Here we are in December, an interesting time in the stock market, as excessive price movements culminate, often reversing course in January. On the bullish side, you may have owned stocks that rose an abnormal amount, all year long. If you own a stock that rose excessively and consistently all year, watch out for fourth quarter window dressing.
That’s a phenomenon where a portfolio manager may have missed out on a rising stock for most of the year, so she buys the stock during the fourth quarter so that she can proudly display it in her year-end report to investors, with the implication that she capitalized on the entire run-up. What often happens next is that the same portfolio managers dump the stock in January, because they never really wanted to own it in the first place, and they certainly don’t want to buy a stock after it’s just run up 50-100%.
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Therefore, if you own such stocks, come up with a game plan. Maybe you’ll sell your shares in December and move on. Maybe you love owning the stock, and you’ll watch for an opportunity to buy additional shares at a lower price in the first quarter of 2020. Maybe you’re kicking yourself that you never owned the stock, and you’re excited at the prospect of possibly buying low next year. And of course, you can always use a stop-loss order to protect profits. Forewarned is forearmed!
On the bearish side, it’s sadly true that if a stock is trading at an annual low in the fourth quarter, it is likely to keep falling until at least mid-December. That’s because there are many investors who are sick of watching it drop, so they dump it and take a tax loss. That’s why you should sell your losing stocks now.
Here’s the silver lining: if it’s a good and profitable company, the stock frequently rebounds nicely in January. That’s because there are no more sellers, only buyers! Everybody who had any desire to sell the stock has already sold it in December so as to take a loss on their 2019 income tax return. Watch for the better companies in this category to rebound in January.
This is a good time to assess every stock in your portfolio. If they no longer meet your personal and portfolio goals, sell them. And if you’re a person who literally never sells stocks because the thought of doing so paralyzes you, frankly, you MUST sell something, because your portfolio is likely not performing well.
Simply look at the earnings outlooks for your stocks. Unless it’s Tesla (TSLA), a biopharmaceutical stock, or a portfolio that specializes in early-stage stocks, if the company is projected to lose money in 2020, sell it now. There’s no rational reason to expect your share price to rise when you own shares in a floundering company.
If selling a stock is completely outside of your normal comfort zone, don’t fret. I think selling your losing stocks could be cathartic for you, and a first step toward maintaining a healthier stock portfolio in the coming years.
*Editor’s note: This post was excerpted from a recent issue of Crista’s Cabot Undervalued Stocks Advisor newsletter. To subscribe, click here.
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