It`s time to look at your stock portfolio. What is your winning and losing stocks? What are you gonna do with your winning stocks, and what are you gonna do with your losers? Do you have a strategy? The fund managers are focusing on two things: to outperform their competitors and to outperform a given sector benchmark.
Every year in late December, many investors, mutual fund and portfolio managers improves the appearance of theirs portfolio / fund performance to make it look better. Mutual funds usually do this before the presentation to clients or shareholders.
Many fund managers like to window dress. They look at their portfolio and sells the big losing stocks. This is good for tax planners. In addition; they purchase high-flying stocks, simply to improve their portfolio. This theory is questionable, because investors can see the actual performance of the fund at a given point of time.
The losing stocks tend to go up when all the investors are selling them. That`s why it can be lucrative to buy the losing stocks at the end of the year. Some mutual funds like commodity funds invest in other stock sectors like some hot sectors at the time, just to disguising the funds holdings. The clients do not know what really going on and what they are paying for.
In a short period of time, this strategy will make the mutual fund more attractive, but in the long run, it is difficult to hide poor performance. As a private investor you can buy some cheap penny stocks to make it look better. As you know, in average of 41 penny stock will double every trading day on Wall Street.
This is why December is so special, and this is why we traditionally see a so-called January effect. There is two reasons for that:
1. Tax loss selling: In (late) December investors sell stocks in which they have losses in order to lower their taxes on net capital gains, thereby further increasing the downward price pressure of losing stocks. In January the proceeds from these sales will be reinvested, resulting in large January returns.
2. Window dressing: In (late) December portfolio managers sell losing and risky stocks and hold cash and blue-chip stocks instead to make their year-end portfolios appear more conservative. In January the proceeds from these sales will be reinvested, resulting in large January returns.
It doesn`t mean that this is going to happen every year. So far, we have not seen any correction and investors are waiting for the FED meeting next week. If the FED start to taper, we will probably see a big selloff. Wait and see. News today: Crude Oil Inventories at 10:30am, 10 Year Note Auction at 1:01pm Fed Budget Balance at 2:00pm.
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