As December 31 draws near, selling stocks to get rid of tax losses unfairly lowers their prices. Things that go down often go up again, though. The selling at the end of the year sets these stocks up for a big bounce after the New Year.
Tax-loss selling means selling your winners to wipe out the capital gains that you would have to pay taxes on. This happens a lot of the time every year, but it’s probably going to happen even more this year because the market is so strong and many buyers have already made a lot of money.
Putting buy orders well below the market on stocks that have lost the most money so far this year is one way to make money from this. These are the stocks that are most likely to be sold to lower taxes. The strategy’s goal is for tax-loss selling to drive down the prices of these shares so much that at least some of your buy orders are filled, and the stocks you buy will then do very well in January.
To be sure, you have to be picky about which stocks to use the method on because some year-to-date losers deserve to be down. One way to stay away from these so-called value traps is to only buy stocks that are suggested by at least one of the investment newsletters that my firm monitors.
A year ago, I wrote a piece about a list of 20 stocks that were made using this method. Since that piece came out near the bottom of a correction, the next three months were not typical for tax-loss selling. From that point until the end of the year, the U.S. stock market went almost straight up. From the time my piece came out until the end of 2023, only four of the 20 stocks on that list went down by more than 10%. It’s possible that no one who used this strategy a year ago had any of their limit orders filled because I say that the buy limits you use with this strategy should be much bigger than 10%.
Still, those stocks did do well in January, showing that the approach could work. I found each stock’s return by going from (a) its lowest price from the time my piece came out until the end of the year to (b) its highest price in January. A 47.4% rise was seen across all 20 stocks. There was an average gain of 51.4% for the four stocks that fell more than 10% after my piece came out.
These gains are the biggest that the strategy could make because you would have had to perfectly time each stock’s low trade in late 2023 and its high trade in January 2024.
