Q: I
invested in some small technology companies that were worth a lot
of money earlier this year. Now their prices have dropped so much
that I can't look at my statement without feeling sick. I was
going to chuck them all and buy some CDs (the kind you play, that
is), but my broker tells me to hang on for the "January
effect." What is that and will it help my stocks?
A:
Whether you like swing or rap, the January effect could be music to
your portfolio. This much- heralded predilection for stock prices
to rise sharply in January-all stocks, especially the small
ones-could be Santa's late holiday gift to you. Historically,
stock watchers note that those stocks that were especially trounced
during the previous year will be the biggest benefactors of the
January effect's munificence.
Why certain stocks and why January? The idea is that the January
effect occurs because of high levels of tax-selling the previous
year. At year-end, investors peruse their portfolios for stocks
selling at a loss to cut their tax bills the following April. To
make the cut this year, sales must be made by December 29, the last
trading day of 2000. Due to the rapid decline of technology stocks
of all sizes, this year's tax-selling has been especially
vicious. The selling pressure generally abates by January so stock
prices could lift.
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The January lift is often largest for those holders of small
stocks as these are, at least theoretically, held by small
investors who can benefit more from tax- selling than large
institutional investors. This year, with so many institutional
money managers (such as those who manage mutual funds) bailing out
of stocks to avoid capital gains on funds whose performance is down
sharply, the January effect could spread to large stocks as well as
small stocks. Thus, the gods of profit should smile on those
holding onto these mauled issues, and this year's January
effect should provide some relief for the beleaguered holders of
technology companies.
So what's a miserable investor to do? Make a list of your
holdings and figure out which stocks are naughty and which are
nice. If you really loathe some of them, need a tax loss and
can't imagine that they'll ever come back-out they go!
Consider selling enough to wipe out any capital gains, and then
decide whether you have enough losses to take up to $3,000 from
your income and thus lower your taxes (this is called the
"lemon to lemonade" effect). Then look at what remains:
If you intend to sell some that aren't on your immediate hit
list, consider waiting until the end of January and sell then when,
hopefully, stock prices will get their seasonal lift.
On the other hand, you may see some bargains out there that
you'd like to own. If so, purchases made before January could
help you get in at lower prices-at least until January's
anticipated market thaw. Consider going after those tech stocks
that have had the biggest routs-provided they have great
fundamentals. Who knows-maybe you'll find a whole new way to
"play" the market.
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Lorayne Fiorillo is a financial advisor and senior vice
president at a major brokerage firm. She spent six years as the
on-air financial commentator for EyeWitness News and 11
years as a market commentator for National Public Radio. She is the
author of the new book,
Financial Fitness in 45 Days: The Complete Guide to Shaping Up Your
Personal Finances(Entrepreneur). She specializes in
retirement and business planning for small businesses.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.