Dec. 31 is not a particularly magical date for stocks, but it is a very important one for Uncle Sam. That’s the date when you need to tally up all of your investment decisions for the year as you prepare for April 15, tax day. Most investors should make financial decisions well before the end of the year to avoid the pressure that comes with a firm deadline.
Here are three of the most important moves stock market investors need to consider before year-end. And how they all interact with each other in very important ways.
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Pay attention to your big winners
We all love watching as the stocks we own rise. There’s nothing wrong with that, and you should let yourself enjoy the successes you’ve had in your portfolio. But you shouldn’t ignore the impact that investment success can have on your portfolio. If you are like most investors, you’ll have some big winners in the mix. For example, shares of Alphabet (NASDAQ: GOOG) have more than doubled in value over the past year. That’s a huge move in a very short period of time, particularly for such a large and dominant technology company.
If you have owned Alphabet over the past year, it is probably a much larger portion of your portfolio than it was. It could make sense to take some profits to bring the stock’s allocation back down. The problem, of course, is that selling the stock will generate capital gains. Making the sales decision well in advance of year-end will give you time to offset the tax impact of the sale of Alphabet.
Do some tax loss harvesting
If you are like most investors, you also have some investments that didn’t work out as well as hoped. For example, shares of NuScale Power (NYSE: SMR), a start-up working on small modular nuclear reactors, have lost 50% of their value over the past year. You may have purchased the stock when the nuclear power sector was a hot topic on Wall Street. If that trade is leaving a sour taste in your mouth, you can sell the stock at a loss.
That sounds bad, but if you sold some winners, like Alphabet, the loss you take on NuScale could be used to offset those gains. That’s called tax loss harvesting, a tactic that experienced investors use to limit the tax impact of their trading decisions. You can’t repurchase the stock you sell at a loss for 30 days, or you will run afoul of wash sale rules. However, after that span, which isn’t really that long, you can buy the stock back if you want. Or, if you have decided that the trade was a bad choice, you can just move on.
