WHEN IT MAY BE TIME TO SELL YOUR WINNERS
Peter Hodson gives the low-down on keeping portfolios in shape as 2021 nears.
Thankfully, 2020 only has about six weeks left in it. Most people — investors and non-investors alike — are more than ready to put this year behind them. Sure, some markets (i.e. the Nasdaq) have been strong, but we are sure most investors just want life to return to normal again.
So, being close to year end, it is time for investors to set themselves up for next year, which we hope will be better. Let's take a look at five things you should do to get your investments in shape for the coming year:
1) Consider selling some of your winners (if they are in a non-taxable account)
Now, regular readers might be surprised here. We typically like to let our winners run. However, it happens every year: some of the big stock winners of the prior year get sold and experience big declines in early January. How come? Well, investors defer selling until they can push the tax consequences into another taxation year. If you are up, say, 650 per cent or so on a stock such as Overstock (OSTK on Nasdaq) and want to sell, waiting until January defers your taxes a year. Nimble, non-taxable traders can sell positions now, or before year end, and then replace them at cheaper levels in January as sellers come in. Nothing is guaranteed, of course, but it can be a good strategy to consider for some nimble traders.
2) Get rid of your losers
This is kind of the opposite of the point above. If you have taxable losses, you want to take them this year. Losses can be used to offset gains this year, carried back three years, or carried forward indefinitely. A tax saving is a guaranteed gain, through lower taxes. You won't get that elsewhere in the market. When we talk to investors about this strategy, many do not crystallize losses as they fear the stock they sell will immediately skyrocket as soon as they sell it. Sure, once in a while this can happen. But someone also wins the lottery too. On average, stocks do not move so much to offset the tax benefits realized. Take the loss, save some taxes.
3) Position your portfolio for the year ahead
If 2020 has taught us anything, it is that the market will hardly ever do what you expect it to. Doomsayers came out in droves during the pandemic, yet here we are, with the Dow Jones hitting an all-time high this week. Maybe it's time to be a contrarian. Does your portfolio have exposure to all eleven market sectors? Or have you loaded up on technology/growth companies? Since neither you, nor I, can accurately predict next year, why not take a balanced approach in 2021? Maybe energy stocks, for example, might actually go up, for a change.
4) Buy more or exit
Look at your portfolio. Do you have a dozen different stocks with a position weighting of less than one per cent? It's time for a decision. A tiny position in a portfolio really accomplishes nothing except wastes your time following yet another company. Take a close look. If you do not like the 0.5-per-cent stock enough to double it to at least one per cent, then it is time to sell. This decision is easier if you look at the math: Even if that stock triples in a year, it adds only one per cent value to your total portfolio. Many portfolios can move that much in a day. Personally, we have a minimum three-per-cent rule, so we don't own more than 30 or so stocks, ever. One does not need more than this to be properly diversified. Small positions? Buy more. Or sell it all.
5) Plan ahead for your tax-free or tax-deferred accounts
Most investors know that compounding is a marvellous thing, and the longer you invest the greater your returns will be. That's great, but tax-free compounding is even better. If you do not think you are going to have enough money next year for your TFSA and RRSP contributions, starting planning to raise money now, or start looking at your securities positions to see what you could transfer in-kind to these accounts. Keep your long-term positioning and cash needs in mind, of course, but if you have a choice between money in a registered account or non-registered account, it is almost always better to go for the registered account (not always the case though if one is looking at only Canadian dividend income vs. RRSP withdrawals). There is some debate on the effectiveness of RRSPS, as money is taxed eventually. But no one can argue with the flexibility and attractiveness of putting money inside a TFSA. We get very few breaks from the government. Use the best one.