With 2008 in the rear-view mirror I thought readers might be interested in my December investing activities during the perennial tax-loss selling period.
What is Tax-Loss Selling?
Tax-loss selling (or tax gain/loss harvesting) is a very important tool an investor can use in a taxable investment account to reduce the tax burden (taxes you pay) now and in the future. Because capital gains are taxed, in Canada, at half your marginal tax rate (MTR) there is an incentive for many investors to sell investments at a loss prior to year end in order to crystallize those losses.
Say I were to invest equally in two stocks: ABC Inc. & MNO Ltd.
During the year the share price of ABC Inc appreciates 50% and I sell all my shares to lock in a gain. MNO Ltd’s share price falls 60% and now I am looking at a big negative in the loss column of my investment portfolio for this stock. Instead of paying tax on my 50% gain from ABC at tax time next year I can sell MNO to offset an amount of capital gains for this year. If I made $1,000 on ABC and had lost $1,200 on MNO I can sell MNO now and carry forward a tax-loss of $200.
If I still like the investing prospects of MNO in the future I can buy back the stock in 30 days and still retain the tax-loss that I’ve crystallized. The $200 loss can be carried forward indefinitely or applied to any previous capital gains I may have had in the past three tax years.
It’s no mystery that November and December each year are opportunities for investors to conduct some much needed housecleaning. This often includes rebalancing of portfolios, a re-concentration on asset allocation and selling investments in taxable portfolios for tax-loss selling purposes.
As a value investor I recognize that many taxable investors conduct tax-loss selling not because they believe the prospects of a specific company are poor, but because it helps them achieve a more tax-neutral position from gains they’ve achieved that year. Selling pressure pulls down the prices of equities that have experienced significant losses during the year and may present opportunities for a long-term investor such as myself to wade into the market and take shares off the hands of those seeking liquidity. While many investors are focused on selling losing stocks for tax purposes I’m keen on looking for opportunities to strengthen my portfolio on this market activity.
Much of my investing activity in Q4 of 2008 focused on the anticipation of significant tax-loss selling in the final 60 days of the year due to the need for so many investors to unload the significant losses incurred over the past year. Because of the extent of gains over the past three years I knew that losses could be applied from this year against previous years lifting the tax burden investors experienced in 2007 & 2006.
I first began this selective buying with a series of purchases in six preferred shares series in October & November during the steep market declines. I then followed with new purchases of TMX Group (X) in December and added to my existing positions in Cominar REIT (CUF.UN), Calloway REIT (CWT.UN), Russel Metals (RUS), Newalta (NAL.UN) and TD Bank (TD).
As a long-term investor I was able to add to existing positions and initiate new ones because of my selective targeting of high quality investments that were selling significantly under any meaningful measure of fair market value (FMV). Even in the event of a dividend cut in one or two of my holdings my dividend income for the year is up substantially and as previously mentioned now matches my intended yearly contribution from savings to my Dividend Growth portfolio. Over the long-term this additional income is used to buy additional shares in companies and compound my returns at an accelerated rate over the next twenty years.
It wasn’t easy or stress-less to wade into the market knowing the extent of losses experienced this year, but discipline and focus were my twin towers in providing a foundation for those purchases.
I also took advantage of tax-loss selling this year – initiating significant positions TD and PWF mid-December. I feel the div’s are safe and with yields of 6% and 6.5% at the time of purchase I was more than happy.
December usually provides a few bargains and this year there were more than a few!
Thanks for the comment Mark. This past year, for the opportunistic long-term investor, should turn out to be a more broad tax-loss selling period than we've seen in previous years over the last bull market. I'm glad that there are other investors out there who recognize the value in a number of high quality names and have the convictions & discipline to stick with their investing plan. Over the long-term, in my opinion, I think these actions will be rewarded by the strongest companies in the current market.