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.
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.
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.