Protecting Your Portfolio In December

As the year comes to a close there begins a very different part of the year for us as traders and investors. And I’m going to take a break from the discussion of oil stocks this week to give you my perspective on this time of the year, so you can avoid the many pitfalls that year end trading action often delivers.

First, there is the vacation aspect. Many of the best capitalized traders and hedge fund managers will be going away on family holidays – and won’t be providing the kind of liquidity to the markets that they normally do the rest of the year. This, perhaps intuitively, delivers usually more volatility to the markets. And while you may think that more volatility is good for trading, in this case, unless you are at the nexus of that trade, it is instead a difficult time to be starting or managing positions wisely.

Next is the attached desire for hedge fund managers to ‘equalize’ and close out positions for accounting. This means normally using options or other hedges to ‘lock in’ gains and prepare the year-end reports for investors. It matters that 2017 has been on balance a very good year for stocks; even more equalization of share prices will be desired – making liquidity even more difficult to find.

Finally, there is the yearly difficulty of tax-loss selling – a particularly interesting phenomenon this year for energy stocks. While there are a few energy shares that have performed adequately for 2017, there are many that have horrible results to report for the year – and those are the ones most apt to be subject to some vicious tax-loss selling as we move further towards the end of the month. It is true that isolating some of these stocks that you have confidence in and buying them as the tax-loss selling beats them down can be a great year-end play for some quick gains in the new year. But this game is also fraught with timing problems that I, for one, have never solved adequately.

The bottom line to all of this is that I generally recommend doing what the big boys do in the last part of December – that is, mostly nothing.

The temptations that the loss of liquidity and the increase of volatility bring are almost always misread by the part-time stock trader and investor, and the chances for destroying what otherwise were very well-considered and crafted positions go up several fold. What you cannot afford to do in December is destroy all the good work that you’ve managed to do in the other previous eleven months of the year.

If you do have some tax-loss selling to do, I’d advise getting it done earlier rather than later. Yes, you are at risk of pre-selling into a wave of buying later in the month, if others see an opportunity in your loss. But the other side is a possible tsunami of selling towards the end of the month that will put you in an even deeper hole than you already have.

You must see the end of year differently in order to properly manage your stock portfolio. And while big, tempting swings in December are common, the chances that you’re going to correctly gauge which moves are traps and which are real opportunities is very small.

My advice is simple: Do like the big boys – get your necessary tax trades in early, close down shop and wait for 2018.

By Dan Dicker