(MONEY Magazine) – TAX STRATEGY
Take Your Losses, Reap the Gains
• Here's a smart way to prepare for a possible fall rally: Sell. Most people wait until the end of the year to dump losing stocks, in order to generate tax losses. But repositioning in early fall is a better idea. In the past decade, the market has come roaring back starting in October. In fact, stocks have risen 8.8% on average in the last three months of the year, according to Ned Davis Research. So you're more likely to have stocks in your portfolio that are down at summer's end than year's end.
Planner Harold Evensky of Coral Gables, Fla. advises locking in your tax losses when you have them to guarantee a lower tax bill. Losses can be written off directly against gains elsewhere in your portfolio. If you have more losses than gains, up to $3,000 of investment miscues can be written off against regular income. Best of all, you can still participate if the market takes off in the fall.
Tax laws prevent you from repurchasing the same stock within 30 days and still recognizing a loss. But you can buy shares of a similar stock (see "Making the Trade"). If you're sour on a loser's entire sector, settle for an equity index fund.
There's no guarantee that prices won't be lower at year-end. But there's nothing magic about December except an IRS deadline, and history suggests you'll get more for your losses now than later. "Returns are likely to be low in the stock market over the next few years," says Evensky. "Anything you can do to minimize taxes will make a huge impact." --STEPHEN GANDEL
MAKING THE TRADE
Losing money on these widely held stocks? Consider swapping.
NOTE: As of Aug. 31. SOURCE: Thomson/Baseline.
HOW THE MARKET FARED
Most equity indexes are flat for 2005. With the MSCI EAFE up 3.5% year to date, foreign stocks are tops.
NOTES AND SOURCES: As of Aug. 25 unless otherwise noted. Index returns from Lipper, New York; 877-955-4773. Index levels from Bloomberg. Bond index data from Lehman Brothers. Stock data as of Aug. 26 from Thomson/Baseline. Monthly S&P 500 ratios from Standard & Poor's. Ratios are based on previous four quarters of earnings.  Annualized.  Price change only.