WSJ: The Real Impact of Tax-Loss Harvesting

Derek Horstmeyer
Nov 4 · 2 min read

Toward the end of each year, investors clamor to reduce their tax bills by selling “loser” stocks, or those that have experienced negative capital gains. This practice is referred to as tax-loss harvesting.

As investors sell off their losers, it puts considerable downward pressure on those stocks at year-end. It also tends to give “winner” stocks a slight bump because once investors sell the losers, they usually want to put the proceeds back into equity and not cash. And, since investors like positive momentum for behavioral reasons, they tend to rotate into winner stocks.

How big is this effect and what, if anything, does it mean for investors?

In fact, the effect can be quite large. On average the difference in return between winner stocks and loser stocks averages 1.11 percentage points in December. On an annualized basis, that amounts to more than 13 percentage points of difference. In months other than December, winners typically outperform losers by an average 0.18 percentage point.

Interestingly, this effect is almost entirely concentrated in years when U.S. markets performed well, which they currently seem on track to do.

To get to these findings, I examined the past 25 years of returns for all stocks trading on the New York Stock Exchange and Nasdaq. I separated the stocks into two categories — winners, or those that experienced a positive return over the first 11 months of a given year (January to November), and losers, or those that experienced a negative return over the first 11 months.

A look at how these two sets of stocks did in December painted an interesting picture. Stocks categorized as winners had a median return of 1.46% in the month of December over the past 25 years, while stocks categorized as losers had a median return of 0.35% in the month of December. This yields the difference in returns of 1.11 percentage points.

Read the rest at:

https://www.wsj.com/articles/the-real-impact-of-tax-loss-harvestingand-what-investors-should-do-about-it-11572836941

Research Shorts

I'm a professor at George Mason University School of Business, specializing in corporate finance. My research focuses on governance, mutual funds, and hedge fund activism.

Derek Horstmeyer

Written by

I’m a professor at George Mason University School of Business, specializing in corporate finance.

Research Shorts

I'm a professor at George Mason University School of Business, specializing in corporate finance. My research focuses on governance, mutual funds, and hedge fund activism.

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