But instead of fretting over how much you'll spend this year, now's the time to focus on how much more you can earn.
You see, over the next few weeks, three year-end trading strategies will come into play, all capable of producing major short-term profits for astute investors.
- Annual tax-loss selling - which, given some major stock and sector declines since early-year highs, could be heavy this year.
- A "Santa Claus rally" in late December, triggered in part by bargain hunters buying beaten down stocks.
- And the "January Effect," a strong tendency for nearly all stocks - especially small caps - to gain during the first month of the year, or even earlier.
Tax-Loss SellingThere are a few ways to play the tax-selling phenomena, depending on your goal, but the most common is to offset your taxable gains.
The best time to unload a large paper loss is the end of the year. Taking a loss on a position reduces your trading gains and limits your tax liability. You'll also see professional fund or portfolio managers do it to replace losers with stronger performers before they issue quarterly or annual reports - a process often referred to as "window dressing."
So if you're sitting on a position with a large paper loss in a stock you want to drop, go ahead and sell to realize the losses for tax purposes. But make sure you beat the crowd - begin looking for selling opportunities now, and try to get out on a day when the market - and hopefully your stock - is sharply higher. (No one wants to take a loss that's larger than absolutely necessary, even to save on taxes.)
If you have a handful of losing stocks and don't know where to begin, start with your biggest gainers, or choose those stocks with the poorest fundamentals.
But before you go cleaning house, there are few things to remember to maximize your profit potential from this trading strategy.