Quick definition: When investors sell an asset at a capital loss in order to offset the capital gains tax in his or her portfolio.
Investors do this when the portfolio math shows that selling assets (stocks in this case) at a loss, which carries no tax, will reduce the overall dollar amount in capital gains tax in the portfolio, so much so that selling stocks for losses is more efficient than waiting for those stock prices to regain and then paying capital gains taxes on the total portfolio gain.
The assets in the portfolio would amount to a higher dollar total if the manager sells stocks at losses and pays capital tax on the smaller total realized gain in the portfolio than if he or she were to hold the stocks that have fallen and pay capital gains on the larger portfolio gain.
Heading into year-end, Morgan Stanley equity strategists compiled a list of U.S. stocks that have had rough rides in 2020 and could experience selling pressure as fund managers deploy tax loss harvesting strategies. Here are 10 stocks on the list:
- Disney DIS
- General Motors GM
- Hasbro HAS
- Medtronic MDT
- TJX TJX Companies
- Wolverine World Wide WWW
- Callaway Golf Company ELY
- Boston Scientific BSX
- Jefferies Financial JEF
- Cigna CI
These stocks are all down double digits in percentage terms this year and could save fund managers some cash in 2020.
One theme in 2020 has been that a higher number of large cap stocks are up for the year, while a significant portion are also down because of the pandemic. Big tech stocks have contributed to a majority of the gains on the S&P 500. Still, digitally-centric consumer companies have risen this year in the at-home environment, while brick-and-mortar, oil and banking stocks have had rough years.
With the broader market up for the year, but a lot of stocks down, give Morgan Stanley’s watchlist and your portfolio more than a second glance.