Save and Conquer

Happy New Year! I hope everyone has had a good holiday and will have a good year going forward.

Some people have stated that 2009 will be worse for investing than 2008 and that the December 2008 rally should be used as a time for selling to protect against further losses.

Others say that January has typically outperformed most other months due to investors buying back into the market after they have gained cash from dividends and capital selling in the preceding December. With the down market in 2008, it is likely that many investors did sell for tax loss harvesting (TLH) and are now sitting on cash.

Profiting from the January effect is difficult for two reasons,

1. The market is expecting it. The January effect now happens a bit earlier, as we have seen in the December rally.
2. Big money is mostly in tax-sheltered retirement accounts. There is no reason to TLH in tax-sheltered accounts.

Will there be a January rally in 2009? No one can say. There could be due to excitement over the change in the federal government and the promised economic stimulus. But there might not be a rally due to continued weakness in the economy. For instance, many blogs are prognosticating large layoffs to come in January.

My attitude is to keep our current asset allocation. I did perform some TLH last month, but I did it as part of an asset rebalance. I sold a fund for a loss that held large-cap U.S. equities and bought an international ETF. I rebalanced, got TLH with no chance of hitting the IRS wash sale rule, and am invested with an asset allocation that would be considered half way between “balanced” and “growth.”

Over the last two months, I dollar cost averaged into equities from a large position of 50% cash earlier in the year to one that still has 25% cash, 15% bonds, and the rest in foreign and U.S. equities.

Bottom line is there is probably no way to profit from the January effect. You might, but then again, you might not. I am sticking with a our asset allocation to meet our long term goals and am not trying to time short term bumps.

Stumble it!