With the end of the financial year approaching, tax planning will be increasingly on the minds of investors.
In the sharemarket context, this means investors will be looking at what their realised financial year-to-date profit or loss is and how their current holdings are performing.
At this time of the year, investors sitting on realised profits often feel motivated to sell poorly performing holdings to offset their gains and minimise the tax they pay.
The effect of this on the share market is that poorly performing stocks - that is, stocks trading close to their yearly lows - tend to bear the brunt of pre-June 30 selling and are pushed even lower.
Conversely, investors feel there is little incentive to sell better performing stocks before June 30.
The first complication with this way of thinking this year is that most investors will have much lower capital gains to offset, if they have any capital gains at all.
After all, the Australian sharemarket is down about 14 per cent so far this financial year and many leading stocks are down significantly more.
Second, there has been relentless selling of many stocks already and many investors have taken their medicine and are sitting on the sidelines waiting to re-enter.
But with sharemarkets teetering on the edge and investor sentiment fragile, we expect to see some degree of tax loss selling as June progresses. (Obviously what happens in Europe over the next few weeks will also have some bearing.)
It is one thing to know of these trends but what should you do as a sharemarket investor?
For starters, you can look through your holdings one by one and objectively consider each holding's fundamentals and outlook. If they don't stack up ask yourself, why are you holding it?
Some investors prefer to sell well ahead of June 30 with a view to revisit a particular stock in the new financial year.
This allows them to realise a capital loss in the current financial year and buy time to re-evaluate the sharemarket conditions at a later time.
Investors holding a high level of cash and looking to increase their sharemarket exposure may use the June period to purchase quality, investment-grade stocks at discounted prices.
Finally, trading style investors may wish to try 'trade the bounce' that is often seen in beaten down stocks during the first few weeks of July as the selling pressure subsides. This may involve holding a stock from a few days to a few weeks.
However, we stress this strategy is only suitable for aggressive, high-risk tolerant investors.Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.
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