Now Is A Good Time to Consider Year-End Tax Moves
Thursday, November 19, 2015

With about five weeks left to go in 2015, now is a good time to give your tax situation a review. You will have enough time to take any desired action if you analyze your taxes now. You’ll also have the ability to start planning for 2016.

A good place to start is to look at your capital gains and losses both realized and unrealized. You can offset realized gains by selling investments that have declined in price since purchase. While we do not recommend letting the tax tail wag the portfolio dog, investing is messy and allowing for some flexibility to take advantage of opportunities that fit within your long-term strategy can help you achieve better long-term returns. Plus, if the investment otherwise violates your sell rules, the ability to reduce your tax bill can be the incentive to follow your portfolio rules. If the investment has long-term appeal but has fallen in price enough to make it worthwhile to realize the loss, wait at least 30 days to repurchase it to avoid incurring the wash-sale rule. Be careful of the dividend dates since you must hold a stock for 61 consecutive days surrounding the ex-dividend date. The ex-dividend date is commonly two trading days prior to the date of record for being eligible to receive the dividend.

Don’t forget to check your mutual fund for any distribution declarations. Mark Wilson at told me that this year is running about average in terms of mutual fund distributions. He estimates about 325 mutual funds will make distributions of at least 10% of their net asset value (NAV) this year, down from more than 500 last year. Wilson is seeing more funds distributing in excess of 30% this year, however. Keep in mind that both exchange-traded funds and closed-end funds can also make taxable distributions, so follow up with any of these types of funds you hold as well.

This brings up the subject of asset location. Put your most tax-efficient assets—index stock funds, long-term stock holdings, municipal bonds, etc.—in your taxable accounts. Use your tax-advantaged accounts (individual retirement accounts, Roth IRAs, etc.) for your least tax-efficient assets—corporate bonds, real estate investment trusts, preferred stocks, etc.

Speaking of IRAs, you have until April 18, 2016, to make a deductible contribution to a traditional IRA. That is not a typo. Emancipation Day will be observed on April 15, 2016, in Washington D.C., so the deadline for filing 2015 taxes and making IRA contributions is extended by three days. (Residents of Massachusetts and Maine can file taxes on April 19, 2016.)

If you have any known medical expenses coming up—such as hearing aids, dental work or another medical procedure—that you have the luxury of scheduling, consider whether you want to incur the expense this year or next year. Do so now, because you will need enough time to schedule the doctor’s appointment or procedure or purchase the medical equipment. Those of you who are 65 or older should pay attention to the upcoming expiration of the 7.5% hurdle for deducting medical expenses. Starting in 2017, medical expenses have to exceed 10% of income before they can be deducted. Those under 65 already face the 10% hurdle. If you have a flexible savings account, be aware of your employer’s rules for carrying over any used balances into 2016.

Any other deductible expense that requires scheduling should also be planned for now.

Charitable gifts have to be made before the end of this year to be eligible as 2015 deductions. You’ll need an acknowledgement of cash donations in excess of $250.

Finally, Intuit has released new versions of Quicken and TurboTax. I bring this up for two reasons. First, the company is selling its Quicken software unit and I have no idea what is going to happen next year. As someone who has used Quicken for more than 20 years, I plan on upgrading this year to ensure I have the latest version given the uncertainty of the product. Secondly, Intuit has apparently learned its lesson and is re-incorporating Schedule D into TurboTax Deluxe after trying to get users to buy a more expensive version of the software program last year. I did try H&R Block’s tax software last year after getting frustrated with Intuit. The interface was not as polished as TurboTax, though it did give me the same result as TurboTax. If you prefer TurboTax, but H&R Block is cheaper, try calling Intuit; last year they willingly price-matched when I asked them to.

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AAII Model Portfolio Update

There are no changes to the Model Shadow Stock Portfolio this month. The portfolio underwent its quarterly review at the beginning of September and no stocks met the sell criteria. Because this is an actual and fully invested portfolio, no new stocks are added without the removal of a current holding. 

Forty stocks passed the screen at the end of October. Seven stocks in the portfolio qualified for purchase at the end of October, up from five at the end of September: CSS Industries (CSS) and Key Tronic Corp (KTCC) now pass the initial Shadow Stock Screening criteria, in addition to the passing stocks from the prior month: Ducommun Inc. (DCO), Rocky Brands (RCKY), Salem Media Group (SALM), Ultra Clean Holdings (UCTT) and Vishay Precision Group (VPG). Qualified stocks are companies held within the Model Shadow Stock Portfolio that currently meet the initial purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.)

There were also no changes to the Model Fund Portfolio this month. The Model Fund Portfolio was discussed in the November 2015 AAII Journal.

The Model Fund Portfolio was up 6.9% in October, while the Model Shadow Stock Portfolio, which invests in micro-cap value stocks, was up 1.7%.

The stock market bounced back strongly during October, with the S&P 500 posting its best monthly gain since October of 2011. It is worth noting that large-cap indexes outperformed the small-cap benchmarks for the month and continue to outperform smaller companies year-to-date. The S&P 500 index, as measured by the Vanguard 500 Index fund (VFINX), was up 8.4% during October and raised its year-to-date performance back into the black—up 2.6% through October 31, 2015. The Vanguard Small Cap Index fund (NAESX) posted a strong 5.7% gain during October but remains in the red year-to-date, with a total return loss of 1.4%. 

Even among the large-cap stocks, the strongest gains are concentrated among the largest stocks. The S&P 500 index is weighted by market cap, so the largest stocks are the ones that have the greatest representation in the index and, therefore, have the greatest impact on the index’s performance. In contrast, the Guggenheim S&P 500 Equal Weight ETF (RSP) invests in the same stocks as the S&P 500 index, but with equal weighting. The performance differences this year are startling. The Guggenheim S&P 500 Equal Weight fund was up 7.2% during October, but remains down 0.5% year-to-date. It has generally fallen less during down months this year, but has not snapped back as sharply as the market-cap-weighted S&P 500.

The Week Ahead

The U.S. financial markets will be closed on Thursday in observance of Thanksgiving. The U.S. stock exchanges will close early on Friday at 1 p.m. ET. Our offices will be closed on both Thursday and Friday.

Just under 15 members of the S&P 500 will report, many of them retailers. There will be also be an underlying food theme with Tyson Foods (TSN) reporting on Monday; Campbell Soup Company (CPB) and Hormel Foods Corp. (HRL) reporting on Tuesday; and Deere & Company (DE) reporting on Wednesday.

The economic calendar will be jammed into three days. The November PMI manufacturing flash and October existing home sales will be released on Monday. Tuesday will feature the first revision to third-quarter GDP, the September Case-Shiller Home Price index, and the Conference Board's November Consumer Confidence survey. October durable goods orders, October personal income and spending, weekly initial jobless claims, October new home sales, the University of Michigan's final November consumer sentiment survey and weekly oil inventories will be released on Wednesday.

The Treasury Department will auction $26 billion of two-year notes on Monday. On Wednesday, it will auction $13 billion of two-year floating rate notes, $35 billion of five-year notes and $29 billion of seven-year notes.

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AAII Sentiment Survey

Pessimism among individual investors about the short-term direction of stock prices jumped to its highest level in seven weeks, according to the latest AAII Sentiment Survey. It’s worth noting, however, that even with the sharp rise, pessimism is close to its long-term average. Optimism and neutral sentiment both fell this week.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 3.5 percentage points to 30.8%. Optimism was last lower on October 1, 2015 (28.1%). Bullish sentiment has now been below its historical average of 39.0% for 35 out of the last 37 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, dropped 4.0 percentage points to 38.7%. The drop puts neutral sentiment at a six-week low. Nonetheless, neutral sentiment is above its historical average of 31.0% for the 10th consecutive week and the 44th week this year.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 7.5 percentage points to 30.5%. This is the highest level of pessimism since October 1, 2015 (39.9%). The jump puts bearish sentiment just above its historical average of 30.0%.

During the past two weeks, pessimism has rebounded by a cumulative 11.9 percentage points after having started the month at its second-lowest level of the year. At the same time, optimism has fallen by a cumulative 8.2 percentage points. The changes occurred as the S&P 500 pulled back from its early November highs.

It is unclear what, if any, impact the Paris attacks had on this week’s readings. This week’s special question was set prior to the last Friday’s events and none of the responses to it mentioned Paris or ISIS. Unrest in the Middle East has previously been mentioned as a concern by some individual investors, however.

The stock market’s ability to hold onto some of October’s gains, seasonal trends and potentially better-than-forecast third-quarter earnings surprises have had a positive impact. On the other hand, some AAII members are not convinced that October’s gains will hold and are concerned about global and international events, U.S. monetary policy, U.S. politics and the pace of U.S. economic growth.

This week’s special question asked AAII members why or why not the Chinese economy and stock indexes are impacting their six-month outlook for U.S. stocks. There was no consensus response. The largest group, 15% of responses, said that China’s problems are adversely effecting global economic growth and commodity prices. Slightly more than 13% said that China is having no or just a minimal impact on U.S. stocks, the U.S. economy or their outlook for U.S. stocks. More than 12% said that they do not invest in Chinese stocks or do not pay much attention to China. Just under 6% said that the problems in China is adversely affecting U.S. stocks, while a different group of a similar size said that the long-term outlook for China is still positive. Nearly 4% said that the problems in China are just one factor of many.

Here is a sampling of the responses:

  • “Not much. I’m in U.S. investments that have little, or no, direct involvement with the Chinese economy.”
  • “The Chinese economy is helping to push commodities prices down.”
  • “China is just one contributory factor amongst many.”
  • “China remains a powerful economy that continues to grow.”
  • “The Chinese economy will drag down the U.S. economy.”

This week’s Sentiment Survey results:

Bullish: 30.8%, down 3.5 points
Neutral: 38.7%, down 4.0 points
Bearish: 30.5%, up 7.5 points

Historical averages:

Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%
Take the Sentiment Survey.

Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!