Let's Take Stock

By Daniel Kadlec

By now you may be asking yourself, why didn't I just sell all my darn stocks in August? Indeed, why not do that every year? Fair questions. On average, September is the market's worst month, often resulting in a pullback that spills into October--a month best known for crashes but also often a good time to start buying again. So why not just sell into August rallies and buy into October declines year after year?

Taxes, of course, are the big reason. If you never sell, you'll never owe Uncle Sam a dime of your gains in your lifetime. The futility of timing the market's peaks and valleys is also an issue. Can you really pick good exit and entry points? Probably not well enough to make it pay.

So why bring all this up? The NASDAQ is down 20% since Sept. 1, more than wiping out a brisk August rally. Other indexes have fared better, but you pretty much had to be an oil sheik to have made money last month. The euro is falling. The economy is slowing. The dotbombs are exploding, and companies are warning of weak quarterly results. Dell is the latest. Everyone has the jitters.

In short, it's October again, and investors are behaving like idiots again. This time last year it was the Y2K bug; the year before, presidential impeachment and the collapse of hedge fund Long-Term Capital; the year before that, the plunging Thai baht and Asian contagion. None of those crises proved catastrophic to U.S. stocks.

For some reason, the market's constant stream of worries takes on added significance in the fall. It may be that some investors simply lose interest over the summer and come back after Labor Day ready to scrutinize everything. Fall is also a time when mutual-fund managers sell losers to lock in tax benefits.

Tom Galvin, chief strategist at Donaldson Lufkin & Jenrette, notes that in September companies and analysts tend to get real about earnings projections for the year, revising their optimistic views lower to suit reality. These problems pass year after year.

Your biggest risk now is losing focus amid the clatter. Look on the bright side. The Fed has stopped raising interest rates for now. Earnings, while slowing, are still projected to be up 15% this year and 10% next. And any company that is going to post disappointing third-quarter results has probably already said so. So there won't be many more ugly surprises.

What should you do? Odds are, you're sitting on unrealized losses. Consider selling to offset your realized gains. You can buy a stock back after 31 days without losing the tax benefits. If you think a stock will begin to rebound before you get a chance to buy it back, consider doubling up now and selling the original shares after 31 days if they still represent a loss. If you invest in funds, sell a loser and immediately buy another fund with the same objective to lock in the loss without losing out on any rally.

Hold fast if you don't want to make tax moves. If you're sitting on cash, start looking for bargains as tax-related selling and general October angst drive stocks down further. Don't abandon tech stocks, but don't be wed to them either. Slowing PC demand is a problem. Cheaper groups such as banks, utilities and energy--even after a recent run--may serve you better. Above all, don't panic, especially if others do.

See time.com/personal for more on tax selling. E-mail Dan at kadlec@time.com See him Tuesdays on CNNfn at 12:20 p.m. E.T.