In our last blog titled “It’s That Time of Year Again”, we pointed out that dumping your losses at year end (“harvesting them”) can allow you to recover some of the losses by writing them off on your tax return and reducing your taxes. Doing so also allows you to replace poor investments with investments that have better prospects. In some cases you may want to buy back a loser if you believe it has good prospects.

Unfortunately, your timing with respect to harvesting can make a big difference in the end result. A recent article in the Wall Street Journal titled “Facing Your Failures” by James B. Stewart (Saturday/Sunday, October 30-31, 2010) discussed the problem. Mr. Stewart noted the problem with harvesting late in the year:

“The problem is that is when everyone else is doing it. Year after year, I end up selling a losing position, only to watch it bounce back in January when the tax-loss selling is over and bargain hunters swoop in.”

Mr. Stewart notes that if you want to re-establish a position in an asset you harvested, there’s no reason you can’t sell it now, before the majority of other investors do so, wait the required thirty days to avoid a “wash sale” (see our previous blog for an explanation if you don’t know about the wash sale rules) and buy the asset bask at year end after everyone else has sold. Doing so can allow you to capture your losses for tax purposes and gain back some of your losses as others buy the asset back and drive up the price.

Of course, if everyone catches on to this technique, it won’t really be effective. That’s often the case with investment strategies. When everyone adopts the approach, it no longer works as effectively.