Financial Education

In the United States, capital gains on stocks held for less than one year are taxed as ordinary income, while gains on securities held longer than one year receive a preferential tax rate. Many investors and advisors hold stocks past the magic one year in order to maximize the after tax gain. In the Journal of Technical Analysis, Issue 64, Jerome Harti examines whether this tendency results in predictable (and thus exploitable) stock price patterns.

The author proposes that a sharp, downward, high-volume trading day and subsequent recovery should be followed one year later by a corresponding period of underperformance as those investors who have delayed realization of capital gains close their long positions.

Based on a sample of Russell 2000 stocks from the 2004-2005 period, the author finds that during the 10-day “anniversary window” beginning one year after the initial event the experimental group underperformed a control group by 4.36%.

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See also:

Long-Term Return Reversals: Overreaction or Taxes?

Prospect Theory

Escalation Bias

Overconfidence and Confirmation Bias

Other Investment Constraints