It’s getting to be that time of year again. No, we are not talking about when we all risk our lives on ladders to put up Christmas lights and spend beyond our means for the holiday season! We are talking about the tax-loss selling season. That odd time of year when investors are sort of happy that they have losing investments so they can offset their tax bill. It can also be a dangerous time where investors cast aside their strategy and portfolio structure for 30 days with fingers crossed that they do not miss the next leg up in the industries they just sold out of. Let’s take a look at year-to-date industry performance and try to pinpoint where Canadian investors might plan to sell:

Looking at the above performance, investors really have two ‘buckets’ that are worth looking at for tax-losses: Energy and Materials. Looking at the year-to-date performance is not only a good way to understand which industries could see some weakness coming up to the holiday season but it also helps to put things into perspective. Energy, believe it or not, is actually up 1% so far this year. If you were reading the news the last month, you would have thought that the energy industry had become obsolete and was heading to zero. If you went all in at the top of the energy market, sure the recent declines would have hurt but if you held a diversified portfolio with a 10% to 15% energy weighting, you probably are not in that bad of shape!  So while the energy sector is a tax loss selling candidate, it may not be as glaring of a red line on statements that many are expecting.

That leaves us with materials, down over 6%. The only problem with materials is that since it has been such an unloved sector over the last five years, we would question if there were many out there that are sitting on significant unrealized losses in this area. Last year, it was pretty much the only industry that had anything worth selling for tax purposes and it is looking like a similar situation this year. You have to wonder if investors would be concerned about missing a bounce at this point with valuations and sentiment so low. So while we think it is an area to consider, we don’t know if we would be expecting much of a tax-loss selling impact in the materials sector either.

Reflecting on the year-to-date performance is interesting because as long as you were diversified, you probably did ok. The performance also shows how heavily weighted the TSX is to both energy and materials as seven out of 10 sectors actually outperformed the broad TSX and offset some quite strong performance in other industries. All in all, there are some opportunities to reduce your tax bill but we would not expect much of an impact this year (or at all if you believe in efficient markets) and would imagine it will be a pretty tough trade to profit from for most investors after including transaction costs, missed dividends and the potential to miss out on future gains.