This being December, givers of financial advice have been quick to recommend selling losing stocks by year's end to save money on taxes. That might be a bad idea, as I'll explain in a moment. More important, it's the sort of idea that everyone acts on, which means you can make money by doing the opposite if you're nimble and slightly brave.

January has historically been a pretty good month for the stock market, and a great month for small-company stocks. According to a study published in Financial Analysts Journal in 2006, a U.S. stock sample that gives big companies higher weightings (as the S&P 500 index does) returned an average of 1.1% each January for just over two centuries ending 2004. That's 0.4 percentage point better than the average for all months. But the same study looked at 77 years' worth of returns for an equal-weight sample, which gives small companies more sway over results. It found a 5.1 percentage point outperformance for January.

Theories abound as to why this so-called January Effect exists. One of the more convincing ones holds that year-end tax selling artificially depresses prices in December, leading to a bounce in January. There's evidence to support the theory: Studies show the January Effect is more pronounced among last year's losers. There's evidence to dispute it, too: Big tax changes in 1986 had little influence over January returns. Also, it has been observed in countries that don't tax stock gains.

The January Effect is a great example of a stock market anomaly something that sticks in the craw of high-math types who insist trading strategies can't predictably beat the market. I think it offers good reason for investors to reconsider the process of harvesting tax losses in December. Might as well sell earlier, or else hold longer, all things equal.

I'm not sure whether this year is shaping up to produce the mother of all January Effects or none at all. An abundance of stock losses would seem to foretell plenty of selling later this month. But losses are so widespread that many investors might not have gains in need of offsetting. And losses are so deep that the $3,000 investors are permitted to write off against income each year seems a pittance.

Regardless, I wouldn't advise the average investor to buy shares of a small company they wouldn't otherwise own later this month in hopes of scoring a few extra percentage points of return in January. The risks outweigh the potential rewards.

One exception: Have a look at closed-end municipal bond funds. These trade on exchanges like stocks, but hold tax-free bonds and pass the interest along to shareholders in the form of dividends. They meet a few key criteria that make them suitable for a January Effect trade. First, they're popular among investors in high tax brackets, which might make them especially prone to year-end tax selling. Second, they're often thinly traded, which means a little selling between Christmas and New Year's can lead to a big price drop. Third, they have a built-in sales pitch to lure buyers in January; as the share price drops, the dividend yield swells. Fourth, they hold bonds, which in general are less subject to headline risk than stocks.

Fifth, and perhaps most important, closed-end bond funds are lousy investments, in general. Individually, bonds come with a give and take. Investors give up some of the long-term return potential of stocks, but gain the ability to get their upfront investment back at maturity. Put individual bonds in a mutual fund, though, and you end up with the worst of both worlds: smaller returns, with no return of principal at maturity. Closed-end bond funds are particularly subject to capital losses, since they can trade at deep discounts to what the underlying bonds are worth. That makes them a bad idea for long-term investors, but a fine idea for late-December traders looking for year-to-date losers to scoop up. (That's all the more true this year, when tax-free bonds have taken a beating over budget shortages among municipalities and strained balance sheets for companies that insure some of the bonds.)

Consider, for example, BlackRock's Municipal Income Trust (BFK). It's down a whopping 46% this year. The share price is more than 16% below what the bonds would likely sell for if liquidated today. The yield tops 10% (free from federal taxes). Dividends are paid monthly. Two-thirds of the portfolio carries a credit rating of "A" or better.

If I were looking to cash in on the January Effect (company trading rules ensure I'm not), I'd start watching funds like that and the handful below on the day after Christmas, and look for a day when the prices gap down on big sell orders, and then pick up some shares and hold them until, say, just before dividend-hunters start buying in January. Only, truth be told, I'd probably run my own closed-end muni fund search at a site like ETFConnect.com instead of sticking with the funds listed here, so as not to have to compete with year-end buyers who've read the same story.

This being December, givers of financial advice have been quick to recommend selling losing stocks by year's end to save money on taxes. That might be a bad idea, as I'll explain in a moment. More important, it's the sort of idea that everyone acts on, which means you can make money by doing the opposite if you're nimble and slightly brave.

January has historically been a pretty good month for the stock market, and a great month for small-company stocks. According to a study published in Financial Analysts Journal in 2006, a U.S. stock sample that gives big companies higher weightings (as the S&P 500 index does) returned an average of 1.1% each January for just over two centuries ending 2004. That's 0.4 percentage point better than the average for all months. But the same study looked at 77 years' worth of returns for an equal-weight sample, which gives small companies more sway over results. It found a 5.1 percentage point outperformance for January.

Theories abound as to why this so-called January Effect exists. One of the more convincing ones holds that year-end tax selling artificially depresses prices in December, leading to a bounce in January. There's evidence to support the theory: Studies show the January Effect is more pronounced among last year's losers. There's evidence to dispute it, too: Big tax changes in 1986 had little influence over January returns. Also, it has been observed in countries that don't tax stock gains.

The January Effect is a great example of a stock market anomaly something that sticks in the craw of high-math types who insist trading strategies can't predictably beat the market. I think it offers good reason for investors to reconsider the process of harvesting tax losses in December. Might as well sell earlier, or else hold longer, all things equal.

I'm not sure whether this year is shaping up to produce the mother of all January Effects or none at all. An abundance of stock losses would seem to foretell plenty of selling later this month. But losses are so widespread that many investors might not have gains in need of offsetting. And losses are so deep that the $3,000 investors are permitted to write off against income each year seems a pittance.

Regardless, I wouldn't advise the average investor to buy shares of a small company they wouldn't otherwise own later this month in hopes of scoring a few extra percentage points of return in January. The risks outweigh the potential rewards.

One exception: Have a look at closed-end municipal bond funds. These trade on exchanges like stocks, but hold tax-free bonds and pass the interest along to shareholders in the form of dividends. They meet a few key criteria that make them suitable for a January Effect trade. First, they're popular among investors in high tax brackets, which might make them especially prone to year-end tax selling. Second, they're often thinly traded, which means a little selling between Christmas and New Year's can lead to a big price drop. Third, they have a built-in sales pitch to lure buyers in January; as the share price drops, the dividend yield swells. Fourth, they hold bonds, which in general are less subject to headline risk than stocks.

Fifth, and perhaps most important, closed-end bond funds are lousy investments, in general. Individually, bonds come with a give and take. Investors give up some of the long-term return potential of stocks, but gain the ability to get their upfront investment back at maturity. Put individual bonds in a mutual fund, though, and you end up with the worst of both worlds: smaller returns, with no return of principal at maturity. Closed-end bond funds are particularly subject to capital losses, since they can trade at deep discounts to what the underlying bonds are worth. That makes them a bad idea for long-term investors, but a fine idea for late-December traders looking for year-to-date losers to scoop up. (That's all the more true this year, when tax-free bonds have taken a beating over budget shortages among municipalities and strained balance sheets for companies that insure some of the bonds.)

Consider, for example, BlackRock's Municipal Income Trust (BFK). It's down a whopping 46% this year. The share price is more than 16% below what the bonds would likely sell for if liquidated today. The yield tops 10% (free from federal taxes). Dividends are paid monthly. Two-thirds of the portfolio carries a credit rating of "A" or better.

If I were looking to cash in on the January Effect (company trading rules ensure I'm not), I'd start watching funds like that and the handful below on the day after Christmas, and look for a day when the prices gap down on big sell orders, and then pick up some shares and hold them until, say, just before dividend-hunters start buying in January. Only, truth be told, I'd probably run my own closed-end muni fund search at a site like ETFConnect.com instead of sticking with the funds listed here, so as not to have to compete with year-end buyers who've read the same story.

Note: A reader rightly pointed out in the comments below that one fund originally listed has suspended its dividend. That s become too common of late among levered funds whose managers are finding it difficult to replenish borrowings. I ve edited the table to include only funds that don t use leverage. Be sure to focus your search on such funds, too.