Question: I’ve heard Halloween is a great time to buy stocks. What do you think?
This conclusion is just one way people have tried to take advantage of the alleged “seasonality” of the stock market in their financial planning. Some call it the “Halloween effect” or “Halloween strategy,” while others repeat the adage, “Sell in May and go away” only to come back in October. The academic evidence for this so-called “market anomaly” that essentially states that the market does better in the colder months than the warmer months is controversial among academics. That debate doesn’t need yet another voice. Instead, I will instead address the question in a way that really matters: how it affects you.
Let’s assume there is a seasonal bias in a market average such as the S&P 500. I write based on this assumption because if we assume there is no bias, then frankly, there is nothing to write about!
- That says nothing about there being being a seasonal bias in your individual stocks. Think of it this way: you can get an “A” in a course in which the average grade is a “C.”
- Saying the market does better during the winter months is not the equivalent of saying the market does badly in the summer. In fact, “better” is relative. If the market is up 5% in the winter, would you reject the summer months because they would only make 4%?
- The long-term benefits claimed by those who believe in this anomaly are very modest! Is the modest extra return worth paying short-term capital gains on all your investments every year in a taxable account?
- Dividends are paid during the summer, too. Depending on the time period used, dividends usually account for nearly ⅓ to ½ of the total return of the stock market! If you are taking advantage of dividend reinvestment, why wouldn’t you want to use the dividend income to reinvest during a time when you presume prices would be lower?
- Long-term averages say little about what it is reasonable for us to expect in any given year. Everyone knows the average annual return of the stock market is about 6-8% a year in the long run–that is to say, a period of at least 10 years. Even though the market may average 7%, it can fluctuate wildly year by year. The point is that expecting an average return in the short-run is not wise.
- Depending on your account size and what you are trading, transaction costs could kill any extra gain you make.
I don’t believe arbitrary dates on a calendar are prudent reasons to buy (or sell) stocks. The market is different every year. Nevertheless, outside of academia it is a critical error to ask questions about the market that exclude an investor’s individual circumstances. That’s why I don’t believe in just trading the market as if it was purely an academic pursuit and void any human element. Our Certified Financial Planner™ professionals (CFP® professional) ensure that the academic pursuit of investing aligns with the individual pursuit of each individual client.
In conclusion, don’t let interesting headlines spook you off your plan this Halloween!
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