(WTNH) — Halloween is a time where we invest in our favorite candy, but it could also be a time to invest your money.
Chartered Financial Consultant and Managing Director at Caserta & de Jongh LLC John Caserta explains what is called the Halloween Effect.
What is the Halloween Effect?
- The Halloween Effect essentially states that stock market returns are seasonal and that returns are higher between November and April than they are during the rest of the year.
- It is considered an anomaly of the Efficient Market Hypothesis, which was developed by American economist Eugene Fama in 1970 and essentially states that it is not possible for an investor to outperform the market because all available information is already built into stock prices.
- The anomaly is also known as “sell in May and go away” and dates back to the 1930s. Recent studies do confirm that returns during the winter months are on average about 4.52% higher than the rest of the year.
- And over the past 50 years, the effect has grown, with average returns during the winter months being about 6.25% higher than the summer.
- Over a 5-year timeframe, the strategy beat the market 80% of the time. And over a 10-year period, the strategy beat the market about 90% of the time.
What are some general rules of thumb for investing?
- The Rule of 125, which was previously the Rule of 100, states that in order to determine the percentage of stocks in your retirement portfolio you subtract your age from the number 125. For example, a 40-year old should have about 85% stocks (or 125-40) and 15% in bonds.
- Do what’s right for you. It’s important to complete a risk tolerance questionnaire, which will help you determine the allocation that is appropriate for you.
- Don’t try to time the market. While the Halloween Effect (and other anomalies do exist) market timing can result in significant losses over the long-run. Studies have shown that the US stock market has returned 7.68% from 1996 -2016 but the average investor has only returned 4.79% – most of that difference is attributed to missing just a handful of the best days in the market.
- Tune out the noise. Making emotional changes to a portfolio based on current events can negatively impact your portfolio. Stick to a long-term strategy.
How can investors get started?
- Talk with an investment advisor to determine what types on investments would be appropriate for you.
- Rather than picking individual stocks and bonds, it might make more sense to use mutual funds or index funds that can give you a basket of securities.
- Mutual funds provide actively managed portfolios of stocks, bonds, and cash equivalents depending on your investment objective and risk tolerance. A portfolio manager or group of managers determines what investments are actually inside a fund. As of 2016, there were about 9,500 mutual funds.
- Index funds are passively managed as they aim to simply replicate what you would find in an index, such as the Dow Jones or S&P 500.
How can investors protect themselves from market swings?
- Don’t put all your eggs in one basket. It’s important to have a mix of investments so that if one falls out of favor and loses value, another is either maintaining or increasing in value.
- All investments have different characteristics of risk, returns, and taxation. It’s important to work with professionals who can help determine which is the best mix for you.