Year End Stock Market Strategies
It’s the most wonderful time of the year, especially for investors in the stock market. Between the January Effect, the Santa Claus Rally and mutual fund distributions, my portfolio usually takes a nice jump at year end. I consider it my personal bonus for sweating out an up and down market and I look forward to it every year. So far, I haven’t been disappointed.
Don’t Miss the Profits
Last year, I wrote a post called How to Profit from the January Effect. It was an informative post, but I published it in January, after the January Effect had largely run its course. This year, I wanted to give everyone a heads up, so they can position themselves to profit. Since the Dow was up almost 400 points last week, it’s possible the January effect started early this year.
The January Effect is caused by investors who sell at the end of the year for tax purposes and then buy again in January. This causes a surge in the prices of small-cap stocks, which may lift the broader market. It is also possible this surge is helped by year-end bonuses, some of which is invested in the market. Like the Christmas shopping season, the January Effect seems to start earlier every year. I believe it’s already well under way this year and it will continue for a couple more weeks.
How you Can Profit
Since the January effect benefits small cap stocks more than blue chips, you may want to shift some of your investments. If you are going to make a year-end IRA contribution or stash away some of that Christmas bonus, consider small cap stocks or mutual funds. Between the January effect and the economic recovery, I believe small cap stocks will outperform the broader markets and that is where I’ve chosen to invest.
If you have some cash on the sidelines, now is generally a great time to invest it. In a good year, you can often make a better return in December in stocks than you would if you left your money sitting in bonds or a savings account for the entire year.
Finishing the Year
Investing is a lot like sports. You can stumble though the first three quarters and still win the game at the buzzer. Finishing strong is a critical strategy for success in any competition, especially investing. Just a few extra percentage points per year can double your total return over time.
Last year’s Santa Clause Rally yielded a 7.5% gain for the Russell 2000 index, which is a pretty good year for most types of investments. This year, the Russell 2000 index is already up 4.6%, since the beginning of December and it’s up 22% since a low in September.
The Bottom Line
The bottom line is that the January Effect has happened in 13 of the last 16 years. That’s about as close as you can get to a sure thing in the stock market these days. When it comes to easy money, I always take advantage.
“The key to making money in stocks is not to get scared out of them.”
Peter Lynch – Former Manager of Fidelity Magellan Fund
Recommended Reading
Invest it Wisely – 3 Unconventional Investment Moves to Make in 2011
Monevator – My Meaningless Thoughts on the Market
MarketWatch – 2010 Ending on a High Note
Interesting post. I think this information is more valuable to someone who is a trader or who is trying to time the market. I’m not so sure this is all that relevant to someone who is a longer-term investor.
Roger,
Thanks for stopping by and commenting.
I’m a long-term investor and the January Effect has been very relevant to me. You don’t have to engage in tax-loss selling in order to profit. Most years, I just sit tight and watch my portfolio go up.
I posted about the January Effect for people who are either unaware of how it works or for people who may be looking for a good time to get back into he market.
I had a couple of comments last year from people who didn’t know why stocks went up in December and they found the information useful. I hope it helps a couple of people this year as well.
Have a happy holiday season and I hope the Santa Clause rally is good to your investments this year.
I would also like to add that some of those stocks that undergo tax loss selling pressure potentially make a good hold for next year, do your DD very carefully.
Mich,
Thanks for the tip. I bought a couple of stocks last month anticipating the January Effect. I hadn’t thought about picking up some of the oversold stocks in January. I will have to check that out.
Interesting thoughts… the tax-selling pressure could also provide better opportunities to get in good holds, but at the same time I would think that the sharks and HFTs would sniff these out as well.
Thanks for mentioning my 3 unconventional investment moves. 🙂
Kevin,
I really enjoyed reading your unconventional investing moves. Natural gas seems like a no-brainer to me. Shorting gold and silver ETFs could be a little more adventurous. Way to come up with some unique advice, while everyone else is following the herd.
Hi Bret, I agree that the January effect is a good one to bet on. I think the reason it kicked in early is probably the massive amounts of QE hitting the stock market. I’m not convinced of a real US economic recovery.
Jennifer,
I hadn’t thought about QE2 jump-starting the January Effect, but you are probably right.
The economic indicators are similar to the beginning every other recovery I’ve seen. I predicted unemployment would stay high, while companies profited from the high productivity (aka layoffs). And, I predicted housing would be in a funk for quite some time. I also predicted the government would be forced to deal with their deficit spending.
Unless we run into some new factor that no one has predicted, I think we should be OK. I’m betting on a slow recovery and investing to take advantage.
13 of the last 16 years is a good track record, I agree. What’s especially interesting is your observation that this might be happening already. I hadn’t connected those dots, but you might be right. Timely post, thanks for sharing it.
Any time Wise Squirrel.
My timing is a lot better this year than it was last year. But, I still think I got beaten to the punch. Hopefully, there is still some upside left in the market.
Timely post. Thanks for sharing. I am an investment novice. So far my investment effort has stopped with dollar cost averaging, never sold anything. I am looking into opening a brokerage account to channel the emergency fund money (now that we have a decent emergency fund, don’t want to spend that). I will try to use this strategy.
Suba,
I also use dollar cost averaging to accumulate wealth. In the past 25 years, the only times I have sold an investment was to change to a new investment and to buy my house, which I also consider an investment. Soon, I may buy an investment property. Otherwise, my money stays fully invested.