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