When is the best time to invest? For that matter, is there such a thing as a good time period to invest in, an investment season of sorts. While some investors may refer to technical analysis before deciding on the ‘best time to invest’, others may look at historical market precedent with regards to which months saw more pronounced upsides or downsides.
This line of thought is not as far-fetched as one might perceive it to be. In fact, there have been numerous studies carried out to show that there are periods when markets exhibit some peculiar characteristics. During these periods, markets behave in a way, which seems to imply that there is a good time to enter or exit investments. The term ‘calendar effect’ refers to a particular period when stock markets react in a peculiar fashion.
Is January the best time to invest? First up, the ‘January effect’. Also called the ‘year-end’ effect, this refers the conspicuous rise of equity markets during the period starting the last day of December and ending the fifth trading day of January. Robert Haugen, in an authoritative study, picked out January as the month when average returns are higher than average monthly returns for the whole year. One reason for the ‘January effect’ could be due to corporations and individuals closing their tax books at the end of December. People sitting on paper losses are more willing to sell out their investments to create a tax-loss situation.
The other reason for selling investments in December is to raise cash for the holidays. These two reasons may contribute to a market sell-down in December. The sell-out in December may temporarily depress stock prices without any fundamental change in the market’s health. Given this is the case, bargain hunters tend to start buying at the beginning of the following year, causing some form of market frenzy during the early part of January – hence the ‘January effect’.
No single month has a 100% probability of positive returns. So we think it is best to look at the fundamentals of an equity market before making the all-important decision to invest or not. The fundamentals include the attractiveness of a market (based on its PE ratio), the earnings growth, and the economic and political situation. And if the fundamentals are all sound and it happens to be December, it may just turn out to be a very merry Christmas!