What Is The Best & Worst Months To Invest In Stocks?
Steve "Mr. B" Ballinger 
Research shows that some months are better for stock market investing than others. Which ones, why is that, and should we adjust how we invest?
The Calendar Effect
The Calendar Effect simply means that some months have better returns for the stock market than others. Here is research from the website "Stock Analysis" that shows the average monthly S&P 500 stock market returns from 1980 to 2019.
January: +0.82%
February: +0.29%
March: +0.96%
April: +1.51%
May: +0.97%
June: +0.02%
July: +0.79%
August: -0.15%
September: -0.70%
October: +0.92%
November: +1.48%
December: +1.11%
Average: +0.67%
Thus, during this time period, you would lose money in August and September. In fact, some of these months have a little fame and their own such as the "January Effect." Let's look a little closer at some of these months and speculate what might be happening to cause this anomaly when investing in stocks.
September…You Are The Worst
Well at least statistically speaking. Actually, where I live September can be very nice from a weather standpoint but not for the stock market. In terms of the calendar effect and which months my be best to invest in the stock market September is a real dud. Why might that be. Here are some of the popular theories. One theory points to the fact the summer months usually have lightly traded volumes, as a good number of investors usually take vacation time and refrain from actively trading their portfolios during this downtime. Once the fall season begins and these vacationing investors return to work, they look at their portfolios and sell stocks that they were planning to when they came back and can focus on investing more. When this occurs, the market experiences increased selling pressure and, thus, an overall decline. Another that large actively traded mutual funds fiscal year ends in September and the fund managers are selling some of their stocks to either incur taxes or avoid taxes by tax loss harvesting and adjust to more of a sell mode in September. One thing to note is that the September effect and the other calendar effects is a worldwide phenomenon although reported that the impact is less in China and India. So the calendar effect is not just an anomaly related to the United States.
October…Not So Scary (Halloween Effect)
October has the reputation for being the worst month for the stock market but statistically that is just not true. It is not even a negative month being up .92% on average based on the data above. So why the bad rap? Is it simply that Halloween is scary so it makes a nice link to say that October is scary for the stock market. That would be dumb.
I believe there are two big reasons for October being thought of as a poor time to buy stocks.
One is that some of the absolute worst days in the history of the stock market occurred in October. Some scary days:
- Black Tuesday (1929)
- Black Thursday (1929)
- Black Monday (1929)
- Black Monday (1987)
On Black Monday is 1987 the Dow (Index Of the Key 30 USA stocks) dropped -22.6% in one day. Yow! That is certainly scary but as we know the markets came back. The other big drop days above were all related to the Great Depression. Yet still, October is positive on average.
The second big reason is that October is the most volatile month for stocks. Wider swings in prices up and down. Research from LPL Financial found that there are more 1% or larger swings in October in the S&P 500 than any other month in history dating back to 1950. One reason for volatility is in the USA elections occur in early November and the market is trying to anticipate or guess the outcomes and what that might mean for companies and investors. Volatility can be scary but the end result is a month that is not so bad and certainly better than September.
January…We love You Baby
The new year brings some good news for investors in the stock market as in positive returns. January is known for the January effect of better stock market returns and people will plan around that as the January Effect has a certain amount of fame. Curious that statistically it is not the best month but certainly gets a lot of media attention.
What might be happening to cause better returns in January and thus the January Effect?
Here are some popular theories:
Investors sell winners to incur year-end capital gains taxes in December and then use those funds to buy back into the market in January. So related to a tax management strategy.
Investors come into money such as getting a year end bonus and they put that to work in the stock market.
"Window Dressing" by poor performing mutual fund managers who want their portfolios to look better so they buy some of the best performing stocks for the year in December, just so they can look a little better when potential investors look at their holdings, and then buy up stocks that have been dumped in December to make room for the temporary window dressing stocks. This has no impact on passive index funds, just actively traded funds with a fund manager, and obviously not a good thing in terms of being in the best interest of investors in the mutal fund.
Year-end sell-offs in December can cause dips in the prices of good stocks that are now selling in effect at a discount which is attractive to buyers looking for a bargain also known as Value Investors. They are interested in the lower prices, knowing the dips are not based on company fundamentals. Check out my Value Investing Complete Course if that style of investing sounds interesting to you and Value Investing can occur at anytime of the year. Warren Buffet is a well know value investor for example.
My favorite, is simply new years resolutions. Many people resolve to lose weight or exercise more but also many decide to invest more and so they start learning and investing more in the stock market and as more new money comes into the market that help raise prices of stocks due to the increased demand. I know for the sale of my own courses on investing in the stock market and I have several they see a spike in sales in January.
So…Should We Invest In Stocks Based On The Calendar Effect?
In my opinion I would say no. If you came into some money like from an inheritance or winning the lottery in late August maybe wait until after September or avoid the volatility of October. The key problem is that it is hard to time the market. Professional economists and big time stock investors get it wrong all the time. Plus, there can be even bigger anomalies that supersede the small calendar effects. For example, March and April are great months based on the Calendar Effect until there is a global pandemic like Covid-19 that really devastated the stock market, and people lives of course, in early 2020 until a quick market recovery occurred later in the year.
The even bigger issue gets more into behavioral finance. Will you get into the market if you wait? Will there always be a reason not to invest from being too busy to just thinking that now is not the right time to invest. Maybe because stocks are too high or they are in a big downward trend. Easy to find reasons not to invest but that just puts you behind. Particularly, if you are investing in stocks for long-term goal like financial independence and retirement the sooner you invest and the more you invest over long periods of time the better you will be based on past history. Now, past performance is no guarantee of future results but safe to say that putting your money in a very low interest savings account will not get you to where you want to be.
In the end, over the long-term, the key is not when you invest, as much as, that you are investing.
Hot Topics
What Are ESG Funds And Should You Invest In Them?
The Pros and Cons of Buying Cryptocurrency With PayPal Crypto
My Top 5 Investing Mistakes So You Can Avoid Them