Halloween Strategy a ‘Treat’ for Investors

With stocks back at all-time highs, you may be tempted to sell. The Halloween Strategy suggests that’s a mistake.
Tonight you’ll probably stuff yourself with all the Halloween candy your kids couldn’t eat.
Tomorrow you should consider filling up on stocks.
Halloween, Oct. 31, marks the traditional end of the stock market’s “Sell In May, Go Away” period. The first day of November signifies the start of Wall Street’s “best six months.” November through April always fares better than May through October. And the last two months of the year are especially fruitful.
That’s why Sell in May and Go Away is also known as the “Halloween Strategy.” The strategy holds that you should buy all your stocks from November 1 through April 30 and should refrain from doing so the other six months.
That’s a bit extreme. I would never recommend limiting your investing to just half the year. But you can afford to be more aggressive starting tomorrow. The following numbers bear that out.
Since 1950, the average return in the Dow Jones Industrial from November through April is 7.4%. Not one month during that period has an average return that’s in the red.
On the flip side, the average return the other six months (May through October) is a mere 0.4% – essentially flat. May, June, August and September are typically all down months.
The difference used to be even more extreme. From 1987 through 2006, the Dow returned an average of 16.3% from November through April versus just 3.9% the other six months.
That’s a big difference. And it’s one that has proven true once again over the past 12 months.
The Dow jumped nearly 6% from November 2013 through April 30 of this year. Over the past six months, the index has risen 4.5%. Not a major difference. But again, the performance in the “best six month” period was better.
The question is why? Why is there such a big disparity, historically at least, between the spring and summer months and the fall and winter months?
There are a number of theories. But the pervading one is seasonality.
Summer is a time when most investors, especially the wealthiest ones, are spending time on the golf course, on the beach with their families, barbecuing, etc. In general, they’re taking a break from their brokerage accounts.
During the fall and winter months, the kids are back in school, everyone’s back to work, and investors are focused on adding to their portfolios. Throw in the always lucrative holiday season in November and December – plus the strong fourth-quarter earnings results that follow in January and February – and it’s not hard to figure out why more people are buying stocks in late fall and winter.
This doesn’t mean you should alter your investment approach. If you’re reluctant to buy stocks right now given that U.S. indexes are back at all-time highs as of this morning and we still haven’t had a correction of at least 10% in more than three years, then don’t necessarily change your stance because the calendar has flipped to November. Conversely, if you remain bullish by the time May rolls around, don’t sell out of all your positions because the “best six months” are over.
Like most seasonal investment theories (Sell in May, the Santa Claus Rally, the January Effect, etc.), the Halloween Strategy is a useful tool to have in your back pocket in case you’re unsure of whether you should be buying or selling. If that describes you, then you could do worse than to follow a strategy that’s supported by 64 years of historical data.
Fortunately for investors, the Halloween Strategy is typically more treat than trick.

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