Have you heard of the Halloween Strategy before?
Well if you haven’t, you are in luck. It refers to a market-timing strategy that centers on selling stocks in May and not investing until the end of October. This investing tactic is based on a theory that months November through April provide investors with higher performances and stronger capital gains.
Where did this come from?
Surprisingly, the Halloween Strategy has been around for quite some time, centuries even. That’s because the idea of abandoning stocks in May, or “Sell in May and Go Away” was first originated between the years 1694 and 1776 in high society England.
Here’s how the idea came forth: The privileged class in England would leave their estates to spend their summer vacation outside of London. Many of them were known to be brokers and analysts. And because they didn’t “actively” manage their investment portfolios during these months, the stock market was believed to have declined.
Does this strategy actually work?
The Halloween Strategy does have some merit. This theory is based on historical studies that show that the months between November and April did actually provide higher capital gains than the other months.
The graph below shows the S&P 500 Index returns from 1970 to 2017 and 1991 to 2017 for the two separate monthly periods. The difference amounts to 5.4% and 4.7% respectively in favor of the months November through April.
Is it right for you?
Whether you want to implement this strategy into your investment portfolio is totally up to you. Regardless of the performance results on the S&P 500, other indices and stocks have fluctuated greatly from year to year. The biggest disadvantage to adopting this strategy is the likelihood that you will be exposed to unpredictable risks. For example, if you skip out on economic booms during the summer months, then you’d be missing out on some serious gains. On the flip side, one key advantage to the Halloween Strategy is that you can employ it to restructure or rebalance your portfolio each November. You are then able to reduce some risks and only invest during the high-return months.
One key research to keep in mind is the one conducted by a group of analysts at the CXO Advisory Group. Looking at 142 years of data, this group studied three distinct strategies: holding stocks from November through April, holding stocks from May through October, and holding stocks all year round. They found that the first strategy indeed performed better than the second. However, the biggest returns came from the last strategy — holding stocks all year round. What this tells us is that unless you are a professional investor, timing the market can be extremely difficult.
For an average person, the best investing strategy may not always be the ones with the highest historical returns. In fact, it may not even be a good one at all. Meaning, what works for you may not work for others. Best advice about investing is to find a strategy that fits well with your objectives. What are you trying to achieve with this portfolio? And how would this particular strategy help you get there? If you know the answers to these questions, chances are, you are at a good spot.
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