The Digerati Life

Now that January is coming up, I’m quite interested to see if the investment phenomenon called “the January Effect” will hold these next few months. To put it simply, the January Effect is a historical “beginning-of-the-year” rally but has also been called the “year-end effect”. Here’s how the Wikipedia describes it:

The January effect is a calendar effect wherein stocks, especially small-cap stocks, have historically tended to rise markedly in price during the period starting on the last day of December and ending on the fifth trading day of January. This effect is owed to year-end selling to create tax losses, recognize capital gains, effect portfolio window dressing, or raise holiday cash. Because such selling depresses the stocks but has nothing to do with their fundamental worth, bargain hunters quickly buy in, causing the January rally.

In the last couple of years, after the January effect became widely known to the public, it has become less pronounced and has started shifting to December causing a rise in stock prices, known as a Santa Claus rally and the December Effect.

It is also typically noted by the financial community and reported by the media as one of those occurrences that sets the tone for the rest of the year. Have a good January and the rest of the year is expected to follow suit. Likewise, hang on tight for a wild year when the month’s returns are lousy.

Throughout the years that I’ve dabbled in the stock market — starting sometime in the 1990’s — I remember seeing the jubilance and hyperactivity of investors and speculators alike, take over during the start of the year while the newbie investor that I was simply looked askance, wondering how I could possibly be so fortunate as to make money so easily that way.

I was quite glad for the January Effect because it was one of those things that gave me some encouragement about staying invested and keeping on an investment program. Somehow I saw my fledgling mutual fund accounts gain ground during those early months of each year of the historical 1990’s bull market and needless to say, it got me hooked. How can you not? Heady days like that are what you’re in the markets for. Though the market is unpredictable and volatile, I somehow placed my bets on riding the phenomenon to help tide me through the rest of the year. Most of the time, it seemed to work.

Obviously, this phenomenon as they call it, is not etched in stone. Realize of course, that the #1 rule in investing is that nothing about the markets is etched in stone. Thus, my question — are you going to take a chance on it this year? Well, one never knows how the equity markets are apt to perform come next month and there have already been some rumblings about its impending behavior, but with the ever so slight correction having occurred this December, I wouldn’t be completely out of line to surmise that there could be a bounce back in the near term (in fact, it’s already happening with the recent record highs — or could this be the aforementioned Santa Claus rally?). So if you’re looking for a time to lighten up on stocks, say while you’re rebalancing your portfolio, you may want to consider these few months as the opportune time to sell on strength.