People love rules of thumb.
Sometimes, mental shortcuts are helpful. Other times they are not. When it comes to investing, seasonal shortcuts are not uncommon. In fact, January boasts two:
The January Effect
explains why U.S. smaller company stocks tend to outperform the market in January. The original theory held that tax-loss harvesting pushed stock prices lower in December, making shares more attractive to investors in January. An article published in International Journal of Financial Research explained the effect could also owe something to the optimism that accompanies a new year, as well as year-end cash windfalls.
In his book, A Random Walk Down Wall Street, Burton Malkiel described the January Effect this way, "...the effect is not dependable in each year. In other words, the January 'loose change' costs too much to pick up, and in some years it turns out to be a mirage."
The January Barometer
suggests the performance of stocks during the first month of the year offers insight to the direction of stocks for the year as a whole.
Last week, the Standard & Poor's 500 Index (S&P 500) was up 2.5 percent. If the Index finishes this month higher, then the January Barometer suggests it should finish the year in positive territory.
Of course, you need look no further than 2018 to see the January Barometer is not completely accurate. In January 2018, the S&P 500 gained 5.6 percent, and it finished the year in negative territory.
According to Fidelity, the theory is flawed because, while stocks move higher for the year a significant percentage of the time after gaining value in January, they also move higher for the year a significant percentage of the time after losing value in January.
This is why mental shortcuts are often poor investment guides.
There is one rule of thumb investors may want to consider adopting: A well-allocated and diversified portfolio that aligns with long-term financial aspirations to help meet goals along with periodic reviews with their financial professional.
Data as of 1/11/19
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
2.5%
|
3.6%
|
-6.2%
|
10.5%
|
7.4%
|
11.6%
|
Dow Jones Global ex-U.S.
|
3.2
|
3.8
|
-15.7
|
5.9
|
-0.4
|
4.7
|
10-year Treasury Note (Yield Only)
|
2.7
|
NA
|
2.5
|
2.2
|
2.8
|
2.3
|
Gold (per ounce)
|
0.7
|
0.6
|
-2.6
|
5.4
|
0.7
|
4.5
|
Bloomberg Commodity Index
|
1.7
|
3.8
|
-9.8
|
1.9
|
-8.6
|
-3.5
|
DJ Equity All REIT Total Return Index
|
4.5
|
4.1
|
4.5
|
6.6
|
9.0
|
14.8
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.