There’s a famous Mark Twain quote in which the great American wit gives the following investment advice. “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
Yet historical data – as often highlighted by excitable market commentators – can seem to imply that certain months are in fact more dangerous, or more profitable, than others. A look at returns on the Dow Jones index going back to its creation in May 1896 shows that the average monthly return each July is more than 1.5%. By contrast, looking back across those 125 years, the worst month by far is September, with an average monthly loss of just over 1%. So is the easy way to stockmarket success to cash out in September then lever up in July?
Sadly not. For one thing, this is just one market. Different markets display different anomalies – for example, April and December have historically been the strongest months for the FTSE 100. More importantly, there is no logical rationale to underpin the pattern, so you have no reason to expect it to continue. It’s similar to being shown the results of 100 coin tosses then believing this gives you some insight into the next 100 – it doesn’t. With a fair coin, the odds of heads or tails are always 50/50 each time. It’s quite possible that this is just the way things have panned out in the past century; the next may be entirely different.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The real problem with seasonality
However, the key problem, as Mark Hulbert notes on MarketWatch, is that the opportunity to bet on these monthly variations only comes around once a year. So even if you think you’ve found a statistically significant pattern, and even if you are convinced that it will endure, you can’t bet on it frequently enough to be sure of profiting in the long run.
Some investors do make money from pattern-spotting. As Hulbert notes, the staggeringly successful Medallion Fund, which is the in-house fund open only to staff at hedge fund Renaissance Technologies, has managed to parlay what amounts to a very minor statistical edge into market-thrashing returns over 30 years or more. But these returns come from spotting extremely short-term patterns and using high-frequency trading to exploit them (not to mention having the pool of capital to do so). In other words, the sort of thing that you can only do if you’re a massive hedge fund staffed almost exclusively by people with maths PhDs.
In short, don’t waste your time worrying about seasonal patterns. If they were an easy path to market riches, they would already have been ironed out by arbitrage traders.
-
Millions of cash ISA savers are missing out on hundreds of poundsBillions of pounds are languishing in cash ISAs that pay an interest rate of 1.5% or less.
-
Keller presents low debt and ample scope for growthGeotechnical contractor Keller, which supports vital global infrastructure, boasts rising profits and a cheap valuation
-
Building firm Keller presents low debt and ample scope for growthGeotechnical contractor Keller, which supports vital global infrastructure, boasts rising profits and a cheap valuation
-
PZ Cussons share price down 75% in last decade – why it's one to watchOpinion Once-strong consumer-goods business PZ Cussons is out of favour with the market. That spells opportunity for investors, says Jamie Ward
-
Cash in on the biotech sector with specialist trust BioPharmaOpinion BioPharma has an attractive niche in lending to asset-rich biotechnology companies
-
India's stock market decline wipes out $1.3 trillion in market value – can investors stay optimistic?More than $1 trillion has been wiped off from India's stock market after investors turn to China. Has the emerging-market darling hit rock bottom?
-
Pensions revolution: how to profit from the trends shaping the UK pension systemThe UK pension system is one of the biggest in the world. Big changes are under way, says Rupert Hargreaves
-
Will Trump force the Fed to lower interest rates?Opinion Markets are ignoring the risk that Donald Trump forces the central bank into reckless interest rate cuts
-
Large cap stocks start to struggle – is it time for investors to reassess their focus?Buying quality large caps worked very well last decade. A more volatile world will be a bigger challenge for these star stocks, says Cris Sholto Heaton
-
How to generate income with fixed-interest investmentsPublic debt is overvalued, but other fixed-interest investments now look like a bargain, says Max King
