Magic returns from Halloween investing
By Jonathan Eley
Stock markets typically perform better over the winter than the summer, leading one broker to create portfolios to take advantage of what Americans often call the ?Halloween effect?.
Since 1995, an investor who entered the market on November 1 and exited on April 30 would have turned £100 into £294, whereas a ?summer? investor would have been left with £78.
Interactive Investor said its ?consistent winter portfolio? has averaged a 26 per cent return over the past 10 years, against 5 per cent for the FTSE 350. A more aggressive version has averaged 37 per cent a year.
?The six-month effect is a genuine anomaly that shouldn?t exist; it should have been arbitraged away,? said Stephen Eckett of Harriman House, publishers of the UK Stock Market Almanac. ?Despite numerous academic studies, no one is really sure why it continues to occur.?
Sven Bouman and Ben Jacobsen recounted in 2001 how in 36 of 37 developed and emerging markets between 1973 and 1998, returns in the November to April period were significantly higher than those in May to October, even after taking transaction costs into account. More recent studies involving more markets have found the same thing.
?Far more money flows into the market over the winter months, which may explain why markets consistently perform better over this six month period,? said Rebecca O?Keefe, head of investments at Interactive Investor. ?Retail investors contribute much more to tax efficient portfolios at this time of year and for the first few weeks of the new tax year, before the money largely dries up in May.?