A Timely Affair: What’s the Best Month to Invest In?

When making the decision to put money into the market, investors are always looking for the extra something that gives them the “edge” over the odds. Be it thoroughly researching the company or sector to make that informed decision, or simply the hot stock tip, we are always on the lookout for a better way to invest. In this week’s A Fund Affair, our guest writer, Mah Ching Cheng, Research Manager at Fundsupermart.com, gives us a unique commentary of whether there is a best time to invest. Is it better to buy stocks in March or should you keep you money out of the market during August? Mah shares her opinion with us.

When is a good time to invest? For that matter, is there such a thing as a good time period to invest in, an investment season of sorts. While some investors may refer to technical analysis before deciding on the ‘best time to invest’, others may look at historical market precedent with regards to which months saw more pronounced upsides or downsides.

This line of thought is not as far-fetched as one might perceive it to be. In fact, there have been numerous studies carried out to show that there are periods when markets exhibit some peculiar characteristics. During these periods, markets behave in a way, which seems to imply that there is a good time to enter or exit investments. The term 'calendar effect' refers to a particular period when stock markets react in a peculiar fashion.

Best & Worst Months To Invest In

Some of the better-known studies include the 'January effect', the 'October effect', the 'sell in May then go away' theory and the 'Santa Claus rally'! There has even been research done on the effect of the 'unlucky sevens'! This refers to the years 1987 and 1997, when equity markets experienced sharp downturns. 1997 is probably still fresh in the mind of many investors. The Asian Financial Crisis precipitated out of various Asian currencies, including the Thai baht and the Indonesian rupiah, depreciating massively against the U.S. dollar. This subsequently brought about the plunge in equity markets.

The above-mentioned studies run counter to theories such as the efficient markets hypothesis, which asserts that stock prices reflect all the information available such as economic data, corporate earnings and other financial news. Before we look into the hard statistics behind these assumptions, let us first have a better understanding of the ‘effects’ we are discussing.

The January Effect

First up, the 'January effect'. Also called the 'year-end' effect, this refers the conspicuous rise of equity markets during the period starting the last day of December and ending the fifth trading day of January. Robert Haugen, in an authoritative study, picked out January as the month when average returns are higher than average monthly returns for the whole year.

One reason for the 'January effect' could be due to corporations and individuals closing their tax books at the end of December. People sitting on paper losses are more willing to sell out their investments to create a tax-loss situation. Unlike many Asian countries, U.S. investors pay capital gains taxes on their investments. After reporting tax losses, the overall tax paid on capital gains is usually reduced. The other reason for selling investments in December is to raise cash for the holidays. These two reasons may contribute to a market sell-down in December.

The sell-out in December may temporarily depress stock prices without any fundamental change in the market’s health. Given this is the case, bargain hunters tend to start buying at the beginning of the following year, causing some form of market frenzy during the early part of January – hence the 'January effect'.

October Blues

Along a similar vein, is there a worst month to invest in equities? We examine another well-known theory – the 'October effect'. This theory postulates that equities tend to decline in October because investors get jittery at the historical precedent of market crashes occurring in said month.

Examples include October 1929, which preceded the Great Depression; and the 'Great Crash of 1987' – also known as 'Black Monday' – when the Dow Jones Industrial Average (DJIA) plummeted 22.6%.

The fascinating thing about 'Black Monday' is that the cause of the massive drop cannot be attributed to any single news event. While there are many theories that attempt to explain why the crash happened, there is no obvious fundamental reason behind the market freefall. The important lesson for stock exchange regulators after 'Black Monday' was the need to insert mechanisms in markets to prevent panic selling. Measures such as trading curbs and circuit breakers are now common in most exchanges.

Turn Of The Month

Besides the 'January effect' and the 'October effect', there are also some lesser-known 'anomalies' on record. For example, in the 'Turn of the month effect', the Frank Russell Company examined the returns of the S&P 500 Index over a period of 65 years. The study found that U.S. large-cap stocks consistently posted higher returns at the turn of the month. This was attributed to cash flows at the end of each month when salaries and interest payments were made to investors, who were then assumed to use these monies to purchase stocks.

The authors, Chris R. Hensel and William T. Ziemba, found that returns at the turn of the month were significantly above the average over the period from 1928 to 1993, and “that the total return from the S&P 500 Index over this sixty-five year period was received mostly during the turn of the month”.

So how much truth is there in these hypotheses? Do markets perform particularly well in January? And likewise, should a fall in the markets be expected in October? We decided to crunch the numbers and see what came out of it.

In our study, we used the monthly returns for major regional markets in the past 18 years, spanning the period from 1989 to 2006. These indices include the MSCI Asia ex–Japan Index as a proxy for the Asian market, S&P 500 Index as a proxy for the U.S. market, DJ Stoxx 50 Index as a proxy for the European market, and finally Nikkei 225 Average as a proxy for the Japanese market. In addition to these four markets, we also observe the returns of Singapore’s Straits Times Index (STI). We focused specifically on the months of the year that these theories touched on.

Analyzing The 'October Effect'

In determining whether a month has performed badly, we look at the probability of its giving a negative return (which would be high if the effect was true) and its average historical return (which would be low if the effect was true). The reverse holds true when determining whether there is a best month to invest into.


Chart 1 shows the probability of having negative returns in a particular month over the past 18 years. In the first instance, we test out the probability based on the STI only (blue bar). In the second instance, we test out the probability on a basket of five indices, including the S&P 500 Index, DJ Stoxx 50 Index, Nikkei 225 Index, MSCI Asia ex-Japan Index, and the STI (grey bar).

The data shows August as having the highest probability of negative returns. This means that out of the 90 months of August surveyed, 50 of them showed negative returns. The probability of the STI having a negative return in August is the highest at 61.1%. So it is August, not October that shows the most frequent number of negative returns in the past 18 years.

In fact, the data reflects only a 38.9% chance of negative returns in October. Given this, it is clear that October does not deserve its bad reputation.

Shopping In January?

Using the same perimeters, Chart 2 shows the probability of markets yielding positive returns. January is looking good with a 61.1% for the basket of five indices. But the probability of positive returns for the months of November and December is even higher at 64.4% and 73.3% respectively. So, empirically, December beats out January as a good investment month.


However, some may argue that although the probability of a positive return in the month of January is not the highest, the actual returns may still be higher compared to other months. It could still be argued that the 'January effect' applies. Similarly, although the probability of having a negative return in October is not the highest relative to other months, the average return in October could be the lowest. In order to find whether this is true, we crunched the numbers to get the average returns for each month over the past 18 years.


The results are the same. December posted the strongest average return while August turned out to be the worst month in terms of the average returns. Based on the data, if you had invested in our basket of five indices during August, you would have lost 1.5% of your investments. On the other hand, you would have made 2.5% if you invested in December.

Just The Bare Facts

This study has drawn some interesting conclusions based on empirical evidence. But one thing holds true -- the only certainty that equity markets face is uncertainty.

While our analysis shows strong upside in certain months, these conclusions are based on the average returns of five markets. If market fundamentals are not sound, inevitably this market will experience a sharp downturn. It does not matter which month you invest in – the investor will be hit by the downturn.

No single month has a 100% probability of positive returns. So we think it is best to look at the fundamentals of an equity market before making the all-important decision to invest or not. The fundamentals include the attractiveness of a market (based on its PE ratio), the earnings growth, and the economic and political situation. And if the fundamentals are all sound and it happens to be December, it may just turn out to be a very merry Christmas!

Send us your questions and comments to us at fundaffair@cnbc.com. Mah Ching Cheng will answer as many of your e-mails as possible on ‘CNBC’s Cash Flow’ airing on Monday, May 14, 10 am to 12 noon Hong Kong/Singapore time.For more information on this study, visit www.fundsupermart.com.