The index of the largest 100 companies listed on the London Stock Exchange hit a record high yesterday and many are putting it down to the ‘Santa rally’.
For those who might not be familiar with the term, it refers to a phenomenon whereby stock markets often see positive results in the run-up to Christmas and the New Year. Since 1984 the FTSE 100 has seen positive gains 84% of the time. We’ve dug into it a little further to see what’s behind this seasonal trend.
What drives the Santa rally?
In the past, strong growth in December has been labelled a coincidence by non-believers but there is good reason to believe that festive spirits and positive attitudes can impact the markets. Add to this the fact that people will often invest their Christmas bonuses and fund managers tend to rebalance their portfolios at the end of the year and it’s not hard to see why this is often labelled the “most wonderful time of the year” for investors.
Can seasonality really impact investments?
There is a lot of evidence to suggest seasonality can shape collective investment psychology. The age old adage ‘Sell in May and go away, come back again for St. Ledgers Day’ refers to a belief that the stock market tends to show stronger growth from November to April. However, when you look a little closer, there are a few holes in this theory.
Whilst the historical data does indeed suggest that May and June are likely to return a loss, staying away could cause investors to miss out on gains often seen in the months of July and August. When averaged out, these gains can often compensate for underperformance in May and June.
Past data and trends are useful in identifying patterns in markets over a long period of time, but what they don’t do is take into account current economic or political affairs and this is one of the reasons past performance is not a great indicator of future performance.
Click & Invest Investment Manager Alex Neilson is sceptical about basing investment decisions on seasonal trends. “Moving in and out of markets may seem like a sensible way to avoid losses, but trying to time market tops and bottoms is almost impossible for investors of any experience level,” Alex suggests. “Add to this that some of the markets’ best days come after bad ones, the benefits of staying invested for the long-term and riding out short-term fluctuations are difficult to ignore.”
What is our investment approach?
At Click & Invest we believe that you should only be investing if you’re willing to do so over a sustained period of three years or more. This helps mitigate the risk of loss, as the longer you invest for, the more chance your portfolio has of recovering from market fluctuations.
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All investment carries risk and it is important you fully understand these risks and are willing to accept them. You may get back less than you invested. The information contained in this article does not constitute advice and the information referred to may not be the same for all, therefore we strongly recommend you seek professional guidance from your independent advisor before taking any action.