Halloween is a holiday associated with witches, ghosts, and the occult. Investing is a profession associated with fancy suits, complicated math, and Wall Street. At first glance, these two seemingly have little to do with each other. That’s why it’s so peculiar that Halloween is often considered one of the best times to invest your money.
This article will take a look at why some people believe Halloween is the best day to invest.
The Halloween Strategy
If you aren’t familiar, the Halloween Stock Investing Strategy is a market-timing strategy that involves buying heavily into stocks from October 31st to May 1st before letting up on your investments come June. This is done under the belief that stocks perform much better during the winter months than they do during the summer.
By buying more stock in the winter, when stocks are expected to perform better, you can maximize your gains. Then, by selling your stocks in the summer, when stocks are expected to underperform, you can minimize your losses.
Think it sounds too simple to work? Let’s take a look at the data.
Is Halloween the best day to invest?
While this theory may sound like pure fantasy, historical data actually proves that the Halloween Strategy works. It’s not guaranteed that every single winter will perform every single summer. However, over a period of at least 5 years, winter returns (November to April) generally outperform summer returns (May to October). Over a period of 10 years, a Halloween Investor can expect to outperform a long-term investor by at least 5%. Not a small difference for simply buying and selling at the right time.
A separate study was conducted by Cherry Yi Zhang, assistant professor in finance at Nottingham University’s Business School in China and Ben Jacobsen, professor of finance at the TIAS School of Business and Society in the Netherlands. They analyzed over 323 years of data across many different markets and confirmed that the Halloween Strategy works.
What causes this phenomenon?
The Halloween Strategy is particularly interested because it has still worked over recent years. Usually, when a new trend is uncovered that relates to investor behavior, investors are quick to abuse it and the trend quickly disappears. That hasn’t seemed to happen with the Halloween Strategy though.
One reason some people think that the summer months might underperform the winter months are that investors are out of the office in the summer. With more investors away from their Bloomberg terminals over the summer, there is likely less money being traded and less volatility overall. This lack of money being pumped into stocks could lead to lower results overall.
However, frequent trading and volatility are also associated with market crashes and bubbles. This would mean that if more investors are trading in the winter months then there would likely be a lot more crashes, leading to underperformance (which isn’t the case). Additionally, with new digital stock-trading apps, investors can be plugged in from anywhere, even when they’re on vacation.
This theory does not hold up 100%, however, it’s the best one that has been proposed to explain this anomaly.
How to use this to your advantage?
So if the Halloween Strategy is pretty undisputably accurate, the next question is how can you use it to your advantage?
In general, we would still recommend keeping money invested for the long-term which means having it invested year-round. However, the Halloween Strategy is a good piece of advice to keep in the back of your mind. Come October 31st, it may be a good idea to ramp up the amount that you are contributing to your investment accounts. Then, when summer rolls around it might be a good idea to pull back on your contributions slightly. Doing this consistently over the long term could help boost the returns of your portfolio.
Remember that this strategy is not a get-rich-quick scheme and, if it works, will only result in a slightly above average performance over a period of 5-10 years. Additionally, past performance is never a guarantee of future results. As we saw in 2020, there is no telling when something will come along that interrupts this strategy completely.
We hope that you’ve found this article valuable when it comes to understanding why Halloween may be the best day to invest. If you are interested in learning more, please subscribe below to get alerted of new articles as we write them!