Did you know? “Halloween strategy” refers to more than just your kids’ plan for dividing and conquering the neighborhood trick-or-treat. It’s a term that refers to an investment strategy centered selling stock in May and not investing again until the end of October.
The strategy asserts that stocks perform better between the end of October and beginning of May than they do between the end of May and beginning of October. Therefore, by only investing in stock during the 6 high-performing months of the year, the Halloween strategy will allow you to end out on top.
History of the Halloween Strategy
The Halloween strategy, also known as “Sell in May and Go Away”, is based on stock market trends that have existed since at least the early 1900s. Some theories suggest that this pattern was formed long ago in the UK. The wealthy class would spend their summers in the country and ignore their investment portfolios, causing declines in the stock market. That pattern still exists among the ultra-rich today, who often abandon the cities for beachside havens like the Hamptons, Nantucket, and more.
Does the Halloween Strategy Work?
The Halloween investment strategy does prove to have some merit. Based on a study of the S&P 500 between 1996 and 2015, there are major fluctuations in ROI between these halves of the year. Between May and October, ROI drops dramatically, decreasing to an average of 0.05% from an average of 0.98% in the other 6 months of the year.
That said, the success of a Halloween investment strategy does fluctuate greatly from year to year. New research suggests that it’s only effective during the third year of every US presidential term, while in other years it’s non-existent.
Should I Consider a Halloween Strategy?
Whether or not to implement the Halloween strategy yourself is an entirely different question than whether or not it works. A Halloween strategy is a tactic that’s most commonly employed by professional stock traders. They have the time and capital to perfectly execute a Halloween investment strategy without hurting themselves financially.
One stock advisory group studied 3 different strategies for the individual investor. The first was the Halloween strategy, the second was the opposite of the Halloween strategy, and the third was simply holding stocks year round. While they did find that the Halloween strategy was better than the opposite of the Halloween strategy, they ultimately found that simply holding stocks year round was the most effective path.
As a non-professional, it can be extremely difficult to time an investment strategy, and it may end up hurting instead of helping. For an average person, it’s always best to invest in stocks and remain in the market over time, rather than attempting to execute a tricky strategy.