The Santa Claus climb

December 19, 2012, 2:25 pm David Koch Yahoo!7

While there is some evidence that markets perform better over the holiday season, there are a more important factors to base your trading decisions on.

Over the 40 odd years I’ve been learning about, commenting on and dabbling in financial markets, one rule rings truer than any other: you can’t time the market. Picking the top and bottom of booms and busts is like predicting footy team fortunes based on pre season form – fluky at best.

But that said, there is evidence to suggest that markets historically perform better in some months than others. One of the better months, as we’re experiencing at the moment, is the December rally, or ‘Santa Claus Climb’.

The sharp analytics team headed up by James Craig at Commsec recently took a look into this phenomenon and found the man in the red coat brings cheer to the local stock market the majority of the time.

Their research found the All Ordinaries Index has recorded gains in December in 49 of the past 70 years. And not just scraping over line either, but gains at a healthy average of 1.8% per month. That’s s a return you’d be very happy to take home in any month of any market.

However despite that merriment, the standout month has actually been January with the ‘New Year Yield’ clocking up gains in 50 of the past 70 years at an even more cheery average of 1.9%.

When compared to the middling All Ords monthly gain of 0.6%, you appreciate how sparkling these holiday season returns are.

As Commsec’s report points out, “December has indeed been a consistent out-performing month over time and certainly the best month to buy shares over the past 20 years.”

Interestingly, the research also identified April and May as consistent outperformers with gains in 47 and 46 of the past 70 years respectively. On the other side June has been the worst month for the local share market over the past 70 years, dropping on 39 occasions.

Unfortunately explaining these index oddities is exceedingly difficult. If it wasn’t, the gains wouldn’t be there because the aim of investors is to act on and profit from any mispricing until it disappears.

Maybe the gains could be put down to optimism around Christmas, New Year and Easter time festivities. The losses might be attributed to end of tax year selling or taking an eye off the markets over the mid-year break.

Whatever the hypothesis, there’s nothing firm to rest an investment case on.

But as Commsec has identified, there are preferable times to buy and sell, so why don’t we just jump into an index fund at the end of November and back out before February arrives?

Well, I’m afraid it’s not that simple.

First of all, the trend looks great on averages but is by no means consistent. In fact over the past decade the All Ords has gained only five times in January and six times in December.

And those gains and losses have varied greatly, with the All Ords turning down by a dramatic 4.1% over the most recent festive December period when Europe’s political and financial fires flared up again.

Secondly, the transaction costs attached to getting in and out of share holdings over the course of a year eat into any incremental gains you might make. As most retail investors know first-hand, taxes and trading fees quickly accumulate.

But lastly, and most importantly, past performance is not a reliable predictor of future performance.

Just like you wouldn’t buy Rio Tinto solely on the basis it was once worth $150 and sits at $60 today, you can’t assume markets will re-enact prior monthly performances either.

Which brings me around to the second most tried and tested investment rule I’ve observed over the years: time in the market trumps timing the market.

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