Think you can improve your portfolio returns by spotting trends and pattern in market movements? In this video, I'll discuss one pattern often cited.
The pattern I'll discuss today is an often-cited seasonal pattern. It is a pattern investors often focus on, especially this time of year. And their focus may be misplaced. While pattern recognition and charting are a natural part of understanding markets and the economy, not all patterns are equally useful. The main takeaway I'll discuss is that investors should focus on the long-term trends that have historically shown to drive markets, rather than surface-level patterns.
For instance, one major seasonal pattern is known as the "January Effect." This is based on the observation made in the mid-20th century that the month of January tends to have larger average returns compared to other months.
Why might this be? Researchers have proposed a number of explanations including the effect of tax-loss harvesting where investors sell stocks at the end of the year and buy them in January. Another reason might be that households buy stocks with their holiday bonuses in January. There are many other reasons that have been proposed.
It's also possible that this is simply a statistical anomaly. In any data set, you might expect to find interesting patterns even when the underlying data is inherently random. So, in this case, it wouldn't be unexpected for a particular month to have larger average returns than others.
Whatever the reason, this chart highlights the fact that the January Effect has faded since the year 2000. This underscores the importance of taking these surface-level patterns with a grain of salt.
What should investors focus on instead? History shows that long run trends based on the business cycle, corporate profitability, valuations, and other fundamental factors have much more understandable impacts on financial markets.
So, rather than basing investment decisions on what month it is or other surface-level patterns, investors should continue to focus on the bigger picture trends and stick to an appropriate asset allocation based on their financial plans.
I hope you found these insights helpful. Please feel free to reach out if you would like to discuss any other these topics in more detail. I look forward to speaking with you.
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