Monday, January 3, 2011

An Easy (and Effective) Way to Time the Market?

There’s a new research story making the rounds lately on many online investing sites. For example, CNBC recently carried a story about the S&P report that states that investors who only bought stocks in the S&P 500 on the last day of the month and sold at the end of the 1st day made 30% more on average (when considering dividends) over the last decade than those who bought S & P 500 stocks on December 31st, 1999 and sold December 1, 2010.



What explanation could there possibly be?

Well, the explanation seems to be that the retirement and pension plan administrators often dump lump sums of investors money (company matches, and that sort of thing) into mutual funds and stocks at the beginning of the month. That, of course has the effect of causing demand - and prices - to surge when compared with other times of the month.

What should investors make of it?

If you ‘re a day trader, you may have just found the easiest day of the month to do your work. But for most small investors, I doubt it really matters much since it would generate excessive trading fees and commissions, and probably create even more work at tax time. But if your in control of when you make contributions to your retirement plan, or investment account then it may make more sense to save up your investment cash until the last day of the month, at least that way you’d capture some of that surge, although you wouldn’t always be able to hang onto the gain the way selling on the 1st would lock in your gain.

On the other hand, will this strategy remain effective once news filters down and more investors start trying to capitalize on it? If enough individual investors start trying to capture these gains, it could alter the system such that the last day of the month would see the surge and anyone buying on that day would start to see diminished returns.

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