If you’ve got some spare cash to invest, then Halloween could be the perfect time to pay it into a stocks and shares Isa and see your savings go bump in the night.
The so-called “Halloween effect” is a well-known phenomenon in the US and is a variation on the old investment adage “sell in May”. The premise is that the best stock market returns can be achieved in the six months between November and April, with performance typically better than the period between May and October.
And while the “sell in May” adage has been somewhat discredited for losing investors’ money if they withdrew their money in May, it would appear that six-month performance cycles do exist.
Research from investment firm Architas has shown that in the past 22 years the FTSE All Share index has returned 167% between November and April, six times more than the May to October periods which returned only 26.97%. On average the FTSE All Share returns 8.38% between November and April compared to just 1.34% in the following six months.
The effect isn’t confined to the US or UK either, with equity markets worldwide performing better between November and April. The graph below shows the performance in the major markets split between the two six month periods:
Source: FE Trustnet / Architas. Data from May 1995 to April 2017 for UK, Europe, US and Japan. Asia data starts May 1999 and Emerging Markets from May 2001.
Adrian Lowcock, investment director at Architas speculates on the cause of this mystery phenomenon: “The curious thing about the six-month effect is that no-one has worked out exactly why it may be happening. There are a number of potential reasons; companies and fund managers are more active in the winter months as the end of the calendar year approaches and they may need to improve their figures.
“Christmas tends to be a good time for markets as investors are generally more positive. Also, the last few months of the financial year end tend to be amongst the most active as investors use up their tax allowances, and take out an ISA or SIPP before the annual allowances are gone.”
However, Mr Lowcock warns: “As is always the case with any adage there are exceptions to every rule and the six-month effect does not happen every year. Some of the most notable exceptions in recent times have been the dotcom bubble in 1999/2000, 2003 as tensions rose ahead of the US invasion of Iraq and more recently the fallout out the global financial crisis continued to hit stock markets in 2008/09.”
“Whatever the cause, the six-month effect does seem to exist, and whilst it is probably not a good idea to take it to extremes and hold cash for six months of the year, the end of October and start of November might be a good time to make any new investments into your ISA or pension, instead of waiting until the end of the tax year having missed out on the potential benefits of the six-month effect.”
If you are thinking of making stocks and shares ISA contributions, find out more about investing for beginners using our guide: Moneywise's First 50 Funds for beginners.