Will investors get a boost from the January effect?

Published by Moira O'Neill on 07 January 2016.
Last updated on 08 January 2016

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The FTSE 100 index of the UK’s leading companies has got off to a poor start in January. But could this mean it’s a great time to start investing?

At the start of the year many investors focus on the January Effect, which is the tendency for positive markets in the first month of the calendar year to lead to positive markets in the subsequent 11 months. 

It’s hard to argue against statistics that show that a positive January has led to further rises four out of five times during the past 32 years.

However, figures from Fidelity International found that in the 13 years since 1984 in which the FTSE 100 had a negative first month, the stock market went on to end the year at a higher level.

A market fall could also present an opportunity to get good value on your investments. The Chinese market falls this month are also hurting global markets, including the UK. This may look painful in the short term but could present buying opportunities.

Investors, however, should be focusing on the long term. You shouldn’t expect a quick return from the stock market over one year and should be prepared to hold your investments for at least five years to ride out any peaks and troughs.

Tom Stevenson, investment director for personal investing at Fidelity International says: “As far as short term buy signals go, the ‘January Effect’ seems to have a reasonably reliable hit rate.

However, as far as 2015 has shown, such adages should not be solely relied upon when making investment decisions.”

Instead, investors should focus on sound investment principles such as staying invested through market ups and downs, saving regularly every month and being well diversified in their investments across asset classes such as cash, equities, bonds and property.

Jason Hollands
, managing director at 
Tilney Bestinvest sees “a cocktail of concerns in the outlook for 2016”. These include:

  • slowing global growth, with China at its epicentre
  • disinflationary pressures, a slowing in the rate of price inflation
  • high levels of government and consumer debt constraining consumption growth


“In the near term we think investors need to take tread with caution and be very selective on where they invest. Just ‘being in the market’ won’t be good enough,” he says.

Mr Hollands investors who want to be choosy about their investments should consider European and Japanese stock market investments. He says: “Both regions are already printing money but are nowhere near their target rates of inflation and therefore there is a real prospect of them stepping harder on the accelerator, which would support asset prices though the benefit to the real economy is questionable.”

Mr Hollands also thinks that in the current rocky investment environment, investors should consider ‘targeted absolute return funds’ that aim to make money regardless of market conditions.

Tilney Bestinvest’s favourite absolute return funds