Monthly statistics for the New York Stock Exchange (NYSE) Index from January 1969 through November 1998 were analysed to determine if the stock market posts increased gains in January, the so-called 'January Effect'. The graph above presents the average percent gain for the index for each month. A quick glance suggests that indeed there is a 'January Effect'--but of greater significance is that November, December, and January clearly have been the best three months for the market in the past 30 years.

This suggests an investment strategy for risk-averse investors: Buy stocks on the first day of November every year, sell them on the last day of January, and maintain a conservative 'cash' portfolio for the remainder of the year. In the past 30 years this would have produced gains of 10% per year or more, with only a 25% exposure to the stock market. The risk-adjusted gain, then, would have easily beaten the market's overall gain.

The question, however, is: will this trend continue? Most professionals seem to believe in the January Effect because there are fundamental reasons that can explain it. Profit-sharing and pension plans have increasingly grown as components of employee benefit plans. These plans normally distribute new funds to employees in January, after the books for the previous year are closed and the companies know what their profit picture looks like for the previous year. When the employees receive the new funds, most plow the money into the stock market, resulting in a surge of buying by the fund managers.

The December gains have recently been explained as being the result of professionals buying stocks in anticipation of the January Effect. And some people suggest that gains in November may also be the result of this anticipation, as professionals try to get into the market before the crowd arrives, in order to buy in at Autumn's lower prices.

Does any of this make sense? My own profit-sharing distribution comes at the end of January, after all the big gains are over. So, then, did anticipation of my putting my new money into the market drive up prices from November to January? Then, when I actually put my money into the market in February nothing happens? 

These questions can't be answered by statistical analysis. The point is, however, that right now has been historically a very good time to own stocks. So, if you have the ability to readily allocate your investments between stocks, bonds, and cash on a short-term basis (can you change your investments frequently and without penalty?), it would probably be good to shift a greater than normal percentage of your portfolio into stocks for now, so you too can benefit from all the professional anticipation.