Trick or treat: Halloween's investment effect | Ben Esget

By Ben Esget
Contributing writer 

It’s almost that time when kids put on their costumes and embark on a quest for sugar and fun. That’s right, it’s almost Halloween.

I love Halloween. I love the costumes and the fall air. I am planning to dress up as cowboy this year, because I have grown a thick mustache in preparation for “Movember” (a nationwide event where men grow mustaches for men’s health during the month of November).

One thing that is seldom discussed over cups of cider and ghost cookies is the market anomaly known as the Halloween Effect.

Halloween and the stock market have a well-documented history together. The Halloween Effect is sometimes referred to as the “sell in May and go away” strategy, and is one of the most well-known seasonal anomalies in the stock market.

The Halloween Effect has been documented in Dr. William Ziemba’s “Seasonal Anomalies,” Haggard and Witte’s “The Halloween Effect: Trick or Treat?” Jacobsen and Zhang’s “The Halloween Indicator: Everywhere and All the Time,” and a multitude of other research papers.

The strategy is to buy stocks six days prior to Halloween and sell come May 1.

Research shows that the market outperforms 4.5 percent during the months of November through May. Over the last few decades, following the Halloween strategy would have paid off handsomely. Ziemba shows that from 1993-2010, the Halloween effect would have produced the following returns vs. buy and hold:

– Halloween Effect Russell 2000: 494 percent total return

– Halloween Effect S&P 500: 373 percent total return

– Buy & Hold Russell 2000: 204 percent total return

– Buy & Hold S&P 500: 96 percent total return

Going back further, however, you will find that that Halloween Effect is more trick than treat. Research by Total Trader shows that from 1875, stocks have indeed outperformed from November through April, but the returns from May through October were not negative. By following the Halloween strategy, investors left a significant amount of money on the table compared to a buy and hold investor. (see chart below).

So, next time you hear about the “sell in May” strategy or the Halloween Effect, it may be best to put them into the category of imaginary Halloween creatures like vampires, ghosts and goblins.

Ben Esget is the president of WealthMark LLC, an investment firm in Bellingham. His columns appear on BBJToday.com every other Wednesday. Esget also runs the finance blog Outsider-Trading.com, in an effort to level the playing field between Wall Street and Main Street. Contact him at 360-734-1323 or ben@wealthmarkllc.com.

Author’s note: The information in this column should not be construed as investment advice. Everyone’s goals and investment portfolios are unique. Please contact a financial adviser or an accountant for your particular needs.

(click chart to open larger view)

 

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