Will stock prices rise in January as in years past? Experts weigh in on what the “January Effect” is and offer advice for investing in 2022.
Welcome to a fresh New Year ahead. For many of us, the start of 2022 might mean making resolutions. But for investors, the beginning of January often brings on a bit of anxiety due to the “January Effect.” But if these last few years have taught us anything, it’s that we’re living through unusual times, so exactly what can we expect to see in the stock market as the New Year kicks off?
FOR STARTERS, WHAT IS THE JANUARY EFFECT — AND IS IT REAL?
This term refers to an increase in stock market prices during the month of January, typically caused in part by people selling stocks in December for tax purposes.
Years of data do seem to point to the January Effect being real, with some sources observing an average increase of 20% each year over nearly 3 decades.
Leah Hartman, Distinguished Lecturer, Program Director Undergraduate and Graduate Finance Programs at University of New Haven, West Haven, CT, says that the historical data does back up the occurrence of a January Effect. Certain “tax incentives” or “the New Year’s resolution to fund your IRA in January” may have contributed in years past, according to Hartman.
However, she states that today “it’s probably more a ‘feeling’ rather than {something} supported by actual data.” Hartman notes that, “Yes, the stock market typically rises, but it’s more due to optimistic expectations for economic growth in the year ahead, coupled with a renewed focus on personal money management.”
She says this does support the existence of the January Effect, but that those higher stock prices might also last longer than just the month of January.
SHOULD YOU BE CONCERNED ABOUT THE JANUARY EFFECT?
The good news is that you don’t necessarily need to worry.
“The so-called January Effect is one of those distractions that can keep people from reaching their investment goals. People should not overly concern themselves with it,” says Trisha Qualy, CFP, a financial advisor at Affiliated Advisors, St. Louis Park, Minnesota.
Qualy advises that typically, the best option for investors is to work with “an independent financial advisor to create and implement a sensible, long-term investing plan.”
Choosing an advisor to help you make decisions can definitely be a smart move, especially for those newer to investing.
TIPS ON INVESTING
Though you don’t need to let the January Effect keep you up at night, it’s good to be aware of it. It’s also helpful to keep an eye out for opportunities in the markets throughout the year.
Hartman advises that to take advantage of an opportunity in the market, you should “do your homework now. Be prepared.” She recommends doing some research and then investing in what makes sense for you specifically.
She wisely adds, “No one will care more about your money than you, the woman who has worked hard and earned it. Don’t be fearful to invest, but don’t gamble with your money either.”
Qualy offers up the advice that “dollar-cost-averaging, where a certain amount is regularly invested, can build wealth over time.” She also says, “even relatively small amounts can make a big difference and can be a good defense against inflation.”
So, even if you only have a small amount of money to invest regularly, that can really add up. And if you start investing what you can after doing your research, that will help position you to take advantage of opportunities in the stock market.
VOLATILITY IN THE MARKETS + INVESTING IN THE NEW YEAR
Hartman notes that we “continue to be in a volatile market period” and she does believe that volatility will probably let up after the holidays. She does mention that until interest rates start climbing, she thinks that we’ll “see favorable market growth, albeit with a few volatile price days.”
Even if we see the January Effect take place in 2022, it isn’t the end of the world. It’s good to keep an eye on what the stock markets are doing, but you needn’t lose sleep over it. And as our experts say, make sure to do your homework on investments to choose what works best for you, regardless of the January Effect or other market movements.
MORE ON HERMONEY:
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- I Have No Retirement Savings. Now What?
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