With January off to such a hot start, many people are wondering if the old adage “As January Goes, So Goes the Year” will ring true. In other words, does January foreshadow the year’s returns in that if January is positive, are the year’s returns likely to be positive (and vice versa)?
Dimensional Fund Advisors put out an interesting piece that looked at the data going back to 1926. What they found is that this theory doesn’t always hold true. If January started off negative, then the remaining 11 months registered a positive return 60% of the time with an average return of roughly 7%.
2016 is probably one of the best examples we can look at as January saw the S&P 500 drop 5%, but then proceeded to rebound and finish the year up 9.53% on a price return basis. If someone had sold their stocks off in January, the opportunity cost would have been huge and would have impacted the portfolio and its performance.
This is a good example of why we advocate for having a plan and sticking to that plan, which helps to mitigate the influence of behavioral biases.
