In the world of investing, the "holiday effect," as it is often referred to, is a phenomenon where stock prices see an increase right before a major holiday. There are many theories on why this may occur. It could be from trading volume being down due to investors taking a vacation or maybe because investors are becoming more averse to risk during the holiday season and off-loading their riskier investments.
No matter the cause of this uptick, it is essential to be prepared for it and follow simple dos and don'ts when investing during a holiday.1
Do Focus on Long-Term Wealth Building
Investing and risk come hand in hand, so while it is essential to only risk within your comfort level, you need to weather some short-term fluctuations that come with the holiday to stay on the path toward more considerable future gains. Riding out the "holiday effect" and sticking to your long-term wealth-building plan is the ideal course of action to keep you on track to work toward your future financial goals.1
Don't Attempt to Time the Market
Since the holiday season is often considered a more volatile time in the stock market and a time when your mind is focused on other issues, you don't want to attempt to anticipate how your stocks may perform during this time. Trying to do so may result in heavier losses as the seasonal effects are likely temporary. Avoid the impulse to suddenly change your portfolio unless it was already planned as part of your long-term investing goals.1
Don't Base Your Risk on Daily Volatility
Your portfolio should be set up to weather certain periods of volatility. That being said, risk tolerance may change over time, and you may find your portfolio riskier than you are currently comfortable with. While there are easy ways to lower the risk of your portfolio, it is essential to consider how you define your risk. If you measure risk based on daily volatility, you may play it too safe to work toward your long-term financial goals.
The holiday swing may produce greater volatility than you are used to, which may cause you to make moves that may hurt your financial future when the better course of action may have been to stay put where you are.2
Do Plan a Reassessment After the Holidays
After the "holiday effect" has subsided and the effects of trading volume or risk aversion have lessened, it is a good idea to reassess your portfolio and make sure that it still involves the amount of risk you are comfortable with, the mix you want to have, and the potential return to help you with your long-term financial goals. It is the perfect New Year's resolution and will help you stay on track with your goals.2
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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Footnotes:
1 How the stock market behaves during the holiday season, Fortune https://fortune.com/recommends/investing/how-the-stock-market-behaves-during-the-holiday-season/
2 8 Do's and Don'ts During Market Volatility, US News Money, https://money.usnews.com/investing/buy-and-hold-strategy/slideshows/8-investing-dos-and-donts-during-market-volatility
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