A happy Christmas for all investors

Looking forward to Christmas? If you’re a stock market investor, you should be – history tells us that the festive season is a good time to have money in shares.

You may or may not believe in Father Christmas, but the Santa Claus rally is a phenomenon that has been well-documented by stock market historians over a lengthy period. It doesn’t always take place but very often, share prices seem to rise strongly over the Christmas period, no matter how the market performed in the run up to the festive season.

The effect was first identified in the US, where historian Yale Hirsch noted in 1972 that prices had risen over Christmas in 77 per cent of the years going back to the 1890s. That long-term average has barely changed since then; according to data going back 1896, the US market has gained, on average, 1.7 per cent during the seven trading days following Christmas Day. In the UK, the figures are similar. Data from the Stock Market Almanac from 2000 onwards, suggests shares here have averaged a gain of around 1.5 per cent over the Christmas period.

Not just for Christmas…

To which, you might say, so what? Long-term stock market investors aren’t supposed to worry about what the market tends to do over a handful of days; that’s the sort of trend traders get excited about, but doesn’t have a lot to do with sensible financial planning.

Ironically, however, the Santa Claus rally rather proves that point. Seeing strong gains recorded over a handful of days is a powerful reminder of the risks of trying to second guess the market. Get it wrong and there’s a danger you’ll miss out on an important chunk of performance; over time, the effect of compound interest foregone on that performance will really add up.

The results can be dramatic, as analysis conducted by the fund manager Fidelity on 30 years of market returns reveals. If you’d invested £1,000 at the start of that period, Fidelity says being out of the market on the 10 best days would have reduced your final return from £14,700 or so to just £7,800 – an opportunity cost of £6,900. In other words, whether you believe in Santa or not, it’s time in the market that matters, not market timing.

The case for regular saving…

How, then, do investors best secure that time in the market? Well, for many, the regular savings plans offered by so many investment companies offer a smart way to build a diversified portfolio of holdings. They enable you to drip feed money into the markets – as little as £25 a month – as your budget allows, inside or out of a tax-free individual savings account (Isa) wrapper.

Saving in this way ensures you maximise the amount of time you’re in the market, even if you don’t have the funds to make a large lump sum investment. It also gives you access to a statistical quirk known as pound-cost averaging, which often plays in investors’ favour. In months when prices have fallen, your fixed cash contribution buys you more shares in your chosen investment company, which is to your benefit as prices recover. The effect, over time, is to smooth out the volatility of stock market investment.

Stocking fillers…

Regular savings plans, by the way, can be taken out in your own name or in someone else’s. They’re a good option for investors looking to be disciplined about regular saving over an extended period, but they’re also a potentially useful present for children, grandchildren or other loved ones. You can set up the plan on their behalf, building a steady long-term exposure that will hopefully grow to be really valuable over time.

Christmas, in other words, is a great time for investors, for all sorts of reasons – and closed-ended funds offer a convenient and attractive way to secure stock market exposure at this time of year.