Now Is the Best Time of the Year to Invest

If you like historical stock market data and are looking to invest new money in the market, you can't just like this time of year -- you've got to love it.

Judged by the past 57 years, we're now in the middle of the three very best months of the year for the stock market. And they are usually followed by two of the three next best.

I'm not making it up
Here's the data, as collected by moneychimp.com -- home of sometimes obscure, sometimes highly relevant numbers:

Add that all up (or multiply to get the correct answer), and here's what you get:

Average return, November to April: 6.52%.
Average return, May to October: 0.98%.

Yowza.

Surprised?
That's one of the lesser-reported stock market stats I've ever seen.

Of course, you've probably heard the old Wall Street adage to "sell in May and go away." So, there's some conventional wisdom that the summer has historically poor returns. Many are also aware that October (mother of a pair of Black Mondays, and more than a few other Black Days of the Week) is a scary month.

January, on the other hand, has clearly been a very good month for market returns. For 10 of the past 14 Januaries, the market has had positive returns. Of course, 2008 is off to a pretty poor start.

There has to be an explanation for this
Are there reasons why there should be any disparity in the seasonal returns of stocks? Well, you can create some if you want. January buying, for example, could be explained by people spending their year-end bonuses and New Year's resolutions to be more financially responsible.

On the other side, the summer is a good time to get out of the home and office and concentrate on the weather rather than discounted cash flow equations. We can create any number of rationales for the numbers without any good way of proving them.

That said, I decided to look at some of the more prominent stocks in the market to see how they've fared over the past three six-month periods:

Obviously, when you get down to the level of individual stocks over short time periods, the results will not conform exactly to the historical averages -- and some of these companies illustrate that well. That said, the broader cycle of the past 20 months, with the exception of this past November and the last couple of days, has resembled what we've seen over the past 50 years.

Ready to go
And that's one of the reasons why our Motley Fool Hidden Gems small-cap investing team is so excited. Following a very volatile past six months, the Russell 2000 small-cap index lagged the S&P 500 by about six percentage points on the year. In other words, the stocks we focus on -- small caps -- are trading at cheaper relative valuations than they have since late 2005. Add to that the historical outperformance of small caps and the fact that we're now in a favorable time of the year for stocks, and we're looking forward to not only the next six months, but the opportunity to hold the great stocks we discover for the next decade or more.

If you'd like to join us at Hidden Gems and read about the two stocks we're recommending in our latest issue, click here to try the service free for 30 days. Our picks are currently outperforming the broader market by 20 percentage points on average, and there is no obligation to subscribe.

This article was first published Oct. 25, 2007. It has been updated.

Bill Barker owns shares of Berkshire Hathaway. The Motley Fool also owns shares of Berkshire Hathaway. Berkshire and Pfizer are Motley Fool Inside Value recommendations. Berkshire is a Stock Advisor pick as well. JPMorgan is an Income Investor selection. The Motley Fool has a disclosure policy.