Do large cap stocks boost portfolio performance at year’s end?

With the approach of the holiday season, holiday-related investment advice has become increasingly fashionable. Here is the latest: a claim of a ‘less well-known fact’ that large-cap stocks outperform small-cap stocks in December versus the ‘well-known fact’ that the reverse is true in January. The article then suggested a simple strategy to boost one’s portfolio: overweight large-cap stocks in December, then switch to small-cap stocks in January.

How much advantage can one obtain using this strategy? We decided to test it.

We used the SP600 Barra Value and SP600 Barra Growth indices as proxies for small-cap stocks (historical data is available starting July 2000), and the SP500 index as a proxy for large-cap stocks. We calculated the average monthly percentage returns of the two SP600 indices for December followed by January of the next year, and then compare the results to those of the SP500 index, in each case for the years from 2000 to 2012. The results are summarized in the following table. Consistency (C) with the above claim is marked next to December and January returns, respectively.

Surprisingly, we find that it is essentially random — there is no discernible correlation.

No wonder that this ‘fact’ is less well-known—it is not a fact, and neither is the other ‘well-known’ assertion. As far as we can tell, both are without empirical foundation. If there is any advantage at all to these schemes, it is certainly not sufficient to constitute a sound investment strategy once trading fees and applicable taxes are considered. At the very least, the proponents of these claims have some work to do, providing specific data and sound analysis to back up their assertions.

Year Large Dec Small Dec C Large Jan Small Jan C
2000 -2.43 3.64 N 7.03 9.18 Y
2001  1.45 1.56 N -1.11 0.06 Y
2002 -1.39 -1.95 Y -0.67 -6.6 N
2003  5.27  0.42 Y 5.42 2.67 N
2004  1.85 -1.05 Y -2.49 0.33 Y
2005  0.91 -1.30 Y  0.15 6.72 Y
2006  1.79  0.11 Y -0.18 3.37 Y
2007  0.92 -1.21 Y -9.81 -1.48 Y
2008  3.35 20.38 N -5.37 -13.23 N
2009  0.38  9.15 N  2.15 -4.50 N
2010  4.84  7.31 N  2.05  0.14 N
2011  2.11  3.62 N  5.97  7.15 Y
2012  3.46  5.95 N  3.95  4.12 Y

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