Don’t Call It Market Timing. But These Are the Best Months to Invest.

(Dreamstime)

For many of us, extra cash burns a hole in our pockets and leads to impulse purchases. A new study finds that many retail investors, especially those who frequent investing apps such as Robinhood Markets, instead put it into the stock market.

Their behavior contributes to the stock market’s volatility. And it also makes it more likely that actively managed mutual funds will lag behind the market.

These are two of the provocative implications of a new study recently published in the Journal of Accounting, Auditing & Finance. Entitled “Household Discretionary Wealth and the Cost to Mutual Funds,” the study was conducted by Robert Carnes of the University of Southern California, Jeremiah Green of Texas A&M University, and Nicholas Krupa of Clemson University.

The professors reached their findings by focusing on months with five Fridays. In these months, which occur about 35% of the time, workers who are paid weekly or biweekly receive an extra paycheck compared with other months. Since most individuals’ regular payment obligations—such as rent and utilities—are billed monthly, that extra paycheck often leads to a significant boost in discretionary income.

To investigate whether this extra income finds its way into the stock market, the researchers compared equity mutual fund flows in five-Friday months—such as this coming August, for example—with those in other months. Sure enough, they found that inflows are significantly higher, on average, in the months with extra paychecks.

Created with Highcharts 9.0.1Take FiveS&P 500’s average monthly total returnSince 1985Source: Hulbert Ratings

Created with Highcharts 9.0.1Five-Friday monthsAll other months00.20.40.60.81.01.21.4%

You might find it hard to imagine that five-Friday months would have this much impact on the stock market. But the professors argue that it makes sense. They cite other studies finding that about “80% of U.S. households are paid weekly or biweekly” and that “calendar-induced uneven paychecks account for 24%” of the monthly volatility of workers’ take-home pay.

Indeed, over the past 40 years, the S&P 500 index ’s average total return in five-Friday months has been significantly more than that of all other months—1.3% versus 0.9%.

Further confirmation came when the professors analyzed stock ownership at Robinhood, an online brokerage particularly popular among younger investors. The researchers found that stock ownership among Robinhood clients jumped significantly in five-Friday months.

The new study has a number of investment implications:

• The first is that jumping willy-nilly into the stock market anytime you find extra cash in your checking account is a far cry from investing according to a well-thought-out financial plan. It could lead your equity allocation to be higher than appropriate, for example. In any case, investors should view the extra paychecks in five-Friday months as an idiosyncratic feature of the calendar rather than a genuine increase in their annual income or overall wealth.
• Another implication is that the stock market on average performs better in five-Friday months. That doesn’t necessarily mean you should trade into and out of the stock market based on each month’s number of Fridays. But you can still exploit this tendency if, for other reasons, you have to take money out of the market or have a lump sum to invest. For example, when withdrawing, you might want to wait until the end of the subsequent five-Friday month to do so—and just the opposite when investing new cash.
• Yet another implication traces to the professors’ finding that actively managed funds lag the market by more in five-Friday months than in other months. This is for a variety of reasons, USC’s Carnes said in an interview, owing to the challenges managers face deciding when to put the influx of cash to work and choosing the stocks in which to invest. Simply put, fund managers, on average, lag the market—and the additional cash inflow in five-Friday months exacerbates the problem. This result provides yet another reason, among the many that already exist, to favor index funds.

Mark Hulbert is a regular contributor to Barron’s. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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