Why do stocks go down at the end of the year?
Image source: Getty Images. If you are an investor or if you follow stock market news regularly, you might have heard the theory that the stock market takes a dip at the end of the year. Lets take a closer look. Compare stocks and shares ISAs If youre planning to open a stocks and shares ISA, choosing the right platform is important. To help you narrow down the choices, weve created a list of some of the top stocks and shares ISAs. Analysts generally attribute the fall in stock prices at the end of the year to tax-loss harvesting. This is where investors evaluate their portfolios and sell stocks that have underperformed in value throughout the year. They do this so that they can claim capital losses against their tax bill. This is especially true in countries where the tax year ends at the end of the calendar year. An example is the US, where the tax year starts on 1 January and ends on 31 December. The ultimate effect of a stock sell-off at the end of the year is a drop in stock prices. The drop in prices at the end of the year is almost always followed by a rise in prices at the start of the new year. This is known as the January effect. According to some experts, the January effect is the result of investors who may have sold off their underperforming stocks at the end of the year returning to the market to repurchase them. They rebuy them in order to hold them for another year of potential gains. This demand from those who have sold off, as well as bargain hunters, tends to drive up stock prices. Another alternative theory for the rise in demand in January is the effect of year-end bonuses that individuals receive from their workplaces, which are then invested in the stock market. Some also believe that the January effect has something to do with consumer sentiment. Because January marks the start of a new year, some investors may believe that its the best time to begin their investing journey. These all-too-common investing errors can cause you to miss out on the long-term wealth-building power that shares can hold. To help you side-step these pitfalls, and move forward on your path to wealth-building, weve created a free report, The 3 Worst Mistakes New Investors Make. Just enter you best email below for instant access to your free copy. Click here! First of all, the seasonal anomaly of stock prices dropping at the end of the year and then rising in January is currently hotly debated. For example, although the January effect theory enjoyed some acceptance in the past, some argue that modern markets are too efficient to be influenced by such a phenomenon. Furthermore, more people invest using tax-sheltered investment vehicles such as stocks and shares ISAs here in the UK. Consequently, they have less reason to sell at the end of the year in order to claim capital losses. Still, the phenomenon is real enough to have some serious research and news coverage behind it. So that really makes you think. Although it sounds good in theory, many experts will tell you that trying to time the market simply doesnt work. The proven way to profit from the stock market is to buy good, solid stocks and hold them for the long term. Swings in the stock market in the course of the calendar year are relatively common. Over the long term, however, the market has an upward bias. Youll almost always make gains if youre patient. Of course, past performance is not a predictor of future results. If youre looking to get more value for your cash when buying stocks, a much better bet, rather than trying to buy at the right time is to use the pound-cost averaging strategy. This is where you invest a specific sum of money at predetermined intervals over time. By purchasing stocks at various prices on a regular basis, you increase your chances of paying a lower average price for these stocks than you would if you attempted to purchase them at a time that you believe is just right. Get a free initial review lasting up to 1 hour, plus 50 off any follow-up advice. MyWalletHero has sourced you a 50 discount off the cost of advice when you find an independent or whole-of-market financial adviser through Unbiased.co.uk*. All advisers are FCA-regulated, qualified and give fully unbiased advice. To find yourself an adviser fast and for free  use the Unbiased matching tool. Find an adviser now! *This is an offer from one of our affiliate partners. For more information on why and how we work with partners, click here. About the author Sean LaPointe Sean is a personal finance writer with a strong passion for helping others become more financially literate and make better financial decisions. He covers everything from credit cards to savings to investing.