How Savvy Active Investors Should Handle Black Friday

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Last year, Americans spent $57.4 billion on Black Friday weekend sales (counted as running Thanksgiving through Sunday) and all indications are that 2014's spending surge will be just as big. But consumers who have waited all year to get bargains from Apple (AAPL), Walmart (WMT) and Amazon (AMZN) might want to look at the stocks of those companies as well.

Many investors -- preoccupied with turkey, stuffing, mashed potatoes, pumpkin pie, football games and all those sales -- may overlook that the stock market is open from 9:30 a.m. to 1 p.m. Eastern on Black Friday. But what's more important is that Black Friday and the week leading up to it are historically bullish for the stock market.

Going back to 1950, the S&P 500 (^GPSC) has rising during Thanksgiving week 44 out of 64 years, or 69 percent of the time, with an average gain of 0.78 percent. Most gains came on the Wednesday before and Friday after Thanksgiving, which rose 54 of those years, or 84 percent of the time.

Boosted by Holiday Hoopla

Similar results can be seen during the lead-ups to Christmas, New Year's, the Fourth of July, Labor Day and Memorial Day -- though never Arbor Day. There are a number of theories as to why this occurs:
  • Perhaps the most widely accepted, though least scientific, is that investors, like the public at large, are generally in a good mood before a holiday and more likely to be buyers.
  • One theory better rooted in stock market mechanics is that short sellers don't want exposure to the extended news cycles over holidays, and as a defensive measure buy up stocks to close out their open positions.
  • Perhaps the explanation that makes the most sense is that with so many market participants already on vacation around the holidays, trading volume is very thin. And since over time, the market has a bullish bias, the light volume makes it easier to drive the indexes higher with a relatively small amount of buying pressure.
But whatever the true reasons are, can you use it to your benefit?

A Strategy for the Nimble Investor

One way you could would be to overweight your portfolio toward stocks in the week prior and then take profits on the last market day before the holiday or in the case of Thanksgiving, on Black Friday itself. This is key because the data shows that the market tends to act bad immediately following a holiday -– supporting the notion that most pre-holiday bullishness is transitory, based only upon emotional factors.

A study by The Journal of Economic Research theorizes that an investment strategy that stays in all cash during the majority of the year and only invests in the stock market around the holidays, could potentially outperform major indexes over time.

Of course, nothing works perfectly every time. For example, in 2009 the Dubai sovereign debt crisis was announced on Thanksgiving, effectively killing any "good will" on Black Friday, sending the market down over 2 percent for the day.

The bottom line seems to be that if you are an active and nimble investor, you might be able to take advantage of the bullish bias during the holidays to add to your bottom line. However, for the rest of us, it is probably best just to loosen your belt, have more pie and enjoy the games.

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How Savvy Active Investors Should Handle Black Friday

Managed to get that raise or promotion? Fantastic -- now don't go out there and spend it all immediately. In classic "keeping up with the Joneses" fashion, too many of us see an increase in salary or a sudden windfall (like an inheritance) as an excuse to take our lifestyle up a notch. We buy bigger houses than we need, get the latest gadgets even though ours work just fine,and spring for fancy steak dinners just because we can.

​Instead, whenever your financial situation gets a boost, consider the best ways to put that money to work for you. The truly wealthy are those whose money continues to grow and earn them more, even when they're not actively doing anything with it.

The average American household that carries credit card debt holds a balance of around $15,000. If you're among those who have a credit card balance, you've probably seen the little chart on your monthly statement telling you how much you'll pay in interest over the next several years if you make only the minimum payment. (If you haven't, look at it.) The same chart will also compare that to a "suggested" payment that's slightly higher. 

​Our recommendation? Throw everything you can at paying your balances off as fast as possible. And make sure not to take on any additional debt in the future; if you can't pay for a consumer good out of pocket, don't finance it.
We don't demonize student loan debt the way we do credit card debt because we see an education as an investment -- and higher education often is the difference between one income bracket and another. Similarly, many people justify taking out a car loan by stating that they need a car to get to work.

​That said, debt is still debt, and the longer you take to pay it off, the more interest you'll pay. Once you've freed yourself of credit card debt, paying down your car and student loan balances should be next on your list.

Whether it's to handle an unexpected car repair, a sudden illness or a major plumbing problem, you should always have some money set aside to cover unforeseen expenses. Set up a regular monthly transfer from your checking to your savings account to earmark this money before you're tempted to touch it. If necessary, cut back in another budget category (like eating out or entertainment) to free up the funds to save more.

​Putting aside a little each month could prevent you from getting socked with a hefty bill you can't afford and then need to finance.

No matter your age, you should be adding to your retirement funds -- such as your 401(k) or individual retirement account -- each month. Just setting aside money sporadically won't cut it; you need to identify how much you'll need to live on once you stop working and monitor whether you're on track to reach that amount.

​Here's a quick-and-dirty rule of thumb: multiply your annual spending by 25. This is the amount you'll need in your retirement portfolio, if you assume that you'll withdraw 4 percent per year to live on during your retirement. In other words, you'd need $1 million in your portfolio to live on $40,000 annually. Creating a plan will help you make sure you're able to retire the way you envision.
A home is a big investment, and sometimes that investment doesn't wind up netting you the return you thought it would.

The biggest culprit is having too large a balance on your mortgage, which detracts from your own personal stake in the current market value for your home. The sooner you pay this amount down, the better your home equity will be.

​You also want to be careful when purchasing a new home. Buying in a neighborhood that's on the downward spiral or buying the most expensive home on the block, likely won't net you a good return when it's time to sell. Also take care to stay away from custom renovations (like turning the garage into a recreation room), which could negatively affect your resale value. 

Paying high investment fees eats away at your gains. And since your gains compound over time, this creates a domino effect that can really chip away at your wealth. Take a close look at your investment companies' fees and shop around to make sure they're not taking more of your money than they need to be.

If you don't have a long-term investment vision and are simply playing the market, you could seriously undermine your wealth-building potential. Stop paying attention to market fluctuations, media pundits and the stories of your friends and family. Instead, create your own long-term investment strategy that will maximize your overall returns. Resist the urge it play it ultra-conservative (or fall for get-rich-quick schemes) and educate yourself on the best way to make your dollars work for you.

​If you're having trouble making sense of your options or want a second opinion, seek the help of a trusted financial adviser.
Based on your experience and seniority level, education and industry, you should have a fairly good idea how much you ought to be making at your job. If you don't, check out a site like PayScale to get a ballpark figure.

If you're not making what you're worth, you're doing more than leaving money on the table; you're also losing all the compound growth and investment returns that money could be generating for you. Invest in yourself with professional development and continuing education, make the case for that raise or promotion, or seek out a company who will value you higher.

If you don't have proper insurance coverage, you're taking a very big risk that could come back to bite you. Too many people think the worst can't happen to them, but the hard truth is you can't predict the future, and scrimping on sufficient insurance is never a good idea.

Of all the things we're hesitate to part with our money for, adequate insurance coverage should not be one of them. No matter your age, everyone should be properly covered with:

  • Health insurance.
  • Disability insurance.
  • Homeowner's or renter's insurance.
  • Flood insurance (if you live in a flood-prone area).
  • Umbrella liability insurance (especially if you own a small business).

If a spouse or children relies on you for support, make sure you have a decent term life insurance policy, as well.

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