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What’s the January effect and how does it help you on the ASX?

There’s a number of investing phenomenons floating around, and one of my personal favourites is known as the ‘January Effect’.

What is the January Effect?

The January Effect relies on market inefficiencies and suggests that you can benefit by investing in late December.

Under the phenomenon, share prices are meant to rise in January each year. That’s typically attributed to a share price decline in December as investors sell out of their losing shares.

Tax-loss harvesting is a process whereby investors sell a losing ASX stock, realise the capital loss for tax purposes, and then re-purchase the stock at the exact same price.

The January Effect relies on investors continuing to do this so that you could invest when everyone else is selling and see the stock appreciate to its fair value throughout January.

So, does it work, and can you cash in this December?

How you can cash in and make money

The S&P/ASX 200 Index (INDEXASX: XJO) has edged 0.89% lower since the start of December.

The benchmark index has fallen despite a number of winners this month including Nufarm Ltd (ASX: NUF) and Bega Cheese Ltd (ASX: BGA).

And while there have been some heavy losers such as Sigma Healthcare Ltd (ASX: SIG) and Whitehaven Coal Ltd (ASX: WHC), I wouldn’t be investing just yet.

The January Effect hasn’t been proven empirically to deliver consistent outperformance. In my view, you’d be better served by implementing a buy-and-hold approach in the ASX 200.

Despite markets being near their all-time highs, there could be some good buying opportunities at the moment.

WiseTech Global Ltd (ASX: WTC) shares are down 10.08% since the start of December but could be good value. There are question marks over WiseTech’s relative value and whether you’re getting bang for your buck.

I’d also be keeping an eye on CSL Limited (ASX: CSL) as we head towards 2020 after another strong year.

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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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