Are you interested in stock trading rules for beginners? The “four-year” rule is an important one to understand for growing your profits
Are you interested in stock trading rules for beginners? Most “market rules” turn out to be demonstrations of the fact that random events tend to occur in bunches. The “research” they grow out of generally consists of studying statistics until you find start-and-end dates of periods when a hypothetical indicator would have paid off.
In most cases, if you change the start and/or end dates, the market rules/indicators lose their advantage or go into reverse. Even if you stick with the same start and end dates, the indicator will still go into reverse eventually.
However, the four-year rule is an exception among other stock trading rules for beginners. That’s because it’s based on events that tend to recur in predictable phases of the four-year U.S. Presidential term.
Some statistics are worth a close look
From the election of Andrew Jackson in 1832 till the election of Donald Trump in 2016, the U.S. has gone through 47 complete four-year Presidential terms.
In the first years of each of these 47 four-year presidential terms (starting with the year after the Presidential Election year) the average result for the U.S. stock market was a gain of 3%.
In the second years (the mid-term election years), the annual gain averaged 4.0%. The average result for the third years (the pre-Presidential Election years) was a 10.4% gain. The average for the fourth years (the Presidential Election years) was a gain of 6.0%. (Source: Stock Traders Almanac 2022.)
This pattern probably comes about because of a couple of unchanging things about most U.S. Presidential Elections:
- First, most U.S. political office holders, regardless of party, want to get re-elected, or pave the way to the election of a successor from their own party.
- Second, U.S. Presidential Elections bring out many “swing voters” who might not bother to vote in less important elections. They tend to get interested in the Presidential Election because of the torrent of attention it inspires, in the media and in day-to-day conversation.
That’s why newly elected or re-elected presidents often introduce unpleasant necessities in the first year or at least first half of the term. (The best recent example is the need President Trump felt to confront China early in his term.) Swing voters (or voters generally, for that matter) will have had time to get over the shock of the news before the next Presidential Election. In fact, the unpleasant necessities of the first half of the term may have begun paying dividends by the second half.
When things are going well for swing voters, they tend to favour the current officeholder, regardless of party. This means current U.S. political office holders have an incentive to make swing voters happy in the time leading up to each U.S. Presidential Election, even if it means cooperating with the opposing party. They tend to start work on that goal around midway through the four-year U.S. Presidential term, often the time of the mid-term election.
That’s why we say the “four-year rule” is one of the most dependable rules of North American investing we’ve come across. It says that U.S. Presidents and office-holders generally tend to get a lot friendlier toward business and investors in the second half of each four-year U.S. Presidential term. Stocks usually (but not always) rise in response.
Stock trading rules for beginners: Everybody likes a rising stock market
Rising stock prices help people feel richer, so they spend more on consumer goods. This encourages capital investment and the launch of new businesses, which help create new jobs. All this spurs the economy to faster growth, at least in some industries and areas. That’s why it’s fair to say that a rising stock market tends to make everybody happy.
Though not universal, this voter-pleasing urge affects pretty much all elected officeholders in the U.S. That includes everybody from the top leaders in Washington, down to county-level dog catchers. It’s a fact of U.S. political life. Happy voters are apt to favour the incumbent. But that’s especially important in the second half of a four-year U.S. presidential term. Mind you, this is not like a routine occurrence that you can depend on from one year to the next. Results vary widely.
In the 47 post-Presidential Election years, North American stock markets rose in 22 years and went down in 24 years. In one of the 47 Election years, 1849, the market finished the year at the same level it started at—no change, in other words. (That’s bound to happen once in a while. In the 188 years since 1833, it happened just once.)
The 47 mid-term years had 28 rising years and 19 decliners.
The 47 pre-election years had 35 gainers and one loser.
The 47 Presidential Election years had 32 winners and 15 losers.
How to profit from the four-year rule
Dividing up the 47 four-year cycles as we’ve done reveals an interesting pattern. The post-election years are the weakest of the bunch, with a total 47-year gain of just 137.7%. Next up is the 47 mid-term years, with a total overall gain of 188.9%, 37.1% above the total gain for the post-election years. The next in the series, the 47 pre-election years, show a total gain of 489.6%—a standout total of 158.1% above the mid-term years’ total gain.
The actual Presidential-Election year — the source of all the fuss, you might say — show a total gain of 282.4%. That’s the second-biggest gain of the four years, and it’s a strong second. However, it represents a drop of 42.3% from the total 489.6% gain of the pre-election years.
Junior investors sometimes decide to confine their stock-buying to the pre-election and election years, because these two together outperform the other two. This, though, is a logical error. All four total-gain calculations show profits, after all. In addition, each of the four shows a wide assortment of gains and losses within its 47-year history.
That’s why we think the single best lesson to draw from all this is to avoid selling all or most of your stocks around the time of the mid-year election. You have to own stocks to make money in the stock market. Many studies have shown that the gains that come do so randomly. They come in years when the market goes up and in years when the market goes down, and everything in between.
When you trade in and out of the market, you run a big risk of losing money simply because you were out of the market on too many of those rare days when stock prices made a big single-day gain.
This is really just a part of the rule-to-beat-all-rules, or the surest route to stock market profit: Invest gradually throughout your working years, and sell gradually in retirement, when you need the money.
If you let investment indicators or predictions guide your buying and selling, it may at times seem to help your investment results. But in the long run, it’s likely to cost you money.
Use our three-part Successful Investor approach for all of your investments
- Hold mostly high-quality, dividend-paying stocks.
- Spread your money out across most if not all of the five main economic sectors:
Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
- Downplay or stay out of stocks in the broker/media limelight.
What do you consider to be the most important stock trading rules for beginners?
Do you invest based on any stock trading “rules,” or do you hold steady, looking for
good stocks no matter what?
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was published on March 7, 2023 and is republished on the Hub with permission.