Method

• Howard Silverblatt, senior index analyst at Standard & Poor's, calculated how well the strategy would work if someone invested using the following method: buying the S&P 500 for the first trading day of the month, i.e. buying at the market close on the day before the first trading day and selling at the market close of the first trading day; holding the money, without earning any interest, until the next month; and then reinvesting the previous month's proceeds in the same way.
  
  

The Strategy Applied to the First Decade of the 21st Century

• ABC News, quoting an S&P report, wrote that someone who invested $10,000 using the first-day-of-the-month strategy from Dec. 31, 1999, to December 1, 2010, would have ended up with $13,816. Someone who invested the same $10,000 for the same 10-year time period, but bought once and then held for the entire period, would have ended up with only $8.209. The first-day-of-the-month investor would have almost 70 percent more than the buy-and-hold investor.
  
  

Theories About Why it Works

• No one knows for sure why the first-day-of-the-month strategy works. It might be a statistical fluke. Perhaps the reason is that there is an influx of money into stocks on the first of each month, with individual investors putting money into retirement accounts and institutional investors starting a new reporting period. Or maybe there's a psychological component, with investors feeling that a brand new month represents a new start.
  
  

Risks

• There is no guarantee that the first-day-of-the-month patterns observed in the past will continue. It's especially risky because no one has yet been able to pin down a definitive reason for why the strategy works. S&P analyst Howard Silverblatt said that it would be "ridiculous to invest in something you don't understand." Even if the pattern were to hold, small investors could lose more than they would gain because of increased trading fees.
  
  

The First Eight Months of 2011

• To illustrate the risks, consider that from January to August, 2011, the S&P 500 rose on the first days of the months only three times, and it fell five times. June 1, 2011, was a particularly brutal day, with the S&P 500 falling 2.3 percent -- the worst day for the index in almost a year.