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December's S&P 500 Effect: A Slightly Negative but Buy-the-Dip Opportunity

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  Published in Stocks and Investing on Saturday, December 6th 2025 at 13:12 GMT by The Motley Fool

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How to Make the Most of the S&P 500 in December: A 2023 Guide

December is the most celebrated month of the year, but for the stock‑market investor it’s often a mixed bag. On the one hand, holiday‑season retail sales can lift stocks; on the other, institutional investors unload positions before year‑end reporting, creating a “holiday sell‑off” that can drag the S&P 500 down. The result? A month that historically has been a bit of a roller‑coaster. Yet, if you approach December with a clear plan, you can actually turn the month’s volatility into a buying advantage.

Below is a concise, no‑frills summary of the key points from the latest MSN Money article, “Here’s the Smartest Way to Invest in the S&P 500 in December,” including insights drawn from the linked resources that expand on tactics, data, and tax considerations.

1. December’s Historical Performance – The “December Effect”

One of the article’s opening observations is that the S&P 500’s average return in December is slightly negative – about –0.2 % over the past decade. While the dip isn’t huge, it’s statistically significant enough that many investors use the month as a “buy‑the‑dip” window. Historically, the market recovers well in January (the “January Effect”), so buying at a temporary low can lock in a lower entry point and set the stage for a stronger long‑term return.

Linked Insight: A supporting data piece on MSN shows that the “December effect” has been consistent since the 1980s, with the market sometimes falling 5–7 % before bouncing back in the new year. The article advises investors to keep an eye on these trends but not to panic.

2. Dollar‑Cost Averaging (DCA) – The Most Reliable Approach

Instead of attempting to time the market (a notoriously difficult task), the article recommends using dollar‑cost averaging. By investing a fixed amount (say, $500–$1,000) each week or every two weeks during December, you automatically buy more shares when prices dip and fewer when they rise. Over the long run, DCA smooths out volatility and reduces the risk of a “big‑money” misstep.

Linked Insight: A side article on MSN explains the mechanics of DCA in detail and demonstrates with back‑testing that a consistent $1,000 monthly contribution during December over 10 years has historically yielded a 2–3 % better return than a lump‑sum investment on a single date.

3. Target the Holiday Sell‑Off – A Window of Opportunity

December 20–24 sees a surge of short‑term selling as fund managers and tax‑loss harvesters unload positions before year‑end reporting. The article points out that buying on or just after these sell‑offs can capture significant price reductions.

The best days are typically the last trading week of the month, especially if you’ve waited for the “worst” dip. If you start buying on the first Friday of December, you’re likely to be in a position by the time the sell‑off hits.

Linked Insight: The article includes a chart from a financial analytics firm showing the average price drop on each trading day of the last week of December. The steepest drop occurs on December 21, with a typical 2–3 % decline, before the market recovers in the following days.

4. Use a Low‑Cost S&P 500 ETF

For most investors, an index‑fund approach is the smartest way to gain broad exposure. The article lists the most popular ETFs—SPDR S&P 500 ETF (SPY), iShares Core S&P 500 ETF (IVV), and Vanguard S&P 500 ETF (VOO)—all of which have expense ratios below 0.10 %. The article highlights that the spread between these funds is minimal, so the choice often comes down to broker commissions or platform preferences.

Linked Insight: A side page on MSN explains the nuances of each ETF’s structure, liquidity, and tracking error, reassuring investors that all three track the index very closely.

5. Tax‑Advantaged Accounts – Maximize the December Advantage

December is a prime time to bump up contributions to a Roth IRA or Traditional IRA (or a 401(k) if you have a 401(k) match). By maxing out your contribution limit, you can invest the extra money into the same low‑cost S&P 500 ETF and let the tax advantages compound over time. The article emphasizes that the tax benefits can outweigh the temptation to keep the money in cash.

Linked Insight: The MSN article links to a tax guide that explains how the early‑year contribution window works for IRAs and 401(k)s, including the 15‑day “grace period” for 2023 contributions.

6. Avoid “End‑of‑Year “Buy” Fads

A common pitfall in December is the so‑called “buy‑the‑rise” strategy—purchasing stocks in the hopes of riding a final rally. The article cautions that many institutional managers, in an effort to hit end‑of‑year targets, inflate stock prices in early December. While the market may recover later in the year, buying at the high can leave you overvalued for the long run.

Linked Insight: A linked study demonstrates that the median price paid in December by active managers is 2–3 % higher than the price paid in January, reinforcing the importance of buying low.

7. Diversify Beyond the S&P 500

While the article focuses on the S&P 500, it also acknowledges that a pure index approach carries sector‑specific risk. To hedge, it suggests adding a modest allocation (e.g., 10 %–15 %) to a broad international ETF like Vanguard Total International Stock ETF (VXUS) or a small‑cap index like Vanguard Small‑Cap ETF (VB). This extra layer of diversification can help cushion any S&P‑specific downturn.

Linked Insight: The MSN piece references an analysis that shows a 10 % allocation to international equities improves portfolio volatility by roughly 0.8 % without sacrificing long‑term returns.

8. Stay Focused on the Long‑Term Horizon

The overarching message is simple: December’s volatility is best viewed through a long‑term lens. Whether you’re investing for a retirement goal, a down‑payment, or just a solid diversified portfolio, the most effective strategy is to stay disciplined, stick to low‑cost index funds, and let time do the rest.

The article ends on a note of encouragement: “Buy the dip, invest systematically, and let the S&P 500 grow with you.” It reminds readers that past performance isn’t a guarantee of future results but that a methodical approach can dramatically improve the odds of a favorable outcome.

Final Takeaway

December is not a period to avoid, but a window to leverage. By employing dollar‑cost averaging, buying during the holiday sell‑off, investing in low‑cost S&P 500 ETFs, maxing out tax‑advantaged accounts, and staying diversified, you can purchase shares at a relative discount, benefit from the annual “January rebound,” and build a robust portfolio that grows with time. Just remember: consistency beats timing, and a disciplined plan is the smartest way to navigate the December market.