How can you double your retirement nest egg? Simply make two allocation changes per year — only two. Most investors have heard the saying “Sell in May”. You will find two opposing views in the financial media on this strategy. In May, you will hear that it is not worth the trading costs or that the strategy does not really work. In October, you will hear about how the strong season in equities is upon us and the “Santa Rally” is just around the corner and you should be fully invested. And these two opposing views come from the same sources. So which is it. We looked at the real numbers.
Many journalists seem to take literally the sell in May saying. I sometimes think articles are written to obscure the seasonal tendencies of the stock market from the public. Think about it, if investors wised up and put their funds in cash half the year, the financial community would lose half their fees.
Since monthly returns are easier to find and calculate than daily returns, most financial journalists use the lazy approach and simply use the posted monthly returns. But knowing more specific dates can significantly affect your returns and by just adding the last few days in October and first few days in May you can capture the change-of-month bump in returns.
An article that got my attention analyzed the Russell 2000 index (small caps). I’ve had been working on the seasonal tendencies of the S&P 500 index, but decided to run the Russell 2000 numbers and make a very simple adjustment. The numbers were surprising; the seasonality of the Russell 2000 index was much stronger than the Dow Jones Industrials or the S&P 500. Using the same dates as the article and an initial $10,000 investment the Buy & Hold Strategy returned $72,100 and the Lazy Journalist Strategy (November 1 to May 1) ended with a respectful $81,300. But with a slight adjustment of being invested one additional trading day on either side of May and November we increased our return to $112,800. Hmmm. So dramatic I double and triple checked it. And remember, the seasonal strategies are invested in cash half the year.
So how did I calculate the returns? The investment window opened on 28 October 1987 and ended on 28 October 2011. Buys and sells occur at the opening price of the given dates. We assume a non-taxable retirement account and negligible transaction fees. Dividends are not included and the seasonal strategy sits in cash when not invested. I came up with the same results as the article for the Buy & Hold Strategy and Sell-in-May Strategy. Starting with an initial investment of $10,000 here are the results:
Buy & Hold: Ended with $72,100 for a 8.58% annual return and a 16.50 ulcer index.
Nov 1 thru May 1: Ended with $81,300 for a 9.31% annual return and a 9.31 ulcer index
Oct 31 thru May 2: Ended with $112,800 for a 10.62% annual return and a 7.63 ulcer index
Our own Advantage strategy: Ended with $200,800 for a 13.49% annual return and a 6.67 ulcer index
Picking a calendar date is not the most advanced seasonal strategy, but at the very least it proves seasonal analysis should be in your investor toolkit. Best of all, with seasonal strategies you have half the market exposure missing out on the summer swoons and fall corrections; and if you move your money into corporate bonds or T-Bills when not invested in the market you can pad your numbers.
Can you beat these calendar date strategies? Absolutely, with more advanced seasonal strategies. Seasonal filters are not correlated with other technical indicators so they can be combined for better results. Ravenstone Research Inc. did this and developed the Advantage model — a Seasonally Modified Buy & Hold Strategy™ that takes into consideration the market trend during the transitions between the strong and weak season. It returned $208,800 when invested in cash during the weak season or $281,600 when invested in T-Bills or four times the Buy & Hold portfolio in 24 years. If you want to learn more about how a simple easy-to-execute strategy can double or triple your nest egg return and help you sleep better at night visit the free Learning Center at TSP & Vanguard Smart Investor website.