How can you double your retirement nest egg returns? Simply by making minor seasonal adjustments. Many journalist seem to take literally the sell in May saying. I sometimes think articles are written to obscure seasonal strategies from the public. Think about it, if investors wised up and put their money in cash half the year, the financial community would lose half their fees and income. And this is just what seasonal strategies can do for you.
Since monthly returns are easier to find and calculate than daily returns, most financial journalists use the lazy approach and use simple monthly returns. Knowing the best seasonal trading dates will significantly affect your returns and by adding the last few days in October and first few days in May you can capture the change-of-month bump in returns.
The recent article that got my attention, analyzed investing in the Russell 2000 index (small caps). I’ve been working with the SP500, but decided to run the Russell 2000 numbers and make this very simple adjustment. What I found surprised me, the seasonals in the Russell 2000 index are stronger than the Dow Jones Industrials or the S&P 500. Using the same dates as the article and an initial $100 investment the Buy & Hold Strategy returned $721, the Lazy Journalist Strategy (November 1 to May 1) ended with a respectful $813, but with a slight adjustment of being invested one additional trading day on either side of May and November we increased our return to $1128. Hmmm. So dramatic I double and triple checked it.
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-and-Hold strategy and Sell in May strategy. Starting with an initial investment of $100 here are the results:
Buy & Hold: $721 for a 8.58% annual return and a 16.50 ulcer index
Nov 1 thru May 1: $813 for a 9.31% annual return and a 9.31 ulcer index
Oct 31 thru May 2: $1128 for a 10.62% annual return and a 7.63 ulcer index
Advantage I strategy: $2,008 for a 13.49% annual return and a 6.67 ulcer index
Picking a calendar date is not the most advanced seasonal strategy, but 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 crashes; and if you move your money into corporate bonds or T-Bills when not invested in the market you can pad your numbers and more than make up for lost dividends. Can you beat the Best Calendar Date strategy? Absolutely, with more advanced seasonal strategies. I 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 $2,088 if invested in cash during the weak season ($2,816 when invested in T-Bills). Yes, a simple easy-to-execute strategy can double or triple your nest egg return and help you sleep better at night. Invest Smart.
Written and edited by Michael H Bond for Almanac Smart
Categories: Seasonal Perspectives