he Canadian and American stock markets have a long history of experiencing very strong growth in the months of November through to April. These markets also experience above-average weakness in the months of May through to October.
Sell in May and Go Away
One could have done very well by simply owning stocks in the “strong months” (November to April) over the last 62 years. The evidence is in the numbers. If we examine the returns of the Toronto Stock Exchange in this time frame, the returns of $100,000 invested from 1956 to present, during the months of May through October (the Weak Months), would be worth just $71,573, a decline of over 28%.
That same $100,000 invested in the strong months of November through April, would be worth an astounding $12,431,260 (to October 31, 2008).
Turning Points
Robert S. Cable, Senior Wealth Advisor, Director, Wealth Management, of the Cable Group at ScotiaMcLeod, has researched this seasonality pattern for 30 years, and has discovered a method to “fine tune” when to best enter and exit the market closer to the actual seasonal turning points. Mr. Cable points out in his book “Investing on Autopilot”, that this approach allows investors to stay invested beyond April if the market is still strong. Similarly, the Cable Group uses this indicator to enter the market in the fall only after the decline, by statistical analysis, is likely to be over. Sometimes this signal does not appear until December, or even January. He has found that a well-researched method, based on statistical probabilities, is far superior to one that is opinion-based and essentially relies on guesswork. I have to agree. His record is proof.
The Record
Robert Cable’s record using the buy and sell triggers compared with that of the TSE’s returns, from November 1, 1970, to October 31, 2008, is very impressive and too convincing to ignore.
Starting with $100,000, a buy-and hold strategy of simply owning the TSE index and riding out the ups and downs would have grown to $1,112,166 over this time frame. Not bad, but lots of grief along the way.
Using the seasonal pattern approach with a large Canadian growth mutual fund (AGF Canadian Growth Equity), the same $100,000 invested over the same time period, had grown to $16,931,614! And that’s with roughly half the amount of market exposure.
Missing the Five “Best” Days, Missing the Five “Worst” Days
Cable highlights the work of Birinyi Associates, an investment research firm in Connecticut, in his book “Investing on Autopilot”. Birinyi looked at the hypothetical results of investing in the Standard and Poor’s 500 Index from February 1966 through late October 2006. During those 40 years, an investment worth $1000 in this index would have grown to $15,388. By missing just the five best days of every calendar year, that same investment of $1000 would have been worth only about $86.
Birinyi then looked at what would happen if you missed the five worst days each year. That same $1000 invested in the same index and missing just the five worst days each year grew to $2,155,180!
No system can isolate the five best or five worst years. Looking at these hypothetical results however, missing the five best days could cost you close to $15,000. Missing the five worst days put you $2.1Million ahead of the market.
Summary: Missing the markets worst days is far more worthwhile than pursuing the markets best days.
Advice for Investors
It’s important to note here that no investment strategy is perfect, and will not work every year. It’s also worth mentioning that the seasonal pattern of investing should not be used as the sole method to invest within a portfolio. It should only be used as a component of an overall balanced portfolio. No single strategy should be the entire portfolio.
The recent market volatility has taught us some hard lessons. Having a set of rules to follow will most certainly eliminate some of the human errors that often occur. If you would like to learn more about this and other programs offered at ScotiaMcLeod, please contact me to schedule an appointment.