This analysis is only looking at the price of the S&P 500, not the total return. An investor that sits out half of the year will miss out on about half of the dividends paid, which are always positive.
Another consideration is taxes. The short-term gains produced by selling after 6 months are taxed at normal income rates (or slightly higher), as is the interest from the "risk free" interest-paying investment held the other 6 months. Long-term capital gains and dividends are taxed at favorable rates.
Its ridiculous how many of the timing/tactical strategies ignore these factors because of the complexity, even though they introduce massive drag vs buy & hold.
With the amount of data available, we should be able to do these sorts of backtests fairly accurately. At some point I hope I can compile a bunch of open prices/distribution data sets for people to use. You can easily get, for instance, daily close and distributions for VFINX (Vanguard's S&P 500 fund) back to 1980, but its not neatly compiled anywhere. Trickier is classifying distributions (dividend/LCG/SCG), but again all the required data exists (Sadly it means manually trawling through Edgar)
If you're interested in getting hold of historic tick data you could go to a data provider (for a price) or perhaps more convenient would be to see if you could get access to a Bloomberg terminal.
Academics that research this area, especially questions of policy and market efficiency of both market pricing and funds, can be extremely open about their work, and are often keen to share.
There are several versions of the S&P 500. The version used here is the price index, which doesn't include dividends. The total return index, ^SPXTR[1], does account for dividends.
But that difference is diminished when you also take into account that you would be earning interest on your capital in the period you were out of the markets (e.g. through a savings account or short-term bonds).
> The question then is: What do you do with your cash when it’s not invested in the stock market? Assuming we put them in high caliber (“risk-free”) interest bearing fixed income instrument they would still give us a return on our investment while we’re out of the stock market. Based on data from various historical sources I’ll stick with an average annual geometric risk-free rate of 5%.
I must be misunderstanding this, otherwise WTF??? Tell me where I can get this risk-free 5% rate.
About a decade ago in Australia, at-call online savings accounts in Australia were getting a 6% interest rate. Nowadays that's down to 3.75% with an extra requirement to deposit $1000 every month (but still at call).
He fit some time periods that happen to avoid the 87 crash and most of the 2008 crash. It's funny, when stats tell you this story, it feels more compelling than some instruction to just avoid the two largest market crashes since 1929, but in reality neither are telling you anything.
If you chop up financial data sets enough, you can always find some generally defined subsets that perform better than the whole set.
OCTOBER: This is one of the peculiarly dangerous
months to speculate in stocks in. The other are
July, January, September, April, November, May,
March, June, December, August, and February.
Shouldn't he test his model on another dataset besides the one used to generate it? Maybe it's overfitted. It would have been nicer to see the whole thing developed with only a decade or two of data, then shown to work for all the other decades too.
I moved a large portion of my IRA to cash towards the end of last year, there were just too many red flags and unknowns, and seemingly unexplainable reactions to the daily news cycle, and the market had performed just so well over the last several years, it seemed like a peak would have to be near.
Of course, what actually happened is I managed to miss a 15% bump in IJT, a 5% bump in VT, a 6% bump in IYY, and about flat in GLD. The two stocks I held directly however did go down about 10% since selling.
So yeah, the two most basic pieces of advice; you can't time the market, and don't hold individual stocks (without spending the time to actively manage your portfolio), both rang quite true for me at least the last 6 months. I just haven't gotten back in, because I'm sure the day I decide to do that will prove to be the actual peak. :-/
Sounds like you aren't listening to your own advice about timing the market. Just put the money back in and know that 20 years from now it will(more likely than not) be worth more than it is today.
In short, while returns for the May to October period may on average be less, they are positive and if anything, the returns for this period have been increasing. The one notable exception being the incredible selloff in 2008. Taxes are a more consistently important issue to consider.
I heard this many years ago. Asking a fund manager colleague, she mentioned it was mostly a fear of liquidity, not a question of HFTs, but should bad news strike, the markets she tended to invest in didn't hold up well (or were not perceived to hold up well, perception causing reality) and price falls were irrationally large, due to this lack of liquidity.
Now, a fund manager that tends to hold onto a stock when its falling by definition sees the falls as irrational, but this was confirmed by her colleague that walked into the room. He added "what's really important is when retail investors start buying, then that's really the time to sell [as after the stock gets popular with the public, who's left to pump it up]."
To ignore taxes and to assume that you're only holding an S&P500 index, it's 2yearsfee (let's say $10 * 2 * 20==$400). Kind of insignificant.
To not ignore taxes though it becomes more clear. If you literally sell every May, you're never holding for more than a year. In the US at least you're always paying short term capitol gains. This is the real killer here.
Given it's an analysis of the S&P500 you just buy/sell SPY and follow the index. Not that I recommend that, for reasons other people here have pointed out.
Seasonal stock market tendencies are real. I created a website (Seasonalysis.com) which quantifies these tendencies. Past performance is no guarantee of future returns but the information gleaned can be incredibly useful if combined with other indicators/analysis.
Not really... It depends on the basis of his intuition. If you knew some details about the market that others did not it would make sense to act on that information regardless of if you needed the money tomorrow or forty years from now.
EDIT: Here is a graph highlighting how important including dividends is: https://i.imgur.com/YZSq6K3.png
Another consideration is taxes. The short-term gains produced by selling after 6 months are taxed at normal income rates (or slightly higher), as is the interest from the "risk free" interest-paying investment held the other 6 months. Long-term capital gains and dividends are taxed at favorable rates.