Salient to Investors:
Professor Marshall Nickles at Pepperdine writes:
The most broadly disseminated personal investment advice is mediocre; otherwise the public would likely be wealthier.
Buying stocks on November 1 and selling on April 30 – the Favorable Period Strategy (FPS). Buying stocks on May 1 and selling on October 31 – the Unfavorable Period Strategy (UPS).
The Ulcer Index – the size of price declines from stock market peaks over a period of time – for the period 1970-2005 for the DJIA was 13 percent versus 16 percent for the S&P500 and higher for the Russell 2000 and others broad market indices. During severe market declines, indexes with higher Ulcer Index readings fall faster and further in price.
The central risk of simply buying and holding the DJIA is is that it is easy to stick with in a rising market but not in a falling market – facing drawdown, or unrealized loss, when everyone is often so negative and the temptation to sell is irresistible.
A buy and hold strategy can face a market moving sideways or down for periods as long as ten years – the total return for the DJIA during the 1970s decade was only 3.65 percent.
Periodic losses require gains that are much larger than the losses themselves in order to offset them. A $10,000 portfolio earning 17 percent over a ten-year period would grow to $48,070, but the a $10,000 portfolio losing 10 percent of its value every other year, but earning 27 percent in the alternate years would grow to only $19,500. The portfolio that loses 10 percent in alternate years would need to earn 52 percent during the positive years to match the first portfolio.
From January 1973 to October 2002, 4 of the five bear markets experienced market lows during the period May 1 to October 31.
From 1-1-70 to 12-31-05, $10,000 fully invested in the DJIA from November 1 to April 30 would have returned 1,681 percent versus 1,266 percent for a buy and hold strategy and minus 15 percent for a strategy invested from May 1 to October 31.
Investing only in the year before the presidential election and in the money market for the other three years the return was 2,406 percent and with no losing years.
Investing in the DJIA from November 1 to April 30 only, but invested for the entire pre-presidential election years (9) during the period would have returned 4,685 percent with 5 losing years.
Read the full article at http://gbr.pepperdine.edu/2010/08/seasonality/