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A Tale of 2 Seasonal Investors

Posted By Barry Ritholtz On October 24, 2011 @ 11:30 am In Data Analysis,Markets | Comments Disabled

Several readers have inquired about the seasonality factor when it comes to equities, which I mentioned last week (Tactical Shift: Reducing Cash [1]).

Let’s take a quick look at the history off the seasonal advantages. “The Best Six Months of the Year” was first described by Yale Hirsch in Stock Traders Almanac [2] decades ago. The historical chart below via Investech Research [3] reveals the surprising degree of seasonality for investors, going back 50 years.

Here are the specifics of seasonality: Imagine we start with two $10,000 accounts, and use them to make investments in an S&P 500 Index fund. One account invests in one 6-month period, the other invests in the remaining 6-month period. Account A is invested from November 1st through April 30th each year, while Account B is invested from May 1st through October 31st.

Here are the numbers:

• Account A portfolio grew from $10,000 to over $438,967. That is a 42-fold increase.

• Account B portfolio barely doubled to $22,659.

By selecting the seasonally strong period from November through April, you capture 97.1% of the available performance over the past 52 years. (Note the November-April seasonality fared poorly in 2007 and 2008).

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[4]
Source:InvesTech Research [3], October 21, 2011
Technical and Monetary Investment Analysis, Vol11 Iss11

The one caveat I would add is that a 50 year chart should be logarithmic, rather than algorithmic.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2011/10/a-tale-of-2-seasonal-investors/

URLs in this post:

[1] Tactical Shift: Reducing Cash: http://www.ritholtz.com/blog/2011/10/tactical-shift-in-portfolios-reducing-cash/

[2] Stock Traders Almanac: http://www.stocktradersalmanac.com/sta/home.do

[3] Investech Research: http://www.investech.com/index.php

[4] Image: http://www.ritholtz.com/blog/wp-content/uploads/2011/10/Picture-81.png

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