Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, July 1, 2019. You can also find the re-balance calendar for 2019 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

What We Can Learn From The Seasonality Strategy

We maintain the stock seasonality strategy based portfolio on our Advanced Strategies page. Every now and then, we did review this strategy as it’s one of a few stock market anomalies that has been considered to exist. As we are now in June, officially entering summer, let’s take a look at this portfolio again and see what we can learn from it. 

The background

The strategy page has the following description: 

Previous research on seasonality indicated that the market’s pattern of favorable seasonality begins October 1st or November 1st and ends May 1.

They discovered that those best day to enter the stock market on average is October 16 for the upcoming favorable seasonal period, and April 20 is the best day to exit from this favorable season.

However they emphasized that the market does not begin a rally on the same day each year, or begin to decline from a top on the same day each year. Based on this reason, they improved the strategy by using MACD to pinpoint buy and sell days.

  1. Entry and exit rules: After October 16 arrives, the entry rule of this STS is that we do not enter the stock market until MACD triggers its next buy signal. After April 20 arrives, the exit rule of this STS is that we do not exit the stock market until MACD triggers its next sell signal 
  2. MACD: the MACD used could be found in MACD Strategy.

Basically, this strategy calls for staying in cash or bonds from May to October with a tweak to utilize a technical MACD indicator to decide the precise timing. 

The STS Seasonal Timing Using VFINX Total Return Bond Fund As Cash portfolio switches a total return bond portfolio such as Schwab Total Return Bond when the strategy switches to cash. Otherwise, it invests in S&P 500 index fund VFINX. 

The outstanding performance

On the surface, the portfolio has done remarkably well since 2001: 

Seasonal timing portfolio returns & risk (as of 5/31/19):
Name Max DD YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001
STS Seasonal Timing Using VFINX Total Return Bond Fund As Cash 34.7% 16.6% 17.0% 12.5% 9.4% 12.9% 10.4% 9.5%
VFINX (Vanguard 500 Index Investor) 55% 10.7% 3.6% 11.6% 9.5% 13.8% 8.3% 6.2%

AR: Annualized Return. Max DD: Maximum Drawdown (peak to a subsequent trail). YTD: Year To Date. 

Return chart since 2001:

Detailed link >>

This portfolio lost -9.4% in 2008, compared with VFINX’s -37%. It just avoided the stock market’s big drop in September in that year that was caused by the Lehman Brothers’ bad news. 

Its maximum drawdown is about 2/3 of VFINX. Its annual standard deviation (volatility) is 12% vs. 17.6% of VFINX. 

In a word, this portfolio has delivered 2% to 3% extra returns annually for the past 15 years or since 2001 with only about two third of volatility!

The uneven (out)performance

This year, the portfolio did a smart thing: it went to bonds on 5/21/19, just in time to avoid some bigger drop of S&P 500 since then. This has helped for the better returns. 

However, if we compare its year by year returns with S&P 500, things are a lot more murky: 

First, among the 18 years from 2001 to 2018, there are nine years when the portfolio underperformed S&P 500. So it’s an even split in terms of number of years outperformance. 

Second, if one were in 2015, looking back the 3 and 5 year performance, she/he would see that: 

as of 12/31/2014:

Name 1Yr AR 3Yr AR 5Yr AR
STS Seasonal Timing Using VFINX Total Return Bond Fund As Cash 9.9% 15.6% 15%
VFINX (Vanguard 500 Index Investor) 13.5% 19.7% 15.3%

We have some very meaningful underperformance for the portfolio for the 5 years and running (in fact, if we calculate 6 year’s return, it would be even bigger underperformance). 

Similarly, if an investor were in 2007 and looking back, she/he would find another string of underperformance. 

What we can learn

Intuitively, the seasonality timing strategy is a nice academic strategy: it does conform with certain intuitions like the conjecture that in summer, investors tend to go on vacation, budgets seem to be tight compared at the end of a year (holiday season as well as corporate rushing to spend for unused budgets) and fresh start in the beginning of a year. However, it still seems a bit unreal to stay in cash for almost half of time regardless of how stocks or fundamental are doing. 

Furthermore, as shown in the above, it’s bound to happen that this strategy will underperform the stock index in some years. In fact, as shown in the above table, it’s about half of time this could happen. 

So it certainly tests investors’ patience and belief in order to reap benefits from this strategy. Unfortunately, this is perhaps the hardest for an average investor to do: year in and year out, you just follow a strategy that somewhat makes sense regardless of how it has (under)performed for many years. 

By no means we advocate that investors to adopt this strategy, at least not for the majority of capital. However, the above data do serve as an important reminder that consistency and patience is an open secret edge an investor possesses to invest successfully. What one lacks of is not a good investment strategy but the long term investing habit that can be boring and unrewarding for some unbearable long time. 

Market overview

As global economy continues to slow down due to the uncertainty induced by the escalating trade war that now includes Mexico and other fronts, stocks and bonds have signaled some potential serious weakness ahead. As of this writing, US, international and emerging market stocks are all in a firm downtrend. US REITs still has a stronger positive trend score than bonds, indicating investors’ hope that interest rate cuts will soon be in order. 

Though economic recession in the US might not be near sight at the moment, things can quickly make a turn for the worse. We call for exercising risk management and staying the course. 

For more detailed asset trend scores, please refer to 360° Market Overview

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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