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InvestWELL Report |
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Question: Which months of the year are the best and the worst in terms of investment returns?
Answer:
The markets tend to have strong returns around the turn of the year as well as during the summer months, while September has traditionally been a down month. The average return in October remains positive, despite the record drops of -19.7% and -21.5% in 1929 and 1987.s (Chart 1).
Chart 1.
How can you benefit from this knowledge?
An investor may consider buying more equities in September. However, please keep in mind that timing the market perfectly is nearly impossible and investors who trade frequently pay more commissions, but do not necessarily make more money. Furthermore, there is a difference between market timing and factoring in seasonality in investment decisions.
Market timing is based on short-term price patterns and trying to pick market tops and bottoms. Seasonality is about anticipating how the market will behave in a given time of a year and taking a position before the change will occur (e.g., if I know that December and January are usually strong then I may invest in November to make sure that I hold my investments in the following months).
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(Cumulative %)
Investment Strategy – MEMBER SECTION
InvestWELL Picks has outperformed the S&P 500 index by a nice margin (Chart 2). Recently, the difference between the two has narrowed somewhat due to a very strong performance of the S&P 500.
Chart 1.
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- During the last month,
the US equity continued to defy gravity until about a week ago (Chart 3 & 4). The market then headed down, mostly as a result of previously being heavily overbought.
Charts courtesy of StockCharts.com
- During the last month,
the Canadian equities declined, especially after the income trust announcement by the Minister of Finance this week (Chart 5 & 6). The unexpected announcement was related to tax treatment of income trusts (securities that account for about 10% of the stocks in the country's benchmark stock index) in Canada, and had a very negative impact on the markets. In the future, we hope that the Canadian government will do proper research before making such decisions.
Charts courtesy of StockCharts.com
- In October,
the job growth in the US was lower than anticipated, but the upward revision of the September numbers pointed to the continuation of the strength in the labor market.
- In October,
the overall Employment in Canada improved significantly (+51,000), with most of the gains recorded in the western provinces. Since the beginning of the year, employment has increased by 261,000.
- U.S. economic growth slowed sharply in the third quarter, increasing at a real seasonally adjusted annual rate of 1.6%. The economy has grown 2.9% in the past year, the slowest year-over-year growth in three years.
- The housing slowdown has turned some parts of the Phoenix and Las Vegas metropolitan areas into "ghost towns," where many unsold homes stand empty, according to Janet Yellen, president of the San Francisco Federal Reserve Bank. Yellen said that she heard the ominous description from a "major home builder," who told her that the share of unsold homes in some subdivisions around the two Southwestern cities has topped 80%. It would be interesting to see if the supporters of the “soft landing” theory live in these areas.
- Some interesting statistics with respect to the survivorship ratio of the actively managed mutual funds: the research indicates that over 33 years, about one third of funds quietly ceased to exist. The high-expense and aggressive mutual funds have had the highest probability of becoming persona non grata.
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(see
explanation)
Charts 7 - 9: Advancing/Declining Line, AAII and Equity Put/Call Ratio
Charts courtesy of StockCharts.com
and DecisionPoint.com
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C is correct.
An average investor has a dismal track record of timing the market (it does not mean he / she will never get it right). Even most of the professionals have a very poor record of timing the market. Yet, the allure is very strong and investors will keep on trying.
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Thank you for reading InvestWELL Report.
InvestWELLFinancial.com
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