Author Topic: Tell me whatís wrong with this strategy  (Read 978 times)

samsonator54321

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Tell me whatís wrong with this strategy
« on: April 27, 2018, 10:47:51 AM »
I want to preface this post with the fact that Iím just looking for a discussion on why this would not be a good idea. Iím am completely convinced that buying and holding index funds is the best investment method and I currently do this monthly.  I like taking the emotion of out investing and doing it passively at a fixed time each month (DCA).

Anyways, Iíve always noticed that the market does worse in the summer months. You can google articles about how historically the months from nov-apr do so much better than May-oct.  And that got me thinking.

Letís say you have 12k a year to invest. Currently you do 1k on the second Tuesday of every month in an index fund. The plan is to buy and hold forever. What if instead you did 2k for the months of May-oct and zero for the other six months. It would still be in index funds, it would not waiver based on what the markets at or where you think itís going to go. And you would NOT be selling it after six months (so not the sell in May and go away thing). 

If you did this disciplined, without even caring what the market was at each year. Do you think you could capitalize on historically lower buy points?  I think that people take out money in the summer to spend, investors go on vacation etc. I feel like there is an emotional/behavioral swing built into the market and if you know you are disciplined enough to not fall into that would this work?

Again, Iím expecting the outcome of this to be a bunch of good reason why itís not a good idea. Just wanted to open a fun discussion I havenít heard much about.

koshtra

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Re: Tell me whatís wrong with this strategy
« Reply #1 on: April 27, 2018, 10:55:13 AM »
You might do a little better, I dunno. Play with the numbers and compare how much it costs you to keep that money idle for six months with how much of advantage you get with the winter buys. My instinct is that it's pretty much a wash, but... instincts and $2.10 will get you a cup of coffee :-)

MrDelane

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Re: Tell me what’s wrong with this strategy
« Reply #2 on: April 27, 2018, 10:57:35 AM »
historically the months from nov-apr do so much better than May-oct.

Let's assume you're right for the sake of argument.
Even is that is true, what you are saying is that the market gains more from November to April than it does from May to October.

You are not saying that the market drops from May to October, only that it does not gain as much as it does the remainder of the year.

Therefore, if you invested only from May to October you would be investing in a flatter portion of the market, but would then re-enter at a historically higher valuation next May, missing out on all the rising values in between.  Unless there were a drop from November to April this doesn't seem like a good idea at all.

You're viewing it as putting in all your money before the next alleged rise.... but you could just as easily view it as putting in all your money right after the last rise.  Either way you look at it, odds are you're going to miss out on lower valuations if you hold off on putting money in.

The only reason this feels like it makes sense to you is because in general it makes more sense to put more money in earlier (i.e. 'time in the market' not 'timing the market').



economist

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Re: Tell me whatís wrong with this strategy
« Reply #3 on: April 27, 2018, 11:03:58 AM »
Let's say, for the sake of argument, that the market does perform worse during the summer. Let's also say, for the sake of argument, that you can be sure this will continue in the future. It's still not the best strategy to buy only during the summer.

Reason 1: Worse doesn't mean bad. The market goes up most of the time. Buying during the summer wouldn't necessarily mean buying during a down market. You could be buying during a moderate up market, or a flat market, in which case you're still missing out on dividends by not buying earlier, which leads to:

Reason 2: If you are going to buy at certain points of the year, it's better to buy as early as possible. Example, if you will put $5,500 in an IRA, better to invest it all Jan 1, rather than wait until May. The reason is that this gives you the longest time in the market. The premise of this question is that the market performs poorly May-Oct, which means it does better than average Jan-May. So buying Jan 1 gives you the growth captured from Jan - May, while waiting means you will be buying *after* a run up in price.

The effect of the market usually going up means that being in the market longer will outweigh whatever seasonal impacts there are.

Edit: Seems MrDelane said basically the same thing as I did right before I posted. Still posting to reinforce/agree.

jjcamembert

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Re: Tell me whatís wrong with this strategy
« Reply #4 on: April 27, 2018, 11:16:56 AM »

If you did this disciplined, without even caring what the market was at each year. Do you think you could capitalize on historically lower buy points?  I think that people take out money in the summer to spend, investors go on vacation etc. I feel like there is an emotional/behavioral swing built into the market and if you know you are disciplined enough to not fall into that would this work?


You'll also be missing out on 2 quarterly dividends. Investors don't go on vacation, and "people" don't take out enough money to move the market. Institutional money moves the market, is constantly working, and running algos. Still, many argue that there is an emotional/behavioral swing in the market, but then you're stepping into the realm of technical analysis which is far from DCA methodology. Not saying TA is bad or doesn't work, it's just different. I have heard about market seasonality anecdotally, but have never seen a trader take it seriously for making investment decisions. In the futures market it is absolutely considered, but not the stock market.

TheOldestYoungMan

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Re: Tell me whatís wrong with this strategy
« Reply #5 on: April 27, 2018, 11:23:07 AM »
As the previous posters said, you run into the following two problems:

1.  At what cost and on what terms?  To realize any benefit you would almost have to be speaking to a leveraged buying scenario, as in, is it worth borrowing money after this summer to invest, ostensibly to be paid back with the money I'll then skip investing next summer.  The response to that is: leverage is bad mmkay.

2.  If you aren't doing 1, then you're talking about delaying investment, and in general, front-loading can be statistically demonstrated to be a good idea, and maybe because of the specific phenomenon you're speaking to, but I've never seen an analysis where waiting to buy-in had good outcomes outside of highly unusual circumstances.

It seems like, from the data, that you do fine with DCA or lump-sum as early as you have it, investing.  It also seems from the data that lump-sum timing (as in, I'm going to hold this money until the market drops x % in a single day) has worse outcomes.  So you'll do fine with everything invested Jan 1.  You'll do fine with everything invested first of each month.  You'll probably also do OK with DCA only on non-summer months, but not as well as the other two.  And if you try and time the market you have the slight potential to do much better, but almost nobody has pulled it off consistently in the long term.

sol

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Re: Tell me whatís wrong with this strategy
« Reply #6 on: April 27, 2018, 11:26:03 AM »
Why wait for months?  A minimal amount of research will suggest that the market does better on Fridays than it does on Tuesdays, and better in the last hour of trading than the first.  Clearly we can all be billionaires if we only trade during the last hour on Fridays?

Telecaster

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Re: Tell me whatís wrong with this strategy
« Reply #7 on: April 27, 2018, 11:27:11 AM »

Letís say you have 12k a year to invest. Currently you do 1k on the second Tuesday of every month in an index fund. The plan is to buy and hold forever. What if instead you did 2k for the months of May-oct and zero for the other six months. It would still be in index funds, it would not waiver based on what the markets at or where you think itís going to go. And you would NOT be selling it after six months (so not the sell in May and go away thing). 

Even if there is something to this, it is wildly impractical.   Most people have a certain amount each month to invest.  You don't get double in May-Oct and nothing during the summer. 

Even if you got $12k to invest each January, you should put it all in in January.  You shouldn't doll it out month by month.

Scortius

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Re: Tell me whatís wrong with this strategy
« Reply #8 on: April 27, 2018, 11:50:50 AM »
As stated above, the answer is very simple. While the months may do worse on average, they also still go up. That's really all that needs to be said.

ChpBstrd

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Re: Tell me whatís wrong with this strategy
« Reply #9 on: April 27, 2018, 12:21:23 PM »
If I flip a coin 100 times, and get heads 70 times and tails 30 times, is the coin rigged? Not necessarily. Each heads/tails event is independent of the other, so although our expected value from tossing a fair coin 100 times would be 50/50, there is no force in the universe making it hit 50/50 instead of 51/49 or even 70/30. Actually there is a probability distribution, a bell curve, of outcomes by probability and 70/30 would just be another outcome out on the tail end of the distribution. 100/0 would be another possibility. Although the 70%/30% result would become less likely as the number of coin flips increased, it would not be impossible. Yet, certain statistical tests could prove that my 70/30 result is so unlikely to have occurred by chance that we should accept the coin is rigged. Such conclusions are based on an estimated chance of being wrong.

Suppose I was running a coin flip gambling scam. I approach someone, let them watch me flip my coin ten times, and then offer to bet my $80 against their $100 on the next flip.

When the ten flips are 5/5 or 6/4 or 4/6, the other person walks away because the risk of losing $100 against the risk of gaining $80 is a bad deal when the odds are 50/50.

However,  sometimes a seemingly unlikely sequence of flips occurs, such as 8/2. When that happens, my victim watching this sequence becomes certain the coin is rigged. Then they take my bet, which is actually a 50/50 chance tilted in my favor due to the different payouts. The expected value of the bet to my victim is (80◊50%)+(-100◊50%)= -$10, and to me it is +$10. If I lose, I can count on my victim to play again, because it seems their narrative has been confirmed.

This example may seem silly and small-scale but the rationale applies to investing. Investors bid up the shares of companies and strategies on a winning streak, essentially shopping around for a street hustler whose coin flips seem unlikely - using computer filters and mass media to locate these lucky streaks amongst thousands of others. They develop a narrative in their heads about past performance predicting future results because of (insert reason here). They pluck down their money until mean reversion occurs yet again. Then it's on to the next narrative.


samsonator54321

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Re: Tell me whatís wrong with this strategy
« Reply #10 on: April 27, 2018, 02:24:33 PM »
Thanks all!  I knew I had to be missing something.