The Best Days of the Month to Invest
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Assume two $1,000 portfolios — which we’ll call the Green and the Red — were started in January 1927. The U.S. stock market is open, on average, about 21 days each month, but the Green portfolio was invested in stocks only during a certain “favorable period” of seven days that recurs each month. Then the stocks would be sold and the Green portfolio would be invested in Treasury bills until the next favorable period rolled around.
The Red portfolio, on the other hand, was invested in the opposite fashion, owning stocks only during the 14 or so other market days each month — the days when the Green portfolio was sitting on the sidelines. Think of this as an “unfavorable period.”
Neither Green nor Red added to their original $1,000, and they continued their crazy competition down through the decades until 1990 when they totaled up their gains from 64 years of investing. (We’re stopping in 1990 because the research data for this exercise goes only that far.)
The Green portfolio, which was invested only one-third of the time, grew to a staggering $4,400,000! The Red portfolio, which was invested twice as many days each month as the Green, saw its original $1,000 shrink to a meager $433! (Commissions and taxes have been omitted to dramatize the point.) Pretty amazing, huh?
The existence of a monthly favorable period and its use as a timing tool was popularized in the 1970s in a book called Stock Market Logic by Norman Fosback. He called this phenomenon “seasonality,” and he defined it as (here’s the part you've been waiting for) the last two trading days and first five trading days of each month.
But times have changed. Yale Hirsch, long-time publisher of the Stock Trader’s Almanac, has argued that the growing awareness among investors of the monthly favorable period caused it to shift, beginning in the mid-1980s. As more and more investors tried to get in ahead of this monthly rally, the rally started to begin sooner. Hirsch said the seasonality period shifted to the last three trading days of any month and the first two of the next month.
Thankfully, for the investor using a monthly dollar-cost-averaging strategy, it doesn’t matter which interpretation of the theory is precisely correct. (Dollar-cost-averaging is the practice of investing the same amount of money at regular time intervals, usually monthly.)
Just do your buying before the other month-end investors start theirs, say on the fifth-to-last trading day of the month. Then, whether the Hirsch theory (seasonality begins with three trading days remaining in the month) or the Fosback theory (seasonality begins with two trading days remaining in the month) is correct, you’ll still benefit from the buying that surrounds the turn of the month.
Here are a few other ways you can use monthly seasonality to improve your long-term performance.
• Perhaps you’re in retirement and part of your income derives from selling enough of your stock funds each month in order to withdraw $500. Wait until the favorable period has run its course; sell your shares on the fifth trading day of each month. Over the long-term, you’ll get a slightly better average price.
• Following a variation of the dollar-cost-averaging strategy, use favorable periods when investing a windfall (for example, an inheritance). If you haven’t been investing regularly, it's a little scary to take a large sum and put it into the market all at once. Divide it into several smaller amounts of equal size, depending on how long you want to stretch things out.
For example, if you want to invest it over a period of six months, divide your total into six equal amounts. Then invest one-sixth each month just before the start of the favorable period.
Remember, these patterns aren’t perfect. The seasonality studies reflect "averages." By definition, an average finds the middle ground (and therefore hides the extremes). So don’t expect the favorable period to lead to higher prices every month.
As J.P. Morgan famously said, the only thing we know for sure about next month’s market is that “stocks will fluctuate.” Seasonality should be used only as one piece of an overall decision-making process.
Mark Biller is the executive editor for Sound Mind Investing, publisher of America's best-selling investment newsletter written from a biblical perspective. Through its website, monthly newsletter, and the small-group study "Multiply," SMI helps people manage money effectively so they can live well and give generously.
© Sound Mind Investing
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