As you may be aware, I tend to become more defensive during the summer as part of the seasonal investing discipline. This typically means holding more cash in my equity platforms over the summer, followed by full investment over the winter. This year, I elected to retain about 27% cash in our equity platforms. Sometimes I am asked if it bothers me to see the stock market continue to rally, having raised this cash back in April. After all, I could have that cash deployed in high performing stocks, thus increasing my returns.
The most important aspect of successful investing is to follow a systematic and disciplined approach. I used to ask attendees at my seminars to repeat after me: “A system will save me from myself!”. It is unknowable whether a discipline such as seasonal investing (“Sell in May, go away…”) will work in any given year. However, the strategy is statistically proven to work over time, thus making the strategies results a little more certain if practiced over the longer term. Murphy’s Law suggests that if I stop using seasonal investing, I am guaranteed a market meltdown that summer…
Below is a chart of the S&P 500 showing the Best six/Worst six month periods and their performances. The worst six months are encased in the red boxes. Note the general tendency for the summer to underperform in most years, even during this raging bull (with the exception of the 17.7% rally in 2009 after the bear market ended). Most importantly, note that the largest part of the 2008 bear market was during the worst six months. Had you “Sold in May and went away”, you would have missed out on the larger chunk of the market meltdown. In fact, if you just invested during the “worst 6 months” each year over the past 6 years, you lost about 23%.
Given my 27% weighting in cash, lets examine three potential scenarios for the summer, and how the ValueTrend model stock portfolio might fare in each environment:
- The stock market falls or moves sideways: In this scenario, ValueTrend outperforms the stock market due to less equity risk exposure — this assumes our stocks are in-line with market performance, no better, no worse (beta 1.0). Better still, we have cash on hand to invest in cheaper priced stocks that result in a market correction.
- The stock market climbs: Assuming our stocks perform in-line with markets, ValueTrend would underperform the stock market in this scenario due to our lower exposure to equity. However, we still benefit from most of the market’s upside through our 73% net exposure to stocks.
- The stock market climbs and our stocks outperform: If our stocks do better than the market, they will make up the difference for holding 27% cash. In this case, we make market returns at a much lower risk (due to our 27% cash exposure).
Obviously, scenario # 3 is the ideal situation. When you get all of the upside with lower risk, it’s a “Have your cake and eat it too” scenario. I’m happy to report that the ValueTrend equity platform continues to outperform the TSX 300 composite over both near termed (1 month, 3 month, 1 year, 3 year)and long termed (>5 years) periods – despite our high cash holdings. Interestingly, despite the almost impossible-to-duplicate performance of the S&P 500 US stock market index, the ValueTrend portfolio has been outperforming that index over the past 1, 3 & 6 months. By holding technically outperforming stocks combined with a high cash allocation, the ValueTrend Equity Platform has delivered market-level returns without market-level risk –the “Have your cake and eat it too” scenario. Here is a link to our end of May performance: https://www.valuetrend.ca/?page_id=318
If you have invested assets of $500,000 or more, I’d like to invite you to learn about our superior approach to investment management. You’ll like the way we focus on your needs, and you’ll appreciate the benefits of our conservative and efficient approach to managing your assets. Many former do-it-yourself investors, as well as clients of other investment firms were troubled by the volatility, and disappointed in the performance of their accounts. After moving here, they feel very confident and at home with assets managed by ValueTrend. At last, you can choose an approach to wealth management far superior to that provided by traditional, bank-owned brokerages. We expect that once you sample our services, you’ll want to stay with us. So give us a call and ask for either myself or my Associate Craig Aucoin at 1-888-721-8736. Or email us at [email protected]
As always, thanks for reading my blog!
IS U.S. MARKET GOING PARABOLIC?
U.S. MARKET REMINDS THE NIFTY-FIFTY OF 1972…
-U.S. STOCK ROSE TO ALL-TIME NOMINAL HIGHS
-BULLISH SENTIMENT (88% OF S&P500 STOCKS ABOVE 50 DAY M.A.), MARGIN DEBT, FALLING VOLUME ARE SUGGESTING CAUTION.
-BONDS FELL LAST WEEK AS A SWITCH OUT OF BONDS INTO STOCKS
-US PAYROLL NUMBERS ARE SHOWING LOSS OF FULL TIME JOBS AND LOW PARTICIPATION RATES.
-VOLATILITY INDEX IS AT 8 YEAR LOW (10.73).
ONE OF MY FAVORITE ANALYST IS SUGGESTING THAT THE DOW JONES SHIPPING INDEX MIGHT BE A CLUE TO THE NEXT ECONOMIC BOOM (SEA:N). DO YOU HAVE ANY FAITH TO IT?
P.S.: HOPE YOU ARE DOING WELL WITH YOUR BIKE CRASH FOLLOW-UP
Thanks re: the ribs J-P
I have no experience with the SEA-N index– sorry I cant add any input on that as a timing vehicle.
BTW–low volume is normal at this time of the year. That’s because guys like me are off breaking bones on bikes, or doing more sensible things like golf. So I don’t read as much into volume declines this time of the year. Bonds falling should theoretically be good for stocks, but I feel that bonds will move up again soon. I do have worries about the volatility and margin debt stat’s you mention.
Thanks for pointing out different ways of looking at investing. This article made me look at your strategy in a different light.
A few weeks ago, you advised a holding in XLB. Would you consider this part of your cash position?
Fred, only cash (or T-bills, savings accounts, etc) is cash. XLB is a long bond play–its seasonally attractive at this time of the year, and has a good chart. But it still has risk and volatility, unlike cash–which has neither. Cash does not have upside potential either, so that’s the trade-off.