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How to Invest for Just Half the Year And Beat The MarketBy
Thursday, October 14, 2010
It's crazy, but true…
You can invest for just half the year and take the other half off… and beat the market.
It sounds crazy, but it's worked extremely well over the last 60 years.
Let me explain…
Down in my office, we're putting the finishing touches on an advanced, systematic way to safely invest in stocks and commodities. It's called True Wealth Systems.
Computer and statistics expert Richard Smith – one of the Ph.Ds on the
True Wealth Systems team – tested this particular simple system:
You own stocks for the six months starting October 31. And you don't own them for the six months starting May 1.
That's it.
Simple... but powerful…
Out of 60 trades, 46 were winners and 14 were losers, for a winning percentage of 77%. The average gain for those trades is about 7% in six months (not including dividends).
Astoundingly, that's better than the market's 12-month compound annual gain over those 60 years. Said simply, you can beat the market's 12-month return with just six months' investing. (We didn't count transaction costs, but we didn't count any interest on our cash for each half-year out of the market, either.)
Past performance is no guarantee of future results, of course. But the weight of the evidence is stunning… One academic study on this phenomenon shows it's true over time in 36 out of 37 countries tested.
Richard dialed it in even deeper for us…
He found that most of the gains come between the end of October and early January (after the January Effect - a general increase in stock prices in the month of January)… And the winning percentage is higher, too.
In hindsight, the optimal trade was October 26th to January 10th. The average gain was 5.7%… and there were only five losing years. (Richard used a 9% stop-loss on this as well.)
No guarantees about the future, of course. But the history is powerful… Richard adds, "Even taking this trade back to 1920 has strong results … Using a 15% stop, it's been profitable 83% of the time (only had 14 losing years) and made 5.9% profit, on average."
Why should this simple system work? Nobody knows for sure. I think that's a good thing. If everyone knew WHY it worked, it WOULDN'T work.
Want to take half the year off, and still beat the stock market's return? Then put on the Halloween Trade.
I don't blame you for being skeptical of this type of trade. I'm typically skeptical of these sorts of timing systems. It sounds "too easy." But the historical results are extraordinary… so it's worth paying attention to them.
At the very least, you can add one "Halloween Trade" to your portfolio… maybe a double-long stock index ETF (like SSO) as your Halloween Trade position.
Another alternative is Richard's October to January trade… You capture most of the gains, with a higher winning percentage, and you're in the trade for just two-and-a-half months.
Something to think about this Halloween…
Good investing,
Steve
Further Reading:
Steve shared a successful system of his own last month, which tells him when to buy and sell oil. It's performed nearly 300% better than simple buy-and-hold. "Even better, you could teach a monkey to follow it," Steve wrote, "and it would only take maybe 12 minutes a year." Learn about it here: My Simple Oil System.
Last month, Steve shared two ideas that investors might find "boring." But we'll happily take 57% and 45% compound annual gains, especially compared to 16% and 19% returns for buying and holding the same stocks. "We tested both of these funds with a simple trend-following system," Steve wrote, "and came up with ridiculously good results." Read more here: Starting Now: 57% and 45% Annual Gains in Boring Investments.
Market NotesWHAT YOU DIDN'T KNOW ABOUT STOCKS AND OIL Question of the day: Should I diversify out of stocks and buy a "hard asset" commodity like crude oil?
Answer: "Go ahead buddy… But there's actually no difference between stocks and oil."
Many investors buy commodities thinking they're "diversifying" their portfolios. But what they don't realize is that often, commodities and stocks move in the same direction, at the same pace. Today's chart shows this idea at work…
Below is a "performance chart" of crude oil and the benchmark S&P 500 stock index. It plots the performance of both assets over the past year. Crude oil is the black line. Stocks are the blue line. As you can see, oil and stocks are trading in lockstep with each other, according to expectations of global economic strength. So… buy stocks… or buy oil? The market says, "What's the difference?
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