Occasionally we come across pearls of wisdom not directly related to our usual focus but which we think might be of interest to our readers.
Oli Hille lectures MBA and MPA/MBM Corporate Finance at Canterbury University in New Zealand. He has written a number of books including “Creating the Perfect Lifestyle” which is available from Amazon Books.
With Oli's kind consent, the following is Rejigit’s summary of his published take on an investment strategy.
Historical stock and share market trading patterns indicate that the "best" six months each year for investment purposes are 01 November to 30 April and the "worst" 01 May to 31 October.
The average annual gain in the Dow Jones Industrial Average from 1950 – 2016 was 7.5% average annual gain over the "best" six monthly periods (01 November – 30 April) and 0.4% average annual gain over the "worst" six monthly periods (01 May – 31 October).
To demonstrate the point in practical terms;
(a) Had you invested $10,000 in stocks and shares at the beginning of the "best" period (circa 01 November) in 1950 then sold your portfolio at the end of the period (circa 30 April) and retained the cash proceeds over the "worst" period and repeated the exercise each year until 2016, your initial $10,000 would have been worth an accumulated $983,639 (a net gain of $973,639).
(b) Conversely, had you invested $10,000 in stocks and shares at the beginning of the "worst" period (circa 01 May) in 1950 then sold your portfolio at the end of the period (circa 31 October) and retained the cash proceeds over the "best" period and repeated the exercise each year until 2016, your initial $10,000 would be worth $9866 (a net loss of $134).
Assuming you had adopted this strategy at the outset, your investments would not have been affected by the 1974 bear market crash when the Dow plunged 27%, the 1987 stock market crash and the 2008 global financial crisis.
If you currently have an equity portfolio, Oli’s suggested strategy is as follows;
(1) Sell all of the portfolio now and wait until 01 November before buying the stocks back.
(2) Buy a November Put Option on the Dow or S&P500 for the equivalent value of your portfolio.
(3) Sell December Futures Contracts (there are no November contracts) on the Dow or S&P500 for the equivalent value of your portfolio.
Having regard to the foregoing strategy, Oli’s suggestion for Kiwi Saver Account management is; as at 01 May each year, switch to 100% cash and as at 01 November each year, switch to 100% growth (maximum exposure to stocks).