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Pick the Best Days to Invest
Believe it or not, there are better days of the month to invest than others. Find out when you're likely to see the biggest gains.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
May 25, 2004
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Dollar-cost averaging -- a fancy term for investing the same amount in stock funds every month, regardless of what the market is doing -- is the best way to invest. Period.
But are there better and worse times of the month to invest? Surprisingly, the answer appears to be "yes."
Mark Hulbert, editor of The Hulbert Financial Digest, has found that the market is most likely to rise in the first and the last few trading days of each month.
No one knows why. But it may well be because many people do regularly invest around the start of a new month.
The bottom line: If you have a choice in your monthly investing, schedule it for the close of the third-to-last trading day of each month. Similarly, if you have a lump sum to invest, this may well be the most propitious day to pull the trigger.
It won't work every month, but Hulbert's research shows that, on average, it may well improve your returns.
Successes of 'seasonality'
Hulbert's findings come from studying the Seasonality Timing System, which was first implemented by Norman Fosback, a newsletter editor, in the mid-1970s. Fosback's Fund Forecaster still offers several seasonality model portfolios. But they're significantly different than the original.
Meanwhile, Hulbert has continued to track the original version -- and its results have been outstanding.
Over the last 20 years, according to Hulbert's work, the system would have returned an annualized 15.4% if you had switched between a money market fund and the Wilshire 5000, a broad-based stock market index. That's the second best performance of any market-timing system Hulbert tracks. By contrast, the Wilshire 5000 returned only an annualized 12.8%.
What's more, the system has been 45% less volatile than buying and holding the index. In other words, there have been far fewer bumps in the road.
How it works
Still, I don't think many investors will want to actually implement the system. It requires 34 trades annually. Plus, you'll rack up big short-term gains unless you use a tax-deferred account. But the results make it intriguing. Here are the rules:
- Buy at the close of the third-to-last trading session of each month, and sell at the close of the fifth trading day of the following month.
- Buy at the close of the third-to-last trading session prior to exchange holidays, and sell at the close of the last trading day before a holiday.
No one knows why the market tends to rally before holidays. But market watchers have long theorized that when people are in a good mood -- as they often are before holidays -- they're more likely to buy stocks then sell them.
There are a few exceptions to the rules:
- If a holiday falls on a Thursday, such as Thanksgiving, sell at Friday's close rather than Wednesday's
- And if the last day before a holiday is the first trading day of the week, usually a Monday, don't sell until the day after the holiday.
- Don't sell on the first trading day after options expire. Instead, hold onto your stocks one extra day. You can check options expirations on Amex.com.
Putting it into action
Time was that lots of mutual funds allowed the frequent switching that this system calls for. Now, especially after the timing scandal, few firms do.
Bull ProFund (BLPIX) allows unlimited switching in an S&P 500 index fund. But guess what? It's 1.71% expense -- together with the deleterious affects of all that frequent trading -- has led it to trail the S&P by just about the amount that the seasonality system has beaten the market.
The better option: Use an exchange-traded fund (ETF). Standard and Poor's Depositary Receipts (SPY) tracks the S&P 500. Expenses are just 0.1% annually, and SPY has trailed the S&P by just about that amount over the last decade. Just as important, SPY is traded so heavily that the bid-ask spread is usually only a penny. On a $110 trade, a penny is insignificant.
If your broker charges $7.50 a trade, it'll cost you 0.34% annually in commissions to execute this strategy with $75,000. If you use more money, of course, the costs will be less. Finally, you'll have to remember to make each trade before 4 p.m.