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By Murray Coleman
Does the cliché ‘sell in May and walk away' have any practical value? Larry Swedroe proposes a real-world test.
In an ongoing trial of sorts on the popular Bogleheads.org indexing discussion site, a name familiar to IU.com readers takes on the age-old adage.
The longtime advisor and financial researcher starts by creating a portfolio that buys the S&P 500 index on Jan. 1, 1926. It holds that position through that April before swapping its stock index for 30-day U.S. Treasury bills on May 1, 1926. Then, on Nov. 1, the Treasuries are sold and replaced with the S&P 500. That process is repeated every May and November, ending in April 2008.
"The results tell the story -- if an investor followed this strategy, they would have been worse off than had they just held stocks," wrote Swedroe.
He says the portfolio would've produced an annualized return of 8.3%, far less than the S&P 500's 10.25%.
"The seasonal strategy described above performed nearly two percentage points worse per annum since 1926," Swedroe noted.
A poster named EmergDoc objected, saying it wasn't a fair study. He noted that the investor who sold in May actually took less risk by investing in Treasuries half the time. "You need to compare the sell in May strategy to one where the investor buys and holds a portfolio of half S&P 500 and half T-bills to be fair," he noted.
Swedroe agreed with the observations, but also pointed out that transaction fees and taxes weren't part of the test. In a taxable account, he added, "that would destroy any hope of this strategy working."
Although he didn't report the findings, Swedroe says he also tried several other shorter periods. In fact, to make the strategy work, you'd have to do some nifty data mining, he added. But from 1987-2002, the ‘Buy in May and go away' tack did show positive results. "But that is mostly a function of the bear market, not seasonality. And of course, (you're) cherry picking the start point," Swedroe said.
In another thread, well-known advisor and author Richard Ferri disputed Swedroe's claim that high-yield bonds were acting like they're supposed to these days.
Showing the past six quarters of how the broad stock market fared compared to the Vanguard High-Yield Corporate Bond Fund [VWEHX], Ferri didn't find evidence of Swedroe's claim that "high yield is nothing more than a tax inefficient way to invest in equities as there is almost no unique risk."
Ferri added that he doesn't buy the argument that the Fama/French three-factor model explains almost all of the excess returns in junk bonds that can't be accounted for by taxes and tied to the plight of investment-grade corporates.
"Institutions are the primary investors in high-yield, and most are immune to taxes. So the entire argument about the premium on high-yield having something to do with taxes is out to lunch. In my humble opinion, it's the unique risk in HY that is giving the extra return. Again, I don't have a Ph.D, but pure logic does have merit at times," Ferri wrote.
The interesting debate continues on the site, along with several others:
-- A poster noted in another popular discussion that Dimensional Fund Advisors' U.S. Core Equity funds are often used in combination with DFA's U.S. small-cap funds or even its domestic large-cap value funds. "This according to one advisor enables him to tailor a portfolio to any desired tilting to small-cap and value, while capturing most of the cost savings of the core funds," RiskyB wrote.
But he wonders if there's a better strategy to take. "It seems to me that a better option would be to use only the core funds and capture the maximum amount of cost savings. DFA has Core1, Core2, and Vector funds that offer increasing exposure to small and value stocks," RiskyB wrote.
"Except for investors seeking a tilt that is more aggressive than most advisors would recommend, using one of the core funds should get most investors the tilt they want and maximum cost savings. It appears to me that investors with taxable accounts beginning to invest now or in the future should invest in core funds only," he concluded, triggering a firestorm of responses.
-- If the consumer price index soared into double digits, BigH wonders where would be the best place to slant a bond portfolio along the yield curve. If it's really a hyper-inflation type of environment, some posters noted, then short-term bonds might hold the least interest rate risk. But others wondered if the threat of deflation has really moved into the rear mirror for most investors.
Such unclear views on the economy, suggests ValueThinker, might lead some to diversify even more than normal. That could mean holding Treasury Inflation Protected Securities, or TIPS. "Even in a deflationary scenario, TIPS will deliver a guaranteed real return," ValueThinker noted, adding iBonds as an inflation-linked cash-like investment might also make sense. But Jeffy added that those were inflation fighters and a truly diversified portfolio would include at least some longer-term bonds.
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This article has 2 comments:
- Wefwef
- 45 Comments
Jul 30 04:56 AM- peterthepainter
- 70 Comments
My Website
Jul 31 08:49 AMI put this quote from mish on my blog today... I find his view persuasive.
".....Credit Crunch Reaches Critical Mass...