6 Mos market strategy

[Tater10]

Cliff notes: Trading strategy for the last 49 years, buy the Dow Jones average 6 months after tax day (October 15th), and sell it on tax day (April 15th). You are flat the other 6 months.

Trade Summary:
Avg Profit: +7.3038%
# Profitable: 32
# Losing:16
(current trade is +4.16% with dow at 12481)

If you bought $1M worth of the Dow in 1958, it would be worth $23,103,238 today, using 540.10 and 12481.49 quotes. No dividends or taxes.

If you began this strategy in 1958 - with compounding - your portfolio would be worth $24,608,711. Again, no dividends or taxes. This also assumes 0% return the other 6 months of the year.

Graph #1. Daily equity of your portfolio, without compounding.



Pic #2. Individual trades, from excel. First 6 columns are investing only $1M each year. Last 3 columns are with compounding.



Graph #3. For fun, here is a daily equity graph investing from 4/15 to 10/15, the opposite strategy.




I wanted to do this for 50 years, but screwed up and only got 49. Didn't want to redo. The trade in 1957/58 is slightly positive, buy 443.90, sell 444.40.

[john kane]

why is oct15-april15 so muc better than april15-oct15? becuase people have just paid tax so dont want to invest?

[Tater10]

I don't know. I'm throwing out this strategy, and hoping for some theories and answers. Maybe someone will run their own analysis and I'll look like a fool with bad data, or missing a big point.

[jively]

The opposite trade had a positive result. Doesn't that mean it's just better to buy and hold for 49 years? You'd have better results than trading, and you wouldn't pay taxes (always short-term capital gains).

-Tom

[Tater10]

I would say volatility. Year over year, the strategy has a 9.7% standard deviation, whereas buy and hold had 13.9%.

I don't want to say this is a holy grail, but I wonder if there are ways to exploit this.

I'm including an equity side-by-side of the buy and hold vs the strategy. Get an idea for the yearly volatility comparisons.

[Chrisman886]

You should factor in putting your idle funds for the other 6 mos in an interest bearing account if you are going to compare the two like that.

[Tater10]

[ QUOTE ]
You should factor in putting your idle funds for the other 6 mos in an interest bearing account if you are going to compare the two like that.

[/ QUOTE ]

This will make quite the difference. I used 1/2 the annualized return for 6 month treasuries, found on http://www.federalreserve.gov/RELEASES/h15/data.htm.

Instead of finishing with $24,608,711 as in the original post, the strategy now is at $88,037,236. This increases the annual return from 6.76% to a whopping 9.57%.

This only opened a can of worms for me, since I am leaving out stock dividends. The buy & hold gets 100% of the dividend return, while the strategy only gets 1/2 the dividends. I can't find historical Dow Jones dividend rates yet. I'll search and try to post again this evening.

[hedgeyerbets]

you should be able to find div adjusted price streams

[pig4bill]

I've read about this in a few places, although I thought they had said the market lost money overall in the summer. Hence the old market saying "Sell in May and go away". I think the scheme is fully detailed in the Motley Fool book. I don't know where my copy is right now so I can't check it.

You can monkey around with the dates a little and probably change the results somewhat, but you want to be careful not to over optimize it. Are you backtesting it with Tradestation or Metastock or something like that?

[DesertCat]

[ QUOTE ]

Instead of finishing with $24,608,711 as in the original post, the strategy now is at $88,037,236. This increases the annual return from 6.76% to a whopping 9.57%.

This only opened a can of worms for me, since I am leaving out stock dividends.

[/ QUOTE ]

Dividends & taxes make a huge difference in results. My guess is this approach gets creamed once you calculate those in.

Specifically, if your funds with this strategy actually compound at the after tax return rate. Todays short term cap gains tax rates are around 35-40% depending upon your tax bracket and state. So your compounding rate on your 9.57% drops to somewhere around 5.5-6%.

The ability to defer capital gains and pay only 15-25% (federal+state) at termination is a very compelling advantage for buy and hold over long periods.