Seasonality

by Gary | Apr 21, 2010 | Archives

Seasonality can have a big impact on your wealth.

Spring blooms at our North Carolina farm.

In this era of great economic change… one constant we can be quite sure of is inflation…. which hurts those on fixed income and salaries the most. Five ways to combat inflation are:

#1: Move where costs are lower.

#2: Invest in real estate.

#3: Invest in commodities.

#4: Have your own small business.

#5: Invest in equities.

Since current times force us to consider investing more in stock markets, about this time each year I remind readers about seasonality.

April showers bring May flowers in the

Blue Ridge like these on…

Little Horse Creek.

But spring also eliminates the bloom on the stock market.

May is a month to exercise extra caution in your equity portfolio.

A statistical analysis was done some years ago by Michael Keppler. This study shows that most appreciation in most major equity markets, is achieved from the beginning of November through the end of May.

Michael wrote: “Gary, We have done extensive research on seasonality and I am proud to announce that a shortened version of a major study which I have coauthored with our Director of Research, Dr. Xing Hong Xue, will be published in the Winter Issue of the Journal of Investing. Our research shows that basically in all major equity markets, nearly all returns are achieved from the beginning of November through the end of May. All the best to you and Merri. Michael”

Keppler showed that over 30 Years Dow the Dow grew 8.16% overall.

There was 8.36% Growth in the months November through April.

There was 0.37 growth in the months May to October.

$100 invested in the Dow grew to $848 overall over the 3o years.

$100 invested in the Dow grew to $1,067 if it were invested only in the months of November through April.

$100 invested in the Dow dropped to $79 if it were invested only in the months of May to October.

Historically the best five months where there are the best chances of equity profits end in about 30 days. There is no on-off switch I know of but we should be thinking more about risk aversion beginning about now.

This equity warning is important because large numbers of investors have borrowed currencies to leverage stock investments. These investors will dump shares quickly to pay off loans so share prices are more likely to drop quickly over the next month or so.

These borrowers tend to be nervous investors because of their leveraged positions. If fear sweeps the market, these investors dump quickly to pay off their loans. This pushes the markets down quickly, especially the emerging markets which tend to be thinner markets to begin with.

The months ahead are when the chances of profit in markets are at their lowest. Risks are at the highest.

This is reason enough for an equity warning. May flowers may be upon us, so you have been reminded! This may be a good time to start cleaning up your equity portfolio.