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Two Proven Short-Term Strategies for Long-Term Investors
Daily Gains Letter publishes daily updates on personal finance, investment strategies and financial planning related topics.
Generally speaking, by keeping focus on the long term, investors can grow their portfolio with peace of mind. When doing this, they are not concerned about what happens to their portfolio on a daily basis; rather, they are looking for performance at the end of the year, when it’s less stressful.
That said, while not denying that focusing on the long term is definitely a good idea, there are times when investors may be able to speculate with high probability trades and give their portfolios a little boost. As I have said before, an increase of just one percent over time can amass into a significant sum.
Consider the following two investment strategies through which investors may be able to grow their portfolio:
1. Sell in May and Go Away
If you have seen or heard the financial news recently, then you have most likely heard of this strategy before. The implication behind this investment strategy is that investors should sell stocks in the month of May and not come back to the markets until October. This is because in this period, historically speaking, the key stock indices don’t perform well, providing dismal returns.
According to the Stock Trader’s Almanac, since the 1950s, in the six months between May and October, the Dow Jones Industrial Average has gained only 0.3%. Compared to the other six months, November through April, the gains on the Dow have averaged 7.5%. (Source: Task, A., “‘Sell in May and Go Away’ and Other Sayings Best Ignored,” The Daily Ticker, May 31, 2013.)
2. Turn of the Month
This investment strategy is very simple. Investors apply this strategy by buying stocks on the last day of the month, then selling them about three or four days into the next month. For example, an investor would buy on June 28—the last trading day of the month—and sell their positions by July 4. (Note that this is just an example, not a recommendation to buy or sell.)
The logic behind this strategy is that at the end of the month, pension funds usually get contributions from their participants, so they have some funds to allocate, resulting in these funds going on a buying spree in the beginning of the month. Similarly, at the end of the month, mutual funds try to get rid of their positions that are poorly performing, looking to buy others to make their portfolio look better—or to “window-dress” their portfolio. (Source: Burton, J., “Timing is everything,” MarketWatch, March 12, 2010, last accessed June 13, 2013.)
How has this done over time? In the bull market, from the end of 1989 till the end of 1999, this investment strategy provided investors with an average return of 13.4% on a condition that the portfolio was invested into the Wilshire 500 Index and 90-day Treasury bills and was switched, as the strategy recommends. In the same period, a buy-and-hold investment strategy would have provided investors with 17.6% per year.
In the time when the markets were in stress, from the end of 1999 to February of 2010, this turn-of-the-month strategy returned investors 4.1% per year on average. If investors had employed a buy-and-hold strategy, they would have seen their portfolio decline 0.3%.
With all this said, investors need to keep in mind that speculating can result in severe losses to their portfolio. Instead of risking their entire portfolio, investors should only allocate a certain amount to taking short-term trades. Investors also need to realize that at the end of the day, these investment strategies might not work, and they may be forced to take a loss.
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Source: http://www.dailygainsletter.com/investment-strategy/two-proven-short-term-strategies-for-long-term-investors/1094/
