Some days are just better than others – am I right or am I right? As a corollary, some days are worse than others. Wouldn’t it be nice to know in advance which days were going to be which?
Well, when it comes to the stock market (and bond market for that matter), maybe you can.
The 3 Days to Miss
For our purposes we will refer to the very last trading day of the month as TDM -1. The day before that will be TDM -2, the one before that TDM -3, etc. Now let’s focus specifically on TDMs -7, -6 and -5.
(See also The World is Your Oyster – 11 Days a Month)
Let’s now assume that we will buy and hold the Dow Jones Industrials Average every day of every month EXCEPT for those three days – i.e., we will sell at the close of TDM -8 every single month and buy back in 3 days later. We will refer to this as Jay’s -765 Method. Granted some may not be comfortable trading this often, but before dismissing the idea please consider the results.
Figure 1 displays the growth of $1,000 invested in the Dow as described above versus the growth of $1,000 from buying and holding the Dow.
*The starting date for this test is 12/1/1933.
*For this test no interest is assumed on the 3 days a month spent out of the market.Figure 1 – Growth of $1,000 invested in Dow Industrials during all days EXCEPT TDM -7,TDM -6 and TDM -5 (blue line) versus $1,000 invested in Dow Industrials using buy-and-hold (red line); 12/1/1933-8/15/2016
For the record:
*Jay’s -765 Method gained +94,190%
*The Dow buy-and-hold gained +18,745%
While these results are compelling, the real “Wow” comes from looking at would have happened if you had been long the Dow ONLY on TDMs -7,-6 and -5 every month since 1933. These results appear in Figure 2 (but you’d better brace yourself before taking a glance).Figure 2 – Growth of $1,000 invested in the Dow ONLY on the 7th to last, 6th to last and 5th to last trading days of every month since 12/1/1933
The net result is an almost unrelenting 83 year decline of -80%.
I would guess that some readers would like me to offer a detailed and logical reason as to why this works. Unfortunately, I will have to go with my stock answer of “It beats me.” Of course, as a proud graduate of “The School of Whatever Works” (Team Cheer: “Whatever!”) I am not as interested in the “Why” of things as I am the “How Much.”
Sorry, it’s just my nature.