Rebalance in May

In a post on the site earlier this week Steven Sears talked about why given the performance of a “Sell in May” strategy that so few investors actually take the strategy to heart. Sears wrote:

So why does no one really respect the seasonal trade? Because no one wants to miss the chance to make money. Imagine if you are a portfolio manager and the market surges from May to October. How do you explain that to investors?

To reflect on it further, Scotty Barber at Reuters just posted the graphic below showing the seasonal performance of the MSCI World Index. In short, a “Sell in May” strategy looks pretty good:

SeasonalMSCI 04121 Rebalance in May

Source: Reuters

Even if you are, like the managers Sears mentions, not interested in going all-in on some sort of seasonal strategy there is a middle ground. In my new book, Abnormal Returns: Winning Strategies From the Frontlines of the Investment Blogosphere, I note how investors can use the end of April and end of October as times to rebalance their portfolios. If equities are seasonally strong this time of year then selling equities to rebalance into other asset classes might make sense, and vice versa in October.

You can see directionally how this sort of rebalancing trade performed historically in this post by Jake at EconomPic Data. In the below graph he shows how switching from equities into bonds, as opposed to cash, based on seasonality performs.

SecretSauce 0412 561x420 Rebalance in May

Source: EconomPic Data

There are some intriguing explanations why this sort of seasonal pattern exists. Then again it may simply be an artifact of data mining. The one argument for paying attention to this seasonal pattern is that net-net it generates a less risky return pattern by being in cash or bonds, for a big chunk of the year. Steven Sears is right that most institutional investors simply can’t follow this sort of strategy given the very real risk of underperforming. Fortunately individual investors report only to themselves making a seasonality-based strategy a viable option.

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