To beat Street, invest 1 day a month

It's a very simple form of market timing that has worked well for more than a decade.

By MSNMoney partner Jan 3, 2011 9:14AM

stockmarket © Image Source/Corbis By DAVID K. RANDALL, The Associated Press


It's one of the truisms of financial planning: Trying to perfectly time the market is a fool's errand. For long-term gains, the advice goes, you should buy index funds and hold them indefinitely. Warren Buffett likes to say that his preferred holding period is "forever."


But a very simple form of market timing has worked for the past 11 years. It involves owning the Standard & Poor's 500 stocks -- but only for the first day of every month.


An S&P report recently found that someone who invested $10,000 in the S&P 500 on Dec. 31, 1999, and left the money there until Dec. 1, 2010, would have just $8,209. An investor who was in the market only on the first day of every month over the same time -- for example, buying at the close on Dec. 31 and selling at the close of the first trading day in January -- would have $13,816.

That's nearly 70% more than buying and holding the whole time. S&P didn't include reinvesting dividends in either scenario, because of the complications of figuring out which companies paid dividends on the first trading day of the month for 11 years. But even if you include all possible dividends for the buy-and-holders, the first-day-trade strategy came out 33 percentage points ahead.


The strategy appears to work because of a market quirk. Money tends to go into stocks of the first day of the month as institutional investors reopen their books for a new reporting period. It's also the day when money tends to go into 401k or other retirement accounts.


"It's a quirk that works," says Howard Silverblatt, a senior index analyst at Standard & Poor's. "It's hard to argue with someone who made well over 30% compared to someone who's down almost 20%."


It helped that the stock market hasn't been kind to most investors over the past 11 years. Staying in the market for only one day a month would have limited your losses during the dot-com bust or the 2008 financial crisis. The week of Oct. 6-10, 2008, for example, the S&P dropped 18 percent.


First-day traders were sitting in cash and spared that agony.

Other financial experts are accepting S&P's research grudgingly.


"It's not as outlandish as it first appears," says Christine Benz, the director of personal finance at fund tracker Morningstar. But she says that it might not be a strategy that most small investors can follow because of the trading costs involved and the amount of discipline that's required to stick with it month after month. She isn't planning on changing her advice any time soon.


"I don't know if I want to give up buying and holding," she says.

Silverblatt says that the first-day trade has worked over two bull markets and two bears markets, which he says gives some credence to the idea that you can time the market, but only over a long period.


"Timers either do the best or they go bankrupt," he says. "No one has gone bankrupt doing this."

2Comments
Jan 12, 2011 7:37PM
avatar
200 day moving average got me out before the 2008-2009 crash, and it would have also worked well for the 1999 crash had I not been in the federal TSP where at that time the delay was 2-6 weeks to switch funds.  In 1987 it happened too fast, but it ended up being a blip when looked at decades later. 
Jan 3, 2011 11:55AM
avatar
Market timing isn't new. It has also been the short cut to bankruptcy when done over time. I don't have the time to check out this latest lunacy, but my guess is that it might hold as a fluke, but investing is serious business where believing in market timing generally is no better than horoscopes.
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