Welcome to the 2017 edition of Seasonal Musings!
Back in 2014 I decided to put together this series of lengthy threads because it seemed like there was a dearth of information for active movers, market timers and buy-and-holders here at TSP Center. New forum members would show up, do some reading, run across something about investing using seasonal methods, and ask a question or two about it. Then it would be up to those of us who still remember those days to dig up the information or the thread and point the newbie in the right direction. In the early days when TSP Center’s forum membership started delving into seasonality (2011 or so), forum member Jahbulon was the de-facto expert on the method. However, there’s not much information readily available on seasonal strategies since he went quiet a while ago (2013ish) when he started his TSP Holy Grail Research Lab and tspmarketwatch.com sites (both of which are no longer up and running, BTW). While I admit to reading, and following, much of his research (and some of it is replicated here), I’ve also incorporated other things I’ve learned from other sources as well.
For those that are interested in history, my other Seasonal Musings threads are here:
Original 2014 thread: viewtopic.php?f=14&t=10382
2015 version: viewtopic.php?f=14&t=11076
2016 version: viewtopic.php?f=14&t=12089
A note to those that followed the old threads: this thread has had a few revisions and updates in the early “introduction” posts from the old ones. You might find some of the new information interesting, entertaining, or irritating. Whichever happens to be the case, please know that I didn’t just copy-and-paste the old thread entries into this one without adding or changing pertinent information.
Please be aware that this thread isn’t an effort to prove that “Seasonal Beats All”, or that it’s impossible to beat the market using timing or that buy-and-hold is for lazy folks. It’s simply an effort to give more options to TSP investors. As I mentioned above, I’ve seen more than a few new (or newish) members asking about the seasonal calculator or other seasonal topics in the past, and I’ve been asked a question or two in private. So in mid-2014 I figured that since I’ve done a lot of studying on this method of investing as it relates specifically to the TSP, I’d share what I know. In the end, we all have the same goal – to make money, right? The data and trends I discuss here are convincing enough to me that I’m following a seasonal strategy with my personal and Fantasy TSP accounts. I’m putting my money where my mouth is.
I’ll caveat all of this by saying that I’m not a fiduciary, I’m not an advisor, I’m not an expert, and I’m not responsible for your monetary decisions. This thread is partly to inform, partly to document my own thoughts and musings, and partly to invite discussion on the topic of seasonal investing within the framework of the TSP. You’re all adults here (at least by law if not by mental faculty), and you each hit the “submit” button on the Interfund Transfer screen on tsp.gov of your own accord.
Now that all that’s said and out of the way, let's get this show on the road, shall we?
Seasonal investing is a strategy that looks at historical monthly patterns in the market, analyzes the times of year that have good odds of having positive returns, and then playing those odds and letting the Law of Averages win out over the long term. This method of trading is a good option for those that don’t want to “set it and forget it” because they feel that they need to be aware of what’s happening with their money, but don’t have the time to devote to learning how to time the market or sitting in front of candlesticks for 2-3 hours a day. It’s also an option for the followers that like John Bogle’s take on investing (buy and hold philosophy), that the best strategy is to stay in for the long haul and weather the storms, but don’t completely agree with his rationale when it comes to staying in the market when the odds are that it will be a negative month.
Think of it this way: an MIT study on casino gambling found that the best possible odds for games where you play against the house (instead of against other players) is Craps. The mathematical calculations show that the best odds (meaning, risk vs payout) you can get are just shy of 50/50 if you bet the Pass Line and take the Maximum Odds option whenever you have a chance. All other bets available on the table are stacked heavily against you. Any other game in the casino is worse for you from there. Knowing that, if your goal is to have the best odds possible at the casino, why go anywhere else but the Craps table?
Seasonal investing is the same way. We’re taking a look at the historical returns, calculating the averages for each Fund for each month, and picking the best Fund to be in for that month based on the odds. It’s not exactly a mantra you sometimes hear in investing talk called “Sell in May and Go Away”, but it certainly follows the concept that there are certain times when it’s better to be in than out, and vice versa. We’re betting on those odds. Market Timers do the same thing, just using different data and on a shorter timeframe to figure out their odds. “Buy and Hold” followers do the same thing in that they rely on the long-term market average to continue being the average for the next 30 years or so simply because it’s been that way for the past 200+ years. We’re all betting the odds, we’re just using different sets of data coupled with backtesting to determine our chances and for some clue as to what might lie ahead.
An example of how seasonal strategies work is like this: since 1988 the S Fund has been positive in December 25 out of 29 times, or 86% of the time. Over that time, it has a Cumulative Annual Growth Rate (CAGR – aka: average rate of return) of 3.00%. In the last 20 years it has been positive 16 times (80%), with a CAGR of 2.99%. And in the last 10 years has been positive 7 times, with a CAGR of 2.22%. The last 5 years has been positive 4 of 5 times, and the CAGR has been 0.86%. Of those 4 negative Decembers since 1988, the returns were -4.32% (2002), -3.91% (2015), -0.4% (2007) and -0.04% (2012). An investor using these historical figures would conclude that there’s a darn good chance of December being a positive month for the S Fund. If it ends up being a negative month then it’s got a 50/50 chance to be only a minor loss (a loss of -1% or less), so his risk of being in the S Fund during December is small for the gains he's likely to get. December is a good bet.
On the other end of the spectrum, August is terrible for the I Fund. It has been positive only 13 out of 29 times (45%), with a CAGR or -1.62% (the average annual return is very negative). In the last 20 years it has been positive 9 times and the CAGR is also -1.62%. The last 10 years has seen only 3 positive returns (30%) with a CAGR of -1.85%. And of the last 5 years, only 2 have been positive (40%) and the CAGR is -1.15%. The I Fund in August is a horrible bet! The odds of it being a negative month are horrifying, and should send any investor running for cover at the thought.
Seasonal strategies take this line of thinking and applies it to the rest of the year, allocating a “best Fund” to each month based on historical odds. Then the strategy is re-analyzed each month to decide if a particular month’s Fund needs to be changed, or if it should stay the same for next year. If the investor desires it, additional study can be devoted to learning “why” each month tends to be positive or negative for particular sectors of the market. December, for example, is affected by mutual fund managers and other investors needing to pad their annual numbers, end of year dividends and pay bonuses being rolled over into further purchasing to avoid tax burdens, the Holiday shopping season and by general optimism. The collective effect is often called the “Santa Clause Rally”, and usually occurs in the last two and a half weeks of the year.
It’s not a 100% accurate method, but then again no strategy is. Personally, I’m satisfied with an 80% success rate – if the strategy has positive annual returns at least 80% of the time with a CAGR of 12% or more per year, then I’m winning in the long run. Why 12%? Because the S&P 500 Index (the C Fund follows this) has a historical 1988 – 2016 CAGR of 10.16%, and the Dow Jones Total Stock Market Completion Index (S Fund follows this) has a CAGR of 11.32% for the same time period. If I can beat those benchmarks, then I will be winning over Buy and Hold. Keep in mind that professional investment gurus say to plan for your retirement using an optimistic 7 or 8% annual return on your money. If I use a system that says I should get 12% or better every year based on history, and I end up getting only 75% of that, then I’m still in that 7-8% range. So I plan for my retirement using those 7-8% numbers. Even if the system only works half the time I’m sitting at 6% a year, and that’s a whole lot better than getting a measly 2% in the G Fund. (And the good news is that there are strategies I’ll talk about later that have a 16+% average, so there’s even more wiggle room for error!)
Seasonal investing can have elements of both buy-and-hold methodology and technical chart analysis in it. It’s like buy-and-hold in that you follow a system and largely ignore the media, blogs, and world politics when making your investing decisions and stay the course. It’s like technical analysis in that you can use technical indicators to decide when the best time is to make your move if you’re not satisfied with just moving funds at the end of the month. Using technicals can give you +/- a few % each year due to moving at the most optimal time +/- a few days. I won't cover technicals in this thread, that's something that's amply covered by other folks on the Forum.
Like any system, though, seasonal systems have Pros and Cons.
- Emotion is removed from the decision making process. Everything is analyzed logically by establishing quantified limitations of what a “good” month looks like, what the odds are of having a positive month vs the likelihood of a month being negative. Don't be fooled, you will still feel the emotion, but if you can keep it out of the decision making process then this is a plus.
- It’s a systematic approach that analyzes the data and makes adjustments as necessary. You don’t blindly follow the system, you understand “why” you’re in a certain Fund at a certain time and have factual data to support that understanding.
- It tends to produce consistent returns because you avoid the times of year when bad things often happen, and you make sure you’re invested when the good things usually end up happening. It doesn't always turn out this way, but more often than not it does.
- It’s simple to do: only about 6 moves a year for most plans, some a few more, some less. Either way, it’s a system that fits easily into the TSP’s restrictions on allowing only 2 IFT moves each month.
- If you commit to the strategy, you must follow through with it and ride the emotions that come with rough times. I made the mistake of not doing so in Feb 2014 – the market took a short dive in late Jan / early Feb while I was in the S Fund. I got scared and ran to the F Fund for the duration of Feb because the F Fund is the second-best Fund for that month. While that Feb ’14 was positive for the F fund (0.62%), the S Fund came back strong later in the month and had a return of 5.43%. This mistake on my part made a big difference in my ’14 real-world return. I further compounded the problem when I went looking for an indicator to keep me from losing again – a “stop my losses” trigger of sorts. That indicator ended up failing me because I didn’t fully understand it until I did a lot of digging and research. Before I could finish my learning, the indicator caused even more losses for me in Oct 2014, after which I finally figured out why the indicator didn’t work the way I thought it did. I’ve learned my lesson: follow the data, trust the numbers. The Law of Averages works.
- No system works all of the time. Sometimes it just won’t work. We’re playing the odds with this strategy and while the Law of Averages says we should win in the long run, it also says that we’ll have periods when we don’t. What we’re doing is stacking the deck in our favor and making an informed decision on where and when we invest. It’s the long-term end result you need to keep your focus on, not the short term dips and peaks. Followers of Bogle’s philosophy can appreciate this sentiment.
- Times when the markets move sideways for a long time are frustrating to this system because we’re looking for clear positives and negatives for each time period we use to make our decisions. At such times, we have to resist the urge to try to play Market Timer and try to do better. You avoid doing this by remembering that a small positive is still a positive, and a small negative could be much worse if we aren’t good at our market timing decisions.
So what does it take to follow a system like this?
- An interest in paying attention to what your account is doing while acknowledging that we don’t know enough to play Market Timer well enough to produce reliable returns.
- Dedication to following a logical system without letting emotion get in the way.
- A long-term focus: 12% a year over 30 years turns a biweekly $200 allocation into around $1,500,000. This would represent a FERS employee that makes $52,000 a year allocating 5% and gets the 5% match for 30 years, and doesn’t get a pay raise the entire time. For the military folks, if an 18-year old service member put $100 per paycheck into his account for 20 years and got 12% on average, it would turn into $180,500 by the end of that 20-year career. That $180,500 would grow into $2,739,700 by the time he turned 62, without having to put in another dime after he retired from the service.
- A willingness to ignore how well or poorly everybody else is doing, what the media is saying, whether or not the “experts” are saying to buy or sell, etc. Let the numbers do the talking for us and aim to get the average as positive as we can. The major exception to this is paying attention to the policies set out by the Federal Reserve – they will probably impact the F Fund, and to a smaller extent the G Fund. How much is not known, but there will be an effect (likely to the downside).
You might be thinking “That’s all fine and dandy, but what data is out there to support a seasonal system?” Answer: tons of it. Many books have been written on seasonal trends in general. Specifically for the TSP, http://www.tsp.gov
has historical data going back to 1988 for the G, F and C Funds, and it’s easy to find similar data for the S and I Funds (which TSP has back to only 2001). I’ve taken the time to make an Excel workbook that details all of the monthly returns for each Fund going back to 1988 and calculated the CAGRs as well as the annual Positive / Negative Rate (PNR) for each Fund for each month.
Most months are pretty black and white as to whether or not it’s a good time to be in the market according to the odds. Then I track various seasonal mixes using that data, and even compare them against each other in order to find the best possible mixture. I freely offer the Excel workbook to anybody who asks nicely, just ask the couple dozen of forum members that already have a copy of it. But be forewarned: it’s big. There’s a lot of manipulation of data going on, and lots of little tweaks need to be done manually each month to keep it updated.
What I’d like to do with this thread is invite discussion on this strategy, and to document the monthly progress of several seasonal TSP Fund mixes that I’ve seen, including the one I’m using. Going forward I’ll also do a monthly entry that documents how each Fund has performed in the past for the next upcoming month, and this entry will be towards the end of the month so interested parties will have enough time to percolate on what the upcoming month looks like historically. I’ll also post how the various mixes are set for the upcoming month. And at the end of the year I’ll do a wrap-up post before starting the next year’s thread.
And with that, I’ll end this lengthy post and use the next few posts to do an overview of the various Fund’s historical details and the seasonal mixes I’m actively tracking. They are as follows:
- TSP Center’s default setting on the “TSP Seasonal Calculator” page.
- Jahbulon’s Basic Mix
- gclapper's M3 Mix
- tmj100's Mix
- Boltman’s Mix
- A straight “Sell in May and Go Away” using G and C
- A formula that’s in G all year, and S in December
There’s other mixes I’m tracking as well. Some are doing ok, some aren’t. They’re mostly variations on the mixes I listed above. I don’t post about them on a regular basis because there’s just so many of them (23 at last count), and it would take just too much time to write about them all. I can give those stats as well if anybody is interested and asks nicely. Also, if anybody has another version they’d like me to add to the list and my ongoing tracking database, let me know and we’ll see if it’s promising. That’s how gclapper’s M3 Mix came into being last year. None of the mixes I follow use the L funds, and I don’t anticipate starting them anytime soon. The L funds don’t fit into the methodology and mindset that seasonality uses.
Stay tuned for some explanations of terms, the individual Fund History posts, the Seasonal Mix overview posts, and a final closing post to signal that you’re at the end of the starting posts I use to introduce this method of investing to interested parties.