Higher Highs and Higher Lows

 
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By Miles Clyne

This is what happens in a market moving – trending higher. I noted in our July report to clients that on average from Mid-August to Mid-October can be the worst performing time of the year to invest. Essentially suggesting to everyone to not have great expectations over that time frame.  So why not just cash out at this time of year?

That could make good sense, especially if you invested specifically in ETFs. ETFs and many mutual funds either replicate, or in the case of many mutual funds, can be closet indexers.  This is where the manager dresses up the fund with jargon, but strip it down and it tracks the index so closely, it may as well be an ETF.  That said, there are lots of options that don’t just mimic an index.

When you have options, the water starts getting muddy in terms of making a decision.  Although our stock strategies went to cash in 2008, 2011 and 2016, we have yet to go to cash in 2018. We go to cash driven by inflow and outflows to the market. When there is consistently more money leaving the stock market over a reasonable time frame, regardless of the seasonality, it could signal an exit.

We are predominantly data driven investors. Two pieces of data told us to stay invested. There isn’t enough capital leaving the markets as of the date of this writing, and statistically we do much better than the market averages through this time frame. I can’t break out the returns of our performance data to illustrate mid-month returns, but 2/3 of the time we have had positive returns over approximately the same time frames.

In the tables below, the performance is up to and including October 16th. Over the same time frame the S&P/TSX Composite dropped from 16,337 to 15,580, this represents a drop of 4.62%.  The performance tab on our website shows the data below and is updated monthly. The performance of our US Composite stock strategy has seven years history, and has had positive returns over these same periods six of those seven years.

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A combination of transaction costs and capital gains might be other reasons to stay invested through these past couple of months.  Selling also begets another challenging decision, when to get back in? If all the issues that were present when going to cash still exist, it could be a tough choice to buy back in. On August 16th  of this year, if you weren’t back in the market you missed the S&P/TSX Composite gaining back 1.1% and our strategy was up 1.32%.

Looking at short-term data is most often a mug’s game anyway, so if you are basing long-term decisions on short-term events, you are likely paying a high price.  

When you are looking at data, I prefer mid to long-term data for decision making. In the investment industry, a rule of thumb is 0-3 years is short-term, 3 – 7 years mid-term and plus 7 years long-term.  You want disciplines that work out all the time, but Darwin was right, it’s not the smartest or strongest of the species who survive, but those who are most adaptable to change. The mid to long-term numbers show who is adapting to the market changes. The table below validates we are adept at adapting.

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The more I think about it, failure to adapt to a more logical investment process is akin to Darwin’s Theory of Evolution. The less we adapt as investors, the less likely we will survive financially.