Is there a significant difference between investors using the traditional buy-and-hold strategy verses a seasonality strategy — investing in the Dow Jones Industrial Average (DJIA) only during certain months of the year?
In a test of the market over the last 38 years, researchers Marshall Nickles (pictured left) and Ray Valadez, professors at Pepperdine University’s Graziadio School of Business and Management, found that if a seasonality strategy had been adopted and coupled with the DJIA, returns would have been 5 times greater than the buy-and-hold strategy. Risk would have been reduced by more than half.
The findings won Best Paper in Finance at the International Conference for the Global Business Development Institute in March. The authors’ paper Enhancing Returns In A Volatile Global Stock Market questions the traditional belief that there exists an inverse relationship between risk and reward.
“The recent shocks in the financial markets and declines of the stock markets around the world have caused many traditional investors to question the wisdom of a buy-and-hold strategy,” said Dr. Marshall Nickles. “This paper uncovers that while invested in the DJIA over the past 38 years, returns could have been enhanced and risk reduced by limiting the time exposure to the market.”
For the study, the authors selected two seasonality strategies; one took an approach of investing in the DJIA during a 6-month favorable period (November-April of the following year) and then remaining in a money market or commercial paper for the next 6-month unfavorable period (May-October), which was called the seasonality strategy.
The other took an approach of investing in the DJIA only during the third year of a Presidential period (political cycle year strategy) and then remaining in a money market or commercial paper for three years until the next political cycle year to reinvest in the DJIA once again. In a previous study, Dr. Nickles found evidence that suggests investing for the 27 months before a U.S. presidential election is more profitable than investing during the 21 months after the elections.
First, the authors’ statistical results showed that over the past 38 years seasonality existed in DJIA. There was a significant difference between the favorable period and unfavorable period as defined. Further, there were significant differences AMONG the two seasonality strategies–seasonality strategy and political cycle year strategy–and the buy-and-hold strategy. Finally, there was a significant difference BETWEEN the two seasonality strategies, seasonality strategy and buy-and-hold strategy, as well with the seasonality strategy being superior in investment results.
“During the test period 1971- 2008, using a time series approach of 10-year cycles and using the Ulcer Index to measure risk, we found that the seasonality strategy performed better overall. There were significant differences in the both the Ulcer Index and returns of the 10-year cycles,” concluded Dr. Valadez. “If the seasonality strategy had been adopted and coupled with the DJIA, it would have accomplished superior investment returns.”
Marshall D. Nickles, Ed.D., is a professor of economics at Pepperdine University and he has been a stock market consultant for over 30 years.
Ray M. Valadez, Ed.D., is a member of practitioner faculty of economics at Pepperdine University. He has held numerous credentials in the financial services field including being a Registered Principal before the National Association of Securities Dealers (NASD).