This portfolio consistently outperforms by 400% By Lee Wild | Mon, 27th October 2014 – 12:23
Buy low, sell high; it’s the basic aim of every investor right? But so-called market experts are fond of telling us that market timing doesn’t work for the majority of private investors. But they’re wrong. There’s an anomaly that has proved year after year over two decades that buying and selling at two specific dates of the year will generate far better returns than if you had stayed invested all year round.
It’s known as the six-month strategy, and is incredibly simple. All it requires is that investors buy a portfolio of stocks on 1 November and sell it on 30 April.
According to data compiled by Harriman House, publisher of The UK Stock Market Almanac, £100 invested in the FTSE All-Share Index continuously since 1995 would have grown to £231 (excluding dividends). However, if they had followed the six-month strategy, that £100 would be worth significantly more – £294. If they had chosen only to invest over the summer months and stayed in cash over the winter, they would have lost money and their £100 would be worth just £78.
Source: The UK Stock Market Almanac, Harriman House – click to enlarge
Over 10 years, the results are slightly less pronounced, but confirm the trend and investing throughout the whole time period would see £100 turn into £151, compared to £155 if just the winter months had been chosen. A summer-only portfolio would have shrunk to £98.
Almanac author, maths graduate Stephen Eckett, admits that this is bizarre. “The six-month effect is a genuine anomaly that shouldn’t exist (it should have been arbitraged away), but exist it does. Despite numerous academic studies, no-one is really sure why it continues to occur. It has existed for decades (in some cases back to the 19th century), and is present in most developed markets worldwide.”
But with a bit of research, we found that you can fine-tune the data to generate even bigger potential profits.
We screened the FTSE 350 for those stocks with the best record of returns between November and April over the past decade. To keep our portfolio manageable, we picked the top five. We called it the Interactive Investor Consistent Winter Portfolio. One of the constituents has generated a positive return in each of the past 10 years, averaging 18% (excluding dividends). The other four rose 90% of the time and returned between 23% and 37%.
In all, the Interactive Investor Consistent Winter Portfolio averaged annual growth of 26%, dwarfing average winter gains for the benchmark FTSE 350 index of just 5%, an outperformance of 416%. Only once has it failed to generate a positive return – in 2008. And that was also the only year it underperformed the FTSE 350. Returns for each constituent were pretty consistent year-on-year, too.
Then we took it further, cherry-picking the most prolific performers with an established track record of at least eight years. Only the ones which had risen between 1 November and 30 April at least 75% of the time made it through. This basket of five stocks carries a little more risk, but the average return from what we have called our Aggressive Winter Portfolio has been an amazing 37%, over seven times more than the FTSE 350.
“Far more money flows into the market over the winter months which may explain why markets consistently perform better over this six month period,” explains Interactive Investor’s head of investment Rebecca O?Keeffe. “Retail investors contribute much more to tax efficient portfolios at this time of year and for the first few weeks of the new tax year, before the money largely dries up in May. Professional managers also invest more over the winter and may be deliberately taking advantage of the disparity in market performance to time their investment to capitalise on the better returns available, thereby perpetuating the cycle.”
“The historic performance of our Winter Portfolios is quite astounding. Obviously past performance is not a guide to the future, however the fact remains that market analysis strongly suggests that this phenomena is more than just a one off.”
On Friday 31 October, we will reveal which companies made the final cut and make both the Interactive Investor Consistent and Aggressive Winter Portfolios available for investors to buy.
For more information on Interactive Investor’s Winter Portfolios, click here.
Purchase The UK Stock Market Almanac 2015 at the special price of £15 Plus P&P (hardback) or £10 (ebook)*. Order at Harriman House, entering promotion code II_ALMANAC_Hb for the hardback version or II_ALMANAC_Eb for the ebook.
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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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