Wednesday 16 July 2014

Seasonal Trading Strategy for Stock Funds and US Federal Employee TSP 401k Retirement Accounts

Summary:
Of course we know past performance does not guarantee future results but there is something here that makes this investor think that just maybe there is something more to the story this time.

Article Body:
“Sell in May and Stay Away” Words to live and invest by?  I don’t know who coined the phrase but I did a bit of research and yes this strategy would have worked out for you is you had implemented it over the life of the TSP retirement account.   Of course we know past performance does not guarantee future results but there is something here that makes this investor think that just maybe there is something more to the story this time.

There are five funds available in the Thrift Savings Plan.

The C Fund is based on the S&P 500
The F Fund is designed to match the bonds in the Lehman Brothers U.S. Aggregate (LBA) index.
The G Fund invests in short-term U.S. treasuries
The S Fund follows the Wilshire 4500 index
The I Fund follows the EAFE index

From its inception in 1988 through the end of 2005 the C Fund (based on the S&P 500) has averaged 12.61556% per year.  In the months October through May it averaged12.87611%.   From June through September it averaged -0.26056%.   For the same 18 year period, the F Fund averaged 3.356111% for the four months June through September.   Had you sold all of your stock C Fund on May 31 and moved all your money into the F Fund and then moved all of your money from the F Fund back to the C Fund on September 30th, you would have realized a 3.616667% per year increase in your rate of return over 18 years.  Let me repeat this, a 3.616667% annual increase based on only two trades per year.

From 2001 through 2005 the C Fund (based on the S&P 500) annual average was only 2.22%.  Its average gain October through May was 9.24% while it’s June through September average was an appalling 7.02% loss.  Utilizing the same strategy as above, our average rate of return would have jumped from an anemic 2.22% to a healthy 11.38%.  That is an amazing increase of over 9% based on just two trades per year.

Since its inception in 2001 the S Fund (based on the Wilshire 4500 index) has averaged 9.314% and the I Fund (based on the EAFE index) averaged 6.56%.   They show the same pattern of gains October through May, with gains of 14.05% for the S Fund and 10.368% for the I Fund annually during those eight months. They also continue the S Fund pattern of losses Jun through September, a 4.736% loss for the S Fund and 3.808% loss for the I Fund.  Using the same strategy of eight months in the S and I funds and four months in the F Funds, you would have realized additional gains of 6.336% for the S Fund and 5.378% for the I fund brining your rate of return to 15.65% for an S+F strategy and 11.938% for an I+F strategy.  

What do you think about this?  Join the TSPcenter forum and let me know.  My gut tells me we are in for a bad summer.  Of course that could be a result of the pepperoni pizza I just ate.


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