Use April Strength To Rebalance

By Charles Rotblut, CFA, AAII

April is the second-best month for stocks, trailing only December in terms of average gains for the S&P 500. April also marks the end of the best six-month period for stocks.

Sam Stovall at Standard & Poor's calculates that the calendar's fourth month has produced an average monthly gain of 1.6% for the S&P 500 since 1945. Large-caps have risen 68% of the time. Jeffrey Hirsch, author of the Stock Trader's Almanac, has found only one down pre-election April since 1951.

After April, the market's batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway). The second quarter of the third of year of a presidential term has historically been a good time to own stocks. The aggregate economic data points to a continuing recovery, even if it is an uneven recovery. First-quarter earnings for the S&P 500 should be 13.3% higher than they were a year ago, according to Thomson Reuters. Finally, the S&P 500 still looks fairly cheap with a forward-looking price-earnings ratio of 13.4.

Not all is rosy, however. Congress is nearing a deadline for reaching a budget with the threat of government shutdown once again looming. The Federal Reserve's program of buying Treasury bonds ("QE2") is scheduled to end in June. Gas and food prices are rising. Unrest has spread across the Middle East. The European Union could raise interest rates next week. Then there is the tragedy in Japan and the ongoing issues with the nuclear reactors.

Hirsch recommends adopting a more conservative position for the period of May through October. He suggests either moving into cash and bonds or, for more active traders, tightening stop limits and using put options.

I'm not an advocate of market timing strategies, but I strongly believe that you should rebalance your portfolio on a regular basis. As I show in the new April AAII Journal, rebalancing your portfolio once a year increases performance and lowers volatility, a win-win proposition. It is more important that you rebalance your portfolio at approximately the same time every year than fret about how stocks have historically fared during a given month.

There is a middle ground"”rebalance twice a year. Research from Vanguard found that semiannual rebalancing can strike a reasonable balance between risk control and cost minimization. The key is to make changes only when allocations are 5% or more away from target (e.g., your stock holdings account for 56% of your portfolio when they should account for 50%).

Following Vanguard's strategy in combination with Hirsh's would have you considering whether rebalancing is warranted at the end of every April and every October. Doing so would allow you to reduce any excess stock allocations at the end of the best six-month period and increase them at the end of the worst six-month period, while still sticking to your long-term portfolio goals. The intent of this methodology is to adjust your stock holdings back to your long-term allocation targets, not to increase or decrease them beyond those targets. (If you need help determining what a proper target for your portfolio is, see our Asset Allocation Models).

I want to reiterate that the most important step you can take is to review your portfolio allocations and rebalance your holdings as warranted at approximately the same time every year, regardless of what month it is. The best and worst six months is a strategy you can overlay upon your rebalancing process, but only after you commit to regularly reviewing your allocations. ——————————————————————————————————————————————————

The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The opinions of all guest authors or contributors can and will differ from those of Mr. Roche. These opinions do not necessarily represent the opinions or investment decisions of Mr. Roche. The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

A brief note on comments – The increase in users in recent months has resulted in an increase in unproductive comments. Any user who engages in the use of racial epithets or uses the comment section as a place to insult other users will be banned from the site. The comment section is welcome to all readers who are interested in asking pertinent questions and/or engaging in thoughtful, intelligent, and productive debate. In short, just be nice. Thanks.

; document.write('');

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

icBrokerWidget('pragcap', 600, 55); Comments Boston_Al

Dear Sir,

In this opinion paper you wrote:

*************************************

“After April, the market's batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway).”

**********************************

As a value investor I read your advice with an incredulous smile. Why? Because investors that sell their “winners” simply because they have grown are holding an incorrect mental business model.

Let me provide a short example that might help explain my viewpoint.

If you owned a Gas Station (or some other firm) whose business grew 100% last year, would you sell it today simply because it doubled? Heck no! You’d hang onto it and seek to make it grow to 200% or 300% or more.

So why do intelligent business people buy a good company common stock and when it grows to 100% sell it just because it doubled? Why not hold it – providing the company fundamentals are still in place – and let it grow to 200%, 300% or 500%?

Thinking of common stock investments in a business like manner exposes your statements about rebalancing for short-term market or seasonal volatility an act of sheer folly. It is also an excellent example of one of the faulty dogmas of modern Wall Street advice.

Reply 04/03/2011 at 1:42 PM Leave a Comment Name Mail (will not be published) Website Click here to cancel reply.

Notify me of follow-up comments via e-mail

Popular Stories OIL PRICES STILL CONSISTENT WITH PAST RECESSIONARY LEVELS: Below we show the ratio of WTI to the core CPI, which recently crossed the 40x threshold for just th... OIL PREDICTS STOCK MARKET DIP: This week's chart shows again how the price plot of crude oil prices has done a great job of giving ... BUBBLE SPOTTING....: I've laid my cards on the table and so have a few other notable bubble spotters.  But few would arg... BUFFETT DISCUSSES THE USA'S PLUTOCRACY, LESSONS FROM THE CRISIS & DABBLES IN MMT: Warren Buffett is still traveling through Asia and still giving interviews.  This one is particular... HOW DARE I....: Some saw my recent article on Paul Krugman as some deliberate attempt to attack and denigrate his wo... 5 POTENTIAL BUFFETT "ELEPHANTS": While the David Sokol controversy unfolds in the coming weeks Warren Buffett will continue operating... LOOKING AHEAD TO APRIL - THE BEST MONTH FOR THE BULLS: It's still March, however, like any good chess player we want to be thinking a few moves ahead of th... THE DISCOUNT WINDOW, ITS STIGMA AND FULL DISCLOSURE: Everyone in the media is making a big fuss over the Fed's lack of full disclosure with regards to th... CHARTS THAT DON'T LOOK LIKE BOOMING DEMAND: Charts that Say Demand Isn't Doing Much of Anything... THE ISM COULD BE PREDICTING TOUGHER SLEDDING FOR THE S&P 500: It might be time for investors to temper their expectations for future equity returns.  That's what... Follow Us! REGISTER FOR PC LOG-IN TO PC var sc_project=5036143; var sc_invisible=1; var sc_partition=57; var sc_click_stat=1; var sc_security="5e6f901b"; icBeacon('pragcap');

© 2009 pragcap.com · Register for PC

Home · Advertise · Contact us · Disclaimer ·

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

icBrokerWidget('pragcap', 600, 55); Comments Boston_Al

Dear Sir,

In this opinion paper you wrote:

*************************************

“After April, the market's batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway).”

**********************************

As a value investor I read your advice with an incredulous smile. Why? Because investors that sell their “winners” simply because they have grown are holding an incorrect mental business model.

Let me provide a short example that might help explain my viewpoint.

If you owned a Gas Station (or some other firm) whose business grew 100% last year, would you sell it today simply because it doubled? Heck no! You’d hang onto it and seek to make it grow to 200% or 300% or more.

So why do intelligent business people buy a good company common stock and when it grows to 100% sell it just because it doubled? Why not hold it – providing the company fundamentals are still in place – and let it grow to 200%, 300% or 500%?

Thinking of common stock investments in a business like manner exposes your statements about rebalancing for short-term market or seasonal volatility an act of sheer folly. It is also an excellent example of one of the faulty dogmas of modern Wall Street advice.

Reply 04/03/2011 at 1:42 PM Leave a Comment Name Mail (will not be published) Website Click here to cancel reply.

Notify me of follow-up comments via e-mail

Popular Stories OIL PRICES STILL CONSISTENT WITH PAST RECESSIONARY LEVELS: Below we show the ratio of WTI to the core CPI, which recently crossed the 40x threshold for just th... OIL PREDICTS STOCK MARKET DIP: This week's chart shows again how the price plot of crude oil prices has done a great job of giving ... BUBBLE SPOTTING....: I've laid my cards on the table and so have a few other notable bubble spotters.  But few would arg... BUFFETT DISCUSSES THE USA'S PLUTOCRACY, LESSONS FROM THE CRISIS & DABBLES IN MMT: Warren Buffett is still traveling through Asia and still giving interviews.  This one is particular... HOW DARE I....: Some saw my recent article on Paul Krugman as some deliberate attempt to attack and denigrate his wo... 5 POTENTIAL BUFFETT "ELEPHANTS": While the David Sokol controversy unfolds in the coming weeks Warren Buffett will continue operating... LOOKING AHEAD TO APRIL - THE BEST MONTH FOR THE BULLS: It's still March, however, like any good chess player we want to be thinking a few moves ahead of th... THE DISCOUNT WINDOW, ITS STIGMA AND FULL DISCLOSURE: Everyone in the media is making a big fuss over the Fed's lack of full disclosure with regards to th... CHARTS THAT DON'T LOOK LIKE BOOMING DEMAND: Charts that Say Demand Isn't Doing Much of Anything... THE ISM COULD BE PREDICTING TOUGHER SLEDDING FOR THE S&P 500: It might be time for investors to temper their expectations for future equity returns.  That's what... Follow Us! REGISTER FOR PC LOG-IN TO PC var sc_project=5036143; var sc_invisible=1; var sc_partition=57; var sc_click_stat=1; var sc_security="5e6f901b"; icBeacon('pragcap');

© 2009 pragcap.com · Register for PC

Home · Advertise · Contact us · Disclaimer ·

Dear Sir,

In this opinion paper you wrote:

*************************************

“After April, the market's batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway).”

**********************************

As a value investor I read your advice with an incredulous smile. Why? Because investors that sell their “winners” simply because they have grown are holding an incorrect mental business model.

Let me provide a short example that might help explain my viewpoint.

If you owned a Gas Station (or some other firm) whose business grew 100% last year, would you sell it today simply because it doubled? Heck no! You’d hang onto it and seek to make it grow to 200% or 300% or more.

So why do intelligent business people buy a good company common stock and when it grows to 100% sell it just because it doubled? Why not hold it – providing the company fundamentals are still in place – and let it grow to 200%, 300% or 500%?

Thinking of common stock investments in a business like manner exposes your statements about rebalancing for short-term market or seasonal volatility an act of sheer folly. It is also an excellent example of one of the faulty dogmas of modern Wall Street advice.

Notify me of follow-up comments via e-mail

© 2009 pragcap.com · Register for PC

By Charles Rotblut, CFA, AAII

April is the second-best month for stocks, trailing only December in terms of average gains for the S&P 500. April also marks the end of the best six-month period for stocks.

Sam Stovall at Standard & Poor's calculates that the calendar's fourth month has produced an average monthly gain of 1.6% for the S&P 500 since 1945. Large-caps have risen 68% of the time. Jeffrey Hirsch, author of the Stock Trader's Almanac, has found only one down pre-election April since 1951.

After April, the market's batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway). The second quarter of the third of year of a presidential term has historically been a good time to own stocks. The aggregate economic data points to a continuing recovery, even if it is an uneven recovery. First-quarter earnings for the S&P 500 should be 13.3% higher than they were a year ago, according to Thomson Reuters. Finally, the S&P 500 still looks fairly cheap with a forward-looking price-earnings ratio of 13.4.

Not all is rosy, however. Congress is nearing a deadline for reaching a budget with the threat of government shutdown once again looming. The Federal Reserve's program of buying Treasury bonds ("QE2") is scheduled to end in June. Gas and food prices are rising. Unrest has spread across the Middle East. The European Union could raise interest rates next week. Then there is the tragedy in Japan and the ongoing issues with the nuclear reactors.

Hirsch recommends adopting a more conservative position for the period of May through October. He suggests either moving into cash and bonds or, for more active traders, tightening stop limits and using put options.

I'm not an advocate of market timing strategies, but I strongly believe that you should rebalance your portfolio on a regular basis. As I show in the new April AAII Journal, rebalancing your portfolio once a year increases performance and lowers volatility, a win-win proposition. It is more important that you rebalance your portfolio at approximately the same time every year than fret about how stocks have historically fared during a given month.

There is a middle ground"”rebalance twice a year. Research from Vanguard found that semiannual rebalancing can strike a reasonable balance between risk control and cost minimization. The key is to make changes only when allocations are 5% or more away from target (e.g., your stock holdings account for 56% of your portfolio when they should account for 50%).

Following Vanguard's strategy in combination with Hirsh's would have you considering whether rebalancing is warranted at the end of every April and every October. Doing so would allow you to reduce any excess stock allocations at the end of the best six-month period and increase them at the end of the worst six-month period, while still sticking to your long-term portfolio goals. The intent of this methodology is to adjust your stock holdings back to your long-term allocation targets, not to increase or decrease them beyond those targets. (If you need help determining what a proper target for your portfolio is, see our Asset Allocation Models).

I want to reiterate that the most important step you can take is to review your portfolio allocations and rebalance your holdings as warranted at approximately the same time every year, regardless of what month it is. The best and worst six months is a strategy you can overlay upon your rebalancing process, but only after you commit to regularly reviewing your allocations. ——————————————————————————————————————————————————

The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The opinions of all guest authors or contributors can and will differ from those of Mr. Roche. These opinions do not necessarily represent the opinions or investment decisions of Mr. Roche. The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

A brief note on comments – The increase in users in recent months has resulted in an increase in unproductive comments. Any user who engages in the use of racial epithets or uses the comment section as a place to insult other users will be banned from the site. The comment section is welcome to all readers who are interested in asking pertinent questions and/or engaging in thoughtful, intelligent, and productive debate. In short, just be nice. Thanks.

; document.write('');

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

icBrokerWidget('pragcap', 600, 55); Comments Boston_Al

Dear Sir,

In this opinion paper you wrote:

*************************************

“After April, the market's batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway).”

**********************************

As a value investor I read your advice with an incredulous smile. Why? Because investors that sell their “winners” simply because they have grown are holding an incorrect mental business model.

Let me provide a short example that might help explain my viewpoint.

If you owned a Gas Station (or some other firm) whose business grew 100% last year, would you sell it today simply because it doubled? Heck no! You’d hang onto it and seek to make it grow to 200% or 300% or more.

So why do intelligent business people buy a good company common stock and when it grows to 100% sell it just because it doubled? Why not hold it – providing the company fundamentals are still in place – and let it grow to 200%, 300% or 500%?

Thinking of common stock investments in a business like manner exposes your statements about rebalancing for short-term market or seasonal volatility an act of sheer folly. It is also an excellent example of one of the faulty dogmas of modern Wall Street advice.

Reply 04/03/2011 at 1:42 PM Leave a Comment Name Mail (will not be published) Website Click here to cancel reply.

Notify me of follow-up comments via e-mail

Popular Stories OIL PRICES STILL CONSISTENT WITH PAST RECESSIONARY LEVELS: Below we show the ratio of WTI to the core CPI, which recently crossed the 40x threshold for just th... OIL PREDICTS STOCK MARKET DIP: This week's chart shows again how the price plot of crude oil prices has done a great job of giving ... BUBBLE SPOTTING....: I've laid my cards on the table and so have a few other notable bubble spotters.  But few would arg... BUFFETT DISCUSSES THE USA'S PLUTOCRACY, LESSONS FROM THE CRISIS & DABBLES IN MMT: Warren Buffett is still traveling through Asia and still giving interviews.  This one is particular... HOW DARE I....: Some saw my recent article on Paul Krugman as some deliberate attempt to attack and denigrate his wo... 5 POTENTIAL BUFFETT "ELEPHANTS": While the David Sokol controversy unfolds in the coming weeks Warren Buffett will continue operating... LOOKING AHEAD TO APRIL - THE BEST MONTH FOR THE BULLS: It's still March, however, like any good chess player we want to be thinking a few moves ahead of th... THE DISCOUNT WINDOW, ITS STIGMA AND FULL DISCLOSURE: Everyone in the media is making a big fuss over the Fed's lack of full disclosure with regards to th... CHARTS THAT DON'T LOOK LIKE BOOMING DEMAND: Charts that Say Demand Isn't Doing Much of Anything... THE ISM COULD BE PREDICTING TOUGHER SLEDDING FOR THE S&P 500: It might be time for investors to temper their expectations for future equity returns.  That's what... Follow Us! REGISTER FOR PC LOG-IN TO PC var sc_project=5036143; var sc_invisible=1; var sc_partition=57; var sc_click_stat=1; var sc_security="5e6f901b"; icBeacon('pragcap');

© 2009 pragcap.com · Register for PC

Home · Advertise · Contact us · Disclaimer ·

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

icBrokerWidget('pragcap', 600, 55); Comments Boston_Al

Dear Sir,

In this opinion paper you wrote:

*************************************

“After April, the market's batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway).”

**********************************

As a value investor I read your advice with an incredulous smile. Why? Because investors that sell their “winners” simply because they have grown are holding an incorrect mental business model.

Let me provide a short example that might help explain my viewpoint.

If you owned a Gas Station (or some other firm) whose business grew 100% last year, would you sell it today simply because it doubled? Heck no! You’d hang onto it and seek to make it grow to 200% or 300% or more.

So why do intelligent business people buy a good company common stock and when it grows to 100% sell it just because it doubled? Why not hold it – providing the company fundamentals are still in place – and let it grow to 200%, 300% or 500%?

Thinking of common stock investments in a business like manner exposes your statements about rebalancing for short-term market or seasonal volatility an act of sheer folly. It is also an excellent example of one of the faulty dogmas of modern Wall Street advice.

Reply 04/03/2011 at 1:42 PM Leave a Comment Name Mail (will not be published) Website Click here to cancel reply.

Notify me of follow-up comments via e-mail

Popular Stories OIL PRICES STILL CONSISTENT WITH PAST RECESSIONARY LEVELS: Below we show the ratio of WTI to the core CPI, which recently crossed the 40x threshold for just th... OIL PREDICTS STOCK MARKET DIP: This week's chart shows again how the price plot of crude oil prices has done a great job of giving ... BUBBLE SPOTTING....: I've laid my cards on the table and so have a few other notable bubble spotters.  But few would arg... BUFFETT DISCUSSES THE USA'S PLUTOCRACY, LESSONS FROM THE CRISIS & DABBLES IN MMT: Warren Buffett is still traveling through Asia and still giving interviews.  This one is particular... HOW DARE I....: Some saw my recent article on Paul Krugman as some deliberate attempt to attack and denigrate his wo... 5 POTENTIAL BUFFETT "ELEPHANTS": While the David Sokol controversy unfolds in the coming weeks Warren Buffett will continue operating... LOOKING AHEAD TO APRIL - THE BEST MONTH FOR THE BULLS: It's still March, however, like any good chess player we want to be thinking a few moves ahead of th... THE DISCOUNT WINDOW, ITS STIGMA AND FULL DISCLOSURE: Everyone in the media is making a big fuss over the Fed's lack of full disclosure with regards to th... CHARTS THAT DON'T LOOK LIKE BOOMING DEMAND: Charts that Say Demand Isn't Doing Much of Anything... THE ISM COULD BE PREDICTING TOUGHER SLEDDING FOR THE S&P 500: It might be time for investors to temper their expectations for future equity returns.  That's what... Follow Us! REGISTER FOR PC LOG-IN TO PC var sc_project=5036143; var sc_invisible=1; var sc_partition=57; var sc_click_stat=1; var sc_security="5e6f901b"; icBeacon('pragcap');

© 2009 pragcap.com · Register for PC

Home · Advertise · Contact us · Disclaimer ·

Dear Sir,

In this opinion paper you wrote:

*************************************

“After April, the market's batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway).”

**********************************

Read Full Article »