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The Muscular Portfolios Newsletter — No. 28 — Aug. 24, 2020
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Which day of the month is the best?
 By Brian Livingston
Is one day of the month better than the others for you to shift from one ETF to a different one? We now have hard data to give us an answer.
Felix Bertram, the CEO of Turing Trader, has run simulations of reallocating the ETFs in the Mama Bear and the Papa Bear. At my request, he used the prices of actual ETFs back to 2007 and switched each portfolio to the strongest funds on the first trading day of each month, the second day, and so forth.
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Figure 1. Reallocating the Mama Bear into the three strongest funds on the last trading day of the month would have outperformed trading on the other days. Source: TuringTrader.com.
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Reallocation is the process of selling one ETF that hasn’t performed in the top three lately, and replacing it with another ETF that’s performed better. This shouldn’t be confused with rebalancing, which means buying and selling funds to return them to their original proportion in the portfolio. Muscular Portfolios don’t require rebalancing unless one fund is more than 20% off its desired one-third weight. (See Chapter 18 of the book.)
Figure 1 shows that reallocating the Mama Bear Portfolio at the close of the last trading day of each month would have turned $1,000,000 into $4,032,000. Choosing any other day of the month would have produced less gain. If you chose (by bad luck) the worst day, your million would have turned into only $2,758,000.
Allocating on the bad-luck day would have given you less ending value than holding the crash-prone S&P 500 (ETF symbol SPY). As we saw in TuringTrader.com’s data in the July 17 newsletter, the index including dividends turned $1,000,000 into $2,961,000 in this period. Reallocating the Mama Bear at the end of each month would have given you 36% more.
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Why would one day be any better than the others?
The reason why portfolios that are reallocated on the last trading day of the month might do better than those traded on other days comes down to calendar effects.
These are the long-term tendencies for US equities to perform better in certain days, weeks, or months. For example, it’s often said that stocks gain more in November through April than they do in May through October. “Sell in May and go away” was a good rule in the 1930s, but it’s lost most of its usefulness since then, according to a CXO Advisory Group analysis.
One calendar effect that remains strong is that US equities tend to perform well just before and just after the first trading day of the month. This is called the turn-of-the-month effect. (See McConnell and Xu, 2008; Marchewka, 2014.)
Perhaps you get (on average) a better price on any ETF you decide to sell around the end of the month. Conversely, any strong-momentum ETF you buy at the end of the month may just be beginning its run, which could continue for months.
I call this the “high-tide effect.” Say you’re trying to jump from one rowboat to another. It may be easier when the water is high and stable. When the water is low and uneven, your effort could land you in the drink.
Chapters 5 and 6 of Muscular Portfolios recommend that you reallocate your account each month in the days just before or just after the last trading day. That advice seems to be confirmed by Turing Trader’s tests. With the latest findings, I feel more strongly that you should reallocate on the last trading of the month, if you can. Chapter 4 advises that you check the website for the latest rankings by 3 p.m. Eastern Time and make any trades necessary before the market closes at 4.
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What did Turing Trader actually test?
Ignoring weekends and holidays, there are 21 market days in the average month. Multiply that by 12 months, and there are about 252 market days a year.
Turing Trader used the Mama Bear and Papa Bear strategy rules to test reallocating once a month into whatever ETFs were the three strongest at that time. The paper-money accounts were traded at the end of the month (known as EOM–0), 10 market days before the last day (EOM–10), 10 days after (EOM+10), and every day in between. If a given day was a holiday, the price on the closest market day was used.
The best account, as shown in Figure 1, reallocated its portfolio on EOM–0. That account had a final account balance of $4.032 million. The second best day, with a balance of $3.780 million, turned out to be EOM–10, which is around the 16th calendar day of each month. (There seems to be a smaller peak in the middle of each month, perhaps because many people get paid on the 1st and 15th of the month and automatically add to their investment accounts on those days.) The worst day would have been EOM+4, winding up with only $2.758 million.
Important note: The test covered an entire bear market and an entire bull market (the shortest period in which portfolios should be compared). But this one market cycle doesn’t prove that any given day will always be the best, the worst, or somewhere in the middle. There’s a lot of luck involved. Portfolios that traded just one day before or after some big change in the market could have quite different results.
What we can say for certain: There’s little evidence that any reallocation day of the month would be better than the last trading day. Mark your calendar to remind you to look at the rankings and act then, if possible.
Let’s be clear; Don’t take these results as gospel. Much of the variation is chance. For the record, however, the ending portfolio values in the test turned out to be as shown in Figure 2.
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Figure 2. The five trading days around the end of the month all provided strong returns for the Mama Bear. EOM–10 through EOM–6 (the five trading days starting on approximately the 16th) were also good dates for reallocation. Source: TuringTrader.com.
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As you can see in Figure 2, the five accounts that reallocated on EOM–2 through EOM+2 all wound up with ending values in the top 10 accounts. There’s something significant about the turn of the month. But don’t go wild. The order of performance is sure to be different in the next market cycle.
The pattern for the Papa Bear Portfolio was very similar to the Mama Bear. The last trading day of the month was a very good choice. I’ll publish a graph for the Papa Bear in a future newsletter.
Turing Trader used the ETFs that are recommended in Muscular Portfolios with one exception. Nearly identical ETFs were substituted in years when some of the recommended funds didn’t yet exist. This is parallel to the way ETFScreen.com has simulated the same strategies on its Mama Bear page and Papa Bear page. See those pages for the names of the ETFs that were used at the very beginning of the tests.
Using the prices of actual ETFs has the effect of automatically subtracting whatever the annual fees of those funds were each year. To make the tests even more realistic, Turing Trader also charged the portfolios $0.015 per share for every trade that was made. This is the commission that Interactive Brokers charged investors until recently for buy and sell transactions.
Turing Trader gave each portfolio $1 million at the beginning of the period. This rather large amount helped the investor avoid holding extra cash during the years when most brokers required trading in whole shares (before fractional shares became common).
The upshot: If you really need to trade on a different day than the end of the month, you should still get good long-term results with a Muscular Portfolio. But investors who can remember to “tune up” their accounts on the last trading day may reap even greater rewards.
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The Papa Bear aces the pandemic test
Speaking of the Papa Bear Portfolio, it’s going gangbusters in the very trying times that we’re now living through.
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Figure 3. The Papa Bear has gained 10.41%, almost TWICE as much as the S&P 500’s 5.76%, including dividends, year-to-date. The Papa Bear never fell into a bear market (down 20% or more), but has delivered big gains. Source: Real-money account as of Aug. 19 at FolioInvesting.com.
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As shown in Figure 3, the coronavirus pandemic knocked the S&P 500 down more than 30% in March — a crash by anyone’s definition. But the index (with or without dividends) roared back to a new high this month. That’s caused a lot of wailing and gnashing of teeth from people who sold in the panic and are now kicking themselves because they “missed the 50% rally.”
If you were investing in line with the Papa Bear, however, your money fell less than 20% — you never experienced a bear market at all! You’re up 10.41% since Jan. 1. That’s almost twice the total gain of the S&P 500, which is up only 5.76%. (The Mama Bear is a bit weaker, being slightly down for the year.)
The Papa Bear illustrates the benefit of using mechanical investing. Your stomach never churns in agony over whether to sell during a market crash.
To be sure, I repeatedly say that only a complete bear-bull market cycle is long enough to compare portfolios. Muscular Portfolios usually lag the S&P 500 during bull markets and only surpass the index during bear markets. I’m showing you the Papa Bear’s most recent eight months just to reassure you that you can spare yourself from FOMO (Fear of Missing Out) when following a Muscular Portfolio.
Why subject yourself to crashes at all? Just follow an established formula once a month and spend the rest of your time doing more important things (like keeping yourself and your family healthy).
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50% sale with special coupon code
The publisher of Muscular Portfolios, BenBella Books, has announced a 50% sale on the hardcover edition. This price break is only available at the publisher’s website, not at Amazon or B&N.
To get this limited-time 50% discount, you must first put the book in your shopping cart. On the checkout page, you then enter coupon code MP50 to get the hardcover book for half off or MP799 to get the ebook for $7.99.
To get these discounts:
Use this link to the publisher’s order page or enter bri.li/200824h.
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About the author: Brian Livingston is a successful dot-com entrepreneur, an award-winning business journalist, a contributor to MarketWatch and StockCharts, and the author of Muscular Portfolios (2018, BenBella Books). He is also the author or co-author of 11 books in the Windows Secrets series (1991–2007, John Wiley & Sons), with over 2.5 million copies sold. From 1986 to 1991, he worked in New York City as the assistant IT manager of UBS Securities; as a consultant for Morgan Guaranty Trust (now JPMorgan Chase); and as technology adviser for Lazard Ltd. He was the weekly Windows columnist for InfoWorld magazine from 1991 to 2003. During portions of that period, he was also a contributing editor of CNET, PC World, eWeek, PC/Computing, Datamation, and Windows magazine, and the editor of E-Business Secrets. In 2003, he founded the Windows Secrets Newsletter, which grew from zero to 400,000 email subscribers. He served as its editorial director until he sold the business in 2010. He is president emeritus of the Seattle regional chapter of the American Association of Individual Investors (AAII). Stipple illustration by The Wall Street Journal.
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