More Information
Sample Issues
Backgrounders
Issue 2: Reversion
to the Mean and Mutual Funds:
Why Buy-and-Hold Doesn't Work
Issue 1: "To every thing there is a season" Why We Sell in the Fall
Sample Issues of the October Strategy
Want to know what a typical issue of the October Strategy looks like, or want to check the results for past newsletters?
The full content of four sample copies of the newsletter follows
Please note, though, that these are not our current recommendations. As momentum investors, we update our fund selections three times a year, and get out of the markets completely every September and October. If you would like our current picks, please sign up for a nearly-free, two-issue trial subscription on the How to Subscribe page .
And, as we note on the How to Subscribe page , The October Strategy is purely an advisory service, we make recommendations only. We do not handle your money or make trades for you.
The E-mail Newsletter For Smart Investing
Early February 2010
Year to Date Performance
Our
year-to-date performance since January 1st has been 0 %,
versus minus 2% for the median average fund’s performance.
What We Do, and Why We Do It
This section is primarily for the benefit
of our new subscribers. Long time subscribers can skip it. Our Strategy
is a system for investing in “equities”, which is another name for
stocks, which are “listed” on stock markets. We invest indirectly,
through mutual funds, and now Exchange traded funds (ETFs), which own
the actual stocks of several publically traded corporations.
The historical rate of returns from equities is over 10%, per year, which is far superior to “fixed income” investments such as GICs and bonds. But there is no such thing as achieving superior returns without some risk, and the equities ride is a bumpy one, with losses some years. To be an equity investor one must accept the risk of losses some years in the expectation of double digit gains most years. Our only year-over-year loss was 2008 at -10%, but we will probably have more losses, at unpredictable times. Moreover, it is even possible (but not probable) that equity investing in general, and/or the October Strategy in particular, could stop being a good way to invest. History is a good guide to the future, but it is not perfect. If we had a terrorist event, or real pandemic or another financial crisis, stock markets could crash by 30-40%. Our strategy is good, but not so good to swim upstream against a tide of stock market catastrophes, if that becomes our nightmarish future.
Accordingly, equities should not comprise 100% of most investors’ nest-eggs, especially those in or near retirement. Here is an example – if we have a stock market catastrophe and the market drops by 30%, but you have only half of your assets in the stock market and half in fixed income, your loss is a “manageable” 15%. It hurts, but it is not life changing like a 30% loss. So, you, like me, should have some fixed income, so that not all of your nest-eggs are in one basket that can drop and fully scramble. I like the “age rule” for all investors over 40 – your fixed income investments (as a percentage of your total nest-egg) should total your age. Also, new investors should get into our system slowly over a 2 -3 year period, if they haven’t been invested in equities previously. Until you are fully organized with your fixed income, you could simply invest the future equity portion of your nest-egg in a money market fund, or in some 1, 2 and 3 year GICs. See below under “Fixed Income Super Simplified” and/or ask us for our 5 page Guide To Fixed Income.
For the equities component of our nest eggs, we follow a system that prevents us from investing with our “gut”, and trying to be invested in stocks only when the forecasts are “good”. Such gut-feel investors are “market-timers,” and I am a reformed, former market-timer, who last did this in the late 80s. Numerous studies have shown that this is not a good long term strategy, because if you miss the best 10 -20 days in a calendar year, you typically miss most of that year’s gains. Accordingly, other than in Sept/Oct, it pays, over the long term, to be invested in the market at all times. Using this system, we have averaged 14% per year, since 2001, which is pretty remarkable, in comparison to the median average fund investor’s rate of return of 3%. Was this all skill or part luck? Time will tell, but let’s go with the “all skill” theory for now.
Our system has two main components: Firstly, every autumn, I advise my subscribers to sell their equity mutual funds in late August or early September, and then park their money in a safe money market fund for the months of September and October.
Why? Because the stock market is quite predictable in one way: in 8 out of 10 years, on average, the stock market (and equity mutual funds) go down in September and/or October. The crash of 2008 was just one example of this well known phenomenon, which is caused by “too many” skittish investors like us selling and driving down equity prices. Too many sellers and not enough buyers = falling prices. (The phenomenon started because most of the big crashes in history have happened in Oct, and because bad economic news through the summer tends to fly undetected “under the radar” until investors and their brokers, and pension boards, can connect after summer vacation). So, we sell our equity mutual funds at the end of August and then buy back in again at the end of October.
But, avoiding the downturns is only half of the system. The second component is a strategy for generating above average results by investing only in “good” equity funds.
Since 2002, we have been using momentum investing. That means: buying a diversified group of equity funds that have done very well, both recently, (and over the long term); holding them for 3 months; and then selling them (while they're still going up, in the best case scenario).This works because the economic factors that have led to a hot fund’s recent stellar performance, do not typically reverse course in the next 100 days, (except for speculative and hedge funds which we avoid). We do this every 100 days between late October and early September, because we need to hold our equity funds for at least 90 days to avoid short-term redemption penalties.
To facilitate our strategy, the Newsletter comes out in 100 day intervals on Oct 27, Feb 5, May 15 and Sept 1. (The interval in Sept/Oct is shorter, but we don’t incur penalties for selling a money market fund). The Newsletter clearly advises which funds are to be bought and sold. Contacting your broker (or doing your transactions on-line) should take about 15 minutes, and should be done within 15 days of receipt of the Newsletter. The newsletters give the exact words to give to your broker to ensure that nothing untoward occurs.
To summarize, our strategy is a combination of momentum investing and autumn abstinence, both of which have worked well for countless other investors. I did not invent either approach. I may have invented the marrying of the two strategies together in a way that fits the 90 day redemption rules, but someone else was probably doing it before me.
Fixed Income Investments
As stated above, I believe that the best way to protect against possible equity losses is to diversify your nest egg between equity investments, such as the equity funds we pick in the October Strategy, and ultra-safe fixed income investments like GICs and Bonds. But GIC rates are at historic lows, and Bonds will probably lose money this year as interest rates rise. PLEASE DO NOT BUY ANY BONDS, OR BOND ETFS, OR BOND MUTUAL FUNDS THIS YEAR; BONDS LOSE VALUE WHEN INTEREST RATES RISE, AND INTEREST RATES CAN ONLY GO UP FROM OUR PRESENT HISTORICAL LOWEST-EVER RATES. I therefore especially like (and own) 2 higher paying Mortgage Backed Securities, in which my money is pooled with that of hundreds of other investors, and lent to borrowers who give us/investors a mortgage on their properties. I can’t mention them by name in this newsletter due to the Securities Act rules, but if you email me directly, I can give you the names of the 2 Pools that I like the best and own. These Pools (or MICs) have always paid between 6 and 12%, and are higher-risk than GICs, but not as high risk as equities, or sub-prime mortgages. (Remember again that there is no such thing as superior returns without some risk).
For those investors who like to keep things super simple, fixed income investing can be as simple as asking your discount broker to invest you in equal amounts of the best (highest interest rate) 1- year, 3 year and 5 year GICs available. Then, as these GICs mature, simply keep reinvesting in the best 5 year GICs. Also, remember to keep your GICs from any one financial institution below the $100,00.00 insured level. (That is, even though Credit Union “A” offers the best rate, you should also buy from Credit Union “B” if you would otherwise have more than $100,000 with “A”). This system will pay a percentage point or so less than bonds over a long period of time, and other fixed income investments, but this is perfectly acceptable for many investors, and better than principal protected notes, and balanced or bond funds, with their high, hidden, performance-killing fees.
If you are a “keep-it-simple” investor you can follow this system for the entire fixed income part of your nestegg. Again, to decide how much of your nestegg to devote to fixed income, the “keep it simple” rule of thumb is that the percentage of your nestegg to devote to fixed income is your age. The rest goes into equities such as those chosen by the October Strategy.
The Big Picture/ Rathgeber’s Crystal Ball for 2010
All market forecasts are as unreliable as weather forecasts for a specific date several months’ hence, (mine included), and those who strongly believe in any particular forecast are fools. That is why I will say only that most “experts” think that 2010 will be an OK but not stellar year. We typically do better than average, but I give no guarantees.
Model Portfolio Recommendations
If you are new to investing in the stock market please re-read your
confirmation letter telling you to slowly bring your assets into an
equity strategy over a two or three year time frame, and to leave a
portion of your nest-egg in fixed income investments forever.
For the first time since 2003 we are giving 2 separate sets of recommendations. One set is for brokerage accounts exceeding $100,000, (in which case Exchange Traded Funds make economic sense, with their low hidden MER charges), and the other set is for accounts of less than $100,000 in which you can not take advantage of $9.99 (or less) transaction fees for ETFs.
Remember that the first question to ask your discount broker is: “Have I held my present mutual funds for at least 90 days?” Only if the answer to that question is “Yes” should you proceed to instruct your broker to sell your holdings, except for Mavrix Explorer MAV 112, and buy the following funds in the following percentages of the cash proceeds. Also, remember to give your broker the fund codes (or the ticker symbol) which appear in parentheses.
Accounts of $100,000 or more
Mav 112; Don’t sell Mavrix Explorer MAV 112 – if you are new to the Strategy reduce IXU from 30% to 20%, and buy 10% of MAV112. With the balance buy:
10% I-shares Canadian REIT Sector ETF (XRE).
10% I-shares Canadian Completion Index ETF (XMD).
30% I-shares Canadian Composite Index ETF (XIU).
10% TD Health Sciences (TDB 976).
10% Bissett Microcap A (TML 207).
10% Mackenzie Cundill Emerging Markets A (MFC 2387).
10% Fidelity Income Trusts (FID 223).
10% Altamira Global Small Cos (NBC 889).
Accounts of $100,000 or less
Mav 112; Don’t sell Mavrix Explorer MAV 112 – if you are new to the Strategy reduce RBF 556 from 30% to 20%, and buy 10% of MAV112. With the balance buy:
30% RBC Canadian Index (RBF 556).
10% TD Canadian Small Cap Equity (TDB 628).
10% Sentry Select REIT (NCE 705).
10% TD Health Sciences (TDB 976).
10% Bissett Microcap A (TML 207).
10% Mackenzie Cundill Emerging Markets A (MFC 2387).
10% Fidelity Income Trusts (FID 223).
10% Altamira Global Small Cos (NBC 889).
Closing Thoughts
The next newsletter comes out mid-May. Until
then, enjoy the Olympics!”
Dale Rathgeber,
President of the October Strategy Publishing Company Ltd.
October Strategy Newsletter
Early February 2004
Bragging Rights (The Big Picture)
Our Model Portfolios achieved an annual rate of return of plus 35% for the calendar year of 2003. That out-performed the vast majority of all portfolios. The average Canadian Mutual Fund performance for 2003 was plus 16%, as measured by the Investment Funds Institute of Canada, by averaging the average fund performance of all funds sold in Canada, by fund category.
Why did we do so well in 2003? Mostly, because the Canadian and US Equity Markets as a whole did very well; and we did even better than the overall market performance. We out-performed at plus 35% -- (19% better than the average rate of return). We believe that our out-performance in 2003 continues to be evidence that our probability enhancement strategy works, and will continue to work over the long-term. But don't count on 35% every year; that is not likely to happen.
The main reasons for our good performance in 2003 are the same reasons which are the foundations for our strategy. That is, we believe that frequent re-balancing by choosing recent top performers (which also have a low risk of dropping) is a better way to invest (as long as those top performers also have a good history of not being very volatile). Picking emerging trends is especially better than either "gut-feel" investing, or trying to follow the expert's predictions of what should be the "next big thing". Our view is that consistently getting the short-term right, most of the time, means that the long-term will be good too.
The other main thrust of using probability as an investing guide is the September/October Fallout, which did not provide any additional benefits for 2003, and in fact, cost us a bit of money. Sorry. That is the price of following a disciplined strategy based on the 80% probability of markets dropping in September and October, which will prove to save us money most of the time over the long term.
Some people (usually those who are too lazy to spend 15 or 20 minutes four times per year to frequently re-balance their portfolio), say that autumn of 2003 proves that the October Strategy does not work. I say that those people are wrong. I never promised that the September/October fallout of equity funds would work 100% of the time, only that it would work 80% of the time. Further still, even during the 20% of the time that markets rise in September and October, they are not likely to rise dramatically – which is in fact what happened this year. By my calculation, the TSX was up about 2 ?% between September 5 and October 27, 2003.
Investing in 2004
Most Mutual Fund newsletters spend several pages predicting what is likely to be the "next big thing" in which to be invested for 2004, or they summarize the conflicting forecasts of several "experts". This newsletter doesn't really do that, because we (like the other "experts") don't really know where the markets are headed 12 months down the road, and we don't really know which sectors will out-perform for the whole year. Rather, we believe in re-balancing frequently by choosing those sectors that have out-performed in recent history (as long as they do not have a risky long-term history). This method has a higher probability of out-performing than any conflicting predictions from different experts about the "next hot thing" based upon the economic cycle etc. This was the whole rationale behind the development of the October Strategy. I developed it because I couldn't consistently decipher which so-called "expert" to follow, among the myriad of conflicting predictors spouting noise, chatter, and static in the news media.
That said, most of the better economic thinkers out there predict 2004 to be a reasonably good year for equity markets (although not as good as last year). The Canadian and US markets should continue to be good places to invest, together with Asia and especially, China. One area of the Canadian Market which is likely to under-perform due to the high value of the loonie, is the manufacturing sector. It will be put at a competitive export disadvantage due to the high cost of the Canadian dollar. Gold and precious metals should also be good places to invest if the American dollar falls further, as it probably will.
Whether or not the above scenario comes about, we believe that our system should again be able to pick out the equity funds winners that have a low risk of dropping, and achieve a good rate of return, like in 2002 when we made money even when most portfolios did not.
$100.00 Discount for Signing Up New Subscribers
If you are instrumental in signing up a new subscriber, you are entitled to $100.00 discount for each new subscriber. We don't mind if you give them an occasional copy of the Newsletter, but I ask that you also refer them to my website at www.octoberstrategy.com which explains how the strategy works
Model Portfolio
Our model portfolio appears below.
If you follow our Model Portfolio in whole or in part, or make other fund trades of any kind, we recommend that you ask your fund switcher to make sure that at least 91 days have elapsed since your last purchases, so that you are not going to be charged short-term redemption penalties.
Some subscribers have been telling me that when they phone in their trades, they have had not had to do their own math – (and convert percentage allocations into dollar allocations) -- as I feared they would in the last Newsletter. In fact, when I phoned my October trades in, I simply gave percentage allocations, and let the person on the other end of the phone do my math for me after I hung up. This is a less of an issue if you only have one or two accounts, but a bigger issue if you have several accounts.
Canadian Content
(The Fund Code follows each
listing) Foreign Content Until May, keep your sticks on the ice.
Dale Rathgeber The October Strategy
recommends that you switch into a Canadian money-market fund for the
months of September and October, because the stock market falls in
September/October in 8 out of every 10 years. (The optimal dates to
"fall-out" are usually September 4th or 5th, and to get back into equity
funds on October 27th or 28th). September 5th falls upon a Statutory
Holiday this year, so September 2nd or 6th are the best dates. It doesn't really matter which money-market fund
you get into as long as it is Canadian content in an RRSP or RRIF. If
you are an Altamira Securities customer, you should probably use
Altamira's Canadian T-bill fund. (They will be less irritated with you).
If you are a Bank of Montreal Investorline investor, you should probably
use Bank of Montreal's Canadian money-market fund. If you are a TD
Waterhouse customer, you should probably use TD's Canadian Money Market
Fund. All Canadian money-market funds pay essentially the same low, but
guaranteed rate of interest, so there isn't really any Canadian
money-market fund that is better or worse than any other for a 2-month
period.
But make sure that at least 91 days have elapsed from the time that
your last equity fund purchases were "implemented" prior to selling your
equity funds and buying your market funds. Always ask your broker this
question before you switch. (The reason for this is the short-term
redemption / 90 day rule by which most brokers will charge you a 2%
"early redemption penalty" if you do not hold your equity funds for more
than 90 days.)
As of the date of writing (August 28, 2005), our funds are up 12% on
the year-to-date, versus 6% for the average mutual fund in Canada.
Why are we doing so well? We are a probability based strategy. We always
try to put the probabilities in our favour. One aspect of putting the
probabilities in our favour is that we follow a momentum investing
strategy -- that is, we invest in Mutual Funds that have been doing very
well in recent history (provided that they are not too volatile over the
long term and that they meet some other long term criteria). Like all
momentum strategies, when the rest of the market is rising, like it is
this year, we do even better than the rest of the market. In particular,
we have throughout the year featured a lot of energy and oil and gas
companies in our portfolio (CI Harbour Fund is full of energy stocks, as
are our two Income Trust Funds). They have been hot lately, and so have
we. Until the late October Strategy
newsletter, take care, and if you are a golfer, keep it in the short
grass. Yes, as of the date of writing, the recent
October meltdown outdid this year's September run-up, and our "fall-out"
saved us about 5%. Year-to-Date Performance / Bragging Rights
As of the last writing in August, we were up
12%, year-to-date. The market went up in the last few days of August,
and early September, so we are now up 13% year-to-date, versus about 4%
for the average Canadian Mutual Fund investor, who suffered badly in the
recent October market meltdown. At the October Strategy, we
generally allow our computer models – which are based on recent price
momentum for non-speculative funds, strong management, and long-term
track record to make our individual fund recommendations for our model
portfolios. We are continuing with our significant Canadian
content theme for this go-around again, notwithstanding the removal of
the foreign content restrictions in R.R.S.P.s and R.R.I.F.s, because
Canadian markets are doing very well. In our May Newsletter, I predicted
that Income Trust Mutual Funds would likely become a regular selection;
however, Revenue Canada and the Federal Government have become upset at
the taxation advantages enjoyed by income trusts -- as opposed to
corporations from whom they collect higher taxes -- and have therefore
stopped pre-approving the tax treatment of corporations wishing to
convert to income trusts. Accordingly, the short term outlook for income
trusts is not very good and we are unlikely to pick any of these funds
again until the cloud of suspicion over them is lifted. Our Model Portfolio appears below. Use it,
modify it, or ignore it as you see fit. My family and I will invest all
of our assets according to it on or about October 28. For new subscribers, the buzz words to tell your
discount broker are: "Sell all of my present holdings and buy the
following funds, in the following percentages (in each of my accounts)".
If your broker won't do the math for you, yell at them, and do your own
math while you have them on the phone. (This will irritate them greatly,
and may have the effect of causing them to allow you to hang up, while
they do the math for you, on their time and not yours).
Model Portfolio
Two Hundred Dollar Discount for Signing up New Subscribers
Over the last four years the October
Strategy's list of subscribers has grown significantly, and
almost all of that growth has come from "word of mouth" referrals. In
the past, we have offered a $100.00 discount to those subscribers who
were instrumental in signing up other new subscribers, and our new
policy is to offer a $200.00 discount in those circumstances. You will
be receiving an invoice in early January (presumably for $400.00, unless
something drastic happens), and if you are instrumental in signing up a
new subscriber, please drop me a note by email ( dalerathgeber@wrhlaw.ca
or doc@octoberstrategy.com ) to that effect.
Until then, keep your sticks on the ice! ("Doc")
Dale Rathgeber Our year-to-date performance is 18% versus about
5% for the average Mutual Fund. Our year-to-date performance is pretty
typical in this scenario of reasonably good fund performance. When fund
performance is good like it is this year, we do somewhat better. Many
subscribers have been asking if we are ripe for a downward "correction".
I don't know, and none of the "experts" who pretend to know, really do
know -- so I advocate staying in the market until September when the
long term probability analysis says that the market falls 80% of the
time in September/October. Let's hope that we're in a "bull" upward
trend for the remainder of this year, except for the typical autumn
downturn. For those new subscribers, you will see that we
have included the January 2006 invoice that was sent out to our
long-standing subscribers because it contained a "refresher course" on
how and why the October Strategy works, and how to use
it in practice. If you didn't get this information, and are a new
subscriber, please email us immediately and we'll send it to you.
I get asked this question a lot, so I thought
I'd put pen to paper. The Financial Services industry likes to say that
one single person needs about a million dollars in their RRSP ( 1.6
million for 2 spouses) in order to retire comfortably, but this is just
a very rough target. To quantify your true "it" number, you need at
least an hour or two to complete the following steps (or several more
hours if you don't have a good budget of household expenses). There are also books on the market like "How
Much is Enough?", but I don't like these books because they use
generalities and "average" budgets, which can get a person in trouble if
they don't have an "average" lifestyle. Therefore, doing your own
detailed calculations and budgets is a safer course of action.
You first need to calculate how much of your
present income you will need in retirement. Financial advisors and the
press throw around a "70% of pre-retirement income" number, but this
again is just a very rough guideline. The better solution is to add up
your ongoing expenses that will not disappear in retirement ---(mortgage
payments, kid's costs and post-secondary education costs should probably
disappear, or you probably can't retire) -- and then add in a
"contingency amount" for purchases of major appliances/automobiles, etc.
(probably $5, 000.00 to $10,000.00 per year). If you plan to travel a
lot or buy a second property in the sunshine belt, add that to your
costs as well. The next step is to "gross-up" the yearly total
of your expenses to account for income taxes to be paid from your RRSP
and/or pension. To do this, you will need to use your own provincial
income tax rate. A good tool to use is available at Morningstar.ca under
"Calculators" - "Marginal Tax Rate" (on the lower left hand column).
You'll have to use the tool "backwards" and guess a few times at the
higher Taxable Income number needed to get your yearly after-tax number
of what you'll need for your yearly expenses. (That is, subtract "taxes
payable - total" from "taxable income" to get your net expenses per year
after tax number). Also remember to divide your required pre-tax
income in half if you are, and expect to stay married -- and if your
spouse's RRSPs and pension is the rough equivalent of yours, which it
should optimally be. If it is not, you'll have to do the calculations
twice. The next step is to go to a good retirement
calculation website, like www.retirementadvisor.ca --"standard
retirement calculator", and plug-in the variables for yourself, and then
redo them for your spouse. (You can also purchase a more sophisticated
program at retireware.com for $39.00, and I would recommend spending
some time with the program as a second opinion before actually pulling
the retirement trigger, but to get a pretty good idea of where you need
to be, retirementadvisor.ca is probably the best free package
available.) Rather than use your current earnings, I believe that this
tool works better if you use your expected pre-tax (gross) income in
lieu of your "current annual earnings", and then plug-in "100%" of that
number for "income replacement objective". But, be truthful about your
age and your current RRSP value, and annual company pensions that are
expected. Next come the tricky parts in
retirementadvisor.ca - "standard retirement calculator". If you plan to
retire earlier than age 65, you need to pick a percentage for "reduced
government pensions level"after clicking "non" to "CPP/OAS as legislated
today". (If you are close to age 60, you can get an estimate from the
Federal Government for your expected CPP; otherwise, you will need to do
some math -- but as a general rule of thumb, if you have worked at a
good paying job for your whole life but expect to retire at age 55, you
should use a number in the vicinity of 70%, because your CPP will be
significantly reduced by the fact that you will not be contributing into
the plan after that age; whereas, most retirees will contribute into the
plan until age 60 or 65). If you plan to retire at 60, use 80%.
Moreover, if your income is expected to be above the "claw back level"
for Old Age Security ($60, 000.00 in 2006 dollars), you will need to
reduce this percentage even more. Please do not forget to click "yes" to
the "Cost of Living Increases" function, and pick an inflation rate of
no less than 2.5% (which is about the average inflation rate in Canada
over the last 15 years). Also pick 2.5% for "expected earnings growth". You can then play with various "expected rates
of return" and "planned retirement ages" to see which ones work, and
which ones will give you an indication that you can't retire as early as
you want, and/or that you are going to have to live more frugally than
you hoped. I personally plan very conservatively and use an
"expected rate of return" of no more than 9%, even though we have been
doing much better than that lately. (8% would be even more prudent.) I
do that for three reasons: 1) it's a good idea to plan conservatively;
2) after the "baby-boomers" are well into retirement in 10 or 15 years,
they will be net withdrawers from the equity markets, which will
probably drive our expected rates of return downward; 3) in retirement,
many investors become more risk averse, and put a large portion of their
investments in bonds or GICs, which are less volatile than equities, but
pay a lower rate of return. I hope this helps, and that you have a little
fun with your retirement calculations. I also hope that you are "on
track". You shouldn't rush through the calculations, and you should
revisit them from time to time as your debt gets repaid, your RRSP
grows, or as your budget changes. Again, before making the decision to
retire, I would spend the $39.00 on retireware.com because it is more
sophisticated -- but harder to use because there are more variables to
plug-in, and therefore more potential mistakes to be made. (If you can't
get the two programs to "jibe", you're making a mistake in one of the
programs, probably retireware.com, and you need to keep plugging away
until you get the results from both programs to "jibe" within
$10,000-$20,000.00. Remember our $200.00 discount for those
subscribers who are instrumental in signing up new subscribers. Most of
the growth in the October Strategy subscription base
has come from "word of mouth" referrals, and for that we thank all of
you who have recommended our Strategy to a friend, relative or
co-worker. If you would like some pre-printed books (which reproduce the
website and contain a sample newsletter and other propaganda like the
MoneySense 4-1/2 star recommendation), please advise us, and we will
mail some out to you.
Our Model Portfolio appears below. Use it, modify it, or ignore it as
you see fit. Dale Rathgeber will invest all of his assets according to
it immediately after publication. (He must invest after publication to
meet the Securities Act rules on newsletters). His immediate family will
also invest according to the table below for 100% of their investments.
If you follow our Model Portfolio in whole or in part, or make other
fund trades of any kind, we recommend that you ask your broker to make
sure that at least 91 days have elapsed since your last purchases, so
that you are not charged short-term redemption penalties.
SPECIAL NOTE: If you bought Sprott Canadian
Equity funds in February, don't sell it - but if you are a new
subscriber, don't buy it. It has a 180 day holding period. If you own it
now, keep it, and also keep:
New subscribers should buy the latter 3 funds in
equal proportions, and all subscribers should buy the following funds in
equal proportions:
The next Newsletter that you will receive will
be at the end of August. It will, as always, simply remind you that the
October Strategy recommends that you switch into a Canadian
money market fund for the months of September and October. Until then,
here is something to ponder: if electricity comes from electrons; does
morality come from morons? Dr. October (Dale Rathgeber) October Strategy
Newsletter
August 2005 September is Fallout Month
The Good News / Year-to-date
Performance
October Strategy
Newsletter
Late October (actually October 28th, or
thereabouts) Is The Time To Get Back in the Market If You Are a
True-blue October Strategist
The October part of our Strategy is based upon an investor selling his
or her money-market funds after the September/October "Fallout", and
purchasing equity funds in late October. This maintains the philosophy
of staying "fully invested" in equity funds at all times except for
September and October (when the markets are predisposed to drop in
value). Moreover, the fund companies' 91-day holding period does not
apply if you presently hold money-market funds. So, if you sold your
equities and bought money-market funds in early September, you can now
sell them and purchase equity funds without paying a penalty. Ditto, for
our new subscribers with either new money, or old money that has been
invested in equity funds or bond funds for at least 90 days.
For Late October 2005 The Results of the September/October
Fallout – Did It Work This Year?
Commentary
Model Portfolio Recommendations
Closing Thoughts
October Strategy
Newsletter
For Mid-May 2006 The Big Picture / Year-to-Date
Performance
A Refresher Course on how to use
the October Strategy, and how and why it's better
How Much Money is Enough to Retire?
$200.00 Discount for Subscribers who
are Instrumental in Signing Up New Subscribers
Model Portfolio
Closing Thoughts
Backgrounders
A series of articles exploring the reasons why the October Strategy usually outperforms all the other mutual fund investing strategies that we know of.
Issue 2: February 2007
A question & answer session with Dale Rathgeber, the Head Coach and General
Manager of the October Strategy.
Q: Buy-and-Hold. It's the mantra for many investors and financial advisors. Why
do we hear so much about this investing strategy?
Dale: Historically, it's been an alternative to the churning of stocks or mutual funds. But though it reduces trading costs, it's still not very good; odds are very high that this year's great funds will be mediocre performers in five years.
Q: How can you make a blanket statement like that?
Dale: Because of a phenomenon called reversion, or regression, to the mean
(RTTM). That's fancy language for "What's gone up will eventually come down".
Q: Let's look at some specifics. Suppose you bought one or more of the ten best
performing mutual funds of 1996 on January 1st, 1997; where would you be ten years later, on December
31st, 2006?
Well, for starters, there's a 60% chance your fund no longer existed at the end
of 1996 Ñ only four of the top ten of 1996 still exist under the same names. Six
of the ten disappeared in the intervening years, a strong indicator they didn't
deliver decent returns.
Here's how the remaining four fared:
Obviously, you wouldn't be happy if you had stayed with the Friedburg
Currency Fund for the full 10 years; your investment would be worth less
than it was in 1996, before even taking into account inflation and taxes (if the
fund was held outside an RRSP).
Over ten years, the two AIC funds averaged less than 10% per year, what I
would call mediocre returns.
One fund would have been made you proud after ten years: the Beutal Goodman
Small Cap Fund. But it's the only one. Or to put it another way, if you
bought and held the top ten funds of 1996, there was only a 1 in 10 probability
after ten years that you made a good, or at least better than average,
investment.
Reversion to the mean (or below it) clearly shows up in the case of AIC
and Friedburg funds, and is quite likely in the case of the six funds
that are no longer with us. Remember, high performance funds, or the companies
that form them, don't get gobbled up by other funds or companies Ñ they become
star attractions in advertising campaigns.
Of course, you might argue that a smart investor would not buy the top ten, that
instead the smart investor would buy some other combination of funds. But, no
matter what combination you pick, you're very likely to experience reversion to
the mean with a buy-and-hold strategy.
Q: Why does it happen?
Dale: There are a number of reasons. One is that the economic conditions and
cycles that make a particular mutual fund outperform will change over time and
eventually bring the fund down. As we know, economic conditions and cycles are
always changing, sometime slowly, but always changing.
There's also the "too big" phenomenon, in which high performance funds become
popular with investors, and as funds grow larger, it becomes more difficult to
make big gains. As a rule of thumb, a small fund has more opportunities for
disproportionate gains than a big fund.
Bottom line: Change is constant, and so high performance equity mutual funds and
ETFs change too, which usually means they revert to the mean. And, while
buy-and-hold may be better than unplanned buying and selling, it still doesn't
do as well as momentum investing, a subject we'll discuss in the next
Backgrounder.
More on reversion to the mean:
"A theory suggesting that prices and returns eventually move back towards the
mean or average. This mean or average can be the historical average of the price
or return or another relevant average such as the growth in the economy or the
average return of an industry." Investopedia,
"Reversion to the mean is the process that draws outliers back to the centre of
the pack where the unweighted average of performance numbers lies. It works with
the sizes of peas, heights of people, values of stocks and prices of equity
mutual funds and ETFs.
"In capital markets, it reflects the process of asset arbitrage in which
investors buy and sell assets over time until companies' stock prices merge into
the long-term, risk-adjusted return for their industries and industries' returns
merge into the long-term, risk-adjusted return for their markets." Reversion
to the mean, Andrew Allentuck, Globe Investor, Issue 1: January 2007
A question & answer session with Dale Rathgeber, the Head Coach and General
Manager of the October Strategy.
Question: I've read on your website that we should get out of the market in
September and October? Is is always bad in those months?
Dale: Not always, but often enough to make it worthwhile to get out. I like to
say the market is predisposed to dropping in the autumn. It's like the football
coach who knows his team should punt when it's third down near his own goal
line; gambling will work once in a while but the probability is low, and the
risk is too great.
Q: Yes, but are markets human, like football players and coaches?
Dale: Absolutely. Behind all the numbers and gobbledygook in financial talk,
it's all about people. A stock market is simply a place where buyers and sellers
get together, even if it's on a massive scale like the New York Stock
Exchange. It's still just one person selling and one person buying, but
happening thousands or millions of times a day. It's all about people.
Q: Can you relate that back to my equity mutual funds and ETFs?
Dale: People, human beings, get nervous in the autumn months because they've
seen the biggest, most famous crashes, occur in October. The Great Crash of
1929, Black Monday in 1987, and more recently the Dot-Com or Tech Crash
of 2000. There have also been lesser crashes, or should I say corrections,
in other Octobers, too. So, investors are inclined to be nervous about October.
Because they're nervous, they've started getting out in September, well ahead of
the beginning of October. And, of course, when a lot of investors pull out of
the market in September, they tend to pull the market down with them. So, we
have a self-fulfilling prophecy. There are also a couple of technical reasons
for declines in September and October, such as pension fund managers making
adjustments after a summer hiatus.
Whatever the reasons, though, stock markets are increasingly softer in September
and October. And, when markets get softer, mutual fund values fall off as well,
because mutual funds and ETFs are made up of stocks and bonds.
Q: Could I be a contrarian and make money by staying in the markets or in equity
mutual funds and ETFs in September and October?
Dale: It's possible, but not likely. In a nutshell, the markets don't have much
potential to go up in September/October, but they have a lot of potential to go
down. So, think like a winning coach and play for a tie when you know you don't
have much of a chance to win.
Q: Are there any other advantages to the being out of the market, other than
just avoiding a loss?
Dale: Yes, at least one: We can buy back into the market at lower prices if
markets drop between the time we sell in late August or early September, and
when we get back into the market in late October. If that happens, we will have
sold high, bought low, and pocketed the difference.
Of course, markets could go up in the autumn, but the odds are higher they will
drop. And probability enhancement is what the October Strategy is about;
using our knowledge of investing history to increase our chances of making money
with equity mutual funds and ETFs.
Q: How has the October Strategy fared in the autumn months since you
started it in 2000?
Dale: We've done well in four years: 2000 (the year of the big Tech Crash),
2001, 2002, and 2005. We gained just a little bit in 2003. Being out of the
market back-fired in 2004. 2006 was a draw. So, overall, we've done really well.
Or to put it another way, we haven't missed much, but we've sure saved ourselves
a lot of grief.
Q: Have there been any studies done of this phenomenon?
Dale: Quite a number of studies have looked at it. There's one that even looked
at the effect on Canadian equity mutual funds and ETFs, which of course is what
interests us. Writing in the October 1997 issue of Canadian MoneySaver
magazine, Cemil Otar reported on a study he'd done.
In one case, he backtested the Trimark Canadian Fund, a diversified fund
that invests in the biggest Canadian companies, and found that if you had
invested $100,000 in this fund in 1982, and stayed fully invested until March
1997, the value of your holding would have increased to $865,000. On the other
hand, if you had pulled out of the market in September and October of each year,
your holding would have increased to $935,000. That's an 8% gain for getting out
of the markets in the fall.
In another case, if you had invested $100,000 in the Trimark Fund
in 1982, and stayed invested the whole time, the value of your holding would
have increased to $1,300,000 by March 1997. On the other hand, if you pulled out
of the market in September and October of each year, your fund would have
increased to $1,500,000. That's 15% premium for getting out in the autumn.
Let me add, by the way, that it doesn't take a huge gain each year to make a big
difference. Saving just a small bit in the early years would make a big
difference over 15 years, because of the compounding effect.
Q: Any final words before we head back onto to the ice for the next period?
Dale: A couple. First, the strategy of getting out of markets and equity mutual
funds and ETFs in September and October works especially well with no-load
equity mutual funds and ETFs because we're not paying any commissions. If you
had to pay your broker to buy and sell, as you do with individual stocks and
front- or back-load equity mutual funds and ETFs, then the extra transaction
costs could well be greater than your savings.
Let me add, too, that since the late 1990s, there's been no good reason for
anybody to pay to buy (or sell) a mutual fund. There's a vast selection of
excellent funds available on a no-fee basis, from deep discount investment
houses.
Finally, let me repeat something I said earlier, and that is that this is a
probability enhancement strategy. There are no guarantees the markets will go
up, down, or move sideways in September and October, but we increase our chances
of avoiding losses by staying out of mutual funds in those two months. And, when
it comes to getting ahead, avoiding a loss can count just as much as making a
gain.
Our subscribers say: "I have subscribed to the October
Strategy for 5 years and Rathgeber's selected funds have consistently
beat my personal selections." Harv Wregget, airline pilot, Airdrie
AB Next:
Reversion to the Mean and Mutual Funds:
Why Buy-and-Hold Doesn't Work
http://www.investopedia.com/terms/m/meanreversion.asp
http://magazine.globeinvestor.com/servlet/ArticleNews/commentarystory/GIGOLD/20050103/allentuck0301/GIGOLDMAG/home
"To every thing there is a season"
Why We Sell in the Fall