Seasonal Timing of Monthly Investment Increments

A subscriber requested evaluation of three retirement investment alternatives, assuming a constant increment invested at the end of each month, as follows:

1. 50-50: allocate each increment via fixed percentages to stocks and bonds (for comparability, we use 50% to each).
2. Seasonal 1: during April through September (October through March), allocate 100% of each increment to stocks (bonds).
3. Seasonal 2: during April through September (October through March), allocate 100% of each increment to bonds (stocks).

The hypothesis is that seasonal variation in asset class allocations could improve overall long-term investment performance. We conduct a short-term test using SPDR S&P 500 ETF Trust (SPY) as a proxy for stocks and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) as a proxy for bonds. We then conduct a long-term test using Vanguard 500 Index Fund Investor Shares (VFINX) as a proxy for stocks and Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX) as a proxy for bonds. Based on the setup, we focus on terminal value as the essential performance metric. Using total (dividend-adjusted) returns for SPY and LQD since July 2002 and for VFINX and VWESX since January 1980, all through December 2020, we find that: (more…)