Wednesday, 20 March 2013

Seasonality and Trend Following on The TSX

Here is a chart showing how three simple investment strategies on the TSX compare. The returns are calculated from price returns (no dividends) over the period 1957 to 2012. The MA(10) switch portfolio uses a moving average trend following strategy by comparing monthly closing prices with a moving average of length ten. Buy or hold the TSX when the monthly close of the TSX is above the 10 month moving average and sell the TSX if it falls below the 10 month moving average. The seasonal switch portfolio invests in the TSX during the 6 month period November to April and then at the end of April the portfolio is sold and the money held in 3 month Treasury bills. The buy and hold strategy produces the lowest returns and highest standard deviation.The seasonal switch produces the highest returns and lowest standard deviation.

Using these average annual returns it is useful to do some future value calculations. Suppose that at the beginning of each year, an individual invested $13,500. This is done each year for 25 years. At the end of a 25 year period, the buy and hold strategy generates $730,747 while the seasonal switch portfolio generates $1,337,942. Commissions and trading fees are not included in the calculations.

The average monthly returns on the TSX vary considerably. September and October are, on average the worst months while December and January are the best months.

1 comment:

  1. This is a long term time series and with data, as you have said, the more the better. I was wondering if the Sharpe ratio and downside deviation would keep the seasonal switch on top or would MA(10) become more attractive. I think that some of your data from 1971 would show that (but I may be wrong)? In addition, one could argue that there has been greater interest and equity ownership from the early 1980s. That has coincided with greater financial deregulation and freer capital flows (as in portfolio rather than FDI). Will this be maintained given the aging demographics in Western developed economies? Big question but I doubt people can stomach passive buy and hold going forward.