Today I want to show you the simple strategy that would have beaten the Dow Industrials Index over the last 120 years. It can be written down in one line:
Walk away by selling all stocks on the last trading day of “9 years”, and come back to get fully invested in stocks on the first trading day of “2 years”.
Before I show the charts that illustrate the past performance of this system, here is how that strategy has done. The Dow closed at 48.41 on December 31st, 1899. It closed at 28538.44 on the last trading day of 2019. So, without considering dividends that can be reinvested, a trader who put $1,000 into stocks at the end of 1899 would have seen his account grow to $589,500 by the end of last year. Not bad for 120 years of patience.
But somebody who has waited in cash over the first two years of each decade would have seen his account grow to $2,183,000. That’s almost 4 times more, and with less risk because he was in the market only 80% of the time..
The reason is that stocks have often done poorly in years ending in 0 or 1. Is that just a coincidence? Maybe. But it could also be that a new decade creates new challenges and a kind of psychological uncertainty that weighs on stocks until things feel “normal” again.
Let’s have a look.
The first years of the 20th century started with a bear market. It even continued well into 1903. You didn’t miss anything by staying out in the first two years of the decade. The early 1910s were very similar. The early 1920s started with a severe bear market. Buying at the start of the “2 year” in 1922 was close to perfect.
Our trader would have enjoyed the roaring 20s and then sold on the last day of 1929, avoiding most of the crash of the early 30s. Buying at the start of 1932 wouldn’t have been easy, but it worked out. The first years of the 1940s started with a bear market again.
Our go-fishing-in-zero-years trader was lucky and as soon as he was back in 1942 the market was going up again. But in the early 50s the strategy clearly failed for the first time. Stocks just climbed through it and kept going until the end of 1959. The early 60s just gave a mild pullback that was quickly recovered, but one wouldn’t have missed much by staying out for a few years.
The early 70s and early 80s were just one long sideways period.
Buying in early 1982 was a great entry point to enjoy the 80s bull market. The first years of the 90s were a tricky sideways again. And getting back in on the first day of 1992 would have done very well. The first two years of the new millennium started with bearish activity as well.
The early 2010s came on the heels of a major bear market in 2008-9. There were some major pullbacks, and one wouldn’t have missed much by sitting out until late 2011. Once those early years were out of the way the market kept climbing until its current peak near 29000.
Can we expect another weak two year period now? I don’t know, but after gains of this magnitude I don’t think anyone would be surprised by a serious correction in the next couple of years. It doesn’t have to start right away. In the year 2000 some indexes kept climbing until March. How deep can it drop? As an educated guess my vote would go to a drop to 25000 or 22000 for the Dow Industrials, and followed by a climb to 50k. But feel welcome to dream of other scenarios…
Very insightful, thanks, useful information, and data!!
Thanks for the answer. You are right: it is a too small sample to be a trustworthy investment strategy.
I would love to email you some of my long term charts. I understand if you dont want to put your emailddress in the open. But if you like to see them, email me at email@example.com
Litte remark: If you leave out the 1930- 1931 period, the difference between buy hold and this strategy is a lot smaller, so most of the advantage comes from 1930- 1931 as I see it. Other 0 and 1 years were sometimes down en sometimes up. ( and although you dit say it, but you would also have missed dividends in de 0 and 1 years, making the total positive difference probably even smaller. But still I really like stuff like this..!
True re 1930-31 being a big outlier. Being out of market in 0 and 1 years could have earned interest, so that would compensate for some lost dividends. And because of having a larger amount invested towards the end the total amount of dividends collected over this 120 year period would be larger for the investor who stays out in 0 and 1 years.
I am not saying that people should base their investments on this bit of history only. With only 12 sets of 0 and 1 years in our sample the “law of small numbers” applies anyway…