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Handling Risk: Have Ultra-Safe Investments Too |
Canadian Equity Funds & ETFs
Dale Rathgeber’s Index-ETF, Plus Momentum, Minus September and October Strategy, a.k.a. The October Strategy
14% Average Yearly Return Over the Past 8 Years
Hi:
I'm Dale Rathgeber and I'll explain how subscribers to my investment newsletter, The October Strategy, have earned above average equity mutual fund and ETF returns by following two simple practices.
First, every year, I advise my subscribers to sell their equity mutual funds and Exchange Traded Funds (ETFs) in 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 most years, the stock market (and equity mutual funds and ETFs) fall in September and October. They do so because most of the great Market Crashes throughout history have happened in the month of October, – (1929, 1987, 1999, and 2008 for eg.) – and therefore many investors get skittish, and pull all or much of their money out of the stock-market in September and October, in anticipation of “scary October.” For this reason October (and now September) thereby become negative most years -- (because too many sellers flood the market, and prices thereby tend to fall). Summer vacations, for both governments and investors, also mean that bad economic news tends to “fly under the radar”, in the summer, only to be acted upon with sell orders when everyone gets back from vacation in September. Accordingly, we always sell all of our equities just after Labor-Day, and buy back in, in late October.
The autumn abstinence part of my Strategy is a pro-active, probability-based strategy of tilting the investing odds in our favour, similar to probability decisions made every day by professional baseball managers and football coaches. Baseball managers rotate left-handed and right-handed hitters, depending upon the pitcher they face. They seldom allow their non-star lefties to face lefty pitchers, because a left-handed curve-ball breaks away from lefties, and is harder for them to hit, than it is for righties. (Lefty hitters typically have a lower batting average against lefty pitchers by a significant margin, and managers pro-actively use that information to their advantage). Similarly, football coaches typically elect to punt on third and ten, because the probability of achieving a first-down is low. We punt every Labour-Day; (or, in baseball lingo, “we bench our lefties” when we face the formidable left-pitching months of September and October).
Note that this autumn-abstinence strategy is not perfect; it only “pans-out” most, but not all of the time. Note as well, that it only “works” well if the transaction costs to buy and sell are minimal. In the last decade, with the introduction of deep discount brokers, and mutual fund rules allowing us to switch into money market funds, without penalty in Sept/Oct, this is now readily achievable.
Moreover, autumn-abstinence saved me and my subscribers from a catastrophic drop of about 25% in 2008, because much of the 2008 rout happened in Sept and October, after the U.S. government came back from summer vacation, and gave the world the bad news.
Our historical performance at the October Strategy since 2002 has been as follows.
2002 _ _ _ _ _ _ _ _ _ _ _ _ 10%
2003 _ _ _ _ _ _ _ _ _ _ _ _ 35%
2004 _ _ _ _ _ _ _ _ _ _ _ _ 5%
2005 _ _ _ _ _ _ _ _ _ _ _ _ 25%
2006 _ _ _ _ _ _ _ _ _ _ _ _ 24%
2007 _ _ _ _ _ _ _ _ _ _ _ _ 0.5%
2008 _ _ _ _ _ _ _ _ _ _ _ _ minus 10%
2009 _ _ _ _ _ _ _ _ _ _ _ _ 24%
for a simple
arithmetic (non-compounded) average of 14 % per year. This is superior to the
performance of any other system with enough diversification (more than a handful
of stocks) to be the only equity strategy needed by the average Canadian.
A second significant contributor to these solid returns is the “momentum” aspect of our October Strategy. Using a momentum strategy, since 2002, we have been able to indentify and invest in:
-
red-hot mutual fund managers,
-
and soaring Index ETFs and mutual funds in certain industry-sectors, or country-specific-funds (like China or India),
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with recent sizzling gains (momentum), which momentum is likely to continue for at least the next few months.
How are we able to indentify such winners? Although our economy and markets continually move in cycles, narrow industrial or regional cycles -- (and the niche-funds that invest in them) -- tend not to reverse their cycles suddenly, and dramatically over the next 3 months, in which we are invested in those funds. To borrow another sports/probability/coaching analogy, this is like a hockey coach sticking with a “hot goalie” in the playoffs. (We stay invested for just over 3 months, to avoid short-term redemption penalties).
In short, momentum investing is another probability strategy which tilts the investing odds in our favour, much like autumn-abstinence.
Momentum investing isn’t a perfect predictor of short-term performance; some trends do uncharacteristically reverse abruptly. Momentum doesn’t always pick all of the future winners all of the time. But it does predict many of them, much of the time; (or at least those formerly hot funds which should at least stay warm for the next ensuing 100 days). When we don't hit home runs we should still hit doubles and triples.
Although we have picked some dogs, our stars have typically outshone our dogs by a wide enough margin that momentum has been a very successful strategy for us.
The October Strategy's proprietary fund selection system "cherry-picks" such hot funds from any and all of the various fund management styles and fund companies that are out-performing at any given stage in the economic cycle; ie: value, growth, index, country or industry-specific, sector, specialty, small cap, etc. We also get to choose funds and ETFs from about 50 of the best companies, like AIC, AIM-Trimark, CIBC, TD, Altamira, AIM, Spectrum, Mackenzie, Dynamic, Franklin-Templeton, A.G.F., etc.
Recently, Exchange-traded-Index-Funds (ETFs) have become very popular as a partial replacement for mutual funds, because their hidden MER charges are typically less than for mutual funds. They are also inexpensive to purchase ($5.99 --$9.99 per trade) at a discount broker (if you are a substantial investor.)
Accordingly, of late we have been featuring more and more Index ETFs for a significant part of our portfolios, supplementing them with “momentous” mutual funds where circumstances warrant. (For investors who don’t qualify for low-cost ETF commissions, we also publish a list of less-expensive index mutual funds as an alternative to ETFs).
Through the email October Strategy Newsletter, -- sent at exactly the same 4 dates every calendar year, -- I clearly state which funds that I recommend you buy, and those to sell. The publication dates are: early Feb, mid May, Labor Day -- (always recommending that you sell all, and go into a money-market fund for 7 weeks), -- and late October in every year. My recommendations are clearly stated, and I never use vague weasel-words capable of many interpretations.
Moreover, I always invest 100% of my family’s equity portfolio (one-half of our total nest-egg) in the manner advocated in each newsletter.
However, please read and consider the
section titled
Handling Risk: Have
Ultra-Safe Investments Too. The October Strategy is an equities-based system and most
investors, especially retirees, will want some ultra-safe fixed-income
investments, such as bonds and GICs, as well as equities. This is called
diversification and is a smart insurance policy in case our superior rates of
return do not repeat to the same extent as they have in the past. Equity returns
have historically been about +10% per year, and our returns have been even
better, but past returns are not guarantees. Therefore, it is smart to have some
non-equity investments, and to ensure that not all of your nest eggs are in one
basket.
Our subscribers say:
"I have been with the October Strategy for six years, and couldn't be happier with my investment returns." Terry Ostash, Aviation Safety Inspector, Abbotsford, BC
How Does the October Strategy Work in Practice?
The October Strategy combines four pro-active and probability-enhancing investment strategies as follows:
- We invest only in equity ETFs and equity mutual funds for the equity component of our nest-egg. We buy equity ETFs when they are cheaper than comparable equity mutual funds, but our portfolio is typically a mixture of both types of equity funds --mutual funds and ETFs. We recommend one of the following deep discount brokers to ensure that you are charged no commissions on your mutual funds, and low commissions on your ETFs: RBC Action Direct, TD Waterhouse, BMO Investorline, Q-Trade, CIBC Investor's Edge, Scotia iTRADE, or Credential Direct. (The Strategy only works if you pay no commissions on mutual funds and low commissions on ETFs).
- We consistently get out of equity funds and ETFs, and into a safe money-market fund, every September and October, to avoid the typical autumn downturn which happens in 8 out of every 10 years.
- after October, we stay fully invested in equity funds and ETFs because over the long-term,
- we rebalance our
equity portfolio about every 100 days, with 15 or fewer
minutes effort. This 100 day period both:
- avoids short-term redemption penalties; and
- allows investors to take full advantage of those equity funds and ETFs with recent out-performance momentum.
Our newsletter tells you exactly which funds and ETFs to buy and sell, and gives you the precise language to give to your broker.
How our system works:
- Our annual cycle starts in late October, when we sell our money market fund (more on that in a moment) and buy equity funds or ETFs. The funds to buy will be listed in the newsletter you receive in mid-October. The percentage of your equity portfolio that each fund should comprise is also specified.
- In February and May we rebalance by selling some or all of the funds we bought in the previous rebalancing, and buy new funds; again the fund names (and recommended weightings) will be provided in the newsletters that arrive in early February and early May.
- In late August or early September you'll receive the final newsletter of our annual cycle. It's the same message every year: sell all your equity funds and ETFs and reinvest the resulting cash in money market funds until late October.
- In late October we start the process again, selling our money market funds and investing in the equity funds and ETFs recommended in the newsletter.
You can subscribe just prior to any of the four dates set out above.
Summing up, you will call your deep discount broker (or use your broker's online brokerage) four times a year; this will take about 15 minutes per call, so the total time spent managing your portfolio, for the year, will total about one hour.
The newsletter provides specific buy and sell recommendations, so you will not have to stay awake nights trying to decide which funds to sell or which funds to buy. Of course, the recommendations are exactly that -- recommendations, which you are free to accept or reject as you choose.
If you don't yet have a deep discount broker, you can get one, quickly and easily; visit our Frequently Asked Questions page to find out how your new broker can make all the arrangements for you.
Our subscribers say:
"Dale Rathgeber is on to something really good. I have subscribed to the October Strategy for almost six years and I am very pleased with the results. I can recommend it to anyone without hesitation. I am pleased to see my investments growing from November to August, then to sit on the sidelines during the scary months." Paul Barrie, Courier/Driver, Airdrie, AB
Why is the October Strategy Better?
Since 2002, the first full year of publication, the October Strategy's funds have averaged plus 14%. Our best year was + 35%; our worst was -10%.
What do these rates mean?
The reason we invest, of course, is to build up our savings for retirement income or some other purpose. And, the faster we accumuate, the greater our total return will be.
So, when our return averages 14% a year, it means our original investment doubles in just over five years (using the Rule of 72 and assuming we shelter our savings with an RRSP).
On the other hand, if we earn the Canadian mutual fund median (average) (over the past five years) of 3% per year, it takes 24 years for our original investment to double (using the same assumptions).
Overall, this means we have been accumulating wealth at more than four times the rate of the Canadian mutual fund median (average) over the past eight years.
Still, the October Strategy is not a get-rich-quick scheme. It should continue to enable investors to become rich slowly, but surely. But quicker than investing on the basis of the “free” advice fund seller/advisors who preach "buy and hold (ignore)". This leaves their clients in Dog funds for too long.
But, again, our system is one that invests in equities. Most investors, especially retirees, should be diversified between equities and ultra-safe, fixed income investments See the Handling Risk: Have Ultra-Safe Investments Too section.
Our strategy will continue to beat those annual paperback books that try to predict next year's top funds, because those books are out-of-date by the time they reach the bookshelves (they are written in the summer and published during RRSP season).
We should also out-perform the balanced funds and investment programs sold by the banks and fund families which try to pick and choose a handful of funds from various managers, gurus, and/or investments styles. These “easy decision” programs are designed for couch potatoes who buy and ignore their funds for too long. They are a clear prescription for mediocrity.
Lately, a number of internet blogs have been touting the supposed merits of investing only in index funds or Exchange Traded Funds, ETFs, (which give an investor a rate of return similar to that of all other investors) because the majority of investors fail to beat the mediocre performance offered by index funds. These statistics are correct, but our eight year average shows that it is possible to consistently beat their mediocre performance of about 3% per year. We also buy index-ETFs as one arrow in our arsenal, but we don't limit ourselves unnecessarily, like the index ETF only zealots do; they are too rigid in their well-meaning but mediocre philosophy.
Our Strategy also eliminates the need to try to stay on top of what the “next big thing” forecast will be, because it does not try to predict future developments, but identifies and takes advantage of already-emerging trends. The “next big thing” forecasts in the media are almost always conflicting and contradictory. As a result, the average investor hears too much noise, chatter, and static. True wisdom is hard to come by. And even when one guru gets it right, their predictions usually take longer to “pan-out” than our system of recognizing and taking advantage of emerging trends.
In fact, too much of the media information available these days is really thinly disguised infomercial hype. Our system is more reliable. It tends more toward the scientific end of the investment continuum between art and science. This, because our fund selection criteria considers such factors as recent performance; long-term performance; stable management; risk-to-reward ratios, and low management expense ratios (MERs). It also ensures prudent diversification between countries, industries and geographic areas by choosing five to ten different funds from different geographical regions and industrial sectors.
Another advantage of our disciplined system is that it takes human emotion out of the equation. This is the downfall of both individual “gut feel” investors, and the famous gurus – they tend to stubbornly hang on to their mistaken predictions for too long, hoping that they will eventually be vindicated. Some of our selections may turn out to be “dog-funds”, too, but they get sold within 100 days.
The October Strategy is a pro-active equity mutual fund and ETF re-balancing program which is prudently aggressive, but should allow investors to sleep easily at night. The strategy is not appropriate for people who are poorly organized, because October Strategists need to be able to collect their e-mailed Newsletter and then phone their discount broker within 10 or 15 days of receipt, 4 times per year; in early September, late October, early February, and mid-May. Again, the October Strategy and equity funds, for most people, should only comprise part of your assets - see the section titled Handling Risk: Have Ultra-Safe Investments Too for counsel on how to be properly diversified with your investments.
Our subscribers say:
"My wife and I have used the October Strategy for seven years. The system works and is easy to follow. My stress level is also very low." Fred (Stewy) Stuart, Business Owner, Calgary
How to Subscribe to the Newsletter
Sign up now for a nearly-free trial subscription, or scroll down to see our unique fee and guarantees for full-time subscribers.
Trial Subscription:
You can receive a 2-issue trial subscription for only $1.05. (The Securities' Act Rules on Advisory Publications stipulate that all subscriptions must be pre-paid, and therefore we charge $1.00 plus GST).
You will get exactly the same investing recommendations that our regular subscribers will get, including the names of the funds, and in what proportions.
To start your trial subscription, click here to make a payment using your Visa, Mastercard, or other credit card (securely, via PayPal):
Or, send your cheque
(check) or money order to:
The
October Strategy
225 1 Ave NW
Airdrie AB T4B 2M8
Please include your e-mail address on your cheque because we publish by email. And tell us who your present broker is. We won't contact them; we just want to ensure that you have a deep discount broker that won't charge transaction fees.
Remember, to avoid transaction fees for your fund purchases you need to use one of the true no-load deep discount brokerages like RBC Action Direct, TD Waterhouse, BMO Investorline, CIBC Investor's Edge, Scotia i-TRADE, Q-trade, or Credential Direct. See the Frequently Asked Questions section for guidance on how to open a deep discount brokerage account. They will do all the paperwork and there is no need for you to confront your present broker if you need to switch.
After receiving your payment (whether by PayPal or by regular mail), we'll confirm with an email message to let you know you'll be on the list to receive the next newsletter.
We also recommend that you move your assets into the October Strategy slowly, over a 2 to 3 year period, if you are new to equity investing. Again, see the section titled Handling Risk: Have Ultra-Safe Investments Too.
Deadlines:
In using our system, there is a 10 to 15-day window in which to follow the recommendations for buying and selling.
To be sure you get the newsletter in time, we recommend your payment reach us by one of the following dates:
- January 31
- April 30
- October 15
We also send out a newsletter in August, but it has the same message every year: Sell all funds and put the proceeds into a money market fund until you receive our new recommendations in October.
Our Unique Fee & Guarantees:
The $1.00 Fee, Unless Our Newsletter Out-Performs, Guarantee
Our newsletter subscription fee structure is unique. Subscribers are charged on a calendar year basis, with a variable fee, which is set every January based upon how well our model portfolio performed in the immediately preceding year. Our minimum yearly fee is $1.00 (to meet the Securities Act's rules) and our yearly maximum is $400.00 (plus G.S.T. in all cases). In years where our model portfolio beats the median (average) mutual fund in Canada by one percent, our fee for the next upcoming year will be $100.00. When we beat the median (average) by two percentage points, the fee for the next calendar year is $200.00. If we over-achieve by 3%, the fee would be $300.00, to a yearly maximum of $400.00. Fees for partial years are prorated, and two spouses are considered as one subscriber. Subscribers can cancel at any time without hassle, by simply not paying their invoice for the upcoming year.
Dale Rathgeber's personal guarantee is that he will invest one-half of his total portfolio (and the portfolios of his wife and family) in exactly the same way as recommended in the October Strategy, (and the other half in fixed income securities).
We also guarantee that we will remain independent of any mutual fund company, or brokerage firm. That includes the deep discount brokers which we presently recommend for the October Strategy.
Lastly, if we come across a better system, we will try to adopt it, for the benefit of our subscribers and to maximize our own personal portfolios. Or if we can't do as well, we will recommend that our subscribers switch. We have no interest in having our friends and families in a second-rate system, only to endure their wrath during get-togethers and Christmas dinners.
Privacy & Security
The October Strategy is purely
an advisory service, we make recommendations only. We never ask for personal
or investment information.
We do not handle your money - we send you a newsletter with recommendations.
You continue to buy and sell mutual funds and ETFs as you did before (assuming
you use a no-fee brokerage service). Only the broker or financial professionals
you select will be privy to your account information, and be able act on your
behalf.
You are free to follow or not follow the recommendations in our newsletters (but
for best results we recommend you do, of course).
To start your trial subscription, click here to make a payment using your Visa, Mastercard, or other credit card (securely, via PayPal):
Or, send your cheque
(check) or money order to:
The
October Strategy
225 1 Ave NW
Airdrie AB T4B 2M8
Want more information?
Head to the More Information page, where you can read sample newsletters from the past (these are the ones with the actual buy and sell recommendations). You can also read our Backgrounders, which give you more insight into how the October Strategy works.
Our subscribers say:
"I have followed the October Strategy for seven years and my rates of return have exceeded my expectations." Brad Ansell, Steam Engineer, Cold Lake, AB
Copyright Dale Rathgeber (The October Strategy Publishing Company Ltd.), 2000-2009