The MOST WONDERFUL TIME OF THE YEAR to invest!

Most investors have heard of the "January effect" or "triple witching" day but there's little mention of the last day of the year, THE MOST WONDEFUL TIME OF THE YEAR to invest in the stock market! 

Next Thursday 12/31/2020 at 4 PM, funds, stocks and everything else will close on the last day of the year and a new "bogey", target or gauge for performance will be set for every investor. Money managers are laser focused on getting the highest one year, three year, five year, ten year and (for the young at heart) twenty year returns for their funds.

The 20 Year Indexes chart below shows the 20 year continuously compounded gains for the major investment indexes starting at 1000 on the close  of 12/31/1999-the beginning of the new millennium. One would guess that the Russell 2000 index would be the way to go!

S&P 500 = S&P 500 Stock Index

NASDAQ = NASDAQ Composite Stock Index

RU2000 = Russell 2000 Stock Index

BCOM = Bloomberg Commodity Index 

The one year 2020 chart tells a different story.

The NASDAQ index was the top performer again this year, while everything else, except commodities, again, were all competitive. Different time periods create different winners. IMHO the S&P 500 index is the ideal long term index for nearly all investors.

The continuously compounded rolling returns show this clearly:

Source: Yahoo Finance, Bloomberg as of the close Tursday, 12/24/2020

The moral of the story is that the index you buy doesn't matter all that much as long as you buy and hold for the long term. Take your pick and, excepting the commodity index, get your decent long-term gains!

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

There's a Chance

Below is the chance of gain for the S&P500 index versus the long US Treasury Bond since 1928 across holding periods.

Stock Market Insurance

The cost of 1 year stock insurance since 2005 is presented below:

SPY = S&P 500 ETF 

Put Cost as Percentage of SPY

Source: T. D. Ameritrade ThinkBack platform.

Above are the year-end closing prices of SPY and cost of the closest 1 year at-the-money put*, as a percentage of SPY, since SPY options started trading in 2005. Note that the SPY Return, our proxy for a stock market portfolio, averaged 9% with the largest drawdown of 38% in 2008. The "married put" insured portfolio, Return with Put, averaged 4% and reduced the portfolio loss by 30% in 2008. The married puts paid off in the down year. 

All told, just like real insurance, premiums (put prices) vary each year and its up to the buyer to judge their worth. In my view, option sellers are very shrewd and usually price put option insurance so its NOT worth buying.

*Two examples from the above table: 

Up year: On 12/31/2018 SPY closed at $249.92. The at-the-money put closest to covering the coming year was the 12/20/2019 250 put which closed at $18.185 or (18.105/249.92 =) 7.3%. On 12/31/2019 SPY closed at $321.86 for a return of 28.8%. The return less the cost of the put was 21.5%. Since SPY closed above the $250 strike price, the put expired worthless. 

Down year: On 12/31/2007 SPY closed at $146.21. The at-the-money put closest to covering the coming year was the 12/31/2008 $146 put which closed at $11.07 or (11.07/146.21 =) 8.0%. On 12/31/2008 SPY closed at $90.24 for a loss of -38.3%. The put stopped the loss at the $146 strike price so the net loss was only -8.1% (=11.70 cost of put +.21 difference between stock and strike = 11.91/146.21.).

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

COVID Hoax Delusions

With more than 100,000 patients filling hospital beds and newly reported confirmed cases exceeding 200,000 a day-all-time records (see Wall St. Journal), the many posts implying COVID is a hoax will NOT let up.

Sadly, delusional politics is par for the course, delusional money managers are not.

GDP Revisited

Despite recent political boasting, the St. Louis Federal Reserve GDP stats provide, for some, a sobering view of economic performance under two Presidents-PRE COVID!. 

"MORE INDEX!" - Stocks versus Options

The COVID break is over! We have a full recovery plus some and NOW what do we do?. Obviously, just buy and hold MORE INDEX. Or to paraphrase: "More Cowbell!" 

In my view, once the ECONOMY recovers, which it WILL, the market will roar and maybe return to Obama level gains. (Note Obama markets doubled in the first term and rose 50% in the second also GDP growth outpaced the pre-COVID Trump era).

Given this bullish opinion, this post will compare the returns from buying the stock to the equivalent buying of TWO "at-the-money" call options. 

A valid test is time period neutral, no cherry picking. Year-to-date 2020, with an extreme decline and extreme recovery plus some, is a perfect stress test for nearly every scenario. A valid test would also use the largest most liquid tradeable index and options available, the S&P500 ETF SPYs!

In options speak, one "at the money" (atm) call option is equal to 50 shares of the underlying stock. Thus 2 atm SPY calls = 100 SPY. See a more complete discussion of options here.

The closing price of SPY on the last day of 2019 was $321.86. The "full year", atm call on that date was the 18 December 2020 expiration, $322 strike, call option. The comparison of buying 100 SPY versus buying 2 SPY atm calls is shown below:

Quotes Source: Thinkorwim Thinkback

The options cost roughly $4,000, a fraction of  the more than $30,000 needed to control 100 shares of SPY.  Likewise the return on investment is huge for the options, while the dollar gains are roughly the same. 

A small caveat is that while you must pay for the options up front in full; the stock position may require one half to a third of total cost depending upon your broker's margin requirements. Thus the return on investment, ROI, would be much larger for the stock position but still far below that of the options. 

A large caveat is that options expire, stocks don't! If the stock is not up enough, you will lose ALL or some of your atm option investment. When your time runs out, your option expires. You stock doesn't expire. 

A final caveat, this is just one data point, just one year. While the method is valid, there is no guarantee that any given year will produce the same results. Consider 2017 for a counter example. 

In conclusion, options may be one of the best ways to capture stock market gains in rising markets.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.