Buying shares Investing safely with the most important stock market strategies
Buy seasonally and follow the trend
October 2013: the Dax exceeds its high in the course of the day of the 18. October for the first time the striking record mark of 9000 points – the highest level since the Dax introduction on 30. December 1987. The following chronicle shows the milestones along the way.
July 1998: Dax has almost tripled within three years and reached more than 6000 points; Asian crisis, Currency crisis in Russia and bankruptcy of hedge fund LTCM send share prices into a tailspin. (In the picture the red place in Moscow in the year 2000)
September 1998Fed cuts key interest rates in three steps starting in September, heralding a turnaround in share prices. At this time the Dax had already fallen below the 4000 point mark.
March 2000: New economy bubble – Stock market fever drives tech company prices to all-time highs; celebrities like Verona Pooth also lure small investors. For the first time, the Dax reaches a level of 8000 points – at least for a short time.
11. September 2001: Terrorist attacks in New York; fear of retaliatory strikes by the U.S. depresses prices. The Dax rushes again well below 4000 points. In the following months, there is first a recovery, then it continues to go down in spurts.
March 2003: Iraq war; U.S. bombs targets in Baghdad and marches on 20. March into Iraq. By the beginning of March, the Dax had already fallen into the 2500 point range, the Iraq war only putting a further damper on things. Then the stock market index begins a multi-year rise.
July 2007: Subprime crisis – German IKB reports massive financial problems due to US mortgage securities. Shortly before, the Dax had surpassed its old record high of 8151 points. Now the Dax starts to run out of steam for the time being.
This (simple) strategy is based on just one parameter: The calendar month. The history of the German share index, Dax, for example, shows that August and September have by far the statistically weakest average returns; since 1988, Dax shares have fallen by an average of more than two percent in August and by an average of 3.4 percent in September. It is similar for most other major world stock markets.
The old saying "Sell in May" comes from the USA in the 1950s. Back then, brokers and their clients were simply on vacation in the summer and didn’t feel like tediously checking prices every day; trading was correspondingly lukewarm. Many also took profits before the summer break or wanted to avoid with the sales to stand before a bad surprise in the depot after the vacation.
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Today, in times of smartphones and free Internet access in almost every hotel room, this is hardly a valid reason. Nevertheless, the pattern also worked in most years in the recent past.
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Investors can take advantage of this and simply leave out the two late summer months, i.e. buy shares in October and sell them again in mid-summer. But then also regardless of the current mood and news situation, and over as long a period as possible. If you had followed this strategy for 15 years, for example with Dax shares, this simple strategy would have yielded an annual return of almost 15 percent – twice as much as the Dax.
2. Trend following
"The trend is your friend", many investors say to themselves: They bet – simply put – on stocks that are already doing well. There are countless different trend-following models. The calculation is always similar: that these shares attract other investors through their price gains and therefore the price gains accelerate.
Surprisingly, the game also works quite well – until it eventually ends in weeping and gnashing of teeth. Because it is also clear where this journey is going: sooner or later too many investors are invested in the trend stocks, the first profit-taking occurs. These accumulate, the price weakens, the trend breaks up, which in turn causes many more investors to drop out, and so on.
Better than the crude "winner" strategy is an orientation to so-called moving averages. The most frequently used is the 200-day line. It is formed by the moving average of the closing prices of the last 200 trading days in each case. If a share price breaks through this line from the bottom to the top, buyers get in; if the share price falls below it for the day, they sell rigorously. In this way, investors avoid large price losses, which probably explains the 4 to 6 percentage points of additional return compared to the general market, which many studies attest to this strategy.
The downside is: the strategy seems to wear out, the more recent the research and the more recent the period under consideration, the worse it worked.