Just do your buying before the other month-end investors start theirs, say on the fifth-to-last trading day of the month. Then, whether the Hirsch theory (seasonality begins with three trading days remaining in the month) or the Fosback theory (seasonality begins with two trading days remaining in the month) is correct, you'll still benefit from the buying that surrounds the turn of the month.

For example, the last seven days in September fall as follows: 24th Friday, 25th Saturday, 26th Sunday, 27th Monday, 28th Tuesday, 29th Wednesday, and 30th Thursday. Since the financial markets are closed on the weekends, the final four trading days in September will be the 27th-30th. In that event, you would want to make your investment no later than the day before the 27th — in this case, on Friday the 24th. If you have your money at a fund organization or broker, a timely phone call or click of the mouse will transfer it into your stock fund on the day of your choosing each month.

If you set up an automatic transfer that is executed on the same date every month, you'll give up a little precision because the seasonal period varies from month to month depending on where weekends fall and the number of days in the month. In that case, we suggest using the 24th of the month, for the reason seen in the prior example. That date will be close on target during months that have 30 days, and a little early in other months (except February). This will be close enough to still provide a benefit.

Here are a few other ways you can use monthly seasonality to improve your long-term performance.

• Perhaps you're in retirement and part of your income derives from selling enough of your stock funds each month in order to withdraw $500. Wait until the favorable period has run its course; sell your shares on the fifth trading day of each month. Over the long-term, you'll get a slightly better average price.

• Following a variation of the dollar-cost-averaging strategy, use favorable periods when investing a windfall (for example, an inheritance). If you haven't been investing regularly, it's a little scary to take a large sum and put it into the market "all at once." Divide it into several smaller amounts of equal size, depending on how long you want to stretch things out.

For example, if you want to invest it over a period of six months, divide your total into six equal amounts. Then invest one-sixth each month just before the start of the favorable period.

• The monthly seasonality concepts also work well in conjunction with the annual seasonality strategy explained in on our Advanced Strategies" section. 

Remember, these patterns aren't perfect. The seasonality studies reflect "averages." By definition, an average finds the middle ground (and therefore hides the extremes). So don't expect the favorable period to lead to higher prices every month.

As J.P. Morgan famously said, the only thing we know for sure about next month's market is that "stocks will fluctuate." Seasonality should be used only as one piece of an overall decision-making process.

 

By Austin Pryor for Sound Mind Investing

Publication Date: June 13, 2012