By Aniket Bose. Edited by Arjun Chandrasekar.
What is the Seasonal Investing Strategy?
The seasonal investing strategy acts as a guide for investors to bet on various stocks and sectors based on their past performance during the same period in the past fiscal year. These strategies are then tested for about 10-20 years, to confirm the performance and being able to identify a related recurring trend. After investors use the seasonal investing strategy, they then typically use selective trading, where the investors pick out different stocks that they believe will perform better than the market over a certain period, typically a year or less. Investors mainly use this strategy because they understand that holding on to stocks for long periods is not very profitable, as a profitable business today may not stay profitable depending on the business’ dynamics. This is why investors can anticipate a foreseeable future and bet on a particular sector that they believe will outperform in the medium term. As we are approaching the future, markets are becoming more volatile, businesses are becoming more dynamic, technology is continuing to upgrade, and there will always become a sort of uncertainty; these are hints for investors to approach a more profound investment strategy, like seasonal investing, so that they can outperform the broader markets by participating in short to medium term trends instead of long term trends.
Why Are the Benefits of the Seasonal Investing Strategy?
Investors use the seasonal investing strategy for the numerous benefits it provides: the data is easily available, there are more opportunities to make a profit, there is a short holding period, and investors can buy stocks low and then sell them high fairly easily. The historical trends and performance of each stock are easily available to investors as they have access to data points from the past. These past trends have enough data to support the future prediction, telling investors whether they should invest in that particular stock or not. The majority of the seasonal trends are short-term with a time frame of less than a year, which allows investors to take advantage of multiple growth opportunities within a year. This allows investors the possibility to outperform the benchmark substantially with these short-term profits. For example, agriculture commodity stocks highly depend on the weather and location giving opportunities to multiple sectors that are related to agriculture. Seasonal investing strategy lasts until the end of the short-term trends, which is almost always less than a year. This makes it beneficial for investors to use this strategy as it provides higher liquidity and it also prepares the investor for identifying the next big short-term trend. The fundamental principle of seasonal investing is to buy the stock at the beginning of the trend and sell that stock once that trend, or cyle, is finished. This allows the investor to make maximum profit on their investment as they would be deploying their funds once the trend commences; at lower prices and rich valuations and then selling the stocks once the trend is over at higher prices.
What Are the Limitations of the Seasonal Investing Strategy?
The limitations of the seasonal investing strategy are not too serious for investors to not consider using it at all, but it is still important to recognize them. The limitations include historical data, only using the seasonal investing strategy is not recommended, timing the trend, and the fact that the research is very time-consuming. The analysis that investors use is based on the historical data and the performance of that stock in the past. The past performance of that stock may not necessarily be a true resemblance to the future performance as there also other variables and factors that need to be taken into consideration. The investor may have to use other indicators and resources that are in place to validate his view on the next upcoming trend. The seasonal investing strategy is a very useful analytical tool for investors, but only when it is used in congruence with other investment strategies, which will result in a higher success rate for investors. For investors, being able to time the trend is very tricky. With a seasonal investing strategy, timing is key for investors to make maximum profits; if they make an incorrect timing they may suffer huge losses. As the seasonal investing strategy requires selective positional trading, investors need to be paying close attention to the market all the time to be updated with the latest trend, which takes a serious toll on anyone. In today’s world there is more uncertainty and volatility in the global markets than ever before, which is leading to investors using the seasonal investing strategy at a much higher rate. However, to increase the probability of success, they should use complementary strategies and resources as well as deploy a risk management tool to ensure maximized profits.