Forum Mailbag: September Effect, HSA Investments, Protecting Against Correction, And More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. Here are some of the discussions happening around the internet.

1. White Coat Investor: September Effect?

Question: Lithium recently read a chart of monthly stock market returns and noticed that the stock market has had its worst month in September (average return of -0.67%). He was wondering whether there was any way to take advantage of this seasonal difference in historical returns.

WSP’s Take: A large number of seasonality effects have been identified by academics and market observers over the years. Here are some of the seasonality trends I’ve heard of:

• January effect — the observation that the stock market tends to outperform in January. A related effect is that the market’s performance in January will predict how it will be do over the entire year.
• Santa Claus rally — the theory that stocks will rise in December, especially in the last week of the year (i.e. between Christmas and New Year’s Day).
• Sell in May and go away — the belief that the stock market underperforms between May and October. Most historical market crashes have occurred in September and October.

I ignore these seasonality trading strategies. Correlation does not equal causation. For these trading strategies to be actionable, there should be a probable explanation for why these seasonality effects occur. People have tried to explain the various effects through supply/demand imbalances (e.g. investors receive year-end bonuses and invest them in January, and the Santa Claus rally occurs in anticipation of the January effect), but they are pretty unconvincing to me.

2. Bogleheads: How To Invest HSA Money

Question: Bluerafters is a healthy, single 40yo who is planning to contribute to an HSA in 2018. He wants to know how conservative or aggressive to be with his HSA money.

WSP’s Take:I am very aggressive with my HSA; while I do pay my health expenses with an HSA as I incur them, I don’t feel the need to treat it as a separate “bucket” of money. I consider the HSA as simply another tax-deferred investment account that has additional tax benefits when spent on healthcare expenses. After all, the HSA can serve as a pseudo-401(k), because the money can be withdrawn without penalty after age 65.

However, I do understand the rationale behind being more conservative with an HSA. The account is intended for health expenses, and some people may want to have enough money to pay for the out-of-pocket maximum if a major health event happens. In this case, you could hold a portion of your HSA in a short-term bond fund (or even cash), while investing the rest of the money aggressively. While not the optimal solution from a math perspective, this might make most sense for some people.

3. Bogleheads: Protecting Against A Correction

Question: Always-passive wants to know if there are any ways to protect against a correction. Specifically, he asks about a method of buying put options and government bonds as proposed by Meb Faber in this article. 

WSP’s Take: This is a very common question. Investors may be worried that we are due for a correction, and are looking for ways to protect against a future bear market.

One method would be to buy put options. A put option is the right (but not the obligation) to sell shares at a certain strike price by a certain date. For example, if the S&P 500 is trading at 2500, then you might buy a S&P 500 December 2017 put option with a strike price of 2400, which gives you the right to sell the S&P 500 at 2400 at any time before December 2017. If the stock market falls, your put option rises, insulating the fall in the stock market.

The problem is that if the stock market keeps on rising, you lose money on your put option. The put option is priced so that you are not expected to make money on the option (and you actually are expected to lose money because of transaction costs). If you’re a long-term investor, buying put options doesn’t make sense. If you’re nearing retirement and are worried about stock market drops, then you should consider having a lower stock allocation.

4. White Coat Investor: First Passively-Managed Portfolio

Question: Countryphysician is a 30-year-old physician who wants suggestions on his $40,000 solo 401(k) portfolio. This is his planned allocation:

WSP’s Take: This is a reasonable allocation. You have more bonds than the typical investor your age, but you compensate for this by holding more small-caps than a market-weight index.

Since you’ve chosen to go with Schwab, I would stick with Schwab funds/ETFs. There are transaction fees or commissions associated with purchasing Vanguard index funds at Schwab, which is unnecessary when Schwab has so many excellent index fund options. For example, you can buy SWTSX (ER = 0.03%) or SCHB (ER = 0.03%) for the total stock market, SCHC (ER = 0.12%) for international small-cap, SCHH (ER = 0.07%) for REITs, and SWAGX (ER = 0.04%) or SCHZ, (ER = 0.04%) for the total bond market.

Wall Street Shares: 5 Articles To Read This Week

1. White Coat Investor: 2017 WCI Scholarship Winning Essays — I served as a first-round judge for the WCI scholarship contest this year. There were over 600 essays, and WCI published the five winners this week. Check out the 1st place, 2nd place, 3rd place, 4th place, and 5th place essays. Congratulations to all the winners!
2. Physician on FIRE: Selling Shares Beats Collecting Dividends — I played the dividend stock game for about two years, but now I’m not a fan of choosing stocks based on their dividend yield.
3. Another Second Opinion: Don’t think I can achieve financial independence in California?? Hold my IPA… — This physician living in a high-cost-of-living state discusses his plan to reach financial independence.
4. The Boss MD: Physicians Guide to Conquering Clinical Quality Metrics — your friendly physician / administrator blogger gives advice on how to navigate every physician’s favorite (*sarcasm*) part of their job.
5. Our Financial Path: Really? Do I Need Bonds? — It can be tempting to go 100% stocks when the market is rising to new highs, but bonds can be very helpful in smoothing your investment returns.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?