New Investing Strategy: Cash in on Congress

So let's say you agree with what I wrote last week -- that the reason stocks are down so much is because all the "change" coming out of Washington is too much and too fast for our already-destabilized economy. How do you invest?

You could just stay out of stocks. That would have served you well the last year. But high-velocity "change" in government policy on banks, energy, unionization, trade and all the rest means high market volatility, and that means there's upside as well as downside. Do you really want to miss the upside just to avoid missing the downside?

Here's one approach you should consider. It's so simple it's almost fiendish.

The Congressional Effect Fund, a small start-up mutual fund, tries to exploit today's environment of political chaos by the simple strategy of staying safe in 100% cash whenever Congress is in session, and 100% invested in stocks whenever Congress is in recess.

The strategic logic is straightforward. When Congress is in recess, it can't cook up new and improved ways to ruin the economy. When it's in session, you'd better keep a firm grasp on your wallet.

Congressional Effect Fund founder Eric Singer, a former investment banker, discovered in the early 1990s that this simple strategy really works. He told me his research shows that over the last 44 years, average stock performance is substantially better when Congress is in recess.

It has nothing to do with Democrats or Republicans, liberals or conservatives. It's just Congress. In or out. It's that simple.

He says on days when Congress is in recess, the stock market has risen at an average annual rate of 16.3%. On days when Congress is in session, it has risen only one-third of 1%.

Over all that time, the average annual return of the S&P 500 has been 8.2%. That's what buy-and-hold would have gotten you, with the risk of having your money invested in stocks every single day. But if you'd been invested only when Congress was in recess, you'd earn 16.3% on those days -- and the money-market rate, on average about 5.5%, the other half of the time. Put it together, and you've got an average annual return of about 10.4% -- more than stocks, with half the risk.

Singer started the Congressional Effect Fund last May. Could he have chosen a worse time to start an equity mutual fund? Since then, through Wednesday, the S&P 500 has lost 47.1%, including dividends. His fund has lost only 6.3%, making it one of the best performing equity funds you could have owned.

Over the short life of the fund, Congress has been in session 13 times and on recess 13 times. On average, when it was in session, stocks lost 4.0%. When it was in recess, stocks lost only one-third of 1%.