Summer vacation is upon us. The pools are open and the sun is beating down. It’s the classic summer lull for stock markets, too.
It’s a predictable pattern of “sell in May and go away” that can stretch into a summer of lackluster trading. A survey from the American Association of Individual Investors finds that less than one in five small investors is bullish on stocks now.
Meanwhile, the percentage of investors who call themselves “neutral” on stocks has hit 53%, the highest in more than a decade and a half. It can feel like nobody is buying stocks.
There are any number of reasons why, besides warm weather and typical summer trading patterns. The Federal Reserve might raise the interest rate. Britons are voting on leaving (or not leaving) the European Union.
The U.S. presidential election is heating up, increasing uncertainty among investors. And so on.
What does the “smart money” do in these scenarios? Absolutely nothing, or at least nothing different from the previous six months, year or five years.
The problem is this: Past is not prologue. If you choose to get out of your stock holdings for a few months on the bet that equities will be flat all summer, you run two important risks.
First, you will miss two or more quarterly dividend payments. If you have $250,000 in a retirement fund, your dividend yield on an S&P 500 Index investment is $5,325 a year. Sit out six months and you leave $2,662.50 on the table.
Over two decades that money could compound into $10,695, but if you don’t collect, well, it isn’t yours. Do that for 10 summers and it’s $130,292 you don’t have. Starting to feel like real money yet?
The other problem is gains. Remember all that risky “bad news” from earlier in this article? Now consider this: Investors have long known the Fed would raise rates, few think Britain will leave the EU and election years often are good for stocks.
Since 1970, stocks have put on about 1% during the summer months. The up summers averaged 5.6% and the down summers averaged a negative 8%. If we have a typical, truly average summer, that’s another $2,500 you don’t collect by being in cash.
Feeling better? What if I told you (and you know it’s true) that how you “feel” about stocks is irrelevant to their ultimate performance? What matters is not making choices based on your feelings.
The long view is simple: Don’t buy and sell stocks. Look to own them instead, and rebalance to stay on track. Collect dividends and reinvest them steadily. Cash is a negative investment. You will not collect meaningful interest on it and inflation never stops eating away your purchasing power.
You might be slightly calmer at the beach, summer novel in hand, taking your money out of stocks and stuffing it in a low-interest but safe money market account. But you won’t be any richer, likely $5,000 poorer and maybe significantly less rich at retirement.
The price is patience and a willingness to reinvest in a go-nowhere market, buying stocks even in a flat summer market. That’s just good investing.