Hang around investors long enough and you eventually hear the phrase “Sell in May and go away.”
Considering the sell-off in stocks since right around May 1 this year, that might seem like good advice. But does it work, and should you try to time the market this way?
“Sell in May” has a long history, dated back hundreds of years to the merchant societies of England. The general idea is that there is a predictable business lull in summer months, so there’s little to be gained by staying invested in stocks.
For many years, that pattern seemed to hold up in U.S. stock trading. Studies show that returns from May to October were lower overall than the winter months, at least from 1950 through 2013.
The difference was significant, averaging 0.3% over the summer vs. 7.5% during the winter months.
Of course, U.S. businesses hardly slow down for any season or reason, so a lot of the pattern can be attributed to just less overall trading as people take vacations. Famously, Wall Street created the “summer Fridays” tradition by closing down early so traders could get to the beach.
But does the pattern work anymore? And does it make sense to sell your investments in slow times?
The short answer is no and no. The reason why is that humans are pretty darn good at pattern recognition. As soon as big investors and their software algorithms spot an anomaly, they trade it out of existence. Despite this year’s experience, that has happened.
The other, bigger reason is your own human nature. Selling your investments at any given time is almost certain to trigger regret if the stock market takes a turn upward in, say, late July. That has happened, too.
Staying invested costs you nothing, and most stock holdings generate dividends to be reinvested. All the better to reinvest them in a lull period when your money buys you more.
Likewise, if you are making regular contributions to a retirement plan, those automated purchases will happen when stocks are lower, buying you more shares. That’s dollar cost averaging at work.
As you lower your cost basis for any investment, your long-term performance only improves. It’s the slow and steady investor who wins the race here.
Think about any kind of trick or neat lifehack you know of. How to get gas five cents cheaper. When to pounce on an airline ticket to get the best deal.
How long before the mass of people on the Internet figure out your angle and drive it out of existence? Usually not long. Demand overwhelms supply and prices adjust.
Zigging when others zag can be fun, but it’s exhausting and introduces risk into your investment plan that doesn’t need to be there. Better to stick to a plan, diversify and rebalance to achieve your goals.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.