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You’ve probably heard the stock market adage “Sell in May and go away.”
The idea, broadly, is that stocks tend to under-perform over the summer months, from the end of April through September.
Another way to look at the trend, of course, is to consider that the opposite six months, from November through April, are typically a good period for stock investors.
Popular among traders, the pattern holds true over the decades. CFRA Research found that the S&P 500 increased on average by 6.8% from November to April and by 1.7% from May to October.
That pattern seems to be holding up this year following a tough September. But it may not be as simple as sitting out the market six months of the year.
The problem with seasonal investment strategies is that nobody knows what actually will happen in any given year. Moreover, while you might feel safer out of the market when valuations are volatile, that assumes your money is doing something better over that time.
Very low fixed-income returns have made it nearly impossible to find a way to “do something better” when stocks are lackluster. Even if you knew that stocks would return less than 2%, money in the bank or in the bond market wouldn’t necessarily perform better.
Taking into account just the dividend return of the broad stock market, you might be in the same place or better by staying investing over those slower months. Absent a market crash or an extended bear market, it’s hard to say stocks are a “bad” investment even if returns are relatively weaker.
The trouble, too, with this kind of market analysis is that gains you miss by being in cash — those out-of-character times when stocks roar higher even if they “shouldn’t” for some reason — are gains you can never get back.
JPMorgan, for instance, calculates that over the 20 years ending in December 2020, an investment in the S&P 500 returned 6.06% per year. Missing the 10 “best days” over roughly 5,000 trading days and that return falls to 2.44%.
Missing the 20 best days causes the return to fall to 0.08%. From there returns go negative.
What this should tell you is that stock investment returns are incredibly spiky. Guessing right which days to own stocks is virtually impossible, and sitting out for months at a time dramatically increases the risk of missing those “best day” returns.
This is why prudent, long-term investors say “time in the market” is a better strategy than “timing the market.” Even professionals with years of experience can get timing strategies wrong, and when they do those losses are permanent.
Another trader saying is that “nobody rings a bell at a market top…or bottom.” Investors can pore over thousands of data points and spend countless hours absorbing the opinions of star money managers.
Nevertheless, data is not wisdom and opinions, however educated, remain opinions. Better to invest steadily with a plan than try to catch a trading wave. You could end up on the rocks.