Should you sell in May?

Every May the same old question comes around in the investment world: should you “sell in May and go away?”

While this adage has been around for many decades now and has been repeatedly proven to be a bad idea, the idea still persists. And each year we hear renewed calls to implement it that many un-educated investors fall for.

What does it mean?

The idea behind this practice is that stock market returns can be slower during the summer months and sometimes they even go negative.

Proponents of this “strategy” suggest that you sell all your equities in May and then re-buy into the stock market in October or November.

However, trying to time the market is difficult to do successfully and in order to pull this off, you have to pick the right timing twice – once when you sell and again when you buy back in.

The data simply doesn’t support the idea either as more often than not, you end up in a worse position by doing this. Looking at the Canadian stock market since 1990, this summer season has shown positive stock market performance 74% of the time.

Ian Tam, a director of investment research at Morningstar Research Canada, crunched the numbers recently and found that during the past 40 years, following this strategy each year resulted in a lower return versus simply staying invested.

Mr. Tam found that someone who invested $10,000 into the TSX index (Canadian market index) in 1977 and applied the “sell in May and go away” strategy each year would end up with $280,000 less in their portfolio as of March 2019 versus someone who stayed invested the entire time.

Looking at this another way, missing out on only the best couple of market growth days over decades can have a significant impact on your long-term growth.

If you invested $10,000 into the S&P 500 index (U.S. market index) in 1980, you would have had roughly $780,000 after 38 years. By missing out on only the five best days during that entire 38-year period, your balance would have been only $458,000.

Are you willing to bet that one of those best market performance days won’t happen this summer?

But this year is different right? Markets have already come back so strong after the crash last spring and the third (or fourth?) wave of COVID will certainly shut things down and pummel corporate returns. The truth is that nobody knows and anyone trying to make this prediction can do serious damage to their savings plans.

We have heard similar “this time is different” stories almost every year for as long as stock markets have existed.

Trying to guess which of these stories is true holds the same odds as a roulette table – hardly something you want to bet your life savings on.

Instead of trying to time the market, focus on staying invested and on track with your well thought out retirement plans. Sure, there will be more dips in the market and volatility will continue, but a long-term vision is the best path to success.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.