Selling in May could make your gains go away

Q – We’ve often heard the old market saying, “Sell in May and go away.” What is your opinion about this? Do you recommend it as a strategy? – Mark N., Guelph, Ontario

A – Catchy little bits of old market lore like this have become so ingrained that they’re often taken for deep wisdom. Unfortunately, they’re more like fairly tales. This one refers to a seasonal pattern that has sometimes been observed in the past – when markets tended to weaken over the summer months, rallying again in the fall when everyone’s finished with beaches and barbecues. But I do not recommend following this or any bit of market lore as a strategy for investing. Seasonal patterns are not carved in stone. It is very difficult to time the market under any circumstances, because you need to get your exit and reentry points exactly right for this type of strategy to work.

The “sell in May strategy” works like this: In May or June, you sell your equity holdings and switch into bonds. Then in the fall, you reverse the process and move back into equities from bonds. Trouble is, if you fail to execute this strategy at just the right time, you could easily end up selling at a market low and buying back in at a market high – for either stocks or bonds. Not only do you incur extra trading costs, but you could severely cut overall performance in your longer-term retirement strategy.

In fact, if you had deployed this strategy in June 2009, you would have missed out on all the gains that followed in the subsequent months. From 2003 to 2007, Canadian stock prices actually rose during the summer months. Selling in May would have made your gains go away.

Instead, my advice is to hold a diversified portfolio based on a strategic asset allocation model using both equity and fixed income assets appropriate to your risk tolerance level and overall financial objectives. Keep your eye firmly fixed on the long-term horizon for investing rather than trying to time the markets. – R.T.

Robyn Thompson, CFP, is the founder of Castlemark Wealth Management, a boutique financial advisory firm, specializing in customized financial, investment, insurance, and retirement planning. Phone 416-828-7159 or email today to rthompson@castlemarkwealth.com for a no-obligation, no-charge Castlemark Integrity Financial Planning consultation.

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