Seasonal patterns can be misleading
“Sell in May, go away, and don’t come back till Labour Day.” With the return of volatility earlier this year after many years of an uninterrupted bull market, many analysts are warning that the stock market is due for a correction, and that now is the best time to sell stocks – before the summer doldrums set in. The market’s crystal ball gazers claim to have a window into the future. In fact, no one does, and acting on what might happen can be decidedly bad for your financial health.
The dangers of generalization
The market lore that advises investors to sell in May is based on a seasonal pattern that has sometimes been observed in the past. Markets have sometimes tended to weaken over the summer months, rallying again in the fall when everyone’s back from vacation. But this doesn’t necessarily make a good investment strategy.
Seasonal patterns are often coincidental, appearing for a couple of years, and then vanishing. Acting on this type of generalization is a form of market timing. It is exceedingly difficult to time the market under any circumstances, because you need to get your exit and reentry points exactly right.
The theory behind trading on this pattern is that in May, you sell lighten your stock holdings and overweight bonds. Then in the fall, you reverse the process and move back into stocks. Trouble is, if you fail to execute this strategy at just the right time, or if you buy bonds just when the bond market is retreating, you could easily end on the losing side of both asset classes, selling at a market low and buying back in at a market high. Not only do you incur extra trading costs, but you could also dampen your overall portfolio performance in your longer-term retirement strategy.
No crystal balls
Short-term market moves are nearly impossible to predict. And doing so consistently would require the ability to see the future. Think of it this way: If these bits of market lore really worked, why would anyone do anything else? They’d soon have all the money in the world. But they don’t work. Here’s my prediction: Using folk wisdom as a guide to long-term financial planning is guaranteed to lose you money in the long term.
Instead, your best plan 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. Work towards your long-term goals and avoid unproven short-term strategies for market timing.
© 2018 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.