Why market timing strategies are bad for your portfolio
“Sell in May, go away, and don’t come back til Labour Day.” This year especially, investors might be tempted to do so, because markets have been on a tear, and the experts say they’re due for a correction. 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. And when it comes to your personal finances, wishful thinking can take you deep into Neverland.
Seasonal patterns can be misleading
The sell-in-May rhyme 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.
So-called seasonal patterns are not carved in stone. Often, they’re simply a coincidental pattern seen for a couple of years, which then vanish. Many of my newer clients express surprise that some of the trend-following market strategies they’ve tried in the past seem to fail for them, despite the hype by market pundits and others flogging get-rich-quick schemes. To me, it’s not surprising at all. 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.
Missing out on gains
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. In 2010, 2012, and again in 2013, Canadian stock prices actually rose during the summer months. Selling in May would have made your gains go away.
Short-term market moves are nearly impossible to predict. Doing so consistently would require clairvoyant ability that no one has. Think of it this way: If these market maxims 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 these bits of market lore as a guide to long-term planning is guaranteed to lose you money in the long term.
Throw away the crystal ball
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. You’ll sleep a whole lot better, and you won’t have to keep wondering why your crystal ball doesn’t work.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. M