You should… only if you believe in stock market fairy dust
You may have heard the old stock market saying, “Sell in May, go away, and don’t come back ’til Labour Day.” These bits of market lore are repeated so often that they eventually become like rules carved into stone. And while there may at times seem to be seasonal patterns to support these, using them as stock market investment strategy is more like believing in fairy dust.
Other instances of such supposed deep wisdom include, “Never try to catch a falling knife,” and “Take your losses but let your profits run.” They certainly sound like some sort of meaningful prescription for guidance in the markets, but unfortunately they’re more like fairly tales, without the moral lesson.
Seasonal patterns are not reliable
“Sell in May and go away” 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 really a reliable operating principle of markets. The problem is that sometimes they weaken, and sometimes they don’t. 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. Relying on historical cyclic patterns that appear “sometimes” is a risky investment strategy.
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 from 2012 to 2014, you would have lost out. Canadian stock prices actually rose during the summer months following a little weakness in May. Selling in May would have made your gains disappear as surely as Cinderella’s coach at midnight.
Asset allocation, not market timing
Instead of using bits of market lore as a guide to investing, my advice is to hold a diversified portfolio based on the kind of strategic asset allocation model that I recommend, using both equity and fixed-income assets appropriate to your risk tolerance level and overall financial objectives. Always keep your eye firmly fixed on the long-term horizon for investing rather than trying to time your investing using some sort of stock market magic. Leave the fairy dust to Tinkerbell.
© 2015 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.