Why you should avoid the 'sell in May' strategy
I’ve never been a fan of trying to time the market. The pros have a hard time consistently getting it right and when you take a stab at it, you have to get it right twice - going in and coming out.
The story for so long has been low growth, low rates, low inflation and lots of stimulus. So it’s understandable why an air of complacency has been hovering over the markets. However, it also begs the question of whether investors should lock in gains by selling in May and going away.
Not according to Ian Tam, a director of investment research at Morningstar Research Canada, who crunched the numbers. He found that over the past 40 years, most of the time leaving the market in May and then returning in November resulted in a lower return than staying invested.
Here is Tam's example from a recent report: "had an investor started with a $10,000 investment in the index in 1977 and applied the ‘sell in May and go away’ strategy, they would find themselves with $280,000 less than someone who stayed invested the entire time.”
Those numbers alone should debunk the myth. However, we have to ask: will it be different this year due to the pandemic?
Maybe. There has been a lot chatter around pent-up demand, but there has also been talk we could slip into a prolonged period of slow economic growth and higher unemployment levels accompanied by rising prices. In other words, a form of stagflation.
The fact is we don't know for sure how markets will respond to the vaccination programs, fiscal plans and however the economy evolves.
But here is what I do know: it is never a bad time to re-evaluate your long-term plans and goals. Take every opportunity to rebalance portfolios that are no longer aligned to you as an investor and may be skewed due to market performance.
Staying invested should be based on facts, not just the calendar month. Sure, there will be dips in the market but for those who are diversified across sectors, asset classes, products, regions and even currencies, taking advantage during periods of volatility to invest could serve you well in the long run.