Don’t Sell in May – Stay Put!

There is an old saying that keeps cropping up at this time of year that needs debunking.

The phrase "sell in May and go away" is thought to originate from an old English saying, referring to a custom of aristocrats, merchants, and bankers who would leave the city of London and escape to the country during the hot summer months returning on St. Leger's Day in mid-September for the last leg of the British Triple Crown thoroughbred horse race.

American traders and investors who are likely to spend more time on vacation between Memorial Day and Labor Day subscribe to the belief that, as warm weather sets in, low volumes and the lack of market participants (presumably on vacations) can make for a somewhat riskier or, at a minimum, lackluster market period.

During the days when stock market participants who stood across from one another on the trading floors of the major stock exchanges went away on summer holidays, this may very well have been the case but not anymore. Since high frequency/algorithmic trading (HFT) took over in the late 90’s, there is less and less need for human minute-by-minute intervention anymore which effectively means that once the programs have been written, traders and investors can afford to go away now.

Market timing has always been a challenge – more so for traders because their time horizon is now measured in nanoseconds. For investors, however, not much has changed because for the most part, they should be disciplined into thinking in terms of rolling 10 year periods - not nanoseconds, days, weeks or even three summer months.

The consequence of missing days in the market can be hugely damaging. According to a recent report from John Hancock, someone who invested $10,000 in the S&P500 from 1998 to 2018 but missed the 40 best days would have seen their portfolio shrink to $7,190 compared to a $53,497 gain for someone who remained fully invested. Looking back over the past 10 years, there is a 95% probability of a positive return on the S&P500 and no losses when expanded over a 20 year period.

As I wrote in my blog “Behavioral Finance 101”, we are all human beings and we react the same way to the two primeval gut drivers - fear & greed. The stock markets feed on both of these emotions which during normal times are kept in check by common sense. Every once and a while, however, common sense is temporarily abandoned and these two extreme emotions are left to slug it out on their own, leading to all sorts of nasty things.

The catalyst that triggers all of this in the first place may change but the outcome is predicable. Common sense eventually returns and stock markets return to their more normal trajectory upward. More normal is simply the inevitable growth of the underlying economy that is driven by the unrelenting change in demographics of a growing population and the insatiable desire to have more and do better.

What should you do then when the markets quieten down for the summer or get sideswiped with short term volatility? My suggestion is to only seek advice from someone you trust, take some time off to enjoy the summer and most important of all – stay invested!

David J. Angas
Senior Vice President, Financial Advisor
Family Wealth Counsel Advisor Group/Raymond James Ltd.

Family Wealth Counsel is a financial advisory group with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This commentary is for information only. Raymond James Ltd., Member - Canadian Investor Protection Fund.