Pay no attention to May doomsayers
My Twitter timeline is being f looded with “Sell in May and go away” again, as it does every year when we have a red day or three during this month. The ‘sell in Mayers’ will provide tons of evidence that markets are weak during the May to November months and that the real money is made by moving to cash during these months.
But are they right? Frankly, I have no idea, but the bigger picture is that it is pretty much always the doomsayers who are suggesting the ‘sell in May’ strategy and it makes sense for them to be doing so. When you’ve been wrong for the last six or so years about the coming market crash, rhymes are probably all you have left.
However, the recent gaggle of May doomsayers did get me thinking about two issues.
The first is an old theory, but backed up with real data, and that is that missing the few really great days in the market can be seriously bad for your overall long-term returns. In fact, just missing the 10 best days over a 20-year period can reduce an annualised 9.2% return to a 5.4% return. That is staggering − just 10 missed days out of 20 years. If you miss out on the best 40 days over those two decades, your returns can actually turn negative.
The research is from the JP Morgan Asset Management 2014 Guide to Retirement and used the S& P 500 as the benchmark.
What these f indings clearly tell us is that it is about being invested in the markets and not trying to time them. If you’re trying to time markets and only be invested during good months, you will without a doubt miss some of the top days and your returns will be significantly hurt as a result. Now, sure, the sellers will tell us that by also missing out on the bad days they’ll come out ahead, but they produce no hard evidence. In fact, looking at the local market every year from 2009 to 2014 on the Top40 the May to November returns were positive.
The second issue I want to touch on this week comes from an interview with The Motley Fool columnist Morgan Housel. It was a general wide-ranging interview, but he mentioned that he loves market corrections for one simple reason. As investors we want to buy stocks that will rise over time cheaply, and every single market correction we have seen − with a few exceptions, such as the Nikkei 225 − has seen stocks ultimately moving higher.
Think about that for a moment. Global markets have moved higher and set new highs after every single market correction in the histor y of markets. Sure, the market may take a few years to recover, but typically it has recovered within two years every single time it corrected.
SO, WHAT DO THESE
First, stay invested. Ignore the noise and the doomsayers and stay the course. Secondly, embrace corrections and market crashes. Don’t be scared of them, buy them. Of course it is not easy to stay invested and even add more money when everything is falling and the end of the world seems right around the corner, but this is how we create wealth over time.
The only exception to the above is if we’re running out of time, but with life expectancies becoming longer we have plenty of time, unless we’re already in our eighties.