Pay no at­ten­tion to May doom­say­ers

Finweek English Edition - - INVEST DIY - BY SIMON BROWN

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

TELL US?

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.

ed­i­to­rial@finweek.co.za

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