One of the more common myths often implied in the popular financial press, is that someone has finally figured out how to predict short-term market movements. Now before we get started let’s agree that no one has a crystal ball. We don’t have one, you don’t have one and none of the pundits have one either. And worse than not having a crystal ball is acting as though you do. Since we don’t have a crystal ball, we must use universal principles like consistency, balance and courage, informed by economic and financial history to guide all investment decisions.
Let’s walk through an example of applying the principle of consistency and the impact this simple yet profound principle can have on your overall performance. Consider the impact that attempting to “time the market” and violate the principle of consistency might have. The chart on the left shows the impact of missing only the 10 best days in the market over the past 20 years, you’ll notice it reduces your investment returns by almost 50%! How can 10 days cause so much damage? Unfortunately, without the aid of a crystal ball it’s not easy to time those 10 best days since they tend to fall in close proximity to the 10 worst days in that same time period. Even worse, investors missing the best 40 days in the market over the past 20 years would have found themselves with negative returns.
Another common attempt to “time the market” and violate the principle of consistency is the concept of “Sell in May and Go Away.” The argument goes, that over the past nine decades (1926 to 2015 to be precise), the returns on the S&P 500 Index from May to October have been worse, on average, than any other six-month period. Adhering to the adage would have prevented investors from participating in such infamous events as the Wall Street Crash of 1929, Black Monday in 1987, and more recently the 2008 post-Lehman crash and summer 2011 correction. The analysis often ends there with little thought of the big summer rallies in the early 1980s, the 20% May to October market advance in 2009, and 2013’s 11% summer rally.
So does “Sell in May and Go Away” work…in short, no. A $1,000 investment held consistently in the stock market from January 1926 to December 2015 would now be worth $5,379,418. That same investment held by an investor selling on May 1 of each year to go into Treasury bills only to get back into the market on November 1 would be worth $1,276,558, or over $4 million less!
In conclusion, buying and holding portfolios constructed by outstanding portfolio managers may not be as exciting as constantly trying to outguess the market. But is rolling the dice with your long-term financial security, really where you want to get your excitement? If you want excitement take up skydiving, hang gliding or bullfighting and let your investment portfolios fund your retirement and hospital bills!1
Compelling Wealth Management Conversations is a program designed to help provide philosophical and historical context and perspective, to keep investors “buckled in” and stay the course during uncertain times, while providing a framework to help identify the best opportunities.
To learn more, download the full Compelling Wealth Management Conversations chart book.
1 Source: Morningstar Direct, as of 12/31/15. For illustrative purposes only and is not intended as investment advice. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Past performance does not guarantee future results.↩
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