There’s a theory that it’s a good idea to sell out of investments in May and then come back in October. The idea is the stock market tends to do worse in the summer months.
Historically, while there’s some truth to this, I won’t be selling out of my stocks. In fact, I’m planning on buying in May (and then going away).
Extraneous events
One of the major reasons I’m not going to sell in May is I think it’s extremely difficult to predict what share prices will do over a six-month period with any great confidence. There’s just too much uncertainty.
As I see it, share prices over a few months are highly vulnerable to extraneous events. A banking crisis, an invasion, or a pandemic outbreak can all have a disproportionate effect on stocks in the short term.
These are nearly impossible to predict, which makes me reluctant to make any stock market moves – buying or selling – with a view to undoing them again six months from now. Over the long term, though, things are different.
The effects of extraneous events over a period of 20 or 30 years is much less profound. So it makes sense for investors to focus on the long term, rather than what will happen in the stock market between now and October.
Share prices
With that in mind, the question becomes whether share prices are attractive at the moment for long-term investing. I think they are.
At the moment, there are quite a few considerations weighing on share prices. The most obvious of these is interest rates, which are at their highest levels since 2008 and are forecasted to go higher.
On top of this, stocks are facing headwinds from the prospect of a recession, tighter bank lending conditions, and higher spreads between junk and investment-grade bonds. All of these create headwinds for shares.
All of this means I think now is a good time to be looking for stocks to buy. Share prices might go up or down over the next six months, but I see this as a good time to invest for the long term.
Stocks go up
Lastly, one of the main reasons for not selling stocks in May is share prices actually tend to go up over the summer months. So buying them back in October is likely to come at a higher price.
The idea that share prices do better between November and April comes from looking at the S&P 500. In the past, though, US share prices generally haven’t gone down over the summer – they’ve only gone up more slowly.
On average, the US index has achieved a gain of 2% between May and October. That’s worse than the average 6.7% return during the winter months, but it’s still true that share prices go up over the summer in a typical year.
I don’t think selling stocks at one price and buying them back 2% higher is a good investing plan. So that’s why I don’t intend to sell my investments in May with a view to buying them again in October!
