You may have heard the old investing adage that you should ‘sell in May‘. It’s based on the belief that the market underperforms during the summer months. Historically, many investors bought into this idea of trying to time the market in this way.
Unfortunately investing isn’t as simple as just selling all of your investments before the summer. Here’s why you should be wary of money superstitions and selling trends.
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What is meant by ‘timing the market’?
Basically, timing the market means attempting to buy investments at their lowest possible price and sell them at their highest value.
Many investors thought they could cheat the system by selling investments in May and then buying back in after the summer. A combination of tradition, some actual data, and herd mentality created somewhat of a self-fulfilling prophecy.
It’s true that some stocks have performed poorly at times during the summer months. But using this as a rule of thumb is a recipe for disaster.
Can you time the market?
The problem is that you have to be right twice. You need a perfect entry and exit point.
To be successful, you must be able to sell your investments at just the right time. Then you also need to buy your investments at an equally perfect moment.
If you were able to do this successfully – and consistently – you’d become a very rich person. Sadly, many have tried and failed to do this. It’s one of those things that sounds easy enough in theory. But actually pulling it off is a completely different story.
Even for those who manage to get it right, repeating this feat is often impossible. Also, there is one big downside to trying to time the market. You only need to be wrong once to end up wrecking your whole portfolio.
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Is it worth trying to time investments?
There is a mounting body of evidence dispelling the idea that investors can blindly follow old English sayings in order to make good returns.
Ben Kumar, senior investment strategist at 7IM, explains why it’s best to avoid selling in May and trying to time things: “There’s no evidence to suggest that summer is a particularly bad time for markets. Overall, the period between May and September has been in positive territory for 60% of the time over the last 31 years.
“In those three decades, the FTSE All Share has seen an annualised average return of 4.29% between 30 April and 14 September, and if you strip out 2001 and 2002, two particularly bad years that had nothing to do with the ‘sell in May’ narrative, the figure is 7.71%.
“Instead of trying to time the market, a far more effective (and simple) strategy for wealth creation is to stay invested for the long term. By doing so, you will benefit from the phenomenal power of compounding. Which Albert Einstein (allegedly) described as ‘the eighth wonder of the world’.
“The critical component here is time – the longer you give your money to work for you and the longer you leave it untouched, the more pronounced the power of compounding is.”
Why is time in the market more important?
Setting yourself up with a cheap share dealing account and a long-term investing strategy can help you weather many summers.
Ben Kumar nicely summarises: “Markets are volatile. They move up and down. Always have; always will. Indeed, there’s a different stock market adage that suggests time in the market is far more effective than timing the market. While many stock market adages should be taken with a pinch of salt, this one certainly has more than a grain of truth to it.”
Using a stocks and shares ISA can help to keep your tax liabilities low. Over a long period, your investments can then grow using the power of compound interest.
It’s important to bear in mind that there’s no such thing as risk-free investment and that the value of your investments can go up or down no matter what month it is.
Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
