– The old bit of stock market lore goes like this: “Sell in May, go away,
and don’t come back till Labour Day.” With the return of volatility earlier
this year after many years of an uninterrupted bull market, many analysts
are warning that the stock market is due for a correction, and that now is
the best time to sell stocks – before the summer doldrums set in. The
market’s crystal ball gazers claim to have a window into the future. In
fact, no one does, and acting on what might happen can be
decidedly bad for your financial health.
The dangers of generalization
The market lore that advises investors to sell in May is based on a
seasonal pattern that has sometimes been observed in the past. Markets have
sometimes tended to weaken over the summer months, rallying again in the
fall when everyone’s back from vacation. But this doesn’t necessarily make
a good investment strategy.
Seasonal patterns are often coincidental, appearing for a couple of years,
and then vanishing. Acting on this type of generalization is a form of
market timing. It is exceedingly difficult to time the market under any
circumstances, because you need to get your exit and reentry points exactly
The theory behind trading on this pattern is that in May, you sell lighten
your stock holdings and overweight bonds. Then in the fall, you reverse the
process and move back into stocks. Trouble is, if you fail to execute this
strategy at just the right time, or if you buy bonds just when the bond
market is retreating, you could easily end on the losing side of both asset
classes, selling at a market low and buying back in at a market high. Not
only do you incur extra trading costs, but you could also dampen your
overall portfolio performance in your longer-term retirement strategy.
No crystal balls
Short-term market moves are nearly impossible to predict. And doing so
consistently would require the ability to see the future. Think of it this
way: If these bits of market lore really worked, why would anyone do
anything else? They’d soon have all the money in the world. But they don’t
work. Here’s my prediction: Using folk wisdom as a guide to long-term
financial planning is guaranteed to lose you money in the long term.
Instead, your best plan is to
hold a diversified portfolio based on a strategic asset allocation
model using both equity and fixed-income assets appropriate to your risk
tolerance level and overall financial objectives. Work towards your
long-term goals and avoid unproven short-term strategies for market timing.
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. She is also listed as a
MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at
for a confidential planning consultation.
Notes and Disclaimer
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The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.