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By Mags Heystek*
How should investors be responding in 2022 to the old investment adage: it’s best to ‘sell in May and go away’? This belief is based on stock market returns in the six months from May to October being lower returns than the half-year returns between November and April.
One would hope that keen amateur investors don’t follow this mantra to the letter and sell all their holdings in anticipation of buying back in in September. In fact, even rotating a portion of your portfolio out of the market because of this adage is not a good idea.
What do the facts show?
While historical data shows evidence to support the ‘sell in May’ theory, it’s just as important to look at more recent market performance.
Evidence supporting the theory can be found in the Dow Jones Industrial Average returning an average of 0.3% in the six months from May to October between 1950 and 2013. By contrast, the index rose by an average of 7.5% between November and April over the same period.
This unbroken run has since ended, adding further doubt to the wisdom of trying to time the market. If you’re wondering how events in 2022 might affect your decision-making and what to do, here’s my advice: sit tight and stick to your strategy.
And here are three simple ways to help you do that.
Understand your risk profile
The first step to constructing an investment portfolio that’s right for you is understanding your appetite for risk.
This might be linked to your personality, or to where you are in your investment journey. The most important thing to understand is that your risk profile can play a big part in the returns that your investments generate. I’m not suggesting that a conservative approach is wrong, but you need to be aware that this will in all probability result in lower long-term results.
If you’re closer to retirement age, then it makes sense to preserve what you have rather than going all-in on more volatile equities. Conversely, if you still have 20, 30 or more years until retirement age then it doesn’t make sense to be too heavily biased toward defensive, low-growth assets.
Be patient and play the long game
It’s perfectly normal for your risk profile to change as your circumstances do. However, the one investment strategy that beats all others is to maximise your time in the market.
This means ignoring the noise and short-term volatility and staying focused on your investment strategy.
Doing so will also help you avoid the classical mistake of trying to time the market. This speaks directly to the ‘sell in May’ philosophy because you should be looking at your returns over 10, 20 or 30 years, not six months.
Sadly, we have seen time and again that nervous investors who try time the market do great damage to their portfolios if they sell when markets at their lowest. And trying to get back into the market at the ‘right’ time almost always fails as a strategy.
It’s practically impossible to know what the markets are going to do on any given day and reacting to short-term moves often leaves investor far worse off than those who spend time in the markets.
Be clear about your goals
Finally, if you know how much you need to retire comfortably then it’s a lot easier to ignore the noise and keep your eye on the end goal.
Working with a financial advisor can help you marry your goals with your risk profile to produce a practical plan that’s based on your time horizon. This is a vitally important part of the equation because a longer horizon buys you the time to ride out market dips.
Even if you don’t have the luxury of a few decades to help your portfolio grow, you can still develop a plan that balances your need for future security with a shorter timeline. It’s probably best, though, to steer away from investment clichés like ‘sell in May’ to make sure your portfolio stands the test of time.
- Mags Heystek, CFP® Professional, is head of the Brenthurst Wealth Sandton