Timing the stock market is a temptation for every investor at some point, particularly if they fear a crash is imminent, and want to secure their profits.
Sell in May
For a handful, it's a seasonal issue, all down to dates, notably this one: May 1. Most of you will recall the old stock market adage: "Sell in May and go away, don't come back till St Leger Day." Is it true? Should you sell?
The saying dates back to the days when a hush fell over the City of London as stockbrokers cleared off to enjoy the summer season, and share prices snoozed through Glyndebourne, the Chelsea Flower Show, the Derby, Wimbledon, Henley, Goodwood, Cowes and the St Leger race meeting at Doncaster. This year the St Leger Festival falls on 12 September, more than four months away.
So should you heed the old adage and bid your portfolio a summer farewell?? I suspect you already know the answer, but here goes.
The summer is not as bad as many think, according to fund manager Fidelity International, whose analysis shows the FTSE All Share produced positive returns between May and September in 18 out of the last 30 years. Investors who sold up would have lost out most of the time.
They would have fared particularly badly over the last six years when the market fell just once, by 7.39% in 2015. It rose the other five times, including 9.72% lift in 2016, and 4.41% in 2017. Some individual stocks can skyrocket.
There is a grain of truth in the saying. If you had invested £10,000 in the FTSE All Share 30 years ago and remained invested the whole time you would now have £128,033. If you had sold in May and bought back in September every year, you would have £126,950, only £1,082 less. However, there are three reasons why you should not try to time the market in this way.
1. Trading costs
Dealing costs quickly add up if you buy and sell regularly, and the money comes straight out of your portfolio. You need to see a clear advantage in selling up, and this one is not clear enough.
2. Dividend losses
Dividends will make up a large chunk of your overall profits, especially if you re-invest them for growth. Take time out from the market, and you are sacrificing a lot of juicy dividend payouts.
3. Bad timing
If you plan to exit the market in May, June, July and August, why not extend the principle? History suggests September and October are the most volatile months. Or perhaps limit your investing to December and January, historically good months? Points 1 and 2 argue against that, while a bad January could wipe out all your profits for the year.
Unless you need money for a specific reason, say, to buy a property or pay a tax bill, you would be daft to exit the market in full at any point. It might be wiser to go shopping for bargains like these two instead. You might also heed another old adage: "It is time in the market that counts, not timing the market."
It's easy to make a million by using a simple strategy such as tracking the FTSE 100 and letting your money work for you. Unfortunately, most investors 'over-trade' and, as a result, their returns suffer significantly...
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.