Maybe you’ve heard the rhyme, “Sell in May and Go Away.” Certainly cute; definitely catchy, but horrible investment advice. This “strategy” refers to the relatively flat summer months in the market. True, the markets can be a bit boring, and September is historically the worst month, but as every disclaimer states, “past performance is not indicative of future results.”
If you followed the investing adage, you’d sell out of the market in May and reinvest in October. You’d have to know when the May high would be to sell and the September low to get back into stocks. You’d have to know the exact perfect time to make a move twice. If it walks like market timing, and it quacks like market timing, it’s probably market timing.
If you follow the Ten Year Rule, it clearly states that money you don’t need within the next 10 years should be invested in high-quality common stocks that should be able to weather the next recession. If you don’t need this money today to pay for living expenses, why go to cash and sit out of the market when we are looking at 4.2 percent inflation? Money market funds are a cash equivalent, and the three-month Treasury yield was 0.01 percent as of as of May 28. If you are invested in high quality stocks, you might experience flat price appreciation, but you also may receive a dividend—the current yield on the S&P 500 index is around 1.37 percent.
The point here is to illustrate that this “strategy”—and I use that term very loosely—just doesn’t apply in all markets. Not every May or third quarter will look the same. In today’s market, we are dealing with inflation, so going to cash would likely cause you to lose purchasing power—that would mean locking in roughly a -4.2 percent return. In the third quarter 2020, the S&P gained just shy of 10 percent, while in 2019, it gained around 6 percent. Even in 2018, the S&P gained nearly 7 percent in the third quarter. Going back to 1928, the period from May to October has been positive 66 percent of the time.
The Ten Year Rule also states that money needed within the next 10 years to cover spending needs should be placed in fixed-income securities held to maturity. I see bonds as a way to protect principal. A laddered bond portfolio can also help you capture rising interest rates. If you keep bond durations short for eight- to 10-year money, you may be able to reinvest at higher yields.
Having a comprehensive financial plan allows you to know what money to invest for growth. Additionally, following your plan can also help you avoid emotional reactions or following investment trends. The point of investing is to meet your life goals and to retire comfortably—it’s not always about winning or beating the market.
Overall, staying out of the market during the boring summer months might be more detrimental than beneficial to your portfolio. If you are concerned about inflation or economic conditions, you may consider short-term tactical moves to take advantage of market conditions. For example, Consumer Staples sector stocks are generally able to pass inflation along to the consumer. Since Consumer Staples are generally necessary to everyday life, product purchases are less likely to be cut should consumers feel the need to curb their spending or should their prices rise.