This has been a strategy applied by investors in the stock market over the years. It is a classic market adage which is also known as the Halloween Theory as the time to renter the market is after Halloween. (End of October). The saying dates back to old England, when the stock brokers would go on summer vacation in May and not return until September.
According to the Stock Trader’sAlmanac, the Dow Jones Industrial Average has had an average gain of 7.5% during the November through April period and a gain of only 0.3% over the May through October period, going back to 1950.
Even though the worst crashes in history have occurred in October, on average, October is not the worst month of the year for stocks. In October of 1929, the market dropped over 24% in two days, and that two-day drop is still the worst in history. On October 19th, 1987, the Dow dropped a record 22% in one day. In October 2008 the Dow dropped over 22% in eight trading days.
What to consider when investing in the markets…
What is your time horizon?
The first question that needs an answer is, “How much risk can I afford to take?”
This needs to be measured against your financial planning taking your life style objectives into account. For example: If you are retiring in a few years time and need the capital you have accumulated to provide an income then you need to be less exposed to the risks of the market than a younger person who has, say, 10 to 15 years to go.
Invest or speculate…
The markets are not for the short term unless you want to speculate which is just another name for gamble.
When you invest in the markets you are buying shares which need time to provide you with dividends from their profits. Over time, if these profits are consistent enough, then the share price will tend to move upwards because of the company’s performance. Better still. the dividends should be re-invested creating the magic of compounding. Time in the markets, in theory, smooths out the fluctuating performance and reduces risk.
Past performance is not relevant
Having explained some theory, be very aware of the current risks that have developed in the markets. The extra ordinary performance at the current record levels against the back drop of weak economic fundamentals has created many questions around the sustainability of the share prices. Do not be enticed into these markets too quickly based on the past stellar performances. Taking a loss on your capital is a lot more painful than losing out on a few percentage points on your returns.
Sell in May has historic relevance, but how different are these markets to their historic performances? It’s the big question! So, be very, very, careful and do a lot more homework!
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This article first appeared on 702 : Sell in May then go away?