The popular investment axiom of “sell in May and go away” isn’t off to a great start. U.S. stocks, as measured by the S&P 500 Index, were up 1.8% in the month of May. While the conventional wisdom behind the saying suggests that investors should stay out of the market for the six month time period of May to October, this strategy hasn’t delivered on its catchy name. Over the last 15 years, the strategy has only avoided a loss two times. In the other 13 times, investors would have missed out on market gains.
Obviously, it’s too early to cry foul this year on the popular saying as the six month time period isn’t over. But, it reminds us that the market doesn’t necessarily follow conventional wisdom or care about popular axioms. And, it also reminds us that trying to time the market is a challenging task.
If you look at the weekly returns in the month of May, the stock markets would have closed to the negative for the month if it weren’t for the returns achieved in the final five days of the month. Big days like these can have big influences on returns. Missing a couple of them by being out of the stock market could result in missed opportunities and lower returns.
Take a more extreme example of missed opportunity through market timing. When most investors think of market timing, they think about the return potential they could achieve by avoiding losses and participating in gains. While markets tend to move in cycles, the day-to-day gyrations of the market can be quite volatile. Investors may be just as likely to miss a bad day as they are to miss a good day.
The table below shows that missing some of the best days in the market can significantly reduce an investor’s results. Over the 20-year period ending December 31, 2015, the U.S. market returned annualized 8.2%. That would have turned a $10,000 investment made at the beginning of 1996 into $48,250. If an investor mistimed the market and was out the 10 best days over that 20 year period, their results would essentially be cut in half. If they missed the best 30 days, they would have actually lost money on their investment.
As the Rolling Stones have suggested, time is on our side. In fact, we would suggest that an investor’s overall time in the market, and not timing the market, is a key to investment success.