Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, JP Morgan Asset Management Global Market Strategist Alex Dryden warns that investors considering taking their chips off the table for ‘Sell in May’ are likely giving up 11% total returns.
If you ‘sell in May and go away,’ exactly where are you going? Super-low bond yields make fixed income investments unattractive in a stagnant environment and risky in an improving one. Meanwhile, current accounts, thanks to incredibly easy monetary policy, are paying next to nothing – certainly not enough to keep pace with even modest UK core CPI inflation. In the 50 years prior to the financial crisis, investors, on average, were getting paid several percentage points above core inflation to sit in current accounts or cash ISAs considering their next move. Today, investors must pay for the privilege.
Forget seasonal savviness – the long-term numbers bear out the benefits of staying invested in equities to grow your pot over the long-term. In real terms, just look at the returns if you’d put £1 to work in the markets back in 1899, today you would have £340. That same £1 kept in cash would be just £3 today. For investors with a long time horizon of more than five years, shares are nearly always a better way to grow their wealth.
In just 11 of the last 30 years the rule of thumb would have worked in generating positive returns for investors. The average portfolio would be about 11% bigger for investors who stayed put rather than jumping in and out of the markets.
Investors who attempt opportunistic market timing all too often end up being their own worst enemy – and that goes for the pitfalls of the misguided ‘Sell in May’ theory as well.
The chart below shows the returns on the FTSE All Share Index for the last twenty years. Had you invested £10,000 in 1996 and simply left that money untouched in the markets, with dividends reinvested, today that money would have grown to a pot of over £35,000. The result is considerably less rosy for investors who gave in to the temptation to tinker.
For example, investors who missed just the best 10 trading days in the last twenty years had a considerably diminished pot, with less than £20,000 to show for their efforts. Equity markets often experience rapid snapbacks following sell-offs, which tends to mean that investors who react to market volatility by going to cash often have the tragic experience of locking in their losses.
Interestingly, over the last 20 years, on average 29 of the best 50 trading days of each year occur between the months of May and November. So, mathematically, investors following the ‘Sell in May’ rule would by definition have missed more than half of the market’s best days. To cite another adage, for investors what matters is time in the markets, not market timing.
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