My wife and I are in the market for a new home. We’ve been saving for several years, including investing in stocks. I have started selling shares in order to free up cash for a down-payment. It’s been strange, selling shares of companies that I love, and would happily hold for many more years.
But it’s also a reminder of why we invest in stocks: There isn’t a more consistently proven way to grow wealth over the long-term than owning stocks. And while I don’t try to “time the market,” the timing of these sales has got me thinking about the old saw, “sell in May and go away.” So I decided to do some digging, and look at the market over the past few years, and see if there are any “trends” to spot around the month of May.
Is there anything to it?
Here’s a look at the S&P’s performance during May since 2008:
As the table above shows, it’s all over the map. Let’s take a look at a bigger picture:
I know it’s a bit busy, but there is a “signal” in all that noise. Since 2004, the market has only been lower at the end of the year versus the end of May exactly three times: 2007, 2008, and 2011.
To take it a step further, the short-term market performance (through August) did show a decline of at least 4% in four of the nine years above, while there were only two summers that saw the market increase by at least that much. Additionally, the combined results of the market’s performance over the summer since 2004 is -3%. Yep, that’s a losing market.
But here’s the kicker: the combined market performance since 2004 is 26%. Those two good summers combined to return over 18%. The verdict: timing the market isn’t a good idea.
So what’s an investor to do?
The approach that legendary investors like Peter Lynch and Warren Buffett have long touted is actually the simplest one: Find great companies with fairly valued shares, and invest in them for the long term. And one of the best ways to make sure to pay a “good” price is to add to them on a regular basis, “dollar cost averaging” over time. And with the rise of discount brokers like ShareBuilder and Interactive Brokers Group, Inc. (NASDAQ:IBKR), trading fees are a lot more competitive. ShareBuilder, for example, offers 12 trades per month for $12. Not a bad way to “ease into” any investment at a low cost.