Does warmer weather bring weaker investment returns?
In many corners of the world, spring has arrived! That means it’s time to pack away those winter clothes and take out our shorts and tank tops in preparation for warmer weather. However, when it comes to our investment portfolios, should we also pack up our stocks and leave the markets in anticipation for weaker investment returns?
An old adage in the stock market is to “sell in May and go away.” The idea is that stock returns might be weaker in the summer and early fall, compared to returns during the rest of the year. There are also other calendar-based and seasonal trading strategies, including the so-called “January” effect – the observation that stock returns have been historically strong in the month of January.
Despite the hype, buying and holding may be a better approach
The reality is that, for most investors, buying and holding, rather than timing the market, may often be the best approach. It’s true that stock returns have historically shown varying patterns across months, and that it’s tempting to believe that these will continue in the future. However, this may have more to do with the nature of random events, instead of underlying stock market behavior or seasonal trends. In other words, correlation doesn’t necessarily equal causation!
Returns can vary greatly across months
One way to see this is that the minimum and maximum monthly returns also vary greatly across months. Even for a month with poor historical average returns such as September, there were still many significantly positive months that occurred quite frequently. In fact, over the past ten years, six Septembers have been positive – and some very significantly so. Selling your stock holdings just to avoid Septembers each year over the same period would have done more harm than good, especially once transaction costs are included. Transactional costs are the costs incurred from selling and purchasing stocks, as well as the fees that banks, brokers, or a financial intermediary may charge an investor. Additionally trying to time the market may cause investors to miss significant market movements on given trading days which could significantly impact an individual investors portfolio performance.
The chart below shows the monthly median, minimum, and maximum returns for each month since 1950. The diamonds show the highest monthly return, the bars show the median monthly return, and the Xs show the lowest monthly return for the month.
Source: Clearnomics, Standard & Poor's
The odds may be in your favor if you stay invested
It’s important to remember that stock returns naturally vary over short time periods as well. On a daily basis, whether the stock market is up or down is only slightly better than a coin flip. However, on an annual basis, the stock market has been positive 73% of the time since 1950. Thus, for many investors, the best odds are to stay invested over long periods of time – not to try to guess whether any individual day, week or month will be up or down.