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Don't miss a beat

Taking a break during 'down' months can make for losses, finds Morningstar's Director of Investment Research, Ian Tam, CFA

Ian Tam, CFA 13 May, 2020 | 1:20AM
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Ian Tam: As an investor, you've likely heard of the phrase "Sell in May, Go Away," a market timing strategy where you liquidate or sell your equity portfolio on May 1st and then get back in on November 1st. The premise of this strategy is rooted in the idea that markets tend to cool off during the summertime as investors and market participants tend to take holidays, market enthusiasm cools and the potential for gains is smaller.

Now, on the surface, the strategy seems to work as the monthly returns of the S&P/TSX Composite Index over the last 40 years show that the months of June, September and October have on average provided lower returns than other months. But much like the rest of life, it's not quite that simple. As this strategy like so for other market timing strategies can dramatically affect your returns.

Here's how the "Sell in May, Go Away" strategy did compared to staying invested the entire time. The strategy works in your favour only about 25% of the time over the last 40 years or so. And if you add in the effects of compounding, the difference is starker. Since the index has generally trended upwards over the last 40 years, not being invested for extended periods of time will provide less in terms of your overall total return. If we assume a $10,000 initial investment in the index, investors who sold in May and went away would have ended up with $280,000 less at the end of that 40-year period.

Timing the market is not something that most investors can achieve consistently. For conservative investors, the best bet is staying invested and have a laser-sharp focus on your risk tolerance to ensure that you're invested appropriately.

For Morningstar, I'm Ian Tam.

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Ian Tam, CFA  is Director of Investment Research at Morningstar Canada. 

 

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