|Rules of thumb and old adages can be misleading. Sometime, these catchy sayings even cause personal harm or lead to lost opportunities. Often people will try to broadly apply advice that is not intended to be reliable for every situation. Think of an old wives’ tale from childhood that proved to be false later in life.
Of course, misleading axioms don’t just exist in the realm of health and wellness. There are nearly as many catchy trappings when it comes to investing, and some can lead to financial harm. For example, investors often hear the adage “Sell in May and go away.” This saying is based on the seasonality of investing, where stocks tend to underperform from the beginning of May through the end of October and outperform from the beginning of November to the end of April.
This rule of thumb certainly has historical merit. According to Fidelity, since 1945, the S&P 500 has gained a cumulative 6-month average of nearly 2% from May through October on a price-return basis. That compares with a 6.7% average gain from November through April. However, every year is different, and following this adage, blindly, meant missing out.
So far, in 2020, investors who chose to head to the sidelines at the end of April have been left behind, missing out on one of the best months for the market in 2020. May was a major turning point, as the S&P 500 once again eclipsed the 3,000 level and the Dow climbed above 25,000 for the first time since the March lows.
For May, the S&P 500 catapulted 4.5% higher with strong performance from the consumer discretionary (retail), communications, health care, and technology leaders. The Dow climbed 4.26% in the month of May.
Instead of relying on adages that can lead to damages, it is better to focus on time-tested principles that lead to long-term success. Did you know that since 2000, if you missed the best 60 days in the S&P 500, your returns would suffer significantly? (See below). Even though May has historically been an awful month for the markets (usually fifth worst month of year), May 2020 was a great month for the markets based on investor optimism.