Sunday, May 1, 2016

Pogo's Timeless Advice Applies to Individual Investors .... Don't Be Your Own Worst Enemy

Pogo, the cartoon character from my long ago childhood, offered to one and all the following sage and timeless advice, "We have met the enemy and he is us."

And so it is with investing and market timing. 'Sell in May and go away' is a time honored, if ill conceived, admonition to individual investors at this time of each year. And in my view, it's bad advice for the long term oriented saver and investor.

Sell Stocks in May? Tempting but Not Very Smart has the fact based story:

"With U.S. stocks near record highs and memories of last summer’s volatility still in mind, investors could be forgiven for wondering whether this is the year to “sell in May and go away.”

Stocks have shaken off an early year rout, but a reading of first-quarter growth for the U.S. economy came in below expectations last week and corporate earnings have been lackluster, clouding the long-term outlook for stocks.

After falling 11% in about the first six weeks of the year, stocks have bounced back, but now at a slower pace. In the six weeks following a Feb. 11 trough, the S&P 500 climbed 11%. In the roughly five weeks after that, it rose 1.4%. Both the Dow Jones Industrial Average and the S&P 500 are off roughly 3% from their highs set in May of last year.

There are many interpretations of the long-running trading adage, but the underlying recommendation remains the same: Stock investors should avoid a summer slump.

It worked last year. If an investor sold the S&P 500 on the Friday before Memorial Day and rebought the index the Tuesday after Labor Day, she would have avoided a 7.4% decline.

Otherwise, the benefits are a bit fuzzier. Stocks gained during the summers of 2012 and 2014. In 2011 and 2013, they fell.

It’s a controversial strategy. Some investors ridicule the idea as no better than predictors tying stock-market behavior to the length of hemlines, butter production in Bangladesh and which National Football League conference wins the Super Bowl.

“Even if last year ‘sell in May and go away’ worked, this year could be a year that it doesn’t. In the short term, you just don’t know,” said Marc Pfeffer, senior portfolio manager at CLS Investments, which manages about $6 billion.

Since 1970, the S&P 500 has gained 1% on average in the period between Memorial Day and Labor Day, according to an analysis by Ana Avramovic, trading strategist at Credit Suisse. Stocks rose during 30 of those summers by an average of 5.6%. The declines were more painful, averaging 8% in the 15 years stocks declined between Memorial Day and Labor Day, Ms. Avramovic’s analysis shows.

The summer will start off with some potentially market-moving events.

The next Federal Reserve meeting is scheduled for June. This past week the Fed held interest rates steady and gave little indication it plans to raise rates in the coming months. Investors will still be monitoring the meeting for any surprises even though expectations for a rate increase remain low. Later that month, the U.K. will vote in a referendum on whether to remain a member of the European Union.

July will bring another batch of quarterly corporate earnings, which are expected to again contract, according to FactSet. This past week negotiations between Greece and its international creditors ran into trouble, setting the stage for another summer showdown between the parties. . . .

Analysts at Northern Trust Asset Management found in a 2012 report titled “Sell in May…and Pay!” that investors face significant downsides getting in and out of the market around the summer.
Even if the time period is extended to include Halloween, U.S. capital-gains taxes alone erode the value of the approach, they found.

Meanwhile, investors also face transaction fees, missed opportunities and confusion about when to buy back in.

“You never know from a a calendar perspective when you’ll get your returns,” said Bob Browne, chief investment officer at Northern Trust, which managed about $900 billion as of March 31."

Summing Up

Anticipating stock market moves, up or down, in the short term is a fool's game.

Knowing that the long term direction of stocks is up is a proven and successful way to invest in the future.

Accordingly, if anytime soon you'll want or need to spend some or all of the money you've managed to save and invest thus far, sell now and refrain from gambling on short term moves in the 'casino.'

But if you're saving and investing for the future, keep contributing regularly, buying consistently, investing intelligently and owning blue chip stocks patiently.

For the long haul, it's the closest thing to a sure thing that we can do with our hard earned money to make it grow both substantially and realistically in inflation adjusted terms.

That's my take.

Thanks. Bob.

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