Monthly Musing: "Sell in May" and You Would Have Lost Your Way

The saying developed from a trend in the 80s and 90s where US market investors would sell out of their holdings heading into the northern hemisphere summer holiday season and would then return in autumn and, buy back in.

It’s a horrible phrase. It completely ignores all investment strategy and market theory of value, long-term investment and that time in the market will always outperform being out of the market.

Furthermore, why on earth would you sell your investments just because it’s a certain month of the calendar year?

If we look at the May we have just completed, this phrase should now be banished and never uttered again.

Looking domestically first, the ASX 200 added a further 2.3 per cent on a total returns basis, taking the year-to-date total return to 10.4 per cent. In fact, the final day of the month saw the ASX 200 make a new record all-time high, crossing above 7200 points for the first time in its 21-year history. That trend has continued into June and looks set to hold true for some time to come.

May also saw the ASX 200 log its eighth consecutive month of gains, its second-best consecutive monthly run-on record. To beat the previous best of 10 consecutive months of gains logged between August 2006 and May 2007 it would need to carry on until the close of August. This will be interesting to see as August is the full financial year reporting month. 

Turning to our international exposures, May was a touch more circumspect for the S&P 500 and its international developed market peers. It was the fourth consecutive month in a row of gains for the S&P 500 but only added 0.94 per cent in May.

However, we think there are better statistics to look at with the S&P 500.

Year-to-date the S&P 500 is up 12.04 per cent on a total returns basis. Since May 2020, its one-year result is up 40.31 per cent. But we would argue this is still too short a timeframe for any investor looking at equities.

Thus, if we look at the 5-year total return from the S&P 500 to the end of May 2021 it’s 120.79 per cent (yes, in 5 years the US market has over doubled in size). The 10-year total return is 283.33 per cent.

This is one of the clearest endorsements of the ‘time in the market’ principle. Think about all the events of the past 10 years that have impacted market sentiment: COVID-19, the Euro crisis, Brexit, three US presidential elections, fears of a China ‘hard landing’ and the speculated fallout of stimulus packages ending after the Global Financial Crisis. Through all of this, the US economy has grown, companies have continued to expand, US consumption has strengthened, seeing the S&P 500 boom. This can be applied to most markets the world over, too.

Looking to defensives and May saw the steadying trend that developed at the start of April continue in fixed income and cash. Thankfully, the ‘reflation trade’ as it has become known, which led to slides in bond markets in the first three months of the year, has eased. This has at least seen fixed income in particular returning to its normal characteristics of low volatility and capital preservation. But we acknowledge that it’s a long way off its highs and the risk of reflation taking off around the world could see movements like that seen in January through March return.

Fixed income’s current plight highlights our other major investment philosophy and something we continuously advocate - investment diversification. Any short-term issues like event risks that equities experience or economic changes that fixed income may experience is smoothed out by having your investment funds spread across all assets so you can take advantage of upswings but are not completely exposed to the downswings.

This philosophy is what we take into account with all our InvestSMART capped fee portfolios at all points in the cycle.

To view the monthly perfromance of our 8 funds please click here: https://www.investsmart.com.au/invest-with-us