One of the best strategies for long-term savings growth has historically been to invest in the stock market for the long term, meaning decades. The market typically won’t rise steadily. Any given day, week, month or even year, may turn out to be terrible and there is always something to worry about. Yet, running the numbers, simply staying invested for the long-term has been a robust strategy for most major stock markets, including the U.S.
On the other hand, those who try to time the market typically fail to do so with any accuracy and incur trading costs when they try. This problem is made worse because just as it can be a pretty easy decision to pull your money out of the market due to a host of fears, by the same token, it can be a challenge to find the ideal point to be comfortable putting your money back in. This means that what was supposed to be a temporary move out of the markets can too easily become a permanent one. That’s a problem because having your longer term savings in cash, typically isn’t a good idea.
Curiously though, despite there being no obvious way to time the market the evidence behind certain seasonal factors driving investment returns seems robust. This holds up to statistical testing over time and across different countries. There are four seasonal trends in the stock market that have worked historically and may continue to work in future. They don’t offer promises of massive wealth, especially once both taxes and trading costs are considered, but can be ways to improve returns. If you know you’re going to invest or withdraw money from the stock market anyway, then awareness of these apparent rules may help you.
Sell In May
Sell in May is the idea that stock market returning are lower over the summer and better in the winter as documented by Sven Bouman and Ben Jacobsen. The data is surprisingly robust across years and countries. It works in all countries except New Zealand, and all decades since the Second World War. This suggests that if you’re looking to invest in the summer, it may be better to park the money in bonds, and then hold off investing in stocks until October.
The impact is relatively small so pulling money in and out of the market to take advantage of this, will likely cost you more in taxes than you’d see in return benefit. Of course, perhaps this relationship may fail in future years, but its track record is impressive. It suggests that May can be a good time to sell stocks and October can be a good time to buy stocks. If you were playing to make moves anyway, then snapping to this timing may be sensible.
The weekend effect suggests that stock returns are lower over the weekend. Obviously, stocks don’t trade over the weekend, so what this means is that returns tend to be lower on Mondays, but positive for the other days of the week. Again, this effect has proven to be surprisingly robust over time. This means that if you’re thinking of buying stocks on a Friday, then it’s probably better to wait until the following Tuesday. However, Friday could be a good time to sell, all else equal.