Sell in May and go away? Not so fast.
The old adage says that the stock market performs worse over the summer months, so investors should cash out and go on vacation. It may be especially tempting this year after a surprisingly strong rally that seems to be defying fears ranging from a looming recession to multiple bank failures. Stocks dropped Tuesday as regional banks sold off.
But for investors with decades of investing ahead of them, sitting on the sidelines is a surefire way to sabotage long-term returns—even if cash looks more attractive than it’s been in years. Many money market funds yield 4% or more and Treasury bills yield around 5%.
Investors have been fleeing stock mutual funds for the relative safety of money funds since last year.
Equity mutual funds saw more money going out than coming in every month of 2022, peaking with a $94.7 billion outflow in December, according to the Investment Company Institute. For all of 2022, a net $472 billion left stock funds.
Assuming that money wasn’t reinvested, it missed out on the subsequent rally that’s seen the S&P 500 gain 8.6% and the Nasdaq 100 surge 21% this year through Monday’s close.
Trying to time the market involves two decisions—when to get out and when to get back in. Many investors who pull money from the stock market during turbulent times wind up sitting in cash for too long, debating when it’s safe to return, and miss the rebound as a result.
“I always warn clients that to successfully time the market you have to be correct twice, and this is nearly impossible,” said Lisa Crosta, director of wealth management at BPP Wealth Solutions. “What makes it even harder is that the best days tend to occur while we are still in a bear market or very early in the rebound.”
Many investors make the mistake of getting out of the market on its worst days, even though the best and worst days are often clustered together in times of volatility. The opportunity cost of missing those best days, compounded over time, is large.
A JPMorgan Asset Management analysis found that someone who invested $100,000 in a fund tracking the S&P 500 Index from Jan. 3, 2000 to March 31, 2023, had an annualized return of 6.5%. For those who missed the 10, 20 and 30 best days, the respective returns were a mere 3%, 0.7%—and a 1.2% loss.
Looking at results over an even longer period of 50 years, an analysis by Citi Global Wealth found that an investor’s returns would have been reduced by 9.5% each year if they missed the 100 best days.
This article was provided by Bloomberg News.