The spring has sprung and with the recent rebound on the market, some would be tempted by this old saying: “Sell in May and go away”. As you can see on the following graph, the months from May to October offer a lower total return compared to the other months. The graph shows the total return per month on the S&P 500 from January 1950 to December 2007 (note that September and October 2008 are not par of that graph ;-)).
So if we make the calculation; an investor that started to sell all his stocks in May and buy back in November from 1950 to 2007 would have made an annual return of 11.2%. Quite interesting, isn’t?
But what is more interesting is that he would have made an annualized return of 11.9% by staying in the market instead of trying to time the market.
You may say that 0.7% is not a big difference but it becomes a huge one after 50 years due to the power of compounding interest. In fact, if you invest 1,000$ per year from 1950 to 2007 and you sell in May, your portfolio would worth $4,677,821… compared to $6,379,526 if you would have stayed in the market all the time. This is a 1,7M$ difference!
After this thought, we still may be lead by the fear of a market rally in a middle of a bear market since the S&P500 surged 31% in the past 2 months. There is still a good chance of seeing a market correction. However, we are still far away from it’s peak of May 19th 2008 (1440 points).
In fact, what will really influence the stock market this year is not related to the fact that summer is coming. I think that the economic stats will play an important role in this story. If they are strong, we should see the market slowly but surely keep going up. However, if we see that the economy is still in a recession and we are not going away with it, we may see another correction…
I have to say that investors are fragile and a bit psychopath these days. They go euphoric upon good news and they would be ready to jump off their building on the announcement of a drop in the house sales in the US… Once again, this is a very interesting situation we are living in the market and I bet we will see some brilliant traders making a ton of money… as they never go away in May 😉
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