A Terrible Investing Mistake To Make

Credit: Terrance Heath

Gone, I hope, are the days when brokers would write to clients to warn them against doing anything rash – such as buying or selling shares during the summer months – whilst the brokers themselves are away on holiday.

Don’t do anything while I am away”, they would tell their clients. “Just wait until I get back”, they would add. Only those brokers will know whether they were acting in the best interest of their clients or acting out of self-interest.

Summer in the city

In fairness to the brokers, there is a popular misconception that the volume of shares traded in the summer months tends to be lower than the rest of the year. And yes, there is a summer in Singapore!

If we believe that liquidity is a crucial factor in discovering the proper value of a share, then there could be a case for arguing that low trading volumes could possibly be detrimental to both sellers and buyers.

However, the popular misconception is precisely that – a misconception.

There is little, if any, evidence to show that the volume of shares traded between the month of May and September are, in any way, lower than during the rest of the year.

In fact, below-average trading volumes can be just as likely outside of the summer months

Summer lull?

For instance, trading volumes in October 2000 were about a-third lower than in the preceding 12 months. Additionally, the volume of shares traded in July 2005 was nearly a 50% higher than the average for the 12 month before that.

That, then, raises the question as to what investors should do.

The simple truth is that investors who regularly drip money into the market should never do so with one eye on the calendar and the other on a stock market index.

Since 2002, investors who invested regular amounts, every month, into an index tracker such as the SPDR STI ETF (SGX: ES3) would have been better off simply riding any peaks and troughs of the market, rather than attempting some crude market-timing strategy.

Sowing seeds

The average cost of the monthly share purchases would not have been materially different, simply by sitting out the summer months. In fact, investors could even have ended up with 40% fewer units by doing so. That would, in turn, have led to fewer dividends to compound into even more shares.

A calendar, it has to be said, might be very handy for telling us when to sow our seeds and when to harvest our crops. But it is useless for telling us whether to buy and sell shares.

A version of this article first appeared in the Independent on Sunday.

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