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Should You Sell in May and Go Away?

“Sell in May and go away” is a famous adage in the stock market. It states that we should sell stocks at the start of the warm weather in May and reinvest only when the cold weather starts in November. Investors have a belief that when the warm weather begins, the lack of market participants (probably due to vacation breaks) can make for a lacklustre market period.

It’s summer all year round in Singapore and it seems that investors here are indeed selling out in May due to the recent weak performance of the Straits Times Index (SGX: ^STI). The Singapore stock market benchmark has fallen 2.6% from 1-7 May. So, should investors sell all their stocks in May and take a break from the stock market? Not at all, in my opinion.

Market timing is hard

According to Forbes, from 1950 to around 2013, the Dow Jones Industrial Average index in the US had an average return of only 0.3% during the May-to-October period, compared with an average gain of 7.5% during the November-to-April period.

In more recent times, however, the pattern isn’t so clear-cut. According to Investor’s Business Daily, if investors had sold shares in May 2016, they would have missed out on some impressive gains. Meanwhile, the Nasdaq ended April 2016 at 4,775.36; it closed higher in May and went even higher in late June. In all, the tech index rose 55% from the end of June 2016 until the end of January 2018.

Here in Singapore, the Straits Times Index rallied more than 13% from May 2017 to April 2018, before falling off the next month to a low in December 2018. There was a mixed performance there.

We can see from the above examples that it’s difficult to predict what the market does next. Investors who had stayed out of the Singapore stock market in April 2017 to April 2018 would be kicking themselves.

What should investors do instead?

Instead of timing the market and selling out of our stocks, we should ignore all the noise and focus on the right things – not the share prices but on the businesses behind them. Behind every ticker symbol is a living, breathing business.

The idea is to buy fundamentally-strong companies at cheap valuations and hold them for a long period. Cheap valuations are mostly presented during times of stock market volatility, such as now.

When the stock market rallies again, the buying opportunities will disappear. Remember back in 2008 to 2009? The best time to buy was when there was panic on the streets. Those who didn’t buy shares then would have missed out on the massive gains that followed.

The stock market might be throwing up some buying opportunities right now amid the volatility but the key questions is; are you prepared to take the plunge?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.