Let’s face it: Dubious trading tips get a lot of investors in trouble.
Please take particular note of the word I choose to use there—investors.
It’s important because there is a huge difference between being an “investor” and being a “trader.” Investors (should) have a solid financial plan, one that gives them the confidence that if they follow it, they will have a respectable chance of meeting their short- and long-term financial goals. Additionally, investors with a financial plan should also have a corresponding investment strategy that is a product of, and supports, the plan.
Traders spend a lot of time getting into and out of positions trying to lock in profits. There is nothing wrong with that if it’s your job. There is plenty wrong with it if it’s not. Essentially, I believe that regular people who work full time in jobs other than being an actual trader should all be investors.
As such, investors should follow their plan and not trading advice, such as “sell in May and go away," because ultimately, such clichés are largely a product of guesswork. It’s a guess because what happened last year, or during any previous set of years, has no bearing on what will happen tomorrow.
To illustrate, let’s look at the Standard & Poor’s 500 index (S&P 500) over the past year. On August 29, 2011, the S&P 500 was at 1210.
Do you remember August of 2011? Everyone was in a panic, there were calls ranging from double-dip recession to complete economic collapse. Poor employment numbers were being used to justify calls that a recession was right around the corner. I remember colleagues telling me they were liquidating their clients’ holdings to all cash. It was total panic.
By October 3, 2011, the S&P 500 had traded down to 1099. Wow!
But something happened. Or maybe it’s better said that nothing happened, except that the market started going up. Not straight up—there were some pullbacks in November and December—but it was going up.
Fast forward to April 2, 2012 and the S&P 500 hit 1419.
People who went about their daily lives and stuck to an investment strategy that eliminated the need for trading around the news ended up OK. One big reason is that they never had to decide when to get out and when to get back in.
Oh, by the way, from Aug 29, 2011 to April 2, 2012 they were “OK” to the tune of approximately a 17 gain. Admittedly, April 2 was the day was the market topped and started to sell off, put I’ll address that in a bit.
So what if you really did sell in May? Well, people who followed that old mantra started out the summer feeling pretty good. In fact, today, the S&P 500 is just about even with where it was on May 1, 2012. So the people who sold out on May 1 are essentially even with those who stayed in—until they file their tax returns. But what about those who followed the advice more in line with Memorial Day to Labor Day—which is a traditional view of summer’s start and end?
Well, that’s a little different because on May 29th, the S&P 500 was at 1332 and as of Aug 29, 2012 it’s at 1412. That’s about a 5.75 percent return. I fully acknowledge that I’m having a little bit of fun here and taking snapshots of time to make a point. But I hope it sinks in: If you are a regular, everyday person with a job doing something other than sitting on a trading desk at a big investment bank, be an investor. Quit messing around timing the market, making guesses, and listening to people on TV. No one knows what is going to happen tomorrow or with the election, the fiscal cliff or anything else.
Oh, and as for cherry picking the April 2 market top above? The S&P 500 is currently just about even with where it was back then. And investors who just sat back and rode out the drops in August and September of 2011, the pullbacks in November and December of 2011, the rally up through April 2012, the pullback through the beginning of June, and this very quiet summer rally are still they are doing OK. They’re still enjoying close to that same 17 percent return. Not bad for sitting back and working their day jobs.
David B. Armstrong, CFA, is a managing director and cofounder of Monument Wealth Management, a full-service wealth management firm in Alexandria, Va. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance referenced is historical and is not guarantee of future results. All indices are unmanaged and may not be invested into directly. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor's portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. There is no assurance that the investment objectives of this program will be attained. Stock investing involves risk including loss of principal. Asset allocation does not ensure a profit or protect against a loss.