It’s the most treacherous time of the year for stock market investors, the dreaded month of May. This is the time of year when the stock market most often tanks and heads into the summer doldrums. Most investors will ride it out and take it on the chin, while others will attempt to beat the market by timing it.
Why is May so Bad for Investors?
It’s a well known fact to most traders that the stock market underperforms in the summer months.
According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has risen over 7% on average from November through April, but only 0.3% from May to October. However, that’s just an average and some summers have been disastrous.
To be fair to May, it’s not usually that bad of a month for the stock market. The worst month is September and most of the biggest losses come later in the summer. May is just the start of the flat market season, so it gets all of the attention. The average S&P drop for May since 1929 is only -0.1%.
Why I am Staying the Course
After trading commissions and tax liabilities, it doesn’t make much sense for me to sell my stocks, in order to avoid a 0.1% drop. I may put some trailing stops on some of my larger gaining stocks, but I won’t be liquidating my portfolio to run for cover. Typically, summer is a time when I add to my investments and look for stocks that have been beaten down. It’s a better season for buying than for selling.
The Bottom Line
The bottom line is that timing the stock market is a fool’s errand. If you have substantial investments, it could be a good time to take a more conservative position. It could also be a good time to buy some great stocks at a low price.
“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor -the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”
- William Bernstein