The Best Time to Invest in Equities?
Assessing the accuracy of "Sell in May, then go away."
Where's the stock market heading? Has the rally that started in early March been exhausted? These are the key questions on all investors' minds as financial markets remain caught between the frantic actions of central banks to get the cogs of the credit system and economy turning again on the one hand, and a still-shaky economic and corporate outlook on the other.
It's therefore no wonder that even so-called "pop analysis," including some legendary axioms, is resorted to in a quest for direction. And besides "buy low and sell high," few other axioms are more widely propagated than "sell in May and go away" - Google revealed an astounding 127,000 items featuring this phrase.
As equities have seen a particularly strong 6-week rally followed by what looks like the start of a consolidation/retracement of some of the recent gains, investors are justifiably questioning the market's next move. And they nervously wonder whether this May will not only herald longer days in the Northern Hemisphere, but also live up to its reputation as the advent of a corrective phase in the markets.
The important issue, however, is whether this axiom actually has any scientific basis at all. Analyzing historical returns, the figures vary from market to market. But long-term statistics seem to show that the best time to be invested in equities is the 6 months from early November through to the end of April of the next year ("good" periods), while the "bad" periods normally occur over the 6 months from May to October.
A study of the MSCI World Index, a commonly used benchmark for global-equity markets, reveals that since 1969 "good" periods returned +6.5% per annum while investors were actually in the red by -1.0% per annum during the "bad" periods.
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