{"id":748,"date":"2017-12-08T12:04:47","date_gmt":"2017-12-08T20:04:47","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=748"},"modified":"2017-12-08T12:04:47","modified_gmt":"2017-12-08T20:04:47","slug":"what-if-i-sold-in-may-and-went-away","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/what-if-i-sold-in-may-and-went-away\/","title":{"rendered":"What if I sold in May and went away?"},"content":{"rendered":"

At the end of April we wrote a piece looking at some new research on the calendar effect and popular heuristic known as\u00a0Sell in May and go away<\/a>.<\/p>\n

While there is some evidence that this particular anomaly does exist and\u00a0has persisted over certain periods of time, there is not really a good theoretical foundation for why it happens.\u00a0 Mining historical data\u00a0often yields\u00a0patterns\u00a0but assuming that those patterns will repeat can lead to unfortunate investor strategies and behaviours.<\/p>\n

It’s in our nature to love short-cuts<\/strong><\/p>\n

Investors just love short-cuts. In fact not just investors love them but people in general always use heuristics to help increase the efficiency of their decision-making.\u00a0 If you step outside, feel a sudden cool breeze and look up and see a dark cloud in the vicinity you respond fairly quickly and sensibly by seeking shelter or at least grabbing an umbrella as you head out the door.\u00a0 This ability to create short-cuts makes our lives so much easier and sometimes even keeps us safe.\u00a0 \u00a0We recognize patterns that we’ve seen before, assume they’re going to happen again and act almost automatically in response – it simply makes decision-making faster and less difficult – no need to analyze things in detail, just act.\u00a0 The challenge is that the same heuristics that make decision-making easier and faster or keep us safe in many aspects of our lives, can also produce behavioural biases that don’t help us as investors.\u00a0 We love things like the “January effect” or “Sell in May and go away” because they’re easy and have sometimes worked in the past.\u00a0 But putting them into practice doesn’t always work out the way we might imagine.<\/p>\n

But short-cuts don’t always work with investing<\/strong><\/p>\n

This year is a good case study.\u00a0 What if we had sold in May and stayed out of the market through until now?\u00a0 To cut to the chase, you wouldn’t be happy!\u00a0 A Canadian investor would have missed out on the following returns from May 1 until now (all in Canadian dollar terms – return data from S&P Indices Canada and exchange\u00a0rates from Bank of Canada as at December 7, 2017)<\/em>:<\/p>\n

S&P\/TSX Composite Total Return Index: +4.6%<\/p>\n

S&P 500 Net Total Return Index (in CAD): +4.7%<\/p>\n

S&P Global ex-US Broad Market Net Total Return Index (in CAD): +4.8%<\/p>\n

Clearly selling in May would have been frustrating this year.\u00a0 But what if you had?\u00a0 If you sold at May 2017 market levels, could you bring yourself to buy back in now or would you wait longer?\u00a0 For what? When would you buy back in?\u00a0 What if the market doesn’t correct to May 2017 levels for another three years?\u00a0 What if it never does?\u00a0\u00a0Put yourself in this position and try to answer these questions – even if you didn’t sell it’s a great exercise.\u00a0 You see, trying to time the market is so difficult because it doesn’t just involve one decision (when to sell) but a second decision (when to buy back in!).<\/p>\n

Successful short-cuts\u00a0can reinforce bad behaviour\u00a0\u00a0<\/strong><\/p>\n

It’s also useful to flip this exercise around.\u00a0 What if\u00a0global markets had gone down<\/em> by the same amounts?\u00a0 Would you be better off if you’d sold in May?\u00a0 We’re not so sure.\u00a0 When would you\u00a0feel good about\u00a0buying back in?\u00a0 If the markets were all down %4.5+ since May we can assure you the headlines and market commentary wouldn’t be encouraging you to buy back in.\u00a0 On the contrary,\u00a0they’d be screaming that markets were going down another 5% and fast!\u00a0 Even if you nailed it and bought back in now and markets started to rise would you really be better off in the long run?\u00a0 We’d argue that the feelings of confirmation and confidence you’d experience from this one “good decision” would bias your decisions in the future\u00a0possibly to your detriment!<\/p>\n

While rules of thumb or heuristics are incredibly useful to us in many aspects of our lives,\u00a0be careful\u00a0when\u00a0searching for short-cut success with your investments!<\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

At the end of April we wrote a piece looking at some new research on the calendar effect and popular heuristic known as\u00a0Sell in May and go away. While there is some evidence that this particular anomaly does exist and\u00a0has persisted over certain periods of time, there is not really a good theoretical foundation for […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10,7,12],"tags":[],"class_list":["post-748","post","type-post","status-publish","format-standard","hentry","category-evidence-based-approach","category-graham-bodel-posts","category-passive-vs-active-investing"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/748","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=748"}],"version-history":[{"count":1,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/748\/revisions"}],"predecessor-version":[{"id":749,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/748\/revisions\/749"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=748"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=748"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=748"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}