Just two years in, the 2020s are already making their claim to be the most prolific and tumultuous period in modern history.
Between a seemingly endless global pandemic, climbing interest rates, international war, and inflation levels not seen since the 1980s, the buzz surrounding the longest bull market in US history continues to grow.
Many investors continue to ride the wave of rising asset prices, despite a growing number of recession indicators.
Nevertheless, many believe the time of the bulls is finally nearing its end.
With May just around the corner, the age-old saying of “Sell in May, and Go Away” may just see its biggest test in a decade.
For generations, investors have preached this adage as fact, and for many decades it was.
From the early 1950s until around 2013, the stock market underperformed between the summer months of May and October.
The past nine years have proven this summer slump to be fallible with some incredible summer performances.
Yet it seems this sun run may finally come to a head if economic indicators continue to sour. To learn more about how to invest during a Recession, check out our Best Recession Stocks article.
Should you Sell?
Financial stability and safety can seem like a balancing act in times of economic turmoil.
It can be incredibly difficult to ascertain whether or not to sell, buy, or just hold in such periods.
These moments become especially confusing when everyone and everything seem to have conflicting opinions and agendas.
So what should investors turn to in times of doubt?
Summer Stock Tip #1: Rebalance Your Portfolio
Rebalancing your portfolio, or in other words selling or buying assets to change your percentage asset allocation, can be a great way to develop or return to your chosen risk tolerance.
In fact, in times of increased unrest, divesting riskier stocks or assets from your portfolio could prove to be a powerful tool in lowering risk, while shoring up a ready cash position.
For investors that are unsure of their risk tolerances, age and financial obligations can provide a great starting point for those looking to determine acceptable risk.
You can learn more about risk tolerance by reading our article here.
For example, older investors, nearing retirement age, may not be willing to risk short term volatility in the market, and could rebalance their portfolios to reflect their desire for stability.
These changes can be made through trimming down riskier positions or shifting into more conservative, defensive stock and bond positions.
Younger investors with less financial responsibilities might consider rebalancing their portfolios to a more aggressive mix that includes foreign equities and small- and mid-cap stocks.
Timing the Market
Although it may seem like simple advice to just buy low and sell high, the modern world and economy can be extremely complex.
Due to these complexities, very few investors outperform the market, and even fewer are able to outlast its returns over a lifetime.
According to the Los Angeles Times, over a 20 year period, 86% of active US equities funds were outperformed by the S&P Composite 1500 index.
If these hedge funds cannot beat the market, how should the average American invest?
Well, that brings us to our second tip!
Summer Stock Tip #2: Index Funds
Even some of the greatest stock market investors of all time respect the power of passive investing.
In the words of Warren Buffett “I recommend the S&P 500 index fund, and have for a long, long time to people.”
The great Mr. Buffet, AKA the Oracle of Omaha, knows that most active managers fail to beat the market, and almost all of them fail to do so consistently over a long period of time.
So essentially what the Oracle is saying is: if you can’t beat ’em, join ’em.
An S&P 500 index fund allows you to track the stock market, or match its exact returns.
Historically, the market as a whole has gained an average of about 8% per year over long investing horizons.
So instead of pulling your hair out trying to beat the market, why not buy into an S&P 500 index fund that will turn you into a millionaire by the time you retire?
Summer Stock Tip #3: Dollar-Cost Averaging
For the majority of investors, especially those with little time at their disposal, investing over the long-term in passive funds can provide extraordinary results.
One of the greatest tools for investing over the long term is dollar-cost averaging.
Dollar-cost averaging is a term that means to invest your money in smaller portions at regular intervals of time, rather than investing it all at once.
If you were to take all of your money you have available to invest and put it in the stock market at once, it could immediately drop and put you way into the red.
But when you dollar-cost average, you adjust your average cost basis, making it easier to stomach big drops in the market.
By consistently investing in small increments over longer periods of time, investors can greatly reduce the effects of market volatility and timing.
You can get a full breakdown on dollar-cost averaging by reading our article here.
Summer Stock Tip #4: Remember the Fundamentals
It can be easy to watch the stocks in your portfolio rapidly rise or fall and think to yourself: “it’s time to sell! I need to lock in the gains I’ve made.”
But at the end of the day, if you’re a fundamental investor, then you’ve done your homework and you know what the intrinsic value of the stock is.
Your goal isn’t to capture short-term gains by timing the market.
Your goal is to buy and hold stocks that you think are undervalued and wait until they’ve reached their true value. THEN, you sell.
So keep in mind, a price swing isn’t always a good reason to sell a stock.
You should think about whether there’s been a change in the fundamentals that alters the true value of the stock before you sell.
Summer Stock Tip #5: Relax
This is the tip that some worried investors really need to hear right now.
If you’ve followed the steps above, then you’re making regular, safe investments into a diversified, well-balanced portfolio.
There’s no sense in pulling your hair out over what the market is doing or may do in the near future.
If you let your emotions get in the way and start panic selling or buying, you’ll likely regret it later.
The fact is that the market has historically gone up over the longterm, so as long as you’re a long-term investor, you have nothing to worry about.
After all, if the stock market as a whole comes crashing down, we’ll have more important things to worry about, right?
Sell in May and Go Away?
With the combination of dollar cost averaging and maintaining an acceptable risk tolerance through portfolio rebalancing, passive investors may even embrace the summer slump.
By following sound investment rules and strategy and avoiding the panic and fear of timing the market, investors can take advantage of any potential buying opportunities, while enjoying the greatest perk of the summer lull: the weather.