The Buds of May
Should we reduce our exposure to equities at this time?
They say that for the month of May, we should sell and go away. Statistics have proven this odd anomaly to be true. Based on historical data, if you sold equities after the fifth month of the year, to then buy them back by the beginning of the new year, your returns would be higher than just hanging on to your holdings and doing nothing. But of course, this year is a bit different and other than those fabled technology companies, most other stocks are down on the year.
Another way of looking at it, is that most global equity markets are up 35% from the lows of 23rd March. Back then, we thought the abyss was upon us and to be honest, not that much has changed since then. We have been mostly confined to our homes and are now slowly trying to get back to where we were. The virus is still rampant, there is no vaccine, the global economy is still operating at a fraction of the activity it once was, and we have hundreds of millions of people unemployed and thousands of businesses going bankrupt. If there is a second wave of the virus or if it mutates, many more people could die, and the global economy would literally implode if we had to shut everything down again for an extended time.
So, do we take our money off the table here and see how things go? We would be fools not to, given all the prevailing uncertainty and the rather large risks to the downside. Not for nothing have some people compared the current situation potentially as dire as the Great Depression. But there is always hope and history teaches us that the world will move on, and the markets will make new highs again. The other thing that should be very clear to everyone, is that the danger of something like this happening was always there. In other words, the risk of equities losing 50% is ever present. It can happen anytime, anywhere and it is the reason we have been getting paid almost 8% on average per year for investing in stocks.
Great, but what about our equity position and the month of May? Easy, we do nothing here that we have not already done in January. Just because something happened more than once, does not mean it will work again this year. It’s a bit like a coin toss and it comes up heads 9 times in a row, and then assuming a higher chance of it coming up tails on the next throw. Having said that, there is nothing wrong with betting on patterns and there are many hugely successful quantitative models that trade on statistics. However, the numbers only work if you do it lots of times, and by making hundreds of trades on many patterns or trends. Trying to time the markets is for muppets. If you were happy with your allocation to equities at the beginning of the year, there is no reason to reduce that now as a long-term investor.