OCBC OneWealth App– Did you sell in May and go away?

Equities

Global

Fundamentals

Vasu Menon

Executive Director, Investment Strategy, Wealth Management Singapore, OCBC Bank

Did you sell in May and go away?

1 June 2021

Those who ignored the investment adage “sell in May and go away” would be happy to know that both equity and bond markets did not fall off the cliff last month (see performance table below).

More importantly, history shows that those who did not sell in May and go away are often rewarded in subsequent months. Letting emotions and sentiment take over and selling prematurely may result in lost opportunities which can cause regrets in hindsight.

Take the S&P 500 index for example. History shows that in eight of the past ten years, it recorded gains for the six-month period to end-October.

Last year for example, the S&P 500 index rose about 12% between May and October, marking the biggest gain since 2009.

Investing is about staying invested

Investing should not be confused with trading. Investing means applying your money with a medium- to long-term view and staying the course unless there is a significant economic or market shock which alters the investment outlook materially. Investing is not about getting into and out of the markets frequently in the hope of making quick gains.

No doubt, the recent volatility in stock markets has gotten some investors nervous and led them to wonder if they should sell their holdings altogether and trade the markets instead.

One concerns investors have is rising inflation and how it might lead to the US Federal Reserve tighten policy sooner-than-expected.

History shows that if the economic and earnings outlook are still improving and if financial conditions are not tight, markets can continue to head higher despite short-term headwinds, including tighter monetary policy.

Take the 2013 taper tantrum by the US Federal Reserve (Fed) for instance. Investors learned that the Fed was slowly putting the brakes on its quantitative easing (QE) program when Ben Bernanke, the central bank’s chairman then, stated in a Congressional testimony on May 22nd that the Fed would taper, or reduce the size of its bond-buying program. Bond markets were roiled, and US 10-year government bond yields rose sharply from a low of about 1.6% that year to 3% by year-end. Despite this, global equities did well and managed to post a gain of almost 22% that year.

In 2016 as well, US 10-year yields rose sharply from a low of 1.36%, to end the year at 2.44%. Despite this, once again, global equities managed to post a decent gain of about 8%.

Clearly, the road ahead in the next three to six months may not be smooth because of intermittent inflation and infection jitters, but these fears should not derail the medium-term upside trajectory for global stock markets so long as the economy and earnings do well, valuations are not too high and central banks do not shock the markets by tightening monetary policy suddenly and aggressively (which seems highly unlikely).

For those nervous about short-term market volatility, a good way to manage risk is perhaps to space out fresh investments over a few months instead of investing a lump sum and trying to time the markets.

Timing markets is risky as we have seen over the past year when equity market defied Covid-19 fears and headed higher. Trying to predict the market’s twists and turns is tricky and can result in investors missing on attractive opportunities.

Macro-outlook is sanguine

So long as the macro-outlook is sanguine, investors should not get consumed by changing news headlines and market noise. They should stay the course and make tweaks and rebalance their portfolios periodically. For prudence it is also important to keep a diversified portfolio - buying into unit trusts is one way to do this.

However, it does not mean that we won’t see intermittent pullbacks in the markets. Occasional corrections are normal and healthy. They allow markets to catch a breather especially after a strong sprint.

If you look at the global equities rally last year, based on the MSCI World Index, it was interspersed by 6% to 8% corrections on three occasions. However, these pullbacks did not signal the end of the bull market. Instead, on each occasion, global equities regained its footing and resumed its uptrend, after a brief pullback.

Time vs timing

Time in the market is a bigger determinant of investment success than timing the markets. Ultimately it is not just about how you invest in the markets but how long you invest in the markets as well.

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