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Investment wisdom that really works

8th June, 2020

‘Sell in May and go away until St Leger Day’

This investment nugget has been doing the rounds for years, dating back to the time when brokers would spend much of their summer at Ascot, Wimbledon, Henley and other events and neglect their portfolios in the interim. They would arrive back at their desks in September, ready to do business. Investors could sell out in May and buy back in September (St. Leger’s Day) without damaging their long-term returns.

The problem is that the City doesn’t really work like that anymore. Fund managers tend to be at their desks pretty much all year round. Research from Fidelity has found that the sums don’t stack up either: someone who had invested £10,000 in the FTSE All Share 30 years ago would now have £128,033. If they had gone through the bother of selling their portfolio and buying it back in September, they would have £126,950, and that’s not counting the costs involved in buying and selling. Verdict: don’t bother.

‘Time in the market not timing the market’

Unless you have found that special alchemy that allows you to predict the top and bottom of markets – which even the investment greats struggle to do – time in the market is likely to be better than trying to move in and out.

Research from Schroders showed that investors missing just a handful of days in the market can lose a substantial share of their returns. If you had invested £1,000 in the FTSE 250 and left the investment alone for the next 30 years, it might have been worth £26,831 by the end of 2019. However, if you missed out on the index’s 30 best days the same investment might now be worth £7,543 – a full £19,288 less. Even missing 10 days would have cost you around 2% a year. That may not sound much, but it makes a huge difference over the longer-term. The verdict: don’t mess around, stay invested.

‘This time it’s different’

“The four most dangerous words in investing: ‘this time it’s different’”– John Templeton may have first said this in 1933, but it hasn’t stopped a lot of investors claiming it since. The most conspicuous was during the technology boom, when companies were no longer to be judged on outdated notions such as revenues and profits, but on clicks or eyeballs. It wasn’t different then and most of the time, it proves to be a triumph of hope over experience.

The same phenomenon tends to be seen on the downside as well as the upside. In tough times, markets can be subject to irrational pessimism, a fear that this crisis – above all others – is the worst and most destructive ever seen. Usually, it’s not different; markets recover.

That said, there is a caveat. While ‘this time it’s different’ is a dangerous assumption, so is ‘this time it will be the same’. Extrapolating future performance based on the past performance of individual assets without taking into account changes in economic conditions can also be dangerous. For example, the impact of quantitative easing and loose monetary policy has distorted valuations. This means that assumptions about long-term returns need to adjust. The verdict: yes, but with caveats.

‘Santa’ rallies

‘Santa’ rallies have a little more substance to them. This is the bounce that often happens in markets in December. The theory is that everyone is spending, companies are doing better, or perhaps that the general bonhomie of the season fuels investor optimism. IG Index research showed that while there isn’t a Santa rally every year – 2019, for example, was a notable exception – markets were generally buoyant in December.

It found that the biggest rises in both indices typically occur from 16, 15 and 14 December. Overall, investing from these dates brought an average annual return of 2.53%, and a positive return 87% of the time. In contrast, investing over the first half of the month yielded an average loss of -0.23%. The verdict: it works, but are you really only going to invest in December?

‘Be fearful when others are greedy. Be greedy when others are fearful’

When it comes to the taxi driver versus Warren Buffett, the Sage of Omaha wins every time. In reality this is just an updated version of Baron’s Rothschild suggestion that investors should buy when there is ‘blood in the streets’. Buying low – when people are fearful – and selling high – when others are greedy is the only way to make money in financial markets. Pretty much all investment strategies are premised on finding clever ways to do this. The verdict: the fundamental principle of investing.

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