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Following the old investment adage of “sell in May, go away” could be adversely impacting your long-term investment goals.
“Sell in May, go away” is an axiom you might have heard a few times during your advisory career, especially over the last few years.
Like many other statements or propositions regarded as being established, accepted or self-evidently true, an axiom is not a necessary truth, but it can and might have influenced your clients.
Should you “sell in May”?
Let’s take a look at recent history. Think back to the Arab Spring in 2011 which then led us into the pain of the eurozone and Greek debt crises. If you had sold in May, you’d have sold at cheaper levels, whether you were invested in equity or debt.
And in the “taper tantrum” (when markets responded negatively to the possibility of the Federal Reserve tapering its bond-buying programme) of May 2013, it would have been a similar experience. With the China growth crisis last summer, you might argue that had you followed the May axiom, you would have avoided the losses.
But that last example in particular, raises some further challenges: the Shanghai Composite Index fell 7% on 4 January 2016, so assuming you had come back to the markets by then, you would have suffered in January instead.
What about long-term strategy?
And that’s the point: having sold, when should you come back? And while we’re at it, what exactly should you sell? Equity? Fixed income? You might have already dumped all your commodity exposure.
So, if it’s all about the creation of long-term value to assist clients in meeting their future financial needs, we owe it to clients to remind them that there will always be pain along the way. The asset class that demonstrates this more than any other right now is commodities.
Here is the Schroders 3-Step rediscovery to the value of commodity investing:
Inflation, inflation, inflation (hedge). In spite of the fact that the BoE Inflation Report showed falling inflation last week, our Multi-Manager Team led by Marcus Brookes believes we should prepare to expect the unexpected. Inflation will return and commodities produce an important hedge to the falling supply/increasing demand dynamic.
Much investor pain is experienced through sentiment and sentiment rules markets when geopolitical concerns are prevalent. Commodity exposure can protect portfolios against geopolitical risks such as the current Russian threat to NATO and the EU, the fragility of the EU and continuing Middle East instability.
Forget the commodity supercycle or the China boom story. Commodities are underowned and cheap (as are some of its proxies), and they remain a portfolio diversifier. Your independent, logical advice gives clients permission to take action beyond their instinct and concentrate on long-term value.
Clients often follow the herd and make sub-optimal investment decisions and that’s not about to change overnight.
Looking at the latest Pridham Report, fund outflows from risk assets in the UK in Q1 is at its worst for over 20 years, with record redemptions of £38 billion as investors exited equities and switched to Buy-to-Let property and targeted absolute return funds.
So, if your clients are tempted to sell in May and go away, here is a new axiom for them to consider: “Buy (commodities) in May and stay?