Published May 3, 2019
File ‘Sell in May and Go Away’ under too good to be true. If only investing were so easy as just following the calendar every six months.
File ‘Sell in May and Go Away’ under too good to be true. If only investing were so easy as just following the calendar every six months.
Every investor wants the market to be simple and predictable, and that’s led to numerous old Wall Street saws that regularly recur in the media. Ultimately, many of these myths come down to trying to predict the market—and that’s just not possible.
Join Chairman Dan Wiener, Director of Research Jeff DeMaso and Deputy Director of Research Brian Mackey as they pour cold water on market-timing myths with straightforward talk backed by hard data. There are no shortcuts in investing—steer yourself in the right direction with The Adviser You Can Talk To Podcast.
Dan Wiener: Hello, this is Dan Wiener, chairman of Adviser Investments, with another The Adviser You Can Talk To Podcast. I’m sitting with Jeff DeMaso, Adviser Investments’ director of research, here in New York and Brian Mackey, who is deputy director of research in our Newton, Massachusetts offices. We’re going to talk about our top-10 favorite myths about investing. Many of these myths ultimately come down to trying to predict the direction of the stock market: They’re timing myths.
Dan Wiener: Brian, I’m going to start with you because you told me one of your favorites has to do with football, and the famed “Super Bowl Indicator.” The Super Bowl is long over; and, yes, the Patriots won again. That’s bullish for their Boston fans; but why is it a favorite of yours, and what’s the myth?
Brian Mackey: I am excited about the New England Patriots and I’m excited that they won this year. But let me take a step back and talk about the “Super Bowl Indicator,” which states, that a team from the National Football Conference, or the NFC, when they win the Super Bowl, the stock market will be up that year. However, when an AFC (American Football Conference) team wins, the stock market will be down that year.
Brian Mackey: Now, this is a favorite of mine because we all know, as investors, you would never use the Super Bowl to try to predict the stock market. It’s kind of one these silly myths out there, but it continues to make headlines—even today. Studies have shown that the Indicator has actually been right about 80% of the time, which sounds fantastic: Why wouldn’t you want to invest in something that’s got an 80% hit rate? However, if you just guess that the stock market would be up every year, you’d also be right about 80% of the time, so the indicator is definitely a myth: It doesn’t have a better batting average, so to speak, than regular guessing.
Brian Mackey: I think the best example of how this indicator got it wrong was in 2008 when the Giants played the Patriots and the Giants won. The Giants are an NFC team. If the indicator was right, the market should have been up in 2008. We all know how that ended: It ended pretty poorly for both the stock market and the New England Patriots. Although I will say in that game, there were a couple of bad calls that maybe the Patriots should have won.
Brian Mackey: However, the Giants won and the indicator was wrong—wrong in a big way. Thankfully, this is a myth because I never want to have to choose between rooting for the stock market or rooting for the New England Patriots, which is an AFC team. now that we know that it’s a myth, that the New England Patriots won this year and the stock market continues to do well, we can safely ignore this one.
Dan Wiener: You Patriots fans are all the same, and you stole some of my thunder. The “Super Bowl Indicator” ties in with another myth: The “January Effect.” This one, in essence, says, “As goes January, so goes the year.” If stocks are up in January, then they’re going to be up over the next 11 months—giving us a positive year. If they’re down in January, then stocks would be down in the ensuing 11 months. That will mean a year in the red.
Dan Wiener: I also hate to be a bearer of bad tidings, but I went back to 1940: Almost 80 years, and the “January Effect’s” success rate is about 69%, which means it’s correct a little more than two years out of three. Better said, it’s wrong one out of three years. If you look back over just the past ten years, the “January Effect” has only been right three times, which is much worse than average, and that’s been during a bull market.
Dan Wiener: If you sold out of stocks because January was in the red, you probably were pretty red-faced when you saw how the market did. Brian, as I said you stole my thunder a little bit here. Because since 1977, which was the first full year after its inception, Vanguard’s 500 Index Fund has been positive in 34 of the last 42 years, or 81% percent of the time: That 80% number that you came up with. If you simply started each year assuming stocks would be higher, you would have had a better success rate than following the “January Effect.”
Dan Wiener: Jeff, you have your own favorite timing indicator or myth, don’t you?
Jeff DeMaso: I do. It’s called the “Sell in May and Go Away” trading strategy. The idea is that if you follow this strategy, you’re going to own stocks from November through April, and then May comes and you sell your stocks and go to cash: You stay there from May through October, so you rotate between stocks and cash every six months. The myth here is that by doing this six-month rotation, you capture most of the market upside and avoid most of the market’s pain.
Jeff DeMaso: Unfortunately, this strategy, like the two that you’ve already mentioned here, I think it can safely be filed under the “too good to be true” bucket. If only investing were so easy as just following the calendar every six months. Where did the “Sell in May” myth come from? If you run the numbers, and we did them, on the surface it looks pretty good: If you compare an investor who just bought and held Vanguard’s 500 Index Fund since October 1976, pretty much the Fund’s inception, it returned 10.8% a year. If you followed the “Sell in May” strategy, your returned 10.3% a year.
Jeff DeMaso: …So 10.8% versus 10.3%—those are really similar returns, and the “Sell in May” strategy had less risk. What’s not to like? Well, this strategy has a super-low hit rate and super-low success rate. You were talking about success rates of 70%, 80%. The “Sell in May” strategy only works in one out of three years, and it goes through these long periods without working. From 1991 through 1999, the big boom market of the ‘90s, this strategy only worked one time. Then it paid off in 2000, but how many people stuck with it?
Jeff DeMaso: Similarly, it has only worked once since 2008. I doubt many people, if they were following this in the first place, have stuck with it. In other words, there’s this big difference between doing a back test and running these in Microsoft Excel in a spreadsheet and actually trying to follow them in real time, with real dollars. Once again, these are just too good to be true.
Dan Wiener: Jeff, isn’t it the case though that the idea of selling in May and then buying back, I believe in November, that over time, on average the market actually does go up between May and November? That’s the big issue here, that you’re not actually seeing the market go down between May and November: It’s just possibly going up less?
Jeff DeMaso: Exactly. It’s that really low hit rate again—it only worked one out of three years. The idea is, yes, usually the market goes up in those summer months-
Dan Wiener: I think we’ve hit this market-timing mythology pretty hard with three different myths. Brian, for those people who’ve looked for alternatives to stocks—and when people are market timing, part of what they’re doing is saying, “I don’t want to be in the stock market, so I’ve got to put my money somewhere else”—maybe there are some myths around the alternatives to stocks?
Brian Mackey: I think the most popular question we get, outside of the stock market, is gold: “What about gold?” The big myth about gold is that it protects you against inflation. Inflation is just consumer prices going up over time. They eat away at your ability to buy the goods and services that you want as an investor. You want to own something like gold if it protected against inflation. However, the data shows that there just isn’t a great case for that.
Brian Mackey: If you take a step back here, the myth was started in the 1970s when inflation took off, and it was in the double digits. It was really scaring a lot of consumers and investors out there. At the same time, gold did really well. If you were living around that time period and investing around that time period, you were looking at those two factors and saying, “Oh, I should own gold to protect against inflation.” The problem is that fast forward to today, and that period in the 1970s is the only period we’ve had where inflation got into the double digits over the past 50 years or so.
Brian Mackey: If you look at a lot of the people that started investing around then they’re becoming retirees now. A lot of these people are saying, “Hey, I’ve saved a lot of money over the years. I just want my money to grow with inflation so I can buy the same goods and services that I want every day.” It’s a perfectly reasonable assumption but we have a lack of data to justify the fact that it will protect you on the upside—when inflation does come around eventually.
Brian Mackey: The real issue is not that gold won’t protect you during periods of inflation, but the bigger problem is that it won’t give you that return that you need for growth over long periods of time. I think a great example of the return that you give up by holding gold is comparing the Dow Jones to the price of gold. Back in the early 1980s, the Dow Jones was trading at around 800 points, and an ounce of gold cost about $800 to buy.
Brian Mackey: Fast forward to today, and an ounce of gold costs around $1,300 to buy. It’s gone up in value. But the Dow has gone up to 26,000, and that’s only including price. Along the way, if you had bought into the companies in the Dow, you also earned dividends as well as price appreciation. It’s not so much that gold is a horrible inflation hedge, it’s just that you’re giving up too much on the upside to get that inflation hedge.
Dan Wiener: It is a terrible inflation hedge. In fact, I have done the math on this $800-gold highpoint back in the ‘80s: Even if gold had only matched inflation, it would be at about $2,800 an ounce today and it’s at $1,300. That’s just matching inflation—much less protecting against it by doing better.
Brian Mackey: I always tell investors that I think the stock market is a much better long-term hedge against inflation because if you think about it, what you’re worried about with inflation is prices going up. It’s companies that are selling you those goods that are increasing prices, so if you invest in those companies then you’re able to participate in the price appreciation by earning more profits. There’s that benefit.
Dan Wiener: Gold is one of those alternative myths that doesn’t work. You also think there’s mythology around real estate, don’t you?
Brian Mackey: Yes, the other popular question that we get from clients is, “Why should I put my money in the stock market when there’s all this great real estate out there that I can buy instead?” I think a lot of investors will say, “I can’t see my investment in the stock market, but I can see the house that I just bought and I see the benefit of that.” The way I look at it is I always try to take a long-term view: Credit Suisse has some great research on long-term returns of various asset classes. They’ve published work on the what their long-term return of stocks, bonds, cash and real estate is; and they’ve looked at other collectible items like art , wine , stamps and things like that.
Brian Mackey: What they came to the conclusion of—in looking at data going back from 1990 up to 2017—was that global equities were, by far, the highest-performing asset class that you could buy. Real estate generated a positive return, but not nearly as much as the stock market did. Real estate can be a good investment: It can go up with, roughly, the population growth; and it will go up a little bit with inflation but over time, the stock market is a better place to park your money.
Dan Wiener: I think that Credit Suisse data is an extension of the data that Salomon Brothers used to do—when Salomon Brothers existed. Bob Salomon used to rate everything from Chinese ceramics to “Old Masters’” paintings to Ferraris. Stocks always came out as the best investment you could make, and neither gold nor real estate was anywhere near the top.
Brian Mackey: Dan, the other distinction to draw there is also between a real estate property that you’re investing in, to rent out, versus one that you buy to live in. The one that you live in, the home where you raise your family, that’s more of a lifestyle purchase. It’s something that you’re consuming. There’s a distinction to make, as well, between rental property and where you live.
Dan Wiener: Absolutely. I call buying real estate to live in “an investment in your lifestyle”: It’s not an investment the way we expect to generate a high total return.
Brian Mackey: That’s a great way to look at it.
Dan Wiener: Also with real estate, as I’ve told some of our clients, they don’t have a little neon sign on top of your house showing you the price of the house every day. There’s very little liquidity. You don’t know what the price is until someone comes along to buy it. Along the lines of investments that people often seem to turn their noses up to, or at least we have, we’ve turned our noses up to gold and to real estate.
Dan Wiener: In this age of the exchange-traded funds, or ETFs, the good old mutual fund seems to be falling out of favor. Mutual funds go back to the 1920s. The first fund, the Massachusetts Investors Trust, was created in the ‘20s, and one of the myths I often hear is that “Mutual funds are only for small or unsophisticated, investors: ‘Real investors’ buy individual stocks or they buy hedge funds.” This is one of those myths that I could spend hours on, and it’s also a myth upon which we built our careers at Adviser Investments.
Dan Wiener: First off, mutual funds are great investment vehicles for all investors: It gives you access to some great investment professionals—portfolio managers who are at the top of their game. They have a very low cost of entry, and they’re very inexpensive to run. They’re very transparent and they have public track records.
Dan Wiener: Virtually none of those qualities exist in the hedge fund world where, for instance, hedge funds are extremely expensive. They’re very opaque. Most of them fail to even match a simple benchmark. You pay fees of 2% annually, typically. Plus, you give 20% of your profits back to the people who run them. The only people I think who really profit from hedge funds are the people who set them up. That’s why they call the investors in hedge funds “limited partners.”
Dan Wiener: You only get a limited return, which leads me to another myth that I think we’ve done a good job busting over the years: That passive funds, or index funds, outperform actively managed funds. Again, I could go on for hours on this one, but suffice it to say, the myth is based on the average mutual fund manager and the average mutual fund.
Dan Wiener: While it’s true that the average mutual fund manager hasn’t outperformed their index benchmarks or index funds it isn’t because index funds are more diversified, holding more stocks or bonds than the average fund. When you diversify out the way an index fund does, you get as many dogs in your portfolio as you get good stocks. Index funds don’t do well against the average manager because humans are inherently worse investors than computers.
Dan Wiener: The fact is it all comes down to costs. Human managers, running funds with high operating expenses, are at a competitive disadvantage. The average manager simply can’t overcome that expense headwind, but we’ve found some terrific managers running low-cost funds that we believe can outperform. In fact, they’ve held up well in the bull market that began in March of 2009.
Dan Wiener: I think, Jeff, you have a myth, or a pet peeve myth, about this bull market, don’t you?
Jeff DeMaso: I am so tired of hearing this in the media, that we are ten years into a bull market. The implication is always that the bull market has run for too long and that we are “due” for a bear market. Have we really been in ten years of a straight, uninterrupted bull market? I don’t think we have.
Jeff DeMaso: Let me back up for a second and just give you two quick definitions: When I say “bull market,” I’m just talking about a period of rising prices, rising stock prices, and it comes to an end with a bear market. A “bear market” is commonly defined as a decline of 20%. Where this myth is coming from is the fact that one index, the S&P 500, has not had a 20% decline since early 2009, so that’s ten years ago, but…
Dan Wiener: Isn’t the S&P 500 the stock market?
Jeff DeMaso: Not quite. There’s over 2,000 stocks in the U.S. market. There’s another several thousand stocks outside of the U.S. market, but, come on: That’s a fairly arbitrary definition of the market. The 20% line-in-the-sand of a bear market is an arbitrary line, as well. In my book, we’ve had three bear markets in the last decade. If you go back to 2011, in the midst of the euro-zone crisis and the U.S. debt getting downgraded, the S&P 500 fell 19%, a whisker from a bear market.
Jeff DeMaso: Everything else was in that bear market: Small-cap stocks, mid-cap stocks, real estate, foreign stocks, emerging-market stocks—take your pick. Everything else was in that technical bear market. Same again in 2015 into early 2016: The S&P 500 did not cross that 20% line, but everything else was in a bear market. Again in just this past fourth quarter of 2018, we had a similar situation: The S&P came within a whisker of a bear market but didn’t fall 20%–but everything else, well…
Jeff DeMaso: Just think back to Christmas Eve. I bet for most of us, that felt like a bear market. I would love to see us just stop talking about this ten-year bull market.
Dan Wiener: You’d rather we all talk about ten years into an S&P 500 bull market and otherwise, not talk about it all. Is that right?
Jeff DeMaso: Yeah, let’s either be very specific, or let’s not worry our heads about trying to time the market.
Dan Wiener: Jeff, some myths are so pervasive they become accepted practices in the investment industry. You have one you wanted to talk about.
Jeff DeMaso: Let’s talk about rebalancing. Rebalancing is just a standard piece of investment advice you hear for investors. It’s, “Have a diversified portfolio and rebalance it every year.” I think the idea of rebalancing is really misunderstood. Rebalancing is the act of periodically bringing your portfolio back to your normal target level. Maybe you have 50% stocks, 50% bonds; if stocks do better than bonds, it becomes a bigger part of your portfolio. You sell down stocks to bring it back to that 50/50 level.
Jeff DeMaso: What’s misunderstood, and what the myth is around rebalancing, is that it’s going to boost your returns because it’s supposed to be this disciplined way of forcing you to sell high and buy low. Again, we’ve run the numbers on this every different way you can invest, and there just is not a boost to your returns from rebalancing. Why is that? It’s because, more often than not, when you rebalance you sell stocks, which tend to offer higher returns over time, to buy bonds, which offer lower returns over time.
Jeff DeMaso: I’m not saying, “Never rebalance.” Just understand why you’re rebalancing. It’s not to boost your returns. It is all about trying to manage the risk in your portfolio.
Dan Wiener: It’s a good point you make that rebalancing almost always generates a sale of stocks and a purchase of bonds. I can’t think of many times, unless you’re rebalancing on an incredibly short time span, where you’d be selling bonds to buy stocks. It has only happened a few times.
Jeff DeMaso: Right and those times are going to be very difficult, emotionally, to do it. It would be in December of 2008 if you just rebalanced every year. In that year you’re going to have to sell your bonds, which have been keeping you safe and holding your portfolio together, to buy stocks in the midst of that bear market. That’s going to be really tough to do.
Dan Wiener: I don’t think anybody’s going to rebalance then. Believe it or not, we’ve already hit nine myths and we only have one more to go. Brian, I’m going to throw this to you. You think there’s a broad myth in the way investors and investment marketers measure success.
Brian Mackey: Yes, one of the big myths out there is what we call, “Success means beating the index.” We’ve talked about a couple different indexes today. The S&P 500—I’ll just pick on that one for a while. Just to take a step back, an index like the S&P 500 is designed to track the performance of the broader stock market, so the index’s return is considered a proxy for the overall market return in any given year.
Brian Mackey: Some investors will earn a better return than the index, while others will underperform it. An index fund, something like the Vanguard 500 Index, is designed to buy all those stocks in the S&P 500 Index. What you’ll get, if you buy the Vanguard 500 Index, is a return that’s pretty close to the S&P 500. A lot of investors out there would probably do better by just buying the 500 Index and getting that “average return,” but a lot of us think we’re above average.
Brian Mackey: There are studies that show that most people believe they’re above-average drivers, that most people believe they’re above average in intelligence and above-average investors. There’s a great quote from Warren Buffett. He was speaking with Bill Gates in front of an auditorium of university students and he said, “Look, all of you in here probably realize you can’t do what Bill Gates did when he created Microsoft, created this new technology. But everyone in here thinks they can do what I do.”
Brian Mackey: The reality is, not a lot of people can do those above-average, market-beating returns that Warren Buffett has been able to deliver over his full career. The reason why this can be harmful is because when you focus on “beating the market,” getting that above-average return, you tend to do things that hurt yourself in the long run. You might buy this hot stock that you heard on the news, or you might buy this mutual fund that is really expensive but it made it into some article that you read. You move away from that disciplined approach of “Just buy and hold, and focus on the long term and keep costs low.”
Brian Mackey: When we get clients that ask about beating the S&P 500, for example, we always try to bring it back to their individual goals. Success, in our opinion, is not beating the index; success, in our opinion, it’s reaching your financial goals and being able to spend the money that you have on the things that you want and the people that you love.
Dan Wiener: It strikes me that the whole notion of beating the index makes the assumption that you own only stocks. Most of our clients, most investors, are not 100% invested in stocks: They’re invested in bonds. They’re invested in cash. I know that when I started Adviser Investments 25 years ago, every once in a while I’d get a call from someone who would ask, and believe me this was in the ‘90s—markets were going up pretty dramatically—and I would get a call from someone asking me if we could … They weren’t going to be piggish, they said,
Dan Wiener: “If we could just match the stock market with about 60% of the risk, they would be happy.” I laughed, and then I said, “Listen, if you can find someone who’ll promise that for you, I’ll give you my money too.” It’s just not a reasonable expectation.
Brian Mackey: Yeah.
Dan Wiener: All right so, “Success equals beating the Index,” is our tenth myth of the day. Thank you, both of you, for taking time out of your day to help bust some myths. I know you both have plenty more you’d love to talk about in a future podcast, and maybe we’ll do that. In the meantime, this is Dan Wiener, chairman of Adviser Investments. I’ve been talking mythbusting with Jeff DeMaso and Brian Mackey, our director of research and deputy director of research, respectively, here at Adviser Investments.
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