NEXT LEVEL money
Sell in May and go away.
“Sell in May and go away” is common market phrase referring to a strategy to sell your equity positions in the beginning of May and not buying them back for 6 months. This is because historically the market has relatively outperformed in the months of January through April plus November and December verses the months of May through October. May through October provides little return to the market’s annual return but still contributes to market volatility, so you might as well reduce you risk so you can enjoy your summer vacation, or so the phrase implies. Now historically if you just buy and hold through those months as well instead of repeating the same buy and sell behavior annually, you would be much better off over the long term because of the compounding effect of returns. Also if you buy and hold, at the end of long period of time, volatility won’t actually affect your final portfolio balance if you were faithful to hold through all the ups and downs. So all things considered, Sell in May and go away is not a good strategy.
Another common phrase you might hear on Wall Street is “this time is different.” Famed investor Sir John Templeton is quoted to have said, “The four most dangerous words in investing are: this time it's different.” While I am aware of the danger of saying it and I know that Sell in May and go away is generally a poor strategy, I going to risk saying I think this time may be different. It may actually be a good thing to sell in May this year (except not buy back after October). I don’t think I’d ever sell 100% of equity exposure in my portfolio, I am willing to take some risk off the table if I don’t think I am adequately getting compensated for that risk (which is a controversial view to some). And I don’t always get the call right either. In March of 2007 I sold a lot of equity exposure (if only I had kept it that way and only bought back in March of 2009, but alas I didn’t). I also had high amounts of cash at some point in 2008. Even after the market rallied I had cash in the 10% - 20% range for a few years if I remember correctly. And then more recently in December 2019 I moved to over 25% cash as I thought market risk was too high. Currently my overall portfolio is at 32% cash. Savvy readers will note cash level is ~24% on my investment newsletter, but what you won’t see is towards the end of April, I moved my entire 401(k) to cash. Previously it was 100% in the Vanguard S&P 500 Index (as noted here). And I still have new contributions going into that index fund. But including my 401(k) + my Schwab portfolio, my overall cash level is ~32%.
Almost 1/3 of my portfolio is in cash which means I believe it’s not in my best interest to be fully bullish on the market. Given the current economic risks (as explained here) I’m getting pretty cautious. Here’s one last common phrase. “Don’t fight the Fed.” If the Fed continues down the path of tightening that they have projected, I think it is highly likely that they over-tighten which will cause the economy to go into recession. There’s even a small chance (though very unlikely) that we are already in a recession considering in Q1 2022, GDP contracted by 1.4%. All it takes is another consecutive quarter of contraction and we are in a recession by the standard definition. Though I think that would take a Black Swan event to happen (like nuclear war in which case we have waaaay bigger issues). But even if a recession doesn’t manifest until 2023, April 2022 may not have been such a bad time to de-risk your portfolio and take some chips off the table. But there’s also a risk this thesis - what if the Fed doesn’t raise rates as much as they think they will (which I believe will be the case). In that case, growth and tech stocks would make a comeback, so my portfolio is positioned for such a scenario.
All that being said, I want to be prepared in case we do see a recession and bear market by next year. I have cash ready to be deployed if such an opportunity arises. While the risk does worry me, it behooves me to remember a bear market is not something to be feared but something to take advantage of. I have always done way better after a bear market because I can buy quality companies at compelling prices. And you can, too.