Ride the summer stocks wave

With the S&P/TSX Composite Index down about 7.5% this month, you might be tempted to heed the long-time investment advice of “sell in May and go away.”

That would have proven to be wise the last few years—the index dropped 12.14% between May 1 and Aug. 31 in 2011—but a new report, released at the end of April, says it’s better to hang on to your investments during the summer.

According to New York-based investment research firm Wolfe Trahan, the S&P 500 has been down during the summer just 37% of the time since 1948. Between May and October the index has averaged a 1.37% return.

Stephen Lingard, managing director of Franklin Templeton Multi-Asset Strategies, says that while the summer is weaker than other time periods, the “critical point is that it’s still positive.”

“If you do the math it isn’t a bad time to be involved in equities,” he says.

Franklin Templeton crunched the numbers to see how the S&P/TSX Composite Index performed between May and October and discovered that since 1950, the index’s cumulative average was 0.37%.

Clearly, you won’t get massive returns over the summer, but these numbers prove that there’s no reason to liquidate your portfolio either.

In fact, Lingard likes to buy during the summer, especially when the market drops. The more people who do get out in May, the lower company valuations go and the more opportunities open up. “I hate to give advice to sell,” he says. “We’re carrying a little more risk in our portfolio to take advantage of what we see as better economic fundamentals and strong valuations going forward.”

Michael Sprung, president of Toronto-based Sprung Investment Management, is also on the prowl for cheap buys. He says that before the recession, the summer was relatively quiet, but now he barely gets a break.

These days, too many opportunities present themselves, so selling can be a mistake. “The fact is, if you’re not paying attention, you might miss those chances,” he says. “Even if the market drops, if you have confidence in a company and its long-term prospects, the price will come back.”

While some investors opt to sell, others prefer to spend July and August relaxing at the cottage rather than watching the markets. For that group, it’s important to hold investments that protect your portfolio from any potential drops.

Jon Palfrey, senior vice-president of private clients and foundations for Vancouver-based Leith Wheeler Investment Counsel, suggests holding high-quality brand name stocks that pay a dividend. Payouts are often a sign of company strength and well-known large- or mid-cap names—like a McDonald’s or Coca-Cola—don’t generally fall as hard as riskier small-caps during volatile periods.

“You can worry less about companies that are well capitalized, well priced and well run,” he says.

If you’re relying on income to cover expenses, Palfrey says to buy some short-term bonds that mature after a month instead of selling stocks. Match up your assets to your liabilities, he says, so you’ll have enough money after that bond comes due to pay any bills. “If you can match correctly, you don’t have to worry about selling at the wrong time,” he says. “You also don’t have to worry about raising money in the market if stocks have a tough August.”

In some cases though, it does make sense to sell before taking off. Sprung says that investors holding commodity ETFs can’t ignore their investments. In many cases, these ETFs don’t track their index point-for-point. There’s often a large tracking error—the index can be up, while the ETF is down—which can cause people to lose a lot of money. Investors must regularly rebalance a commodity ETF portfolio; if you ignore it for a few months you could find yourself deep in the red.

There is another approach investors can take: invest for the long-term. If you’ve got a portfolio filled with stable assets, such as brand name stocks that you plan to hold for years, then what happens between May and October won’t matter much over the long run. “Longer-term investors don’t have much to worry about,” says Sprung. “The stocks they’ve selected should be relatively secure so there’s no need to be concerned about some temporary shock.”