Darren Coleman explains why some advisors use the rule and how he's planning to approach this summer
Sell in May and go away. It’s a saying that crops up at this time every year in the advisory business. It’s a quick and simplified distillation of the concept of seasonal investing. Seasonal investing is based on market trend research conducted over the past sixty years which offers an interesting takeaway: equity markets tend to outperform between October and May while over the summer months until roughly Halloween they tend to underperform.
“The problem is that this isn’t overly predictable for each year. I’m reminded of the line from Anchorman, ‘sixty per cent of the time it works, every time,’” jokes Darren Coleman, senior VP and portfolio manager at Coleman Wealth Management of Raymond James. “There are problems with some of these ‘almanacs’ in that they kind of work but they don’t always work.”
Coleman cites 2020 as the most recent example of a year when selling in May would have completely failed an investor. Given the COVID-19 crash began in March, and the market recovery took place over the summer, an investor who sold in May that year would have had all the downside and none of the upside. Rather than following that rule this summer, Coleman says that advisors can use this somewhat slower period to help clients adjust to some changing circumstances and ensure that their long-term plan remains intact.
This summer may be a busy one for some advisors and their clients, given the looming changes to Canada’s capital gains inclusion rate which are set to take effect on June 25th. Advisors with clients who have over $250,000 in capital gains, or clients who have a trust or corporation with capital gains, may want to sell in May this year simply to avoid that higher inclusion rate. Coleman notes, however, that the decision to sell in May would be more informed by a tax consideration than investment performance.
While rules like ‘sell in May’ might not play a role in Coleman’s practice, he does pay close attention to one historical dataset that he believes holds true: the DALBAR Quantitative Analysis of Investor Behaviour. That annual report has consistently found that investors underperform their own portfolios by around two per cent, largely by entering or exiting at the wrong times. It aims to identify the areas where investor and advisor behaviour causes underperformance.
“Sometimes not doing anything is the best strategy,” Coleman says. “There’s another adage I like which goes, ‘your investment portfolio is like a bar of soap, the more you touch it the smaller it gets.’ Lots of trading and trying to outsmart markets might make you feel good, but ultimately it’s a question of whether it helps you meet your goals or not.”
As he keeps his clients from failing that DALBAR test, Coleman works to reinforce their long-term plans. He says that summer is a great time to do this as an advisor. When clients take more time for holidays or trips to the cottage, enjoy the nice weather and imagine all the good things they want to do in retirement, advisors have an opening to discuss exactly what their long-term goals look like. It’s a chance to go beyond finances and ask — for example — how their plans align with their social circles. We know that maintaining a healthy social life is key to longevity, but if a client is setting themselves up for a different lifestyle bracket from their friends, they could see themselves isolated later in life. Advisors can use the summer months to add those additional pieces into the conversation.
It’s also a good time for advisors to run ‘fire drills’ for their clients. While these exercises are less fun than imagining retirement, they are a crucial aspect of the value an advisor can deliver. They involve asking about what happens if a family member falls ill or doesn’t come home. Coleman asks about the scenario to find out what documents are in place, who gets called, and what the client has set up in the way of password storage so their family can access key accounts. It’s an exercise that can be done in the slower summer months that helps keep the client on track with their goals.
While summer is certainly a time that many investors and advisors slow down a little to relax in good weather, there may not quite be enough evidence to follow a ‘sell in May’ rule according to Coleman. Rather, it’s a time to ensure clients are on course with their plans and prepared for any possible outcomes.
“This is where the advice we can give and that partnership is really important. We often think about the long-term, but we also have to do all the little steps along the way too,” Coleman says. “Combining these together I think is where the experience, the skill, and the wisdom of an advisor shows through. Because the client may not know, they’re focused on the destination, but its those little things that help make the journey better.”
