Each time your investment statement arrives, do you open it with anticipation, do a quick comparison, and file it with the previous statements? Or are you the type who tosses it unopened in a shoe box along with a multitude of previously unopened statements.
Whether you are the person who reviews them immediately or the one who lets it go for several months, it is worth understanding the general trends of the market. It is important to understand that as investors, we expect to see ups and downs. This is the very nature of the market.
The graphic below offers us a great picture summary of the emotions experienced by the average investor. This cycle repeats itself over the years.
This is not a new topic for us as we have written previous articles on this topic. But, are you aware there are also some natural trends evident in the market in a calendar year month by month? Peaks and valleys are constantly happening all the time throughout the year and some general long term trends emerge.
In the spirit of investor education, we have included an interesting analysis done by squirrelers.com that looks at historical stock returns by month. They pulled data from Yahoo Finance taking the monthly opening and closing values from the S&P 500 over a 40 year span between 1971 and 2010 and charted the following results for average monthly returns.
Here are the results for a 40-year time period:
It is very important to understand these are trends only and each individual year within the 40 year span would have been slightly different, or even completely different.
You can see the average annual return over these 40 years was 7.75% (adding the average monthly returns listed together) with some of the months seeing more gain or loss than others. On average 10/12 months saw an upswing and 2/12 months saw a downswing. Keep in mind, this is a trend only and we know that each year within this 40 year window was unique.
Does this mean you should adapt a consistent strategy to sell in January and buy in February, sell again in August and buy in September? Not necessarily, unless you are a do it yourselfer who wants to experiment, spend a great deal of time researching and take a high amount of risk in doing so.
Not only is this a high maintenance strategy but these are only trends, there are no guarantees, and your chances of timing the market perfectly are very low. You not only need to time the right month but day as well, and the odds are not in your favour. In fact, it turns out that missing the buy or sell by even a small window can result in a negative effect.
So what can we learn from this? It is generally better to stay the course and understand the general direction of the market is historically up in due time. You can take this information into consideration if you wish for additional purchases. This also highlights the benefits of purchasing monthly at various highs and lows and taking advantage of dollar cost averaging. The big picture message here is to look at the trend over the full calendar year, and further over the time frame of your investment goals.
Educating investors on how these trends work is helpful in understanding month to month, day to day and year to year volatility. A dip in the market does not always mean we are headed into a downward spiral. So when you open your statements, keep this in mind and recognize there are natural ups and downs. Understanding these trends goes a long way to helping an investor level out their feelings of euphoria at a market upswing or despair at a market drop.
Stephanie Farrow, B.A, CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc. About our Farrow Financial Team.