Summer Doldrums in the Stock Market
If you have read a lot of older investing tomes or spoken with stock traders of a bygone generation, you might have heard the phrase "summer doldrums" come up from time to time. Perhaps you've also heard the phrase, "Sell in May, then Go Away."
Though the concept of the summer doldrums isn't nearly as popular these days as it once was—we now live in an always-on, interconnected world where people are able to access markets from the furthest reaches of the planet or while they are using the restroom—it still plays an important psychological role in the stock market depending on who you ask.
First, let's get the definition of the way. The summer doldrums refers to the perception that the period between July and Labor Day is particularly dangerous for investors because many are away on vacation and, as a result, volatility is higher because liquidity is lower than it otherwise would have been. As a result, stock price fluctuations tend to create a lot of financial pain for those who would attempt to trade stocks.
Are the Summer Doldrums Real?
Whether the summer doldrums are a real phenomenon or whether it is largely a case of cherry picking and confirmation bias on the parts of traders is up for debate. What we do know is that the concern over liquidity is not as pronounced as it once was, and it's now possible for investors to trade easily even when they are on vacation.
What is not up for debate, in my mind at least, is that it's all nonsense and a useless distraction to the goal of building wealth. That is because those of you who have been reading my work know that I'm a long-term investor in the truest sense of the word. At the heart of my capital allocation philosophy, which I use not only in my own life but at my asset management firm, resides the following list of behaviors that make worrying about things like the summer doldrums a meaningless waste of time.
- Don't buy any common stock or preferred stock in your brokerage account or custody account that unless you are comfortable holding onto it for at least five years.
- Do not borrow on margin. In fact, don't invest in a margin account at all but, instead, demand a cash account. Not only will you never have to worry about a margin call, but you also shouldn't have to worry about rehypothecation and hyper-rehypothecation risk.
- Diversify your portfolio. Understand why that's important.
- Decide whether you will follow a valuation or systematic purchase approach, avoiding market timing.
- Pay attention to the asset placement strategy to maximize your after-tax results. For example, except in the most unusual of circumstances, you shouldn't own tax-free municipal bonds through a Roth IRA.
Rather than worrying about the theoretical "summer doldrums," it's more crucial that you continue to add money to your portfolio, if at all possible. In addition, make sure your investment fees and expenses are reasonable. Let time do the heavy lifting, focusing on owning a collection of high-quality productive assets that you understand and, as long as civilization still stands, things have historically worked out in a satisfactory way.
Folks want to make things too hard. Don't fall into that trap. Investing is simple. That doesn't mean it is easy, but it is simple. Give yourself a long enough runway to compound while avoiding any major mistakes and the odds are good you'd be amazed at the outcome over a 25- to 50-year period.