I've been a financial advisor for 15 years, and it's clear to me why common rules of thumb aren't effective for most investors

I've been a financial advisor for 15 years, and it's clear to me why common rules of thumb aren't effective for most investors

I've been a financial advisor for 15 years, and it's clear to me why common rules of thumb aren't effective for most investors
Following the investing adage "sell in May and go away" could cost you returns. (Author is not pictured).FG Trade/E+/Getty
  • As a financial advisor, I'm constantly reminded that there's more nuance in investing than many of us are led to believe.
  • Common rules of thumb, such as "buy low, sell high," usually require more context to execute successfully.
  • My advice is to always consider your own circumstances and never try to time the market using rules of thumb.

Do you still use the "I before E, except after C" mnemonic rule of thumb to help you with spelling? I know I do. It works and it's clear how to follow the rule.

Unfortunately, when it comes to investing, many rules of thumb aren't nearly as clear to implement and aren't nearly as consistently effective.
Advertisement

1. Missing days in the market could cost you returns

Take the commonly used adage "sell in May and go away." Seems straightforward enough, but the devil is in the details. Sell what in May? All stocks? When do I sell them? May 1? Go away until when, exactly? When I decide to reinvest, do I do it all at once? Do I go back into the same stocks I just sold? These are just some of the unanswered questions the rule doesn't address.

If you sell at some point in May and get back into the market at an undefined point later in time, by definition you will be uninvested during that window. This uninvested window can be very costly. Consistently missing just a handful of the best days in the market over time can drastically reduce the average returns an investor experiences.

According to the Wells Fargo Investment Institute, over a 30-year period from March 20, 1990 to March 19, 2020 the S&P 500 returned an average of 6.7% per year. Missing the 10 best days during that same 30-year period, the S&P 500 returned an average 4.2% per year. That is an unbelievable difference that could ultimately cost you thousands or even millions. Now, imagine if you missed the best 20 or 50 days — which isn't a long shot if you consistently sell in May and re-enter the market who knows when.
Advertisement

So, when it comes to investing, my advice is not to try and time the market using convenient rules of thumb. Odds are you will get the timing wrong.

2. Whether a stock is priced low or high depends on the investor

I also often hear people say "buy low, sell high." While in theory, this is true, the unanswered questions are numerous. What exactly is a low priced stock? What is high? Said otherwise, how do I know when a stock is cheap and when it is priced richly? If I told you that in February ABC stock was $900 per share when just months earlier it had been $250 per share, would you say that the stock went from low to high? Would you sell it? What if I told you the same stock was trading today at $1,500 a share?
Advertisement

Everyone's definition of low and high is different, depending on their risk tolerance, goals, desire to lock in gains or appetite for losses. When I manage my portfolio, I try to buy stocks that I believe will be able to grow earnings over time. I worry far less about whether someone thinks the stock at any moment is low or high.

The bottom line is that short and sweet sayings may work for simple tasks, but when it comes to investing, you have to rely on much more to succeed.

Scott Pedvis is a financial advisor and managing director of Investments at Wells Fargo Advisors, and a member of BI's Money Council.
Advertisement
{{}}