Old truths are linked year after year, whether they are about life in general, about love or about finances. Some of them may not be viable in all contexts, but some of them have a meaning that cannot be underestimated. Albert Einstein’s statement that “interest on interest is the eighth wonder” is such. It cannot be said that the reinvestment of interest rates has a huge effect on the return over time.
Among other classic truths and advice in economics and investment can be mentioned “buy for herring, sell to the crayfish”, “do not fight the trend” and “do not believe you can beat the market”. The question is what validity they have today 2017 and if you can profit from trusting them and following them?
Buy for herring …
Investors always try to find patterns in developments for stocks, commodities, currencies and so on. The perception is that by following patterns can maximize their return and this preferably at lower risk. One way to start by identifying patterns is to look at the development month by month and see the development in a long time perspective. Obviously, there is something in seasonal patterns, because there are a lot of classic quotes that aim at when it is best to buy or sell.
In Swedish you usually say that you should “buy for the herring and sell to the crayfish”. What this means is that you should buy shares at midsummer and then sell some or a few weeks into August. Historically, however, the summer months are not very favorable for those seeking returns. June, July and August are actually quite “messy” and even infrequently even small negative news can have a big effect in the slightly more sleepy stock market climate.
Statistically, over 30 years, June, August and September are the three months of the year that shine red in a bar chart. However, July is a month with a stable and positive development historically, but the summer is generally not a good period on the stock market. Based on this, we can make a hole in the myth that investments according to “purchase for the herring …” are not a bomb-proof strategy.
Internationally, one has a rather different view of the summer exchange. There is an old truth that reads “Sell in May and go away”. According to this, you should sell shares in May and not come back until September. Historically, this strategy is considerably better than the “Swedish”.
Follow the trend
Financial markets follow trends and trends are created when a certain so-called momentum arises. One can resemble momentum at a car that accelerates. It goes slow at first, but after a while the car has got up speed. If nothing unexpected happens, such as the car breaking or a car crashing in front, the car will continue to roll forward.
The power of momentum in financial markets is normally very strong and large events are required for a trend to end. For that reason, it is mostly less wise to make an investment that goes against the trend, even if there were rational reasons for making a particular purchase or sale.
You can’t beat the market
It is absolutely possible to beat the market in the short term. At the same time, both luck and a lot of work is required to succeed. Over a longer period of time, the likelihood of beating the market, for example in the form of a stock exchange index such as the OMX30, will be less, and over a sufficiently long period – say 30-40 years – a darting monkey will probably get the same return on its investments as someone who spends 24 hours during the day with analyzes.
Diversification and patience
In order to link the reasoning above, we can mention that the safest way to minimize the risks and maximize the possibility of return in the long term is to follow three basic advice below. If you do, you don’t have to keep track of the seasons, try to time when trends turn or spend lots of time trying to be smarter than the market.
The three guidelines are as follows:
- Diversify your investments (different securities, different industries, different markets)
- Invest continuously (eg through monthly savings)
- Be patient and make no unplanned changes.