1st May '21 by Edmund Shing

30 comments 3815 reads

Don’t Panic! You CAN stay invested in Equities

Summary:

Podcast: Seeking Sustainable Sustenance in France
Don’t Panic! You CAN stay invested in Equities (even over summer)
Seasonality favours Health care, Food & Beverages, Technology now

New Podcast: Seeking Sustainable Sustenance in France

Charlotte and Edmund discuss trends in healthy eating in France.

Seeking Sustainable Sustenance in France

Why is this trend growing?
How does France fare in plant-based food compared with other countries?
How is France adapting to new consumer needs?
How can people invest in these emerging food trends?
Is there a future for insect-eating?

26% of Greenhouse gas emissions come from Food Production!

Source: OurWorldInData.org

Don’t Panic! You CAN stay invested in Equities

Yes, it is the beginning of May, so keen stock market historians will be crying out: “Sell in May and Go Away” (until the end of September).

This year there are lots of reasons for even calm rational investors to listen to this advice:

The global stock market has risen 84% in USD terms since the March 2020 market low, and 27% since the beginning of November last year. There is naturally a huge temptation to bank these extraordinary gains…
Stock market valuations are on the high side, particularly in the US (end-2022 P/E of 22.3x for the S&P 500 index). We know that high valuations today generally lead to lower future long-term returns.
Retail investor stock market sentiment is on the high side, reflecting widespread optimism (perhaps over-optimism?).
Fund flows to stock funds and ETFs have been huge these past few months, with US investors putting USD167 billion into stock funds and ETFs since the end of January 2021.
Negative seasonality: Stock market returns have historically been far worse over the summer (May-September inclusive) than over October-April. So seasonality is negative for equity markets from now until October.

BUT

There are lots of reasons for not rushing to sell your stock market exposure just yet…

1. Climbing the stock market “wall of worry”: there are ALWAYS reasons to worry about the state of the global economy, geopolitical risks, risks to companies from competition or changing end-markets, exogenous shocks like COVID-19 and so on. But more often than not, stock markets continue to motor higher regardless...

S&P 500 has gained impressively despite a myriad of concerns/events

Source: Michael Batnick

2. Momentum begets…

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Leebod

2nd May '21

Cheers. I have exposure to warehouse REITs but was thinking of a heart over head investment that we could use / move to in a couple of years when we aren't tied by children. I should take another look at other REITs though.

William K

3rd May '21

Thanks for pointing that out. Quite right. Apologies. I think I must have confused March with May on the chart. Need to visit Specsavers.

Edmund Shing

Hi Simon,

Well I am more enthusiastic about investment trusts to be honest, for a few reasons.

Firstly, there are a few areas where good active fund managers have fairly consistently outperformed index benchmarks over time, justifying an active approach. these areas include Small-Caps, Japan, Emerging Markets and specialist areas for which ETFs are not readily available, including certain credit and distressed debt investment trusts.

Private equity is another areas where investment trusts can be interesting, and for which the ETF offering is relatively poor.

The platforms like Hargreaves Lansdown and AJ Bell continue to charge a "platform fee" for holding unit trusts on their platforms, without any justifiable reason - whereas ETFs and ITs do not attract this extra charge, so a good reason to favour ETFs and ITs.

But for broad indices, I would stick with ETFs for the lower charges, which is the one thing we can be certain about!

On ANIC, I share your sentiments. I like the idea very much, but valuation is challenging so I am waiting for now, personally.

Best

Edmund

Hi Momoko,

the answer is yes, if you are holding classic ETFs for indices. On small-caps, this is different as I believe that one should only hold small-caps for the long-term anyway, which is more of a buy and hold strategy and where the investor has to accept higher volatility anyway...

In the UK, there is some sense in at least crystallising some losses at the end of the tax year in taxable accounts, to offset gains where small-cap holdings may have done very well and become an outsized weighting in your portfolio - this is what I do when I am lucky enough to have a very big winner where I am uncomfortable about the resulting weighting.

Yes Wilkonz,

I feel that much of the negative news flow around Chinese tech companies and regulatory clampdowns by the Chinese Communist Party are somewhat overblown and now well-known, in the share price of TenCent and Alibaba etc. More importantly, the CCP wants Chinese global tech champions in the long run, so will continue to encourage these behemoths to challenge the US FANG stocks on a global basis (as long as they continue to toe the party line...).

Wilbraham

It pays to read the small print re your broker charges. Charles Stanley are outrageous - applying their platform fee to all ETFs and most ITs! The latter is particularly hard to justify - all they're doing is transacting and holding a single listed company shares.

Useful article again, thanks, though I always prefer to read balanced arguments as there's often a negative for every positive.

gus 1065

Re. Charles Stanley fees, here is the small print:-

https://www.charles-stanley-di...

(Tiered) platform fee is indeed chargeable on ETF’s and IT’s .... but is waived if at least one trade made per month. Also capped at £240 per annum (for stocks and shares element), so for aggregate holdings above £68,500 (£240/0.35%) the headline fee drops as a percentage of the total quite quickly. Their £11.50 per trade is, admittedly, on the high side for internet trading (although still much cheaper than telephone broking). By no means a low cost provider but I’ve used them for several years and I’ve found their service is very good.

Gus.

JohnEustace

If it's a second home does the stamp duty holiday help? In fact there's an extra 3% to pay.

Unless you are buying on a holiday park where you never own the land so no stamp duty - but don't do that.

https://www.tax.service.gov.uk...

If you are going to sell in May and go away, don't come back on St.Leger's Day (second week of September) as the rhyme has it. Wait for Halloween.

The Phoenix

Hi John bit more meat on the bones as to the Halloween date being better ?

Thanks

Tommy H

Hi Leebod

I have a second property as part of my overall portfolio, but this has been held for a few years now and is a pure rental play. I would add it was also kept should I ever have to work again in London or the children want to move there to study/work. We moved to Manchester area, and then North Yorkshire when we had kids following our work at the time and have not had any desire to move back down south since.

For transparency my split looks like; 55% - company pensions with Fidelity/Aegon, 35% property (one), 10% ISA/Shares.

This excludes the family home (no mortgage) and cash (>1 year buffer).

We looked at a holiday property pre-Covid, thinking that we might use it for several weeks over the summer holidays (beach) and then rent the remainder of the year to pay the mortgage, but factoring in costs (stamp duty, maintenance, cleaning, agents, lots of damage and upkeep every year - do not think that people are like you and look after the place, if it can break or go wrong it does and more!) also the lost cost of the weeks we would use it rather than renting as we would need peak season as the girls are at school still. What we thought were expensive rent a couple of weeks costs actually are reasonable when being logical rather than emotional.

The only difference would be if you were looking to "flip" properties within the 3 year stamp duty refund. By this I mean you are buying your retirement (or the kids have moved out) home now and would then sell your current home. I think the key here is if you think that the area you are buying is a higher inflation area to where you live. E.g. our biggest financial mistake was selling a 2 bed terrace in East London in 2010 to fund the various family homes, but it was totally the right emotional decision.

I am currently debating whether to exit the second property and go to equities as the returns over the last few years have been a lot better. I currently get ~4% gross rental, so you can get a better return from REITs...

Sorry a bit longer than planned.

Tommy

john2

In 1987 Black Monday was October 19th. In 2001 the dotcom crash became serious in October. In 2007 the financial crisis kicked off in October. You wouldn't want to have bought back in just before any of these events.

JESSE LIVERMORE

Well, yes.

The chart I posted earlier revealed minimal cumulative gains for the S&P500 since 1950 for the May-Oct periods.

FuzzyHaha

When I've looked at the finances of Furnished Holiday Lets, they're fine if you live next to it, but to subcontract fully out a managed service say using Houst, then it's not a purely investment play. The conclusion I came to was ..."buy somewhere nice to enjoy" and have someone else pay for it, if you make money great, but invest elsewhere"..

ACounsell

Hi Edmund,

On the subject of fund charges I am currently trying to get an explanation from both my platform (AJ Bell) and Jupiter Asset Management regarding a 2020 ‘incidental charge’ of 7% (!!) on the Jupiter UK mid cap fund. This was previously the Merian UK Mid Cap fund taken over by Jupiter in July 2020. Jupiter have batted my enquiry away saying I need to sort it through AJ Bell (but they must know if they levied such a charge) and AJ Bell are failing to answer my enquiry with any sort of urgency at the moment. Their communications have been shocking during the pandemic. If this charge is not an administrative error then why has there been no notification to investors by any one of the reason for it. Finally if it is correct who should it be raised with as it is surely extortionate, the FCA perhaps?

Interested to hear your thoughts

Regards

Andrew

Patxi

6th May '21

I was curious to replicate a similar chart based on FTSE100 data.

This also clearly shows that the largest gains are made over the winter months. The flaw in this strategy is that you are only invested for half the time and will therefore only receive half the dividends.

I don't have the data to confirm this but I suspect that if dividends were included and compounded over the 37 years of FTSE data I have that the Buy and Hold strategy would be the winner.

Indie

Really interesting - shows it really well and is exactly what I've been wanting to see, so thank you. Did you take transaction costs off the blue line? If not, then doing that as well as adding dividends to the green line would at least shrink the gap or, as you say, put Buy and Hold on top.

Thanks for this. An additional flaw would be the transactional friction of buying and selling everything once a year. Although the bid/ask spread is usually quite tight for the FTSE 100 companies (more of an issue for 250 and AIM) you would need to contend with Stamp Duty and brokerage charges. Also an acceleration of CGT (assuming no tax wrapper and that you’re making capital gains above your allowances) would be a further incidental cost.

Rusty2

But are not the largest dividend payers the ones with the least capital growth? The FTSE100 has hardly grown in the last 20 years.

If you want growth I would generally invest in small to mid caps, if you want income the FTSE100 is probably the place to invest.

Steve H

7th May '21

I wonder how does the adage "Sell in May and Go Away” works for the global markets ?

Market Musings 01/05/21: Don’t Panic! You CAN stay invested in Equities

Don’t Panic! You CAN stay invested in Equities

New Podcast: Seeking Sustainable Sustenance in France

Seeking Sustainable Sustenance in France

Don’t Panic! You CAN stay invested in Equities

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Edmund Shing

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