5 Popular Investing Strategies You Should Really Rethink

The investing strategy "buy the dip" written on a steamy window.

(Image credit: Getty Images)

Words might not hurt like sticks and stones, but they can damage your finances, because they have the power to move markets.

Every Federal Reserve speech and earnings call is parsed like a Shakespearean sonnet as investors read between the lines for clues to what could make or break their portfolios.

Watch any financial news broadcast or scroll through social media, and you'll hear a flurry of investing expressions, many of which are decades old. These soundbites might seem savvy, but not all the strategies suggested in them stand up to scrutiny in today's market.

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For the average investor, that can be a problem. One retirement survey found that more than a third of Americans feel less confident about retirement because they find financial jargon too complex.

Similar to sayings such as "April showers bring May flowers," there are many investing proverbs that sound nice. Are they helpful strategies or outright myths?

We take a look at five popular investing adages to see what experts — and historical data — have to say about their success.

1. Sell in May and go away

The old adage, "Sell in May and go away," suggests investors should exit the market in May and return in the fall. But a closer look shows it might have more to do with traders' vacation habits than with a sound investing rule.

"This is a perfect example of what psychologists call the rhyme-as-reason effect, a cognitive bias where we believe something is true simply because it sounds catchy," explains Patrick Huey, owner and principal adviser of Victory Independent Planning.

Historical data show the proverb doesn't hold water. Research from American Century Investments shows the market posted gains during the summer months in 38 of 50 years, from 1975 to 2024.

From May 1 to October 31, the S&P 500 returned an average of 3.86%. While that's lower than the average from November through April, it's still solidly positive.

Had you withdrawn money based on this phrase, you'd have missed out on gains more often than not.

"It has zero relevance for someone building a retirement portfolio or dollar-cost averaging through their 401(k)," says Melissa Caro, CFP® and founder of My Retirement Network.

2. Don't catch a falling knife

The phrase, "Don't catch a falling knife," warns against buying a stock in free fall, hoping it will bounce back. Just like catching an actual falling knife, it can get messy fast.

Huey notes this investing strategy reflects recency bias, the tendency to overweight recent losses and assume further pain is imminent. That bias can sometimes protect investors, but it can also lead to missed opportunities.

Amazon.com (AMZN), for example, lost more than 90% of its value from 1999 to late 2001 during the dot-com crash. It took nearly a decade to return to its pre-crash highs. In more recent times, AMZN stock has been a buy-and-hold investor's dream.

"It's a phrase I still respect," Caro says. "People forget there's often a second wave of downgrades or fallout." She cautions against applying it too broadly. "Using it to avoid broad market dips or ETFs can mislead the average investor. It's not the same thing."

While investors should certainly use pullbacks in high-quality stocks to dollar-cost average into existing positions, they should conduct thorough due diligence before buying something that has sold off sharply because, as the saying implies, it might have further to fall.

3. Buy the rumor, sell the news

The investing strategy, "Buy the rumor, sell the news," assumes that you buy an asset when positive rumors emerge, then sell once the news becomes official, taking in a profit.

"It does have some credibility, especially in sectors like tech and health care," says Chris Mankoff, CFP® and partner at JTL Wealth Partners. "There have been rumors regarding mergers, acquisitions or FDA approval that influence the price short term. But that can all change quickly once the news comes out."

Still, in today's hyper-connected world, defining a "rumor" is tricky.

"It's hard to know what counts as a rumor anymore when every opinion is broadcast 24/7 on social media," Caro says.

Case in point: The GameStop (GME) frenzy in early 2021. Fueled by Reddit chatter, some traders won big by buying and selling the volatility in meme stocks, but many lost money jumping into something they assumed was a sure thing.

4. The Santa Claus rally

The seasonal phrase "Santa Claus rally" refers to the historical tendency for stocks to rise during the last five trading days of December and the first two of January.

According to the Stock Trader's Almanac, this so-called strategy has delivered an average return of 1.3% since 1969.

There seems to be a real pattern, but it's not guaranteed. There have been declines, too, such as a 3% drop in 2014 and a 4% decline in 1999.

In other words, those looking to trade the Santa Claus rally might consider investing a portion of their holiday bonus that they're okay with losing, just in case things don't play out as expected.

5. Buy the dip

"Buy the dip" is more of a battle cry than a proverb. This phrase encourages investors to take advantage of short-term market declines by buying stocks at a discount.

In theory, this strategy makes sense. In practice, it can feel like market timing – trying to jump in and out of the market at just the right moment. That's where it gets tricky.

"Many Wall Street idioms ultimately just describe attempts to time the market," says Trevor Ausen, CFP®, RICP® and founder of Authentic Life Financial Planning.

"While they might sound clever, study after study has shown that trying to time the market consistently is nearly impossible. The problem is that timing the market relies on continuous decisions, complex data and ultimately, a lot of luck."

For buy-and-hold investors, buying the dip makes sense as a means of dollar-cost averaging into existing positions. What is arguably the more important lesson for long-term market participants is not to panic when stocks are selling off.

Research from J.P. Morgan Asset Management found that if you were invested in the S&P 500, missing just 10 of the best days in the market over a 20-year span would drop your annualized return from 10.60% to 6.37%. Miss 20 of the best days, and it falls to 3.69%.

Even more striking, seven of the 10 best days occurred within two weeks of the worst days.

The only tried-and-true investing strategy

As an investor, the odds of a positive return increase the longer you stay invested.

In a 2023 blog post, finance expert Ben Carlson compiled data showing that from 1926 to 2023, the U.S. stock market delivered positive returns 56% of the time on a daily basis; 63% of the time on a monthly basis; 75% of the time on a yearly basis; 88% of the time on a five-year basis; 95% of the time on a 10-year basis; and 100% of the time on a 20-year basis.

As Huey puts it: "Over the long haul, markets reward patience more than clairvoyance."

That's why Caro says when it comes to investing proverbs, "The only one I think still holds real value for a retail investor is, 'Time in the market beats timing the market.' "

She adds, "When people are investing for retirement or long-term goals, they need a plan, not a forecast."

While these investing idioms might be catchy, they're not crystal balls. If you want to build wealth, ignore the slogans and stay focused on your long-term goals.

If you're still tempted to time the market based on a clever phrase, consider this timeless line from Mark Twain:

"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."

Jacob Schroeder is a financial writer covering topics related to personal finance and retirement. Over the course of a decade in the financial services industry, he has written materials to educate people on saving, investing and life in retirement.

With the love of telling a good story, his work has appeared in publications including Yahoo Finance, Wealth Management magazine, The Detroit News and, as a short-story writer, various literary journals. He is also the creator of the finance newsletter The Root of All (https://rootofall.substack.com/), exploring how money shapes the world around us. Drawing from research and personal experiences, he relates lessons that readers can apply to make more informed financial decisions and live happier lives.