That would have proven to be wise the last few years—the index dropped 12.14% between May 1 and Aug. 31 in 2011—but a new report, released at the end of April, says it’s better to hang on to your investments during the summer.

According to New York-based investment research firm Wolfe Trahan, the S&P 500 has been down during the summer just 37% of the time since 1948. Between May and October the index has averaged a 1.37% return.

Stephen Lingard, managing director of Franklin Templeton Multi-Asset Strategies, says that while the summer is weaker than other time periods, the “critical point is that it’s still positive.”

“If you do the math it isn’t a bad time to be involved in equities,” he says.

Franklin Templeton crunched the numbers to see how the S&P/TSX Composite Index performed between May and October and discovered that since 1950, the index’s cumulative average was 0.37%.

Clearly, you won’t get massive returns over the summer, but these numbers prove that there’s no reason to liquidate your portfolio either.

In fact, Lingard likes to buy during the summer, especially when the market drops. The more people who do get out in May, the lower company valuations go and the more opportunities open up. “I hate to give advice to sell,” he says. “We’re carrying a little more risk in our portfolio to take advantage of what we see as better economic fundamentals and strong valuations going forward.”

Michael Sprung, president of Toronto-based Sprung Investment Management, is also on the prowl for cheap buys. He says that before the recession, the summer was relatively quiet, but now he barely gets a break.

These days, too many opportunities present themselves, so selling can be a mistake. “The fact is, if you’re not paying attention, you might miss those chances,” he says. “Even if the market drops, if you have confidence in a company and its long-term prospects, the price will come back.”

While some investors opt to sell, others prefer to spend July and August relaxing at the cottage rather than watching the markets. For that group, it’s important to hold investments that protect your portfolio from any potential drops.

Jon Palfrey, senior vice-president of private clients and foundations for Vancouver-based Leith Wheeler Investment Counsel, suggests holding high-quality brand name stocks that pay a dividend. Payouts are often a sign of company strength and well-known large- or mid-cap names—like a McDonald’s or Coca-Cola—don’t generally fall as hard as riskier small-caps during volatile periods.

“You can worry less about companies that are well capitalized, well priced and well run,” he says.

If you’re relying on income to cover expenses, Palfrey says to buy some short-term bonds that mature after a month instead of selling stocks. Match up your assets to your liabilities, he says, so you’ll have enough money after that bond comes due to pay any bills. “If you can match correctly, you don’t have to worry about selling at the wrong time,” he says. “You also don’t have to worry about raising money in the market if stocks have a tough August.”

In some cases though, it does make sense to sell before taking off. Sprung says that investors holding commodity ETFs can’t ignore their investments. In many cases, these ETFs don’t track their index point-for-point. There’s often a large tracking error—the index can be up, while the ETF is down—which can cause people to lose a lot of money. Investors must regularly rebalance a commodity ETF portfolio; if you ignore it for a few months you could find yourself deep in the red.

There is another approach investors can take: invest for the long-term. If you’ve got a portfolio filled with stable assets, such as brand name stocks that you plan to hold for years, then what happens between May and October won’t matter much over the long run. “Longer-term investors don’t have much to worry about,” says Sprung. “The stocks they’ve selected should be relatively secure so there’s no need to be concerned about some temporary shock.”

The lion’s share of the roughly 400 million shares up for grabs will go to institutional investors and to their clients with portfolios in the hundreds of thousands of dollars. But there are ways average Canadian investors can own a piece of the social media giant before it’s expected to begin trading on the Nasdaq Friday starting at between $34 and $38 a share.

Here’s how:

-Buy a Nasdaq-only publicly traded fund that has a piece of the IPO. You can buy into these funds just like you would buy any U.S. stock through your broker or online discount brokerage, said James Telfser, an associate portfolio manager at Caldwell Investment Management in Toronto.

Firsthand Technology Value Fund (SVVC) for instance owns 600,000 pre-IPO class B Facebook shares. GSV Capital (GSVC) bought 225,000 shares at an average price of $29.28 in the middle of last year. Hercules Technology Growth Capital (HTGC) also lists pre-IPO Facebook stock as a holding.

Telfser cautioned that these funds have been fairly volatile leading up to the IPO and that he has not looked into the funds to see what else they specifically hold.

“But if you have a bullish feel on Facebook when it IPOs, there is a good chance these will participate,” he said.

-Buy a token share through an online service such as GiveAShare.com. The company, which sells single shares of consumer brands including Disney and Playboy, is selling Facebook shares at market price plus a $39 fee complete with a paper stock certificate.

“It’s more than a novelty than anything,” said Telfser. “If you wanted to make the smart investment, you’d be better off going through a broker or discount brokerage.”

Or you could just wait

Facebook shares are expected to be extremely “liquid” on opening day as tons of shares trade hands, Telfser said.

The price you’ll pay for the shares is a different story. Although the shares are expected to hit the market at between $34 and $38, they are expected to jump considerably.

“If you want to get in for a short-term trade there may be money there, I’ve never seen an IPO this hot before and it could come back to earth very quickly.”

But Telfser is skeptical of the so-called “glamour stock.”

Facebook is currently valued at 80-to-90-times earnings.

“You’re growth has to be pretty strong going forward to justify that kind of multiple. And we just don’t know if that kind of revenue growth is possible,” he said. If Facebook misses expectations, the share price could take a big hit.

“We’re suggesting that you sit on the sidelines a bit, let this thing blow over even if you miss the initial pop in the share price.”

The good news is even investors who take a wait-and-see approach are likely to benefit from the Facebook IPO, especially those with exposure of big tech firms.

Confidence in Facebook could bode well for other market players such as Google, Amazon, LinkedIn and Zynga, which makes highly profitable games for Facebook.

“I think it’s going to have a positive effect on technology stocks right out of the gate,” Telfser said.

An ETF tracking the tech sector (iShares has a few) may be a great way to dabble in Facebook without putting all your eggs in one basket, Telfser said. “The risk here is that you have to like Apple, which is a huge component of these ETFs now.”

Test your knowledge and take the Canadian Business Facebook IPO quiz.

This isn’t just a short-term trend. Canada’s glory days were back in the mid-2000s: we’ve lagged the global markets over the last three years, and the U.S. has outperformed Canada over the last five. Are our best days behind us?

If so, investors don’t seem to care: most Canadians dramatically overweight domestic stocks, even though our market is tiny (5% of the MSCI World Index) and poorly diversified. Some Canadians even insist on 100% homegrown portfolios. “I’ve had clients ask, ‘Why should I invest anyplace else when my best investments have been Canadian?’” says Tony De Thomasis, a portfolio manager with De Thomas Financial in Thornhill, Ont.

One of the reasons our stock returns have been sluggish is that Canada is now perceived as lower risk compared with the rest of the world. “Admired economies typically don’t produce great returns,” says Art Johnson, portfolio manager at Scotia McLeod in Calgary. We’re even seeing this in the bond market, he says. “I can get much higher yields outside of Canada for literally the same risk, because we’re so admired.”

Indeed, the best years for Canadian stocks followed a period when we looked like a banana republic: in the mid-1990s our credit rating was cut and we wrestled with a huge deficit.

No country’s outperformance lasts forever, so the best strategy is diversification. Since 1970, the average returns of Canadian, U.S. and international stocks have been remarkably similar, but they have varied dramatically over shorter periods. That’s why holding a globally diversified equity portfolio—say, one third in each region—lowers volatility without sacrificing returns. Many Canadians ignored that advice when we were on top of the world. Maybe now it will sink in.

—Lana Kolupaev, Toronto

Unfortunately, as a new immigrant you can’t claim any RRSP contribution on your 2011 tax return. The reason is simple: you don’t have any Canadian income from the prior year to claim it against. Your 2012 RRSP limit will be based on the income you report on your 2011 tax return. If you opened an RRSP in 2011, you might be wondering, what happens now? The Canada Revenue Agency allows you to overcontribute to an RRSP by as much as $2,000, says Jennifer Horner, a senior tax manager at BDO Canada. If you contributed more than that, then you could face a penalty of 1% per month. However, TFSAs don’t work the same way. You get the full $5,000 contribution room automatically every year you are a resident of Canada (age 18 or older) with a valid Social Insurance Number. Since you have been here two years, you can now put up to $10,000 into your TFSA. As a new Canadian there are other potential tax issues to be aware of, so it’s well worth your time to visit the CRA’s website or consult with a tax adviser.

It’s now been more than three years since the end of the devastating 2008–09 financial crisis. Since that time, stock market returns have been outstanding—at least for investors who haven’t been sitting in cash. In the 36 months that followed the market bottom on March 9, 2009, U.S. stocks returned over 25% annually. The Canadian market delivered about 19% annually over that period. Even European stocks—despite a difficult 2011 and ongoing worries—are about 60% higher than their 2009 lows.

But you wouldn’t know it from talking to investors, who remain jittery, even paralyzed. It’s understandable that investors felt shell-shocked after the crisis, but isn’t it surprising that many are still feeling that way three years later? What explains our fear and diminished desire for risk, even after such a dramatic recovery?

Here are four common psychological conditions that help explain our lingering hangover.

Loss aversion: People tend to focus on downside risk when they invest in stocks. When they suffer a loss, they experience not only an objective loss in dollar terms, but also a subjective “emotional loss.” This can linger for a long time, and many stock investors who realized major losses during the financial crisis still avoid perceived riskier asset classes such as stocks (and stock mutual funds).

Anchoring: Investors often focus on specific pieces of information, and these reference points influence their decisions. For some, the 2008–09 financial crisis continues to be a negative reference point, or anchor. They may recall their portfolio’s value in mid-2008, before the market plunged, and become preoccupied with “getting back to even.” When investors anchor on a bad experience, they can become excessively risk-averse and loss-averse. This results in a higher degree of worry, which can cause them to underweight equities in their portfolios.

Depression: A recent study examined the relationship between seasonal depression and investments. It found that when individuals become depressed during the winter months, they tend to become more risk-averse and are less likely to invest in stocks. This new finding suggests that that cycles in the market could also have something to do with cycles of emotional depression—or vice-versa.

Inertia: In times of financial distress, people who have experienced loss aversion, anchoring, and depression might suffer from inertia, or “inattention bias.” They no longer want to manage their portfolios because they don’t want to reflect on their bad experiences. This inertia can have long-term consequences. One study examined one million retirement accounts over a two-year period and revealed that approximately 80% of participants made very few or no trades. After the financial crisis, many retirement savers had portfolios that were underweight in stocks and overweight in bonds and cash. By not rebalancing, they may have left themselves with overly conservative portfolios, which may result in them falling short of their savings goals.

In any market environment, it’s important to perform an annual portfolio checkup in order to avoid the emotional impulses experienced during bull markets (high levels of over-confidence) or bear markets (extreme pessimism). Your portfolio should be based on a risktolerance assessment, an asset allocation strategy, and regular rebalancing, not on emotion.

Investors should keep in mind the concept of reversion to the mean. This principle is based on the premise that stock market cycles and asset classes, over the long run, tend to return to their historical average (or mean). For example, the historical average for stock returns is in the range of 8% to 12%. A non-emotional approach to long-term decision making will help investors avoid mental mistakes, control impulsive, emotional judgments and earn a share of what the markets have to offer.

Victor Ricciardi is assistant professor, Financial Management, at Goucher College in Baltimore.

A retired business analyst who lives in Toronto, the 67-year-old Brunner still owns several stocks she bought in the early 1980s, including BCE, Bank of Montreal and Bombardier.

Brunner says her experience has made it relatively easy for her to ride out market volatility. “Been there, done that,” she says. “There are good times and there are bad times, and I can do nothing about that.”

While most of her assets are long-term holds, she has been in and out of stocks like Research in Motion and Loblaw. The BlackBerry maker was a shorter-term play and she missed the stock’s most recent decline. Loblaw, however, was intended as a long-term investment that went sour for her.

Patience is the key to long-term investing success, she says. “All sorts of things can happen in the market quickly. You need a minimum of five years to ensure you’re not selling at the wrong times.”

Enjoyed this profile? Meet our other investors James Ford, Gurchuran Rai and Dominic Milotte, all featured in our “Stocks that pay you back” series.

Milotte began investing nine years ago as an active trader, but after a lot of reading—including Benjamin Graham’s The Intelligent Investor—and market experience, he came to appreciate the benefits of the long-term value approach. Milotte focuses on the company’s business and ability to pay a dividend, as opposed to making buy and sell decisions based on short-term price movements.

“My philosophy is to hold a stock as long as it still has fundamental attractiveness,” says Milotte, a 39-year-old federal civil servant. He limits his holdings to 10 to 12 stocks. “I have held some of my stocks for a long time, but I’ve sold some after just three years because I realized I misjudged the company, or the fundamentals had changed and I lost faith in its future.”

He’s learned to ride out market storms and remain calm and now regards himself as a “grown-up” investor. “The biggest obstacle as a buy-and-hold investor is psychological. Thinking long-term goes against everything we see and hear in today’s investment world, especially since the 2008 crisis.”

Enjoyed reading this profile? Meet long-term investors Gurchuran Rai and James Ford, two other investors profiled in our “Stocks that pay you back” series.

For the last two decades, however, Rai has followed a more disciplined strategy, and it’s paid off. The 62-year-old accountant from Queensville, Ont., retired three years ago.

After a few unsatisfying years in the relative safety of mutual funds, Rai realized he would be better off saving on the management fees by investing directly in his funds’ biggest holdings, which were blue-chip, dividend-paying stocks.

Since making the switch, Rai’s portfolio has grown to 13 stocks that form the core of his portfolio. “These are companies that I understand, are recession-proof, and have a long history of paying dividends.” The cornerstones of his portfolio are Bank of Nova Scotia, a 14-year holding that he likes for its potential in foreign markets, and Enbridge, which he added in 2007 because of its track record of increasing dividends.

“I still keep the worthless stock certificate from that first investment,” Rai says, “just to remind me not to do something like that again.”

Enjoyed this profile? Meet James Ford, another investor featured in our “Stocks that pay you back” series.