The old saying “sell in May and go away1” has managed to endure for many years. It essentially suggests that investors should sell their positions in the stock market from May through October and buy back in for the often more lucrative period between November and April.
This catchy adage is once again making the rounds as another May is well underway. Especially given this year’s market runup2 and increased valuations3, many investors are left wondering how much longer this bull market can last and whether it’s time to take their chips off the table for summer. But is this an advisable investment strategy?
On the surface, “sell in May and go away” may seem sensible as more significant market gains historically occur from November through April than from May through October.1 However, that is as far as the logic goes.
The average return between May and October is still a respectable 3.5 percent, which translates to a 7 percent annualized return over a full year.4 Meanwhile, the period from November through April has an average annualized return of 13.4 percent.2 Although that’s certainly better, there’s no reason to forsake a 7 percent annualized return during the so-called “bad months” because it falls short of the return you would make during the “good months.”
This number still looks attractive compared to current bond rates which are yielding only about a 2.5 to 3 percent return for a full year.5 Additionally, in avoiding the stock market between May and October, you wouldn’t just lose the 3.5 percent return during those months, but the compounding effect6 it has on your return throughout the remainder of the year.
If you invested only from November through April every year from 1926 until today, $1 would have turned into about $350.7 But if you invested year-round during that time span, $1 would have become almost $8,000.7 That’s an incredible amount of compounded wealth to leave on the table, which is a primary reason we are skeptical about using “sell in May and go away” as a long-term strategy.
Also consider that these investment “rules” are constantly changing and fluctuating. If you followed “sell in May and go away” as a strategy in 2018, you would have missed the market reaching its peak in late September2 and returned just in time to see the market crater in December.8 The “January effect9,” which states that Januaries tend to have outsized returns, has also experienced hard times over the last decade.2
The only time we consider “sell in May and go away” as a strategy at Exencial is if an investor needs to sell positions for cash in the near term for everyday spending or perhaps a significant purchase like a car. During the fourth quarter last year and through the first half of March 2019, when markets were in a substantial recovery2, we sold bonds for those seeking distributions from their portfolios to accommodate spending needs.
Now when an investor needs cash, we’re mainly selling U.S. large- and mid-cap stocks, as long as those equities are not underweighted in a portfolio. Instead of selling in May and going away, we constantly adapt our cash-flow strategies to sell appropriate positions when cash is needed. If there’s no need to pare a position due to spending considerations, we won’t sell assets simply because the calendar turns to May. Overall, we don’t believe it makes sense to exit the market and miss out on potential expected returns we could capture over the next six months.10 They may not be as high as what we saw during the first half of the year, but the expected returns are still positive. We’ll also benefit from the compounding effect that would be lost if we left the market. That’s why the most sensible long-term plan is to remain invested, diversify your portfolio and avoid being distracted by normal market fluctuations or supposed trading patterns.
Source
1. Investopedia – Sell in May and go away definition
2. Yahoo! Finance – S&P 500
3. Shiller P/E – A better measurement of market valuation
4. Forbes – ‘Sell in May worked’…or did it?
5. CNBC.com – U.S. Treasury’s
6. Investopedia – Compounding
7. DFA Returns 2.0 – S&P 500 Total Return
8. CNN Business – Stocks on track for worst December since the Great Depression
9. Investopedia – January effect
10. Yardeni Research – Stock market indicators: Historical monthly & annual returns
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