Sell in May and Go Away?

by DAVID NOVAK

Most investors have heard the old stock market adage, “Sell in May and go away.” While the phrase has been around for decades, following the actual advice could be downright dangerous.

The thesis behind the axiom is that the vast majority of the stock market’s returns are generated between November 1 and April 30.

In fact, for many years, the numbers supported the strategy. Between 1950 and 2013, the Dow Jones Industrial Average returned 7.5% annually for the period
between November 1 through April 30. For the six months between May 1
and October 31, the Dow’s return was only 0.3% per year.

Additionally, this latter period included some of the worst events in stock market history, including the famous crash of 1929, Black Monday in 1987, the collapse after the 9/11 terrorist attacks, and the failure of Lehman Brothers in 2008.

In a general sense, the thinking goes that trading slows down between
Memorial Day and Labor Day, and in these periods of lower volume, markets can tend to drift. Furthermore, the winter months contain periods of higher consuming spending around the holidays, and also all the annual investment inflows that happen after the New Year.

But in recent years, the numbers tell a different story. In four of the last five
May through October periods, the S&P 500 delivered returns of 10%, 7%, 6%,
and 5%. This May is also off to a very good start, as the S&P 500 is up more
than 3% so far in 2018, as of this writing.

There are other obvious holes in the approach as well. For one, the trading costs involved would be detrimental to investors’ returns, as they would be effectively turning over their entire portfolio twice per year.

Additionally, the tax implications of implementing this strategy could be
significant—either forcing an investor to realize a large gain in a long-held
position, and/or generating short-term capital gains, which are taxed less
favorably than long-term capital gains.

But the biggest hole is the fact that fundamentally “Sell in May and go away” is a market-timing strategy. Not only that, but a totally arbitrary one, based solely on the calendar. We tell clients all the time—if anyone tells you they are able to effectively time the market, run away! This person is either lying to you, or totally incompetent, and certainly should not be entrusted to invest your money.

 

David Novak, CFP® is a Certified Financial Planner™ at Novak & Powell Financial Services in Pinellas County. Please note: he is not an attorney and this article should not be construed as one offering legal advice.
For information about investment decisions and
financial planning, contact him at (727) 451-3440.

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