Every year at this time, investment gurus debate the old adage, “Sell in May and Go Away.” The strategy says avoid summer volatility in the markets by selling your stocks in May, and then return to the markets in November.
Indeed, as our contributor Jeffrey Hirsch, the editor of Stock Trader’s Almanac, and one of the most respected market historians, notes there is empirical evidence that shows stocks do tend to underperform during the six-month period beginning in May and ending in October, compared to the six-month interval from November to April. His research goes back to 1950, and illustrates that during the May-October timeframe, the Dow Jones Industrial Average returned an average of 0.3%, compared with a gain of 7.5% during the November-April period.
No one really has a definitive answer as to why this disparity in returns occurs, but most agree that lower investment activity due to summer vacations probably plays a large part. That makes sense when you consider that the adage actually dates back to old England, when stock brokers would vacation from May until September, leaving markets barren. And while our markets no longer close during that period, it’s well-known that you may be better off locating a trader or banker in the Hamptons than on Wall Street during the hot summer.
But the question is, does it really make sense to completely abandon the markets at this time of the year? In my opinion, the only conclusion is a resounding no!
Let’s look at some more stats: The folks at moneychimp.com, also tracked the S&P 500 from 1950-2014, looking at returns in each of the “Sell” months. The table shows their results, which confirm how difficult it is to time the market. There’s just no way to know which years are going to fare better or worse, and by sitting out, you would limit your overall returns.
• Transaction costs and tax issues from trading, rather than investing
• No strategy works all the time
• History hardly ever repeats itself exactly
Or as our contributor Barry Arnold of Primary Trend says in a recent issue, “Obviously, it is not a valid strategy to “sell in May” every year. It would have backfired over the last two years alone, with a +7.1% missed opportunity in 2014 and a +10.0% gain in 2013.”
Jeffrey Hirsch adds, “We do not suggest purely going away in May. We do, however, suggest changing your investment posture from aggressive to defensive, especially with the market looking like it’s on shaky ground and ready to break down.”
Arnold adds, “We do not disagree with being more defensive, but for the reason that the stock market is no longer dirt-cheap.”
Bottom line: It makes sense—at all times—to tailor your portfolio according to economic and market cycles. Buy and forget is no longer a viable option in these volatile markets. However, by diversifying your portfolio, tracking market and economic cycles, and setting price targets and stop-losses, you won’t have to spend your time fretting about specific entry and exit times.