Sell in May and Go Away?
You have probably heard the old financial adage “Sell in May and go away.” Today I want to talk about the meaning behind the adage and whether it still holds true.
The adage essentially means that investors should remove money from the stock market in May and keep it sidelined until later in the year.
Origins of the Phrase
A 2017 article in Forbes described the historical underperformance in the May to October period:
“According to Almanac data, since 1950 the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.”
I would point out that although the November to April period performed substantially better, a 0.3% return is still a positive return.
However, the article went on to state that “the month for true market danger is September”, citing two studies that had shown actual long-term declines for the month of September.
I think these pithy adages can be risky if relied on for advice, but it’s always worth taking a look. Is there a valid theoretical reason for the underperformance?
For example, when I first started investing back in the 1980s, the Super Bowl Indicator was a popular adage. This adage says that a Super Bowl win for a team from the National Football League’s (NFL’s) American Football Conference (AFC) indicates a decline in the stock market (a bear market) in the upcoming year. But a win for a team from the National Football Conference (NFC) means the stock market will rise in the coming year (a bull market).
Until 1978, that adage had never been wrong. But it wasn’t based on anything that could actually impact the markets, so it eventually broke down. In the past 10 years, this adage has been wrong seven times. It was merely based on coincidence. I am sure we could look back and come up with lots of coincidental indicators that have no value for predicting the future.
So, is there a theoretical underpinning for “Sell in May and go away?” Some have suggested that it’s a result of more people being on summer vacation, meaning less money flows into the market. Conversely, a lot of money flows into the market near the end of the year.
But just like the Super Bowl Indicator, this adage has also broken down in recent years. In the past 10 years, “Sell in May” has only been correct twice. In 2011 the S&P 500 experienced a decline of 8.1%, and in 2015 it declined by 0.3%. But the average return over the past 10 years in the May to December period was 3.8%, with double-digit gains in 2013 and 2020, so the adage seems to have lost validity.
One of my general rules is, never try to time the market. People who do this tend to underperform the market. There’s a good theoretical reason that explains this. You only sell after a decline has begun, and you only buy back in after the market has bounced. Both actions clip your returns.
So, ignore those adages. Keep your money invested in May. If you want an adage that helps you sleep at night, stop looking at the markets in May. Enjoy your summer. But let your stocks keep working.
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