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Sell in May and Go Away- Do Savvy Investors Really Do That?

One of the oldest stock market sayings is to “Sell in May and Go Away”. But what does this phrase mean? Is there any historical reason for selling stocks in May and leaving the market? What are the risks?

The Strategy

“Sell in May and go away” is a well-known adage that suggests investors sell their stocks in May to avoid a seasonal decline in the stock market. An investor selling his or her stocks in May would then buy stocks again in November because the November through April period shows significantly stronger growth in the market than the other half of the year.

Where did this “Sell in May and go away” advice originate? Not on Wall Street, but rather in London’s financial district. The original saying, “Sell in May and go away, come back on St. Leger’s Day” refers to a horse race. That’s right, a horse race.

The St. Leger Stakes is one of England’s greatest horse races and is run in late September. London traders would sell their shares, enjoy their summer, and return to the market after the St. Leger race. The idea is based on seasonality, and with this strategy, traders are only invested in the stock market for about six months of the year (November through April).

Statistics on this Strategy

As it turns out, stocks have done better during the winter-early spring period. According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has gained an average of 7.5% during the November through April period since 1950. Its average return has been only 0.3% during the May-October period in those same years.

In addition, the Dow Jones Industrial Average has lost money in only 14% of the November-April time periods since 1950. That success rate is remarkable.

Explanations for the November-April Success

Frankly, there is a lot of money moving throughout the economy and the stock market from November through April. Here are some examples:

  • Holiday spending: Halloween, Thanksgiving, Christmas, New Year’s Day, the Super Bowl, Valentine’s Day, Mother’s Day, etc. all come during those months.
  • Back-to-school, Black Friday, and Cyber Monday sales.
  • Employer contributions to employee retirement plans, almost all of which are invested in the stock market, through 401k and other retirement vehicles.
  • Year-end employee bonuses.
  • Tax refunds.

No economist has come up with a specific reason for this seasonal success rate. The increase in money moving through the economy, for the reasons listed above, is one possible explanation.

Limitations to this Strategy

Despite these favorable statistics, there are limitations to implementing this strategy.

  • No one knows when to start: From 1988-2015, according to economist John Mauldin, the best strategy might have been “Sell in August, buy in mid-October”.
  • With any strategy based on averages, any given year might show an extreme high or extreme low.
  • Investors lose short-term gains to taxes because short-term gains are taxed as ordinary income.

Ultimately, only professionals should consider this type of strategy. They know how to handle the particulars of short-term selling, they have more money to move into various investments, they can be selective as to which particular stocks to sell, and they simply know more about what they’re doing. However, even the wisest of investment professionals don’t “bet the farm” on a simple seasonal strategy having its origins in a summer break before a horse race.

That would be like gambling…

Working with a Professional Money Manager 

The key to successful long-term investing, of course, lies in following a well-thought-out strategy. And professional money managers understand this. It is generally best not to rely on interesting statistics that are not explained by actual market trends or economic analysis.

No specific investment strategy is foolproof. Your best strategy as an investor is not to base your plans on market timing or the season. Instead, consider hiring a professional whose expertise is to consider many factors, including assessment of business cycles and changing economic conditions.

Your financial advisor is the best source for information about how to handle your money.

Enjoy May!

 

"Sell in May and Go Away- Do Savvy Investors Really Do That?". FMeX. 2017.


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