Is this a worthwhile investing strategy?
One of the oldest stock market strategies 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?
“Sell in May and go away” is a well-known trading adage that counsels investors to 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.
However, this seasonal strategy flies in the face of the buy-and-hold strategy of investors like Warren Buffett, the wildly successful “Oracle of Omaha”.
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 race 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). These months are typically the strongest period of the stock market. Investors sell their stocks in May, save their money in cash, bonds, or another safe investment, then buy stocks again in early November.
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-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. Maybe the horses are onto something after all?
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:
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.
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 the best available 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, a wave that a buy-and-hold investor could ride out.
Investors lose short-term gains to taxes because short-term gains are taxed at your regular rate.
Investors face additional transaction costs due to selling stocks and mutual funds, followed by buying stocks and mutual funds later.
Ultimately, only the pros should consider this type of strategy. They know how to handle the particulars of short sales, they have more money to move into various investments, they can be intelligently 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…