Sell in May, and Go Away?

Hey there Money Saver! Welcome back to another week of How to Save A Buck, where we explore ways of saving money in personal finance, credit cards, and investing!

Market timing is futile. This we know.

There’s a saying most people know, “Sell in May and Go Away.”

So much for not trying to time the market!

This statement reflects the historically weak period for stocks between May and October. The funny thing is, it doesn’t tell you when to re-buy!

This week we explore this phenomenon of selling equities in May and “going away.” And DOES IT EVEN WORK?

Before you answer that question, let’s examine why this mantra became popular in the first place.

Most believe it originated in Britain’s high society where the privileged class would leave the financial city centers such as London and travel to their country estates in the summer, ignoring their portfolios and returning in September.

This is not unlike the current trend of summer in NYC where the Wall Street folks flock to their seaside escapes of Nantucket, the Hamptons and Martha’s Vineyard.

Whatever its origins may be, the behavior also known as the Halloween Strategy illustrates the seasonality of stock market gains in the first several months of the year and the historically weaker performance of equities from May to October.

At least, that’s what people think.

Merrill Lynch analysts calculated 3-month seasonal data for equities back to 1928. What did they find? The June-August period typically is the second-best of the year, with gains 63% of the time, and an average return of 2.97%. They also discovered that a weak May usually led to a strong June-August period.

Equity strategist Sam Stovall of S&P Global Market Intelligence furthers this notion that the strategy is bunk.

He notes the S&P 500 Index (a broad-based index that tracks the prices of the 500 largest companies in America by market capitalization) has advanced an average of 1.4% during the summer months. And he’s not talking about the last few years. He looked back all the way to 1945.

OK. So, the summer months have proved fruitful enough to keep your assets invested. Right?

This graph shows a bit more nuance - the strategy does have some merit when looking at the S&P 500. The November-April period does outperform the May-October timeframe.

So, what’s the optimal strategy?

Well, of course - only you can decide for yourself given your risk, time horizon, and investable assets.

However, further research shows that buying-and-hold is the strategy that yields the highest return.

Analysts at Virginia-based CXO Advisory Group examined three strategies using 142 years of data:

(1) keeping stocks from November to April and cashing in from May to October ("Buy in May and Go Away")

(2) doing the opposite (Halloween strategy - “Sell in May and Go Away”)

(3) holding equities all year long

According to Forbes magazine, approach (3) was by far the best overall, even if strategy (1) produced higher profits than strategy (2). This superiority was amplified when transaction costs were taken into account. Even a comparable study by Wall Street Daily that used data from the last 20 years came to the same interpretation.

You can see above that the buy-and-hold behavior was about 100x more effective.

Even though Halloween has passed for 2023, don’t let any old adage or crowd tell you what to do with your investments.

Selling in May and going away may historically yield some decent results, but research shows that buying and holding still triumphs over all.

Plus, as you know, past performance is not indicative of future results. (Wink.)

Save On,

Chris