Why ‘Sell in May and go away’ is a profitable strategy for investors
You have a vacation planned in the coming months, or still might book one. Why not give your investments a summer holiday, too?
Some investment advisers say it’s an idea worth considering, as the stock market has shown a strong tendency to perform sluggishly during the warmer months of the year.
Historically, investment returns are much weaker from around May through October than during the other six months of the year. Consequently, now could be a time to shift out of stocks and stock funds and into bonds or cash.
But there also are some sound reasons to think twice before making such a move, as drastic changes to your investment mix, based solely on seasonal changes that might not recur, could damage your performance and trigger unfavorable tax consequences.
Nevertheless, the adage of “selling in May and going away” comes up regularly in investment reports, blogs and other Wall Street communications around this time of year, and for good reason.
“The results are striking,” wrote Jack Ablin, chief investment officer at Cresset Capital, in a recent commentary on the strategy.
He analyzed the price performance (excluding reinvested dividends) of the 30 Dow Jones Industrial Average stocks, and their various replacements, from 1900 through October 2022. An initial $1,000 stake back in 1900, if invested solely from May through October, would have risen to a modest $3,270 or so by last fall. But the same stake from November through April would have surged to a whopping $180,600, he reported.
Others have reached similar conclusions, though often using different measurement periods and other comparisons. For example, stock-market investors would have earned an average 6.9% annual gain from November through April, compared to just 1.7% annually from May through October, according to an analysis by Jeffrey Buchbinder and Adam Turnquist of LPL Financial. They tracked market performance for the broader Standard & Poor’s 500 index, dating to 1950.
Investing 101:The 60/40 standard of stock-investing isn’t working. You need a new look at the market
What explains this summer investing trend?
Why do the two seasonal periods differ so sharply?
Some of it might reflect relative inactivity as investors and many advisers take time off during the warmer months, implying that the “real” investing activity occurs in winter and spring, Ablin hypothesized. Other possible explanations might deal with the timing of important elections (in November) and a perception that social unrest (and thus widespread unease) tends to “boil over” in warmer months, he added.
Then there’s the federal income-tax filing period that concludes in mid-April (except for people filing extensions who still must pay any tax liability by mid-April). While most taxpayers receive refunds around this time of year, that’s not true for a lot of wealthier individuals — the people who typically invest more in the stock market.
None of the explanations are especially convincing, Ablin admits. Adding more intrigue: The seasonal discrepancy wasn’t that pronounced from 1900 to 1960 but “exploded” in the decades since then, he added.
Tax refunds are arriving in Arizona:Here’s what to do with the money this year
Several caveats to consider before changing investments
The difference in returns is so startling that the strategy is worth considering, especially if you have required minimum distributions or other ongoing withdrawal needs anyway. Just remember that pulling out of the stock market, or paring back, could backfire.
“If you miss the biggest day, week or month over say, any three-year cycle, you will lower your returns,” said Susan Linkous, a financial adviser in Fountain Hills who is skeptical of the approach.
While the “sell in May and go away strategy” has flourished over the long haul, it doesn’t work well all of the time. For example, the stock market actually rose during May in eight of the past 10 years, prompting Buchbinder and Turnquist to quip that perhaps the adage should change to “sell in June and go away” (though it would no longer rhyme).
One key factor that explains the seasonal gap reflects the abnormally poor behavior of stocks during September, when the S&P 500 since 1950 has declined an average of 0.7% — well below average annual gains of 1.7% in November, 1.4% in December and 1.5% in April. Other weak months are February, -0.1% on average, and both August and June, when the market essentially has been flat.
Then again, why is September so weak? The explanations here also are inconclusive.
The effects of emotions — and taxes
Another caveat is this: Even if you lighten up on stocks or stock funds during the warmer months and avoid a market tumble, you still would need to buy back later to participate in any stock-market rebound….
Read More: Why ‘Sell in May and go away’ is a profitable strategy for investors