"Sell in May and Go Away?"

"Sell in May and Go Away?"

One of the oldest stock market strategies is to “Sell in May and Go Away.” But what does this phrase mean?  Is there any supporting 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 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?  It occurred in London’s financial district and not on Wall St. The original saying, “Sell in May and go away, come back on St. Leger’s Day” refers to a horse race. That’s right, not the bulls and bears of Wall St, but rather 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 which entailed traders only investing in the stock market for about six months of the year (November through April).  These months have often been very strong periods for the stock market.  Investors sell their stocks in May, save their money in cash, bonds, or another safe investment, and 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 about 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 (DJIA) 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?

So Does it Always Work?

There is no crystal ball that can predict stock market returns, and past performance does not guarantee future results.

Looking at the S&P 500 from November 1, 2017 through April 30, 2018, the DJIA returned 3.11%.

If you sold out of equities in May 1, 2017 and bought back in on November 1, 2017 you would have missed a 11.78% return of the DJIA.

Explanations for the November-April Success

The reality is that 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 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 sophisticated traders should even 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 have more resources and experience. 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 Weiser Financial Planning

The key to successful long-term investing lies in following wise disciplined investment strategies. At Weiser Financial Planning we understand these strategies and can help you focus on achieving your financial goals. It is generally best to rely on fundamentals and current economic analysis rather than on interesting statistics without sufficient evidence.

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, focus on the traditional factors that include assessing business cycles, changing economic conditions, and the fundamentals of the market.

We are a financial resource to help you navigate market uncertainties by utilizing a disciplined investment philosophy for each client's individual goals and needs. We help guide our client's on how to best handle their money and plan for their future.