Sell in May and Go Away: Should You or Should You Not?

Sell in May and Go Away: Should You or Should You Not?

Derek Gabrielsen, CRPC®, Wealth Advisor

Summer is almost here! One of the most commonly heard stock market sayings headed into the summer is “sell in May and go away.” This old adage suggests you sell your stocks in May, and not get back into the market until October.

The tactic of reentering the markets for the winter months is sometimes called the Halloween effect. The logic behind these expressions is said to be that the market outperforms in the winter months and underperforms in the summer months. So the question is, should we be using this saying to help us make investing decisions this summer?

• • Historical performance: From 1950 to 2013, the Dow Jones Industrial Average returned only 0.3% on average during the May to October period compared to a 7.5% return for the other six-month timeframe. This pattern appears in as many as 65 countries in a similar time period. However, if you look at the much more recent history, and use a more relevant index such as the S&P 500, this trend does not really hold up. Since 2010, the S&P 500 has had only three negative returns in the May-October period (-0.3% in 2010; -8.1% in 2011; -0.3% in 2015).

• • Market timing: The idea of “sell in May and go away” has some structural flaws that would make implementing such a practice impossible. The first clear problem is market timing. Trying to time the market is almost always a bad idea because it is so difficult to execute properly. Not only do you need to sell at the right time, but you also have to buy back in at the right point. Many of the models indicating the validity of this adage have money reinvested at the very bottom, regardless of the actual date.

• Tax considerations: Moving in and out of the market comes with tax consequences. Furthermore, there may be tax issues if you try to use this strategy in a non-qualified, taxable account. If assets are not held for 12 months, the profits can be taxed as ordinary income rather than long-term capital gains.

While it is a rather catchy phrase, “sell in May and go away” has been proven in the most recent decade to be pretty much nonsensical. Combine this with the inherent problems of market timing and we can conclude that this is a strategy investors should avoid. If you have questions about investment strategy, please contact your advisor at 216.800.9000.