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Tue April 16, 2013
Stocks: Should you sell in May and go away?
The financial media are full of suggestions for timing the stock market. We usually discredit those schemes on Money Matters, but this month we talk about one that might have at least a little merit to it.
The strategy is to “sell in May and go away.”
It’s based on the notion that the six months from late fall to late spring are great for owning stocks. Conversely, the period starting in May is not. Those periods are often referred to as the winter months vs. the summer months.
Does it really work?
Over the past half century, the Dow Jones Industrial Average has gained 7.5 percent in winter, but fell a tenth of a percent in summer.
In recent years, the difference has been even more pronounced. Two years ago, stocks jumped more than 10% in winter and dropped 7 percent in summer.
Many market timing indicators are fads. They might work for a while, only to see their effect muted as time passes and/or when too many players follow them.
But “sell in May” has legs. Its impact has been observed as far back as 400 years!
So why not jump on the bandwagon? May is just around the corner. Sell now and repurchase your shares around the end of October or first of November. (That’s why another name for this trick is the “Halloween Indicator.”)
Here are reasons to avoid jumping in with all of your portfolio:
- In any given year, no one can guarantee a successful pattern. A war, a banking crisis or international economic upheaval or assassination doesn’t look at the calendar.
- Most investors’ portfolios are too small to gain a significant return.
- Although knowledge of this trading pattern has existed for a long time, there’s no evidence that large numbers of investors have taken advantage of it. When everybody does it, the effect is negated.
Counting dividends and share price appreciation, investors in the broader stock market earn 9-10 percent average annual returns. Why risk that?
If you’re absolutely determined to try your hand at timing the stock market, “sell in May and go away” seems to be better than many other methods/fads. Just don’t bet your entire portfolio on it. Try maybe 5 percent of your holdings and see if you’re satisfied with the results.
But, for the trillionth time, we point out that buy-and-hold strategies are the safest way to successful investing. Buying no-load mutual funds reflecting broad market indexes will guarantee that you’ll achieve that average repeatedly.