Filed under: Stock Picks, Investing Basics, Index Funds, Stock Markets, Investing
Is there any validity to the strategy of selling in May and going away? More importantly, how would following this old saying have affected your portfolio this year?
The saying originated as “Sell in May and go away. Stay away till St. Leger’s Day,” and it was based upon the concept that in England, the financial movers and shakers didn’t return to the market until the end of horse racing season, traditionally St. Leger’s Day, in mid-September.
Over the years, the concept became Americanized by dropping the “St. Leger’s Day” reference and creating a narrative that involved brokers and money managers going to the Hamptons for summer vacation and not returning until after Labor Day as its underlying rationale.
Five Decades of Analysis
As investors, we’re always looking for ways to improve our returns, so how has this strategy performed? Surprisingly well, as least since 1950. A consistent strategy of being out of the market during the summer far outperforms a strategy of being invested for a full 12 months out of the year.
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In the last 10 years between the first market day of May and the first market day after Labor Day, the market was down 60 percent of the time, either flat or slightly up 30 percent of the time, and significantly up only 10 percent of the time.
But as they say, there are exceptions to every rule, and 2014 was definitely an exception. By almost any metric, you would have lost out on some hefty gains by sitting out the summer this year.
During that period, the exchange-traded funds SPY (SPY) and QQQ (QQQ) — which track the S&P 500 (^GPSC) and Nasdaq (^IXIC) indexes respectively — were stellar performers. SPY rose 6 percent, and QQQ was up a whopping 14 percent during the “stay away” period. Looking at individual stocks, it only gets worse, or better, depending on how you invested.
You would be hard-pressed to find any stock from the Most Widely Held list that didn’t rise significantly between May 2 and Sept. 2 of this year, with Bank of America (BAC) adding 8 percent, Ford (F) 10 percent, Disney (DIS) 15 percent, Apple (AAPL) 25 percent and Netflix (NFLX) a staggering 45 percent. Even among the few losers, the losses were small, such as Exxon’s (XOM) barely 2 percent decline.
Consider the Industries
If you do find stocks that declined significantly during that period, it is most likely that they, or the industries they are in, had already been in longer-term down trends, and their summer losses were just continuations of those larger moves.
So should you incorporate the “sell in May” strategy into your investing? The answer seems to change based upon the type of overall condition of the market. In the case of a bear market, or even a flat market, it seems as if statistically speaking you should exit in May, or at least pare down your holdings, and re-enter after Labor Day.
But in a bull market, especially like the raging bull market we have been experiencing for the last few years, it seems as if the better strategy is to stay invested during the summer. The odds say that at worst you will be flat or down slightly, but the overall bullish nature of the market may actually cause you to continue to get a good return on your stocks.
For example, the current bull market is generally considered to be about five years old, beginning after the S&P 500 bottomed in March of 2009. If you had “sold in May” in the years since, the periods where you were out of the market would have been either flat, slightly up, or slightly down — in essence negligibly effecting your return — for four out of five of those years. But by being out of the market this summer, you would have missed the massive run alluded to previously, which would have added substantially to your overall return.
The Lund Loop is a free once-weekly curated slice of what I am writing, reading and hearing about in the stock market, finance and tech.
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Source: Investing
