Today I’m posting a guest writer blog from a fellow fee only financial planner in Newtown, Pennsylvania. Michael Garry is a CERTIFIED FINANCIAL PLANNER® and NAPFA registered fee only financial advisor. Mike sent me his thoughts on the old adage of “sell your stocks in May and ‘go away'”
Did you “sell in May”?
The idea of ‘sell in May and go away’ has been around for many years and followed by some investors – but why? Is it a good idea?
The saying originated in merry old England when stockbrokers would take the summer months off for vacation and wouldn’t return to work until October after St. Leger’s Day.
More recently investors have followed that same advice because there is some historical evidence that November to April has yielded better stock market returns than May through October. According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has had an average gain of 7.5% during the November through April period and a gain of only 0.3% over the May through October period, going back to 1950.
Did selling stocks in May really work?
So some investors use this past performance to predict future performance and move out of their positions prior to the summer months, but is this the right move?
We don’t really know whether there is something to it or it’s simply a statistical anomaly or a fluke based on a fairly small sample size. We do know that investors that bought into the concept of selling in May and going away missed the 20% May to October market advance in 2009 as well as the 11% rally in 2013.
We also know that betting on the idea that the summer months will produce significantly less returns compared to the months following September could also be a fairly expensive bet as transaction fees and taxes for moving in and out of stocks or funds could add up.
Stop data mining, the past can’t predict the future!
Stock market data has been mined relentlessly for as long as there have been stock markets, and predictably, other anomalies have shown themselves, like if the NFC wins the Super Bowl it will be a good year for stocks, or the market will be up or down based on how the first 5 trading days of the year went or how the month of January went.
While its fun to talk about these anomalies, I wouldn’t invest based on them. What we know for sure is that long-term investors have been rewarded in the stock markets when they buy investments that are appropriate for them. We don’t really have any evidence of investors doing well by following these market-timing strategies. I’m much more comfortable with “time in the market” than “timing the market.”