Q2 2018: Should We Really “Sell In May & Go Away?”
The world of investing is full of phrases that some participants live by while others scoff at. On the one hand, Wall Street (the place where many of these sayings originated) has been around for over two centuries, so you have to think there is some truth to these phrases. On the other hand, if an expression was born 100+ years ago, does it really resonate today? Either way, what most intrigues us is what is the meaning of the phrase and more importantly, how does it affect our investment approach?
“Sell In May & Go Away” is a well-known adage that warns investors to sell their holdings in May and do not return to the stock market until November. The theory is… by doing this you will avoid the most volatile six months of the year (especially October) thus not subjecting your portfolio to potential “losses.”
In addition, this period is mainly the summer months when the “professionals” vacation… so, of course, they wish to sell before they leave. This thought definitely demonstrates how old this phrase is, as we all know in this technological era no one takes a legitimate vacation (i.e., we are always connected)! Therefore, these days, I highly doubt investors are making investment decisions based on their vacation plans!
Now that we know it’s origin, is it true? Are you better off selling prior to this six-month period? The answer is… No! Yes, it is true that the November – April period outperforms the May – October period, but the latter timeframe still yields a positive return. This has been especially true since 1980 (see the below graphic).
If you are an S&P 500 index investor and you acquiesce to the old adage, you are giving up 1.90% in annual returns. In addition, if you are investing in a taxable account, you most likely have exposed yourself to capital gain taxes, and lastly, you have put yourself in the position to have to reinvest in November subjecting yourself to trading fees to buy back into the index (of course you paid this fee when you sold in May as well).
That is a lot of activity and cost to avoid positive performance. I’m not sure who conjures up these phrases, but this one has obviously missed the mark (at least since 1980). Maybe an ulterior motive is at play here? I mean, whether you realize it or not, traditional Wall Street is a transaction-oriented business. Meaning, those folks you see on TV, they make a lot of their money when they make trades. Maybe this is why this saying came to fruition. It does guarantee two transactions!
Whatever the case, us long-term investors, we’ll simply take our vacations fully invested! Period.