It’s an old investor adage that has its roots in an even older English saying: “Sell in May, and Go Away.”
The concept is that returns in the stock market will likely be worse from May through October than they are from November through April. So, it makes sense to reduce or even eliminate your exposure to equities during the summer months. Or does it?
Historically, returns have been lower beginning in May. According to a 2017 column in Forbes, from 1950-2013, the Dow Jones Industrial Average has produced an average return of only 0.3% from May through October. During that same period, the Dow gained 7.5% from November through April. No one really knows why.
If you are an investor thinking about following this line of thought, there are two major considerations that “May” (pardon the pun) keep it from working out.
1. Historical Data is Just That… Historical.
Recent data suggests that stock gains in May through October have been stronger. But, looking to the past to determine the future, is always a dangerous game.
We caution our clients on this when they tell us they choose the investments in their 401(k) based on which funds have the highest lifetime returns. While this is useful in explaining these funds have a good track record and may have good managers, it really has no connection to how that fund will perform in the future.
In the same way, May through October may have been a weak period for stock returns in the past, but it really has no connection to whether it will be in the future. You wouldn’t drive your car to work by looking only in the rear-view mirror. You have to look ahead of you to know where you’re going.
2. Missing Any Time in the Market Could Reduce your Returns
There is significant data that shows trying to time the market is not a good idea. (By “time the market,” we mean trying to determine to buy when the market is low, sell when the market is high, and repeat). But the same applies here. If you “Sell in May” and the market goes up significantly, you will be forced to decide if you are going to get back in and chance the market going down, or stay on the sidelines. Being put in that position can put a big hurt on your financial goals.
Consider data from Bloomberg measuring the potential growth of a $10,000 investment in the S&P 500 Index from December 31, 1979, through April 30, 2019. If you were invested every day of that nearly 40-year period, your investment would have grown to $779,870. But, miss just the 5 best days of the market over that same period and your investment would’ve reached $504,911. Miss the 10 best days and the investment shrinks to $376,073. Miss the best 30 days, it’s $147,902. And miss the best 50 days over nearly 40 years and you’d wind up with $67,853. It’s important to note that the S&P 500 is an index that cannot be directly invested in, and this is for illustrative purposes only.
So, if you’re thinking of “Selling in May” and getting back in by November, ask yourself how sure are you that you won’t miss even the best 5 days of the year’s market. And how much would that cost you over time?
Money makes you emotional. The stock market is a roller coaster ride. One of the benefits of working with a financial advisor is having an objective third party that helps you NOT make emotional decisions about your investments, because staying invested through the good and the bad can help you manage your financial goals. Whether your goals include retirement, college savings, or a big purchase, create a written plan to help you stay on track, no matter what month it is.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This is a hypothetical example and is not representative of any specific investment. Your results may vary. Resources: Forbes and First Trust.
