The investing world is full of old saws, supposed rules of thumb for making a pile of money.
- “Buy the rumor, sell the news.”
- “Don’t fight the Fed.”
- “Sell in May and go away.”
This time of year, you may be seeing articles championing that last axiom. But as with many of these pat rules, its logic doesn’t survive close scrutiny.
“Sell in May and go away” encourages us to sell our stocks in May and return to the market in the fall. The reasoning is that stocks have supposedly performed better from November through April than they have from May through October. It follows, then that you should reap those higher returns during the “strong” half of the year, and then get out during the less fortuitous months.
Is this rule of thumb worth following? Our answer is no.
For starters, it fails to stand up to a very practical question: Having cashed out of the market in May, where do you stash your cash? Traditional safe havens such as Treasuries and money market funds aren’t even keeping up with inflation these days. Even if stock market returns are low, storing your money in safe alternatives can actually shrink your wealth.
Then there’s the fact that selling and buying stocks can get expensive. The brokerage fees you pay for those transactions are just part of the problem. Selling all your stocks once a year means you’ll likely rack up short-term capital-gains, which are subject to a higher tax rate rather than short-term gains. “Sell in May” may make sense in a vacuum, but the idea stumbles in the real world.
Now let’s look at whether the historical evidence supports selling in May. Studying historical data, Larry Swedroe, who is the research director at BAM Alliance, found that the answer is, essentially, “not necessarily.”
From 1960 through 1979, the sell-in-May strategy returned 9.7% a year, beating the market by 2.8 percentage points. However, over the prior 33 years, holding one’s stocks year-round earned an average of 10.3%—trouncing “sell in May” by more than 5 percentage points.
As you can see, it’s possible to find historical data to support either side of the argument. The truth is that it’s impossible to tell when markets will outperform or underperform, especially within a given year. Attempting to time the markets based on the calendar can backfire—with investors selling stocks at low prices and buying them back at higher prices.
The underlying problem with the sell-in-May adage is the same one associated with most of the “rules of thumb” I have heard in my 32 years of providing financial advice. When it comes to the financial markets, “one size fits all” just doesn’t work. Every situation is unique and needs to be addressed with strategies specifically designed for the family or individual directly.
However, there is one rule of thumb that works every time, and for every situation: You never go broke taking a profit! Please don’t hesitate to contact us if you’d like to discuss your investment strategy.
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