The history of seasonal market cycles runs into the dawn of history — quite literally for food, but also for the financial world that came much later.
Ben Jacobsen, a finance professor in New Zealand, studied all available historical evidence from 108 different stock markets around the world. His statistical tests detected the seasonal pattern in the United Kingdom stock market as far back as 1694.
Jacobsen even managed to find a Financial Times article dating back to 1935 that refers to the “Sell in May” pattern and implies that it was well-established with market watchers, investors, and financiers.
So yeah, these Sell in May articles are nothing new. However, most of them are simply terrible. Like, ‘what can we trust that worthless intern with’ terrible.
I aim to correct that today and give you a real look at what Sell in May should mean to investors, and it applies to every year ahead as well.
Let’s get right to everything that is right and wrong about “Sell in May,” along with how it can be used to your advantage.
The Misleading Charts
First up, let’s get the basics behind this trope out of the way:
- The idea is to sell at the beginning of May and buy back in at the beginning of November.
- Over a 50-year time span, May through October averages a -0.1% loss.
- Over the same time span, November through April averages a 7.5% gain.
So there we have it. Cut and dried. Case closed.
This information — on its own — indicates we should sell. Why take a small loss while staying exposed to equity risk?
Now let’s take a look at the kind of chart that gets circulated around this time of year.
Here is a look at how a single dollar would grow if it were invested in just one of the six-month blocks each year, up to a couple years ago:
Notice the issues here? First off, people don’t liquidate their portfolios biannually. What exhibited weak growth is probably going to still be in a real portfolio for any accelerated growth in fall and winter.
Also, that one-dollar investment still turned into four dollars. That -0.1% average return did not properly express how, in reality, retaining equity exposure over the summer has not been bad. It just hasn’t driven comparable returns.
Then there is the whole issue of what you’re doing with your money while it is out of equities. Money markets, bank accounts, bonds, cash?
All incur their own risks without offering much at all (if anything after inflation) in the way of returns.
What if your otherwise long-term equity positions are dinged with massive short-term capital gains taxes every year?
The removal of wealth via taxation will be crippling to long-term wealth through compound growth. This will single-handedly turn the whole “Sell in May” trend into a disaster for retail investors.
These unmentioned issues — and these are just a couple — make all the “chart of the day” posts this time of the year beyond useless.
It makes them dangerously misleading and potentially costly to investors.
The Timing Issue
Then, of course, there is the eternal problem of timing. Selling based off of an arbitrary date instead of capturing gains, cutting losses, re-balancing portfolios, or reevaluating risk is ill-advised.
Check out this chart from last year:
If you ignored the rule and stayed in the market, you’d be down 0.29% in the S&P 500, unlike those who sold in May and bought in November. So far, so good. The rule held.
However, waiting to buy in November was part of the deal, and it simply didn’t make sense.
The August flash correction was a pretty messy time in the markets. Volatility was up, people were suddenly freaking out over Chinese economic numbers, which hadn’t really changed, but I guess no one was really paying attention for years while the stock market steamrolled everything and thought bad news was good.
But buying at the September bottom and capturing that greater than 10% gain in a matter of months, using a large-cap index no less, was the correct answer.
As always, everything is clear in hindsight. That includes the right answer.
And the bigger point is that hindsight — which is the entire basis of the “Sell in May” trope — is completely worthless in the day-to-day markets. Past performance doesn’t indicate future results.
How to Do It Right
So on one hand, we have a trend that is absolutely real, if only on an aggregated, long-term basis.
Yet, the very name of it suggests an action that is all-but-guaranteed to hurt your wealth if you attempt to follow the trend.
So, how do we do it right?
The first step is to purge any ideas of any grand changes to your retirement accounts or allocations.
Yes, the trend exists, but it is far from absolute. Plus, it isn’t that equity exposure during these months is a bad thing. We just need to temper our expectations for large returns driven by growth and market inflows.
The next step is to start looking at ways you can slightly alter your investment behavior starting in or around May to gain a bit more exposure to what will pull in returns while equity growth tends to be stagnant.
For example, your regular contributions to retirement accounts can be put towards other investments during this period.
Then, from November through April, contributions can balance out your account so your portfolio is at your ideal allocations.
No selling is needed, just an emphasis on returns, while staying consistent with your risk appetite and portfolio overall.
That is why, this time of year, I personally emphasize dividend investments. Given how the stock market has just clawed itself back to a break-even point year-to-date, and revenue and sales are going to contract on average over the next six months or so, now is certainly the time to focus on returns that are not dependent on the greater fool to buy your shares at a greater price.
Jimmy Mengel is our resident dividend guy, and he’s been on the hunt as well. In fact, he just clued his readers into a stock that has returned 80% of its market value to shareholders as dividends in the five-and-a-half-years it has been listed on the NYSE.
With a bit of discipline and due diligence, you can boost your portfolio performance a bit each year, and reap massive rewards as relatively small gains compound into much larger account balances down the road.
Take “Sell in May” for what it is, and please don’t ever think a real-world investing strategy is so simple that it can be summed up in three words.
