Skip to main content
Investing

Why You Shouldn’t “Sell in May and Go Away”

By May 4, 2016September 21st, 2022No Comments

Like a medieval alchemist trying to turn lead to gold, investment gurus are forever seeking shortcuts to riches in the market.

One classic scheme involves getting out of stocks between May and October. “Sell in May and go away” proponents argue that stocks have historically performed worse during these months than in the November-through-April period. Investing during the “weak” months is for dummies, the thinking goes; the real money is to be made during those strong months.

Like so many claims about investing, this one sounds intriguing until you examine it more closely. We’ll do that in a moment. But first, let’s review the principles of sound investing. Investing really requires just a few steps: develop a plan, create a good asset allocation, understand the risks involved, and then give the market a chance to do its job.

Keep that last step in mind: The market have historically gone up over time, despite temporary ups and downs, and if you’re consistently invested in it, you should ultimately make money if you believe in capitalism. Unfortunately, that’s not good enough for the would-be alchemists.

So let’s examine the sell-in-May strategy. One study, by Larry Swedroe, research director at BAM Alliance, found that it worked—at least it did from 1960 through 1979. Over that period, the market returned an average of 9.7% a year in November through April, beating the overall year by 2.8 percentage points. But Swedroe also found that, over the prior 33 years, the market’s year-round growth averaged 10.3%—more than 5 percentage points better than the supposedly stronger months of November through April.

It’s an artifact of historical research that you can find evidence to support either side of an argument. But there’s a deeper truth in investing, which is that past market performance doesn’t guarantee future performance. What happened last year might not recur this year. And if it doesn’t you’ll risk making the classic, costly mistake of selling low and buying high.

Then there are some inconvenient practical questions. Where, having cashed out of the market before May, do you put your money? Treasury bonds? CDs? If you’re not careful, your returns won’t even keep pace with inflation, and your wealth could shrink.

Also consider that selling your stocks and then buying them back can get expensive. Transaction fees can add up, but the bigger hit may be the short-term capital-gains taxes triggered by selling your entire stock portfolio every 12 months.

Another investing “shortcut” based on the calendar has to do with the “January effect.” It’s based on the idea that stock prices are more likely to rise each January than in other months. Why? Because each December, the theory postulates, investors sell losing stocks to offset capital gains elsewhere in their portfolios. All this selling pushes losing stocks even lower. In January, the underpriced shares are scooped up by bargain-hunting investors, and the demand drives up their prices.

Smart investors can supposedly take advantage of this annual ritual by buying stocks during the month of December and selling in late January, after the market has bid their prices back up.

Like all the calendar-based investing strategies, there’s some historical evidence to back this one up. But again, past market performance doesn’t guarantee future market performance. There’s no way to know if the January effect will occur this year or not. To invest on the assumption that it will is to gamble with your money in a market that recently has been quite volatile—and for what? A percentage point of outperformance? Taking on high risk for the potential of a relatively small return is the antithesis of sound investing. You wouldn’t bet your house in the hopes of winning a car.

Furthermore, as with the sell-in-May strategy, betting on January can get expensive because of trading fees and taxes.

Finally, a word about market efficiency. Economic theory holds that because of the amount of information available to all investors, the market tends to be very efficient in fairly valuing securities. If there really were reliable seasonal patterns in the market, millions of investors would attempt to profit from them. With the cat out of the bag, any advantage would disappear along with the seasonal phenomenon itself.

The bottom line: investors shouldn’t upend their long-term investment strategies to try and catch short-term returns. Investing is simple—and your best chance of success is to keep it that way.

Disclosures:
The information provided is for educational purposes only and is not intended to be, and should not be construed as investment, legal or tax advice. The information is subject to change and, although based upon information that AdvicePeriod considers reliable, is not guaranteed as to its accuracy or completeness. AdvicePeriod makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information.
In accordance with Treasury Regulations Circular 230, any tax discussions contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.
Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. In preparing this article, we have relied upon information provided by third parties. While we believe these sources to be reliable, the accuracy and completeness of the information is not guaranteed. We have provided performance results of certain indices for comparison purposes only. A description of each index is available from us upon request. The historical performance results of each index do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index.
AdvicePeriod, LLC (“AdvicePeriod”) is an SEC registered investment adviser with its principal place of business in the State of California. Any reference to the terms “registered investment adviser” or “registered,” do not imply that AdvicePeriod or any person associated with AdvicePeriod has achieved a certain level of skill or training. AdvicePeriod and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which AdvicePeriod maintains clients. AdvicePeriod may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from registration/notice filing requirements. This article is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by AdvicePeriod with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of AdvicePeriod, please contact AdvicePeriod or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
For additional information about AdvicePeriod, including fees and services, send for our disclosure statement as set forth on Form ADV from AdvicePeriod using the contact information herein. Please read the disclosure statement carefully before you invest or send money.