What is your opinion of the “sell in May and go away” strategy? Is there any merit in it?
Wall Street loves its investing catchphrases. If you “buy low and sell high,” “let your winners run” and remind yourself during bad times that “the market climbs a wall of worry,” you’ll make out just fine. Or so we’re told.
But just because an adage has become lodged in the collective psyche of investors doesn’t mean it will make you wealthy. In some cases, the opposite may be true.
“Sell in May and go away” is a perfect example. It’s a catchy rhyme, but it’s terrible advice.
According to this well-worn slogan, stocks have historically struggled in the period from May through October, so investors are better off switching to cash or fixed-income during those months. Then, when Nov. 1 rolls around, they should buy back their stocks to benefit from the strong gains that supposedly follow in the subsequent six months.
I have never read a convincing explanation for why such a seasonal pattern would exist. Some proponents of “sell in May” have argued that demand for stocks softens during the summer months when portfolio managers and institutional investors are at the cottage. Others have theorized that year-end bonuses contribute to market strength from November through April. Another theory is that the spring income tax filing season takes money out of investors’ pockets, causing the market to slide.
I don’t put much stock in any of these explanations. Nor does the market’s performance back them up, especially in recent years.
The Stock Trader’s Almanac, which helped to popularize the strategy, says that “investing in the Dow Jones Industrial Average between Nov. 1 and April 30 each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950.”
Instead of advising investors to follow the calendar exactly, however, the Stock Trader’s Almanac combines the seasonal pattern with a technical analysis tool – the moving average convergence/divergence indicator, or MACD – “to confirm or assist in timing buy and sell decisions.” The publication’s trading alerts are available only to paying subscribers, which may help to explain why it is such a big fan of the seasonal approach.
But let’s leave the technical analysis aside and look at how a Canadian investor would have performed in recent years using a simple six-month switching strategy.
In 2022, “sell in May” worked as advertised. For the months of May through October, the S&P/TSX Composite Index posted a total return, including dividends, of about negative 5 per cent. So staying out of the market during that time would have been a good move. For the months of November, 2022, through mid-April, 2023, on the other hand, the index gained about 7.5 per cent. So, unless the market completely falls apart over the next couple of weeks, the “sell in May” strategy has been a winner over the past 12 months.
But the strategy backfired badly in the preceding few years. From May through October of 2021, the S&P/TSX gained about 11.5 per cent, including dividends. That was definitely not a good time to be sitting on the sidelines. And from November, 2021, through April, 2022 – when the strategy called for people to be fully invested – the index fell about 2 per cent.
Similarly, from May through November of 2020, Canadian stocks returned about 7 per cent, including dividends. Investors who decided to “sell in May” would have missed out on those gains as well.
The fact that recent historical data don’t support the strategy isn’t the only reason to be skeptical.
If you’re investing in a non-registered account, buying and selling frequently could trigger taxable capital gains. It will also drive up your tradings costs if you’re paying a commission each time you buy or sell. For dividend investors like me, there’s another huge cost to staying out of the market from May through October: You’ll miss out on half a year of dividends. No thanks.
For all of these reasons, I propose a new slogan: “stay away from sell in May.” Perhaps the strategy worked at one time, but it could have been due to a statistical quirk. If you slice and dice historical market returns long enough, patterns will emerge that don’t really mean anything and won’t necessarily repeat. These artefacts of data mining have given birth to a range of ridiculous prognostication tools, from the “Super Bowl indicator” to theories based on election cycles and skirt hemlines.
In his book, Debunkery, U.S. money manager Ken Fisher put “sell in May” under the microscope and found it to be flawed. His conclusion: “Ignore ‘sell in May’ and any other saying about selling automatically based on dates, months, pro football teams, or anything else not somehow grounded in sound, fundamental economics or portfolio theory.”
Such timing strategies appeal to investors looking for a shortcut way to “beat the market.” But in my experience, there is no substitute for owning a diversified portfolio of blue-chip companies or index exchange-traded funds and letting time and compounding work their magic. If you follow this simple approach, the only adage you’ll need is: “buy and hold.”
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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