What is your take on the “sell in May and go away” strategy? The way markets have been going with tariffs, do you think sitting out the next six months is a smart strategy?
The kindest thing I can say about “sell in May and go away” is that it rhymes. But it’s lousy investing advice, even in the current uncertain environment.
According to proponents of the strategy, stocks typically struggle from May through October, so investors should park their money in cash or fixed-income securities during these months. On or around Nov. 1, they should get back into stocks to ride the bull market that will supposedly follow in the subsequent six months.
Why would such a seasonal pattern even exist, you ask? Beats me. Some advocates of “sell in May” argue that demand for stocks softens during the summer when portfolio managers and institutional investors are on holiday. Others have suggested that year-end bonuses on Wall and Bay streets contribute to market gains from November through April. Or maybe stock prices melt in hot weather, just like Popsicles and ice cream cones. I don’t know.
What I do know is that the strategy has delivered some disappointing returns in recent years.
In 2024, for example, the S&P/TSX Composite Index surged 11.2 per cent from May through October, or about 12.9 per cent, including dividends. So, contrary to what the adage recommends, that was actually a great time to be invested in stocks. The strategy worked better in 2023 and 2022, as stocks fell in the spring and summer months. But in 2021 and 2020, the opposite happened.
If you’re keeping score, that’s two of the past five years that “sell in May” worked as advertised, and three when it didn’t.
That’s not the only reason I would never follow the strategy. In a non-registered account, buying and selling based on seasonal patterns could trigger taxable capital gains and drive up commission costs as well. And while you’re out of the market, say goodbye to any dividends you might otherwise have collected. That alone is a deal-breaker for me.
Yes, the future is uncertain with the economically challenged U.S. President Donald Trump calling the shots for the world’s largest economy, which also happens to be Canada’s biggest trading partner. But instead of trying to time the market’s ups and downs based on an unproven seasonal theory, my advice is stay invested, maintain a diversified portfolio, collect your dividends – and hang on until the clouds part.
My daughter just accepted an offer to attend university in the fall, but I am not clear on when I can start making withdrawals from her registered education savings plan. Can I do this right now? Also, what kind of withdrawals do you recommend once I get the green light to take money out?
I’ll answer your second question first. What I usually recommend, and what I have done with my own two kids (the younger of whom just finished her second year of university), is to prioritize the withdrawal of educational assistance payments, or EAPs.
EAPs consist of investment earnings and government grants that have accumulated inside the RESP. Unlike withdrawals of your own RESP contributions, which are not taxable, EAPs are taxable in the hands of the student. To minimize taxes, and to avoid potential penalties down the road, it’s prudent to withdraw these taxable funds while the student is enrolled in school and has minimal other income.
To be clear, I’m not suggesting you should make the biggest possible EAP withdrawal as soon as you are permitted, as that could immediately push your daughter into a higher tax bracket. Rather, consider developing a plan to gradually take EAPs – say annually or semi-annually – in a tax-efficient way that exhausts the EAP funds while your daughter is in school.
The goal is to avoid a situation where your daughter graduates with a big chunk of taxable earnings and grant money still inside the RESP. In such cases, any remaining grants might have to be repaid, and the RESP subscriber who set up the account might also have to pay income tax – plus a penalty of 20 per cent – on the withdrawal of any remaining earnings. The government gives you a grace period of up to six months after graduation to withdraw EAPs, but I would caution you against waiting that long in case your daughter starts a full-time job and finds herself in a higher tax bracket.
Now, regarding your first question, you’ll need to provide your financial institution with a proof of enrolment letter from your daughter’s university before you can request an EAP. Some schools charge a fee to download the letter, others don’t. Many schools also require new students to select their courses before an enrolment letter is issued. If you can’t find this information on the school’s website, you or your daughter should contact the registrar.
Once you’ve provided proof of enrolment to your financial institution, you can request an EAP of up to $8,000 in the first 13 weeks of full-time enrolment (or up to $4,000 for part-time students). After 13 weeks, there are no hard limits on EAP withdrawals, although the financial institution could theoretically ask for proof of education-related expenses to justify withdrawals that exceed the Canada Revenue Agency’s inflation-indexed “annual EAP threshold limit,” which is $28,881 for 2025.
The years fly by when your kids are in school. Now is the perfect time to develop a plan to make use of the money inside the RESP in the most tax-efficient way possible.
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.