“Sell in May and go away” is an old investment adage that seems to be true more often than not. Should you really sell your investments in May or simply stop trading stocks? CNBC notes that the recent rally might be a concern because after the previous early year rally stocks plummeted over the summer.
Stocks have surged through April in their best start to a year in 32 years.
But, markets don’t have a good track record of following up on a rally of that size.
“There are four other years since World War II that the S&P was up at least 15% to kick off the year like we’re going to be this year. Three of those years are virtually flat during these worst six months of the year, the other was 1987 when we lost about 13%, ” said Ryan Detrick, senior market strategist at LPL Financial, on CNBC’s “Trading Nation ” on Tuesday.
Since the Second World War the stock market has had four similar rallies starting the year. The 1987 19% rally in the first four months was followed by a 13% loss culminating in Black Monday. In 1967, 1975, and 1983 the market started the year very strong but then went flat for the summer months and into the fall.
Here at Profitable Investing Tips we routinely suggest that investors pick strong stocks using fundamental analysis techniques such as finding intrinsic stock value for buying and selling stocks. But, if what you need to choose and hold onto an investment is based on such solid analysis, how is it that the old adage, “sell in May and go away” has any value?
Why Sell in May and Go Away?
Investopedia looks at the adage sell in May and go away.
If a trader or investor follows the sell-in-May-and-go-away strategy, he would divest his equity holdings in May (or at least, the late spring) and invest again in November (or the mid-autumn).
Some investors find this strategy more rewarding than staying in the equity markets throughout the year. They subscribe to the belief that, as warm weather sets in, low volumes and the lack of market participants (presumably on vacations) can make for a somewhat riskier, or at a minimum lackluster, market period.
They cite the fact that between 1950 and 2013 the market has had an average gain of 0.3% during the May to October time frame and 7.5% during the November to April time frame. No one is absolutely sure why this happens but it seems to be tied to trading volume and presence of more investors.
Sell in May and Long Term Stock Investing
Some of the most successful investors are those whose preferred time period to hold a stock is forever. How does the “sell in May and go away” rule apply to them? It should be noted that while the stock market on the average does not do as well in the summer months as during the winter, over the years the market is still up on the average, by a little, in the summer. If you are thinking of selling your well-chosen stocks in May, consider the costs of fees and commissions as well as the work involved in repeated analysis of investments that have otherwise served you well. One of the basic reasons that long term buy and hold investors are successful is that they avoid the excessive overhead of investing found in paying repeated fees and commissions. Rather they use dividend reinvestment plans to keep purchasing stock without paying commissions and they typically use a dollar cost averaging approach that evens out the peaks and valleys.
Stock Market Timing and the Sell in May and Go Away Adage
The place where “sell in May and go away” would seem to work is in market timing. Trying to find bargains in May is a difficult task when so many investors and traders take the summer off. Rather, a better choice may be to use the summer months to evaluate investment opportunities and start buying, as a rule, in October. Of course, you will want to avoid the next Black Monday!
Buying Stocks That Let You Sleep at Night
A solid approach to investing is to buy stocks that have a long history of paying dividends, steady growth, and minimal volatility. These are investments that let you sleep at night. To the extent that these stocks experience their growth during the winter months may be a good reason to time your buying to take advantage of the winter months. It is not a good reason to sell the stocks that will provide you with a secure retirement.