Will they sell it in May and leave? Three reasons why it’s dangerous

The world of investment is full of proverbs and mottos. Those who say “sell in May and leave” are concepts that have attracted investors’ attention for decades.

The phrase historically suggests seasonal patterns of stock markets that perform better in colder months (November to April) than in warmer months (May to October). But is it just a catchy proverb or is there something?

The origin of “sold in May”

Many believe in the Stock Trader Yearbook, a book known for highlighting past market trends in order to generate phrases for sale.

The concept of the book “The Top Six Months of the Year,” written by Yale Hirsch in 1967, suggests that historically the period from November to April has a higher average return than the year.

One way to implement Hirsch’s switching strategy is to trade stocks in a portfolio in favour of cash or bonds. During the “best month”, you are fully invested in stocks and mutual funds, but during the “worst month”, you either remove the money from the stock and leave cash, or use cash to buy a bond ETF or bond mutual fund.

Is there a truth that “I’ll sell it in May and leave”? ”

There are some truths about the seasonality of the stock market.

The S&P 500, a major stock market index since 1990, has typically increased by around 2% from May to October, but according to Fidelity, an average of around 7% from November to April has become much stronger.

Interestingly, this pattern is not limited to large caps on the S&P 500. Even small caps and global stocks show similar trends based on their respective S&P indexes.

3 reasons why “selling in May” is dangerous

Loading May’s bandwagon sales is not a great strategy for the average investor. A closer look reveals some important cautions to catchy phrases.

1. I missed the opportunity

Perhaps the biggest drawback of “May Sell” is the possibility of missing out on a summer gathering. The market is inherently unpredictable and strong rises occur at any time. By selling in May, you can lock in short-term losses and miss out on potential growth over the summer.

For example, in 2020, the stock market went low in March as investors paniced at the start of the pandemic. But by May, the market had already recovered. If they sold most of the positions in May 2020, they would have crystallized those early Covid-19 losses and missed a powerful gathering that other investors enjoyed the rest of the year.

Bankrate’s chief financial analyst Greg McBride notes that closing inventory as a summer approach can burn traders with dividends.

“As time goes by, about 40% of total revenue comes from dividends,” he says. “Sitting on the sidelines for half the year means getting half the annual dividend. What’s more, if the market tends to be sluggish in one of the year, wouldn’t you want to reinvest those dividends at a low price?”

2. Presidential Election Year Breaks Trends

Election years may be even more likely to defy May-in-Sell intrend, McBride said.

“History shows that in the era of presidential elections, market returns tend to throw the whole ‘selling in May’ paper into your head later than the first one,” says McBride.

In fact, according to Carson Group data dating back to 1950, the S&P 500 rose by an average of 2.3% during the May-October period of the presidential election year, reaching nearly 78%.

3. It’s not guaranteed, there are other factors to consider

Past performance does not guarantee future results. Just because a pattern doesn’t fit in the past doesn’t mean it will continue.

The average revenue difference between the two periods may be statistically significant, but may not be substantial enough to justify efforts and potential costs to positively recalibrate the portfolio based solely on the timing.

Finally, the performance of a particular stock is influenced by many factors unique to each company, such as revenue reports, industry trends, and administrative decisions. These often have a much greater impact on stock prices than seasonality.

Alternatives for “selling in May”

Instead of taking “Sale in May” as the gospel, implementing other investment strategies is much more likely to help you in the long run.

Averaging dollar costs is the practice of investing a certain amount on a regular basis, regardless of how the stock market is functioning. Trying to consistently timing the market is notoriously difficult, even for professional traders. Practice dollar cost averaging to average costs per share over time, reducing the risk of buying at peak times.

Another option is to buy and hold a small number of index funds that track specific market indexes, such as the S&P 500, or passively managed investments.

Unlike “May Sales,” which requires active management of your portfolio, index funds have a set and forget-it approach. Once you invest in an index fund, you can hold it for the long term without constantly monitoring the market or adjusting your holdings. A good, long-term approach to investment is generally considered a more practical approach.

Conclusion

The May and Godey sayings may be an interesting part of the folktale of investment, but it should not be the basis of your investment strategy. If you are considering selling your assets, we recommend consulting with a financial advisor who will help you devise a plan based on your individual situation and time horizon.

Index funds have built-in diversification, low cost and the ability to acquire market returns, offering more reliable opportunities for the average investor. By focusing on long-term strategies, you can avoid the timing pitfalls of the market and position yourself for success regardless of the season.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Furthermore, investors recommend that past investment products performance is not a guarantee of future price increases.