Sell in May
Well, it’s May again, and most investors have heard the old saying, “Sell in May and Go Away”, and while I try to stay away from any philosophy that uses a rhyme to identify itself, this one potentially works. The term comes from eighteenth century England when stock brokers left for the summer months and didn’t return until fall. That’s how it was back then. The saying that we recognize today is shortened from “Sell in May and go away, do not return until St Leger’s Day.” St Leger’s Day was the last horse race of the season and since there weren’t any more, the brokers could go back to work.
Legendary investor Yale Hirsch discovered the market pattern that lead to the investment strategy now known as “The Best Six Month’s Switching Strategy.” If you had followed Hirsch’s advice and invested in the stock market on November 1st and sold on April 30th each year since 1950, your cumulative return on the Dow Jones Industrial Average would have been a 17,892.70 point gain over the last 65 years. Conversely, if you had invested on May 1st and then sold on October 31st over the same period, you would have lost 1066.19 points. Of course you could have simply bought and held, but then you wouldn’t have received interest on your money when you were out of stocks or potentially invested in fixed income, costing hundreds of thousands of dollars.
To put this in the perspective of real money, $10,000 invested in the November-April period was worth $848,486 on January 1st, 2015. The same $10,000 invested in the same years in the May-October period actually lost $221. It’s astonishing, but it seems to happen most of the time. Since 1950, the November-April period is up in 56 years and down only 9. The May-October months were down 27 times.
It the past it was easier to use the switching strategy; when May rolled around you moved money away from stocks and into CDs, Treasury Bonds or any other fixed income investment and earned an average of 6% over the years. But thanks to the Federal Reserve’s ineptitude by dropping rates so low, you can’t do that anymore. Today the average 6 month CD pays about one half of a percent, and that isn’t going to change much anytime soon.
Now the switching strategy isn’t for everyone. There are a lot of considerations that go into investing; taxes are probably the biggest one. But dividends are close behind. As we get older, a divided paying strategy is a major part of investor’s lifestyles. Plus, dividends are responsible for 42% of the stock markets total return over the last 85 years. If you’re out of the market for 6 months, you miss two dividends per stock and as I’ve said, you can’t make up the difference as safely as you used to.
So a modified switching strategy might be the answer. Market sectors like health care, utilities, consumer staples, leisure and retail do just as well in the summer months as they do in winter. Keeping selected stocks or investing in those sectors Exchange Traded Funds (ETFs) is a good way to keep market participation year round without suffering a May-October battering. Studies by Fidelity have found a combination of 50% consumer staples and 50% healthcare outperformed the market with lower volatility.
Another strategy for those who aren’t looking to switch their entire portfolio twice a year is to add to their current positions in the November-April period, then sell those in May. With the over 1700 U.S. ETFs available, it could be easy to pick a portfolio that will take advantage of the seasonal anomaly. This way you’re going with the tide without as many costs that cut into returns.
But this is a year when there are more pressing reasons to consider a Sell in May approach. The markets saw a nasty correction in January and February and it looked like things could get a lot worse. Fortunately, the markets rebounded, but many of the reasons for the sharp decline remain in place. The current earnings season looks very weak, declining for the third quarter in a row, the market is trading at valuation levels that are historically high and volatility could easily return as worldwide events influencing U.S. stocks haven’t gone away.
Another reason to consider the strategy to Sell in May is the presidential election. This one is shaping up as really ugly and it’s hard to believe something bad isn’t going to hit the markets hard.
Until the next time, we’ll watch your money.
Nicholas Bertell ChFC®
Redwood Coast Financial Partners, an independent firm with securities offered through Summit Brokerage Services Inc., member FINRA/SIPC. Advisory Services offered Through Summit Financial Group Inc., a Registered Investment Advisor. Opinions expressed are that of the author and are not endorsed by Summit Brokerage or its affiliates. All information herein has been prepared solely for informational purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. Certain Statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risk and uncertainties. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.
Roberts, Ken, The Real Reason We Say “Sell In May and Go Away”, The Street.com., )5/07/15
Stock Trader’s Almanac 2016, Jeffrey A. Hirsch & Yale Hirsch, Wiley
Historical Return on Stocks, Bond and Bills-United States, Stern,NYU
Returns: Price and Dividend Contribution- Business Insider, www.businessinsider.com.
Should you “Sell in May and go away”? Fidelity Active Trader News, 04,27,2016