Sell In May And Go Away: Meaning and Strategy Analysis
JA
Summary:
Sell in May and go away” is an investment strategy that recommends selling your stocks in May before the market dips. Over the previous years, market performance drops from May to October and rises again in November. While this may have worked in the past in some cases, it’s difficult to say for sure whether the market will continue this trend in the future.
If you’re like most people, you’re probably looking forward to summertime when May is around the corner. However, if you’re an investor, you might feel a bit anxious. That’s because May is traditionally seen as a tougher month for the stock market.
For many years, retail investors have followed the saying “sell in May and go away,” popularized by the stock trader’s almanac, and many investors choose to follow this strategy to avoid potential losses. But does this strategy actually work? And should you also sell all your stocks in May and take the rest of the summer off?
In this post, we’ll take a closer look at the “sell in May” method and whether or not you should follow this stock market strategy.
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How “sell in May and go away” works
Sell in May and go away (also known as the seasonal switching strategy) is a famous adage in the investment industry. The saying is based on the idea that the stock market tends to underperform from May to October every year. To help investors avoid the low stock market returns during these six months, the “sell in May and go away” strategy suggests selling your stocks in May and reinvesting in November.
But is there any evidence to support this theory? Well, sort of. A few studies have looked at this phenomenon, and some have found that stocks do tend to underperform during the summer months. According to Fidelity Investments, since 1990, the S&P 500 has averaged a return of about 2% annually from May to October, compared to about 7% in the other six-month period.
This phenomenon isn’t just limited to the United States either. A 2012 study showed that stock markets worldwide are also affected by the seasonal divergence trend. But as any savvy investor knows, past performance is no guarantee of future results.
Should you “sell in May and go away”?
While it’s true that the stock market tends to be strongest from October to April in the past, there’s no guarantee that this pattern will continue in the future. In fact, over the last few years during the pandemic, we’ve seen more volatility and less predictability in the market, so it’s risky to try to time your trades based on historical data and patterns.
Second, even if you manage to get out of the market before May, you’ll incur what’s called opportunity cost — simply put, the cost of not being invested. This cost can be significant, as you could miss out on potential gains if the market rallies while you’re out of it.
Lastly, this calendar-based trading pattern doesn’t consider the economic conditions, business cycle, and market environment. For example, if there’s a recession during the period when you’re invested in the stock market, you’ll likely see your portfolio values decrease regardless of which month it is. Plus, this strategy doesn’t account for changes in the business cycle or market conditions. That means if the stock market is in a bull market phase during the summer months, you would miss out on potential profits by not being invested.
So while there may be some merit to the strategy of selling in May and going away, it’s important to weigh the risks and potential costs before making any decisions.
Pro Tip
Relying on seasonal patterns can be risky. If you’re a long-term investor, focus on creating a diversified portfolio and following a sound asset allocation strategy rather than trying to time the market. If you need some help diversifying, try reaching out to one of the investment advisors below.
Will the stock market crash this year?
Many people wonder if the stock market will crash this year. Some experts say that it’s possible, while others believe that it’s unlikely. So, what’s the verdict?
Unfortunately, no one knows for sure. There are certain indicators, such as soaring housing prices and rising interest rates that can be red flags for a stock market crash. But at the same time, other indicators such as strong employment rates and growing wages can show that the economy is still on solid footing.
The stock market is a complex system, and predicting its movements is notoriously difficult. So only time will tell whether or not the stock market will rise or fall this year.
Alternative to the “sell in May and go away” strategy
May is typically considered a tougher month for the stock market, so many investors choose to “sell in May and go away.” However, analysis by the Center for Financial Research and Analysis (CFRA) has shown that a better method would be to rotate your investments instead of retreating completely.
The CFRA found that the consumer discretionary and technology sectors notably outperformed the rest of the market from November to April, whereas the consumer staples and healthcare sectors typically outpace the market from May to October. And to help investors capture these gains, CFRA created an equal-weighted seasonal rotation index in 2018.
So if you’re looking to keep your portfolio growing throughout the year, sector rotation may be a better strategy than selling everything in May.
Other ways to increase your stock market performance
In order to get the most out of your invested funds, consider following the steps listed below.
- Opt for funds over individual stocks. To reduce risk, it’s important to diversify your portfolio by investing in a mix of different stocks and mutual funds. This way, if one particular stock takes a tumble, the overall impact on the portfolio will be minimized.
- Dollar-cost averaging. This strategy involves investing a fixed amount of money into a security at regular intervals. For example, instead of buying a stock at $100 a share all at once, you could invest $10 per week over the course of ten weeks. This approach can help smooth out the ups and downs of the market and reduce the risk of losses.
- Do your homework. When it comes to investing your money in the stock market, it’s important to do your homework. That means thoroughly researching a company before buying its stock and avoiding succumbing to FOMO or the herd mentality. Both of these can lead to making bad investment decisions that cost you money. So take your time, do your research, and don’t let yourself get caught up in the hype.
- Compare brokerages. Different brokerages offer different levels of service, and some may be better suited to your needs than others. For example, if you’re an active trader, you’ll want a brokerage that offers low commissions and fast execution. But a brokerage with robust research capabilities can be more beneficial if you’re a long-term investor. Take a look at the comparison tool below to find the ideal brokerage for your investment style.
Key Takeaways
- The “sell in May and go away” strategy is based on the idea that the stock market tends to underperform from May to October and recover when November rolls around.
- The Center for Financial Research and Analysis found that rotating your investment portfolio instead of selling in May can be a better method for capturing gains.
- The “sell in May and go away” method has flaws because historical patterns are not always reliable predictors of the future. Economic conditions and unexpected events (like the COVID pandemic) can cause stocks to behave differently than in the past.
- While the “sell in May and go away” method may work for some investors, it’s not necessarily the best approach for everyone.
Find your ideal investment strategy
So is selling in May and going away a good idea? Well, just as there isn’t one “best” investment strategy, there are also conflicting viewpoints on this strategy. Some swear by it while some don’t.
Investing involves risk, so it’s important to consider what your investment objectives are. Don’t just take investment advice without doing your own due diligence. Also, never make investment decisions unless you’re fully comfortable with the risks involved. If you need help with financial planning or building your investment portfolio, talk to a financial advisor who can develop a strategy that’s right for you.
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