If my doctor or lawyer spoke in nursery rhymes, I’d fire them. And yet on Wall Street, it’s perfectly normal to not only speak in nursery rhymes, but to use them as actionable investment advice — like “the trend is your friend!” or “don’t frown, average down!” In my home state of Texas, it’s perfectly legal to shoot a financial advisor in the leg for uttering that nonsense. No jury would convict you for it, at any rate…
This brings me to perhaps the most overused maxim: “Sell in May and go away.”
If your financial advisor says this as anything other than a joke, you should fire him that day. And if you’re in Texas, you should go ahead and shoot him in the leg.
The problem with this isn’t that its wrong, per se. But rather that it’s a dangerous half-truth.
Stocks have indeed performed better during the November to April period than during the May to October period. Over the past decade, the winter half of the year returned 8.67% annually, whereas the summer half returned 3.86%.
Over 50 years, the gap grows larger. The winter half of the year returned 7.56% per year, and the summer only 0.31%.
Yes, November to April has performed a lot better on average than May to October. But both halves of the year are positive on average, and in any given single year the numbers can look a lot different.
If you had sold in May of 2017, you would have missed out on nearly 8% gains by the time you reinvested in November.
Let’s dig deeper…
S&P Monthly Returns January 1950 to April 2019
Above are the average monthly stock returns going back to 1950.
The powerhouse months are April, November, and December, which collectively account for more than half the returns of the entire calendar year. But July and October have historically been decent months too, and May, June, and August are just sort of flat.
The only month with a lousy average return is September, and even then, the average loss was less than half a percent.
Averages like these are interesting, but not particularly helpful when it comes to investing. I can count five instances where the market returned better than 10% in a single month between May and October. You’d really feel bad if you missed out on those gains because you tried to time the market using an overly simplistic model.
But there are bigger issues here, too.
Why You Shouldn’t Sell in May
Ever think about taxes and transactions costs? Does it really make sense to sell everything and pay short-term capital gains rates every year because the averages suggest returns will be flattish for a few months?
And what about income? If you depend on your stocks for the dividend stream, do you want to sit out for two or more quarterly dividend payments?
Let me be clear… this is not a manifesto for buy-and-hold investing. Personally, I sold most of my index funds months ago, and my personal accounts are invested heavily in income and market neutral strategies.
But if you’re looking for an edge to beat the market or significantly reduce portfolio risk: sell in May, ain’t the way.
See? I can make infantile nursery rhymes, too. Only mine is much a full-truth than a mere half-truth
If you’re anything like me and make income a major component of your investing process, you care a lot less about whether your stocks trade sideways for a few months and a lot more about the dividends continuing to hit your account.
That’s the approach I’ve been taking in Peak Income, and it’s working — 14 out of our 15 open positions are sitting on profits.
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