Market Beat: Sell in May and go away
Many of you have probably heard the old stock market saying, “Sell in May and go away.” I’ve written about it in the past several times. You may hear it again in the financial media this time of year. It refers to seasonal cycles in the stock market.
The original phrase came from old England hundreds of years ago. In those days, the stockbrokers would take long summer vacations and nothing much would happen in the stock market until they returned in the fall.
In the old days the quote was,” Sell in May and go away, don’t return until St. Leger Day.” Saint Leger day was celebrated in the middle of September, and the final horse race of the season was held on that day, after summer and the horse racing season was over, the stock brokers would finally return to work and the markets would get moving again after a quiet, dull summer.
There are strategists that still employ a “Sell in May and go away” market timing strategy. What they do is liquidate their equity holdings on the last trading day of April, sit in cash for half the year, and then put their funds back into the stock market on the first trading day of November.
Statistically, the summer months can tend to be pretty quiet and some of the largest corrections have occurred in September and October. Looking at long-term averages, September tends to be the worst month of the year for stocks and December is the best.
That doesn’t mean that you should sell everything once a year and reinvest at a later date. Just because the summer months are not quite as good on average, that doesn’t mean that we won’t have some summers where the market posts respectable returns. In the past the summer months have not had returns as good as the winter months. You’ll also miss out on dividend income if you sit in cash all summer. Don’t forget about taxes if your funds are held outside a qualified retirement account, you’ll have to pay short-term capital gains every year instead of holding your investments for the long haul and paying the much lower long-term capital gains rate if you decide to liquidate a stock position.
It is an interesting old saying, but I wouldn’t base your investment strategy on it.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.