Last Updated on August 14, 2020
Sell in May and go away refers to an investment strategy of avoiding the typically underperforming summer months in the stock market. In a nutshell, sell in May and go away suggests selling your stocks in May, and then buying them back up in November. Festive investors refer to this strategy as the Halloween indicator because that holiday is a signal to buy up stocks again.
Timing the market is something that rarely ever works. However, over 6 decades of data show there’s some validity to this approach. But before you sell off your portfolio, let’s examine if this really is a smart strategy.
Historically, the stock market has stronger growth in the months of November through April. We don’t know exactly why summer months underperform winter months, but we do have some theories. A majority of holidays that involve heavy consumer spending fall between November and April. This tends to boost stock prices.
Additionally, holiday spending leaves less of our hard-earned dollars available for spending in the summer months. Finally, traders and investors alike tend to take vacations in the summer, which is believed to contribute to lower trading volume and higher stock price volatility.
How does sell in May and go away work?
The mentality of sell in May and go away is structured on the logic of avoiding the typically underwhelming performance of the stock market in the summer. Those who subscribe to this strategy hold onto their stocks in the months of April through November, and then sell them off in May, sitting out the summer season. Then, as Halloween nears, investors buy back stocks to gear up for the better performing six months of the year.
While this is an old adage in the investing world, many people have mixed feelings about it. And rightfully so. Historically speaking, the S&P 500 has gained an average of only 2% from the 6 month period of May through October. In contrast, the historical November through April period has seen an average growth of 6.7%. That’s a big difference, and this trend has held true for over 60 years.
Despite the fact that this trend has been historically accurate, it is still just that – a trend. Most financial professionals will advise that you not attempt to time the market…and for good reason. Missing just 5 of the best days in the market can cost you hundreds of thousands of dollars over the lifespan of your account. That’s a big price to pay for buying and selling stocks on predicted seasonal trends.
Should you sell in May and go away?
For those that are well versed with the nuances of the market, sell in May and go away could be a solid strategy to harness the best growth months of the year, and avoid the most underperforming months. However, there are some other serious downsides to consider before you employ this strategy.
The irreplaceable value of time
Time is the most important factor in how your portfolio will ultimately perform. Taking yourself out of the market for 6 months of the year each year tremendously limits how long your account will have to grow. While the summer months have seen an average of only 2% growth, that is growth nonetheless. Leaving your money in the market during those months allows you to not only accrue compound interest but also dividend payments which can be reinvested.
No one can predict the future
There’s no discounting the fact that sell in May and go away is based on some pretty strong historical data. But again, it is a trend. No one can predict the future, and there certainly have been years where this trend did not hold true. In fact, the S&P 500 performed much better than anticipated over the summer months in 2013, 2014, and 2017:
2013: averaged 10%
2014: averaged 7.1%
2017: averaged 8.0%
There may be additional costs
Many online brokerage firms offer free trades, but not all do. Additionally, free trades can often be limited to stocks and exchange-traded funds (ETFs). Fees can quickly add up and eat into any potential benefits that you might get by participating in the sell in May and go away strategy. By selling, you will be on the hook to pay capital gains tax on any assets held in a taxable account.
You may be tempted to try to time the market more often
Yes, this topic has already been mentioned a few times in this article, but it deserves every bit of your attention. Volatility in the stock market can be a very intimidating thing to watch for investors. The moment you feel like you can counteract some of that volatility by timing the market is the moment you’ve lost sight of the fact that time in the market is key. The more you try to predict the future, the more likely you are to dig yourself into a hole, missing out on profitable opportunities.