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“Sell in May and Go Away” is Dumb, Dumb, Dumb

Why employ an investing strategy that is based on a summer horse race?

One of the oldest stock market strategies is to “Sell in May and Go Away.” But before you factor in this seasonal “strategy,” you might want to think twice (and twice again) about employing.

Let’s look at the history and more importantly, the numbers.

The Strategy

“Sell in May and go away” is a well-known trading adage that suggests that investors should sell their stocks in May to avoid a seasonal decline in the stock market. An investor selling his or her stocks in May would then buy stocks again in November because the November through April period shows significantly stronger growth in the market than the other half of the year.

Where did this “Sell in May and go away” advice originate? Not on Wall Street, but rather in London’s financial district. The original saying, “Sell in May and go away, come back on St. Leger’s Day” refers to a horse race. That’s right, a horse race.

The St. Leger Stakes is one of England’s greatest horse races and is run in late September. London traders would sell their shares, enjoy their summer, and return to the market after the St. Leger race. The idea is based on seasonality and with this strategy, traders are only invested in the stock market for about six months of the year (November through April).

These months are typically the strongest period of the stock market. Investors sell their stocks in May, save their money in cash, bonds, or another safe investment, then buy stocks again in early November.

Historical Statistics on This “Strategy”

As it turns out, stocks have done better during the winter-early spring period over the past 75 years. According to the Stock Trader’s Almanac, since 1945 the S&P 500 has gained a cumulative 6-month average of nearly 2% from May through October on a price return basis. And for the 6-months from November through April, the S&P 500 has gained 6.7%, on average.

In addition, the S&P 500 has lost money in only 13% of the November-April time periods since 1945 and about 33% of the time from May through October. That success rate is remarkable. Maybe the horses are onto something after all?

Recent Statistics on This “Strategy”

You may be tempted to employ a “strategy” that has performed admirably for the past 75 years, right? But before you do, maybe you should look at a simple scenario over a shorter-time period? Consider the chart below that shows the difference between staying fully invested and employing this “Sell in May” theory.

Oh and the time period is shorter as it only covers the past 30 years (sarcasm intended):

But This Time It’s Different

This is probably the most dangerous phrase in all of investing: “this time it’s different.” In fact, if you are discussing investments, the markets, or anything financial related and someone says this, don’t walk away, run.

  • Most Recent Year: Looking at the S&P 500 from November 1, 2020 through April 30, 2021, the S&P 500 gained approximately 27%. But if you sold out of equities in May 2020 only to get back in on November 1, 2020? Well you would have missed the S&P 500 returning 13.97%. Didn’t work.

  • Last Year: Looking at the S&P 500 from November 1, 2019 through April 30, 2020, the S&P 500 lost approximately 5%. Didn’t work.

  • The Year Before That: Looking at the S&P 500 from November 1, 2018 through April 30, 2019, the S&P 500 returned approximately 8%. But if you sold out of equities in May 2019 only to get back in on November 1, 2019? Well you would have missed the S&P 500 returning 2.6%. Didn’t work.

  • The Year Before That: Looking at the S&P 500 from November 1, 2017 through April 30, 2018, the S&P 500 returned 2.33%. But if you sold out of equities in May 2017 only to get back in on November 1, 2017? Well you would have missed the S&P 500 returning 7.83%. Really didn’t work.

This time it’s different? Utterly dumb. Especially when you consider what happened in 2020 and 2021.

Other Things to Worry About

Despite irrefutable proof that this “strategy” hasn’t worked over the past 30 years, there are other things you need to worry about too:

  • With any strategy based on averages, any given year might show an extreme high or extreme low, a wave that a buy-and-hold investor could ride out.

  • Investors lose short-term gains to taxes because short-term gains are taxed at your regular rate.

  • Investors face additional transaction costs due to selling stocks and mutual funds, followed by buying stocks and mutual funds later.

Why “bet the farm” on a simple seasonal strategy having its origins in a summer break before a horse race? That would be like gambling…

Working with Your Financial Advisor

The key to successful long-term investing, of course, lies in following wise strategies. Your financial advisor understands these strategies. It is generally best not to rely on interesting statistics that are not explained by actual market trends or economic analysis.

No specific investment strategy is foolproof. Your best strategy as an investor is not to base your plans on market timing or the season. Instead, focus on the traditional, sensible factors that include assessment of the business cycles, changing economic conditions, and news from the market.

Your financial advisor is the best source for information about how to handle your money. He or she can guide you in planning for the future.


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