Sell in May and Go Away? The Numbers Don't Lie

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The old market adage exhorting investors to "sell in May and go away; come back on St. Leger's day" appeared to find favor today, as U.S. stocks lost ground on this first day of the month. The and the narrower, price-weighted both fell 0.9%.

Consistent with those losses, the , Wall Street's fear gauge, rose 7% to close at 14.49. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

A year ago, I examined the long-term record of a "sell in May" strategy and compared the returns to those of the converse strategy (i.e., buy in May) and to "buy-and-hold." These are how the results shook out (I've updated the data through yesterday):

 

8.5%

5.1%

10.1%


Source: Ibbotson Associates, Standard & Poor's, Federal Reserve Bank of St. Louis, author's calculations.

The May through September period does appear less favorable to stocks over the long term, but note that both seasonal switching strategies underperformed a simple buy-and-hold strategy. Naturally, this has not been the case over every period within that 87-year span. In fact, over the past five years, selling in May and buying back in October has been the dominant strategy, beating buy-and-hold by a full 3 percentage points, on an annualized basis:

 

8.2%

(2.4%)

5.2%

Source: Ibbotson Associates, Standard & Poor's, Federal Reserve Bank of St. Louis, author's calculations.

In light of this recent performance, should investors then sell their holdings to try to avoid a seasonal penalty? My answer is an emphatic no. Seasonal effects are unreliable and, assuming you're a fundamentally oriented investor, they have nothing to do with your reasons for owning equities. Finally, regardless of recent past performance, the long-term results of "sell in May" aren't convincing. My advice: Build an all-weather portfolio and don't deprive your stocks of the warmth of the spring and summer sun.

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The article Sell in May and Go Away? The Numbers Don't Lie originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned, and neither does The Motley Fool. You can follow Alex on LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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