Sell in May, and go away

A widely used trading expression

October 12, 2017

Sell in May, and go away is a widely used trading expression that warns investors to sell their stock holdings in May to avoid a seasonal decline in the equity markets. It’s a way of avoiding the typically volatile May-October period. There is a school of thought among some investors that this strategy is more rewarding than staying in the equity markets throughout the year.

This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. This is what Investopedia, a highly regarded source of credible market intelligence, says about this practice:

‘Since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. While the exact reasons for this seasonal trading pattern are not known, lower trading volumes due to the summer vacation months and increased investment flows during the winter months are cited as contributory reasons for the discrepancy in performance between the May-October and the November-April periods, respectively.’

Two significant weaknesses

In my view there are two significant weaknesses that the Sell in May, and go away syndrome overlooks:

  1. The transaction costs and tax consequences that are inseparable from moving in and out of the equity markets.
  2. Market timing strategies don’t play out in the long run.

Let’s talk about market timing, for a moment. Market timing seems so easy, in theory. Buy when prices are low and sell when they are at a high. Right? Wrong, certainly over the long term.

Market timing is a losing game

Market timing is a losing game, as volumes of research critical of the practice have validated. Some of the greatest investment minds in history – William Sharpe, a Nobel laureate, Benjamin Graham, considered the father of value investing and John Bogle, founder of The Vanguard Group – have all argued strenuously against it.

The alternative: tactical asset allocation

Like them, I am adamantly opposed to market timing, simply because there is a far more powerful alternative: tactical asset allocation (TSA). This is a strategy that, while allowing you to take advantage of market opportunities, enables you to stay fully – or substantially – invested.

Without wishing to seem excessively technical, a TSA portfolio strategy shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors.

The folly of folk wisdom

Rather than adopt an investment strategy based on folk wisdom – which is what the Sell in May, and go away adage amounts to – let me work with you to pursue an approach to portfolio planning that suits your unique needs and long-term goals.

Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721