What is this adage based on and is it good advice? Since trading in markets began, traders have been trying to figure out how markets work, what patterns to watch and how to predict the market ups and downs. After all, if you could figure out when the next market correction was going to occur you could sell your investments and avoid a loss. You’d stay invested until just before the market dropped so you could squeeze out that last bit of return. But predicting what the markets are going to do and when has proved difficult at least and a fool’s errand at worst. But that hasn’t stopped investors and those who invest for others from trying. Combine that with a bit of superstition and you get adages like “Sell in May and Go Away” or things like the Santa Clause Rally.
So where does the phrase come from? London was the center of the financial universe before Wall Street and the saying may have come from the tradition of wealthy merchants and bankers to escape the summer heat. The complete phrase was “Sell in May and go away and come on back on St Leger’s Day.” (Investopedia, 2018) St Leger’s Day is significant because it marks the start of the horse racing season and a race by the same name. (The Telegraph, 2018)
The historic underperformance of the markets during this time are likely attributed to lower trading volume due to vacations and may still have an effect today.
So why should we not sell in May and go away? Three reasons come to mind:
- Transaction costs – it costs money to buy and sell investments
- Tax consequences – buying and selling, especially on a short-term basis causes capital gains tax
- Market timing strategies rarely work out and for every adage, there are the exceptions
I’m not a fan of market timing for the above reasons and because it necessitates timing the market twice. Once to find the right time to exit the market and the other to get back in. There are piles of research to suggest that the average investor underperforms the markets they are invested in. Why? Let’s take the S&P as an example. A popular strategy floated before the tech correction in 2000 and only occasionally mentioned of late, is to just buy the S&P and forget it. After all, the S&P 500, a passive basket of U. S. stocks, has returned about 10% since it’s inception in 1928. (Seeking Alpha, 2018) Unfortunately, about 1/3 of those years were negative. The worst was 1931 when the index was down 43.84% (Seeking Alpha, 2018). So why is it a bad idea for many of our clients to invest only in the S&P? Because most of the investors I know, myself included, can’t handle the volatility of the S&P. And that is exactly why most clients don’t get the market returns for the investments they choose. Because when they have a down year of 44% they inevitably sell, and they do so at the worst time, the darkest hour, missing the market exit and entry points the adages hopes to identify.
So, what should you do? Construct a portfolio that is appropriate to your level of risk and stick to it. Revisit from time to time, when you are having trouble sleeping at night or when you suddenly feel like placing a big bet. We have lots of tools to both evaluate an appropriate level of risk for you as well as evaluate the risk you are currently taking in your portfolio. We are always happy to help clients reevaluate their portfolio and how it fits into their overall financial picture. Just ask.
The information provided is for guidance and informational purposes only. The articles are not the opinions of ProCore Advisors, LLC.