Why You Shouldn’t “Sell in May and Go Away”

It’s an investing adage that’s nearly as old as the markets, but it’s one saying that people shouldn’t take to heart.

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Anyone who has taken any interest in the markets will likely have heard the saying “Sell in May and go away.” It’s a catchy adage that cautions investors to sell stock holdings before the summer, when trading volumes decline, and then to buy again in the fall, when people start paying to the market again.

The evidence does not bear out the theory. Investors should stay invested because they don’t want to miss out on May to October returns.

Because of the perceived lack of interest in investing over the summer, many people think that markets underperform from May to October as compared to the November to April period. But do stocks really perform poorly while we’re all at the cottage? Not according to a US study that found that from 1928 to today, the June to August period is typically the second best period of the year for markets with gains 63 percent of the time and an average return of 2.97 percent.

Bill Chornous, Senior Vice-President of Investment Strategy for Investors Group, says that “Sell in May and go away is a market timing strategy that is doomed to failure. It’s about ‘the cost of opportunity,’” he says. “If you got out in May, you could have exited with solid gains but you would have lost out on the incremental gains you would have made by staying invested.”

Chornous did his own analysis of the markets and found that, according to data from the last five years, investors would have lost money if they sold on May 1 and rebought on November 1. As well, markets between November and April didn’t always outperform the other half of the year.

S&P 500 – 2013 to 2017
November to May May to October
2012 to 2013 11.91% 2013 10.98%
2013 to 2014 6.94% 2014 7.13%
2014 to 2015 3.36% 2015 -1.37%
2015 to 2016 -1.84% 2016 2.16%
2016 to 2017 12.90% 2017 7.83%

It was a similar story with the Canadian market, with some summer periods outperforming the winter ones and market rising between May and October in three out of five years.

S&P/TSX Composite Index – 2013 to 2017
November to May May to October
2012 to 2013 -0.35% 2013 8.44%
2013 to 2014 9.86% 2014 -0.35%
2014 to 2015 4.72% 2015 -11.80%
2015 to 2016 2.42% 2016 6.63%
2016 to 2017 5.47% 2017 2.89%

On the surface, the sell in May and go away strategy may seem sound but, “it’s an old theory that might have made sense in the past – the idea that, in the summer because of holidays and so on, volume goes down and the market languishes,” Chornous says. “But the evidence does not bear out the theory. Investors should stay invested because they don’t want to miss out on May to October returns.”

Selling before a certain month also goes against the long-term investing ethos that the majority of investors should adhere to, adds Chornous. “The market is a place for building wealth over the long term,” he says. “Investors who try to time their re-entry seldom succeed. Those who stay true to specific long-term strategies that fit their investment goals and risk profile can count on success over the long run.”

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