It’s that time of year again. The perennial phrase “Sell in May and go away” gets the most unwarranted attention of any conventionally unwise cliche, and even respectable newsies like the Wall Street Journal get caught up in the hype. The expression comes from ye olde times in London, when stock-market trading would dry up over the summer months as bankers took vacation. The phrase implies that timing the stock market is as easy as reading a calendar and knowing when to plant your seeds. Googling the phrase yields an astounding 518 million hits – pretty impressive. It’s a perennial hit, and one which it’s worth revisiting to see how wrong it has been.
Is the summer really any different?
This market timing strategy says you should stay out of the stock-market (and in cash) from May till September. This means being out of the market for 3 months – a quarter of the year.
The first thing we should do is check if there is any systematic difference between monthly returns in the summer, and those outside of summer months. The graph below depicts monthly returns of an 80% stock portfolio*, like Betterment’s, broken out for those periods since 2003. There don’t appear to be any strong differences between the two periods – in fact, “Not Summer” has quite a few worse months than “Summer”. When we compare the annualized averages, the two are different by about 2.4%… but this difference is statistically most likely to be random, and not systematic. It’s also important to note that while 6.5% is lower than 8.9%, it’s not negative. Growing your wealth by 6.5% is still a pretty good reason to be invested.
We can also see how this strategy would have fared over the past 10 years in an 80% stock portfolio, like one with Betterment. As you can see below, tactically selling in May is clearly a losing strategy, underperforming buy-and-hold by 29%.
Source: Analysis by Betterment, data from Yahoo Finance.
So if you want to invest smart this summer, sit back and do absolutely nothing. Investing is still one of the few cases where you do better, by doing less. Enjoy it.
*Historical performance is provided since 2003 given availability of relevant data. Data and performance returns shown are for illustrative purposes only. Please see our Historical Performance Calculations and Presentation Methodology disclosure for more information.
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