Everyone likes to take a summer break—including, apparently, traders. Or at least that's the premise behind the old investing adage, “Sell in May and go away.”
What does that even mean?
Basically, the pithy investing advice is based on an expectation that, during the summer(ish) market months of May through October, stocks don’t perform as well as they do from November through April.
Many speculate it has to do with typical American vacation plans peaking between Memorial Day and Labor Day: While the traders are away, their portfolios pretty much stay put, and the market follows suit. Then, supposedly, everyone gets back to work, and the market starts its strong churn again.
Well, is it true?
Surprisingly, there’s some supporting data. One widely referenced study on the phenomenon found that between 1980 and 1998, average returns for U.S. stocks are more than 5 percent higher between November and April than they are during the “summer” months.
Pretty convincing, right? Except you can find plenty of instances in which the fortune-cookie-esque dictum crumbles. For example, if you'd sold at the start of this May, you might be dismayed. According to Morningstar, Standard & Poor’s 500-stock index returned about 1.2 percent for the month—a healthy gain following lower returns in March and April.
Besides, following this strategy is “just good old fashioned timing the market,” says Natalie Colley, an analyst with Francis Financial in N.Y. “For the vast majority of investors, human nature makes it a very bad idea to utilize this type of strategy.”
What’s wrong with trying to time the market again?
The odds are never in your favor. Sure, you may be able to avoid some losses by selling before you expect the market to drop, but you also risk missing out on gains because you never know exactly when it'll head back up. “Timing the market is virtually impossible,” says wealth advisor Bradford Pine. “If it was that easy [to make money by selling in May and going away], everyone would be doing it.”
So remember your long-term investing strategy this summer—and ignore any seasonal market movements. “Losses that do occur in the summer months, or any time throughout the year, really, should not worry long-term investors,” Colley says, “because they will be offset by gains over an extended time horizon.”