As you get older, you may find yourself beginning to question the aphorisms you heard over and over as a kid. And rightly so. Medical researchers have discovered that an apple a day does not, in fact, keep the doctor away. And anyone who has waited tables can tell you with certainty that the customer is not always right.
The financial world has its pithy little sayings as well, which are worth investigating as you mature as an investor. Among the oldest and most oft-repeated: "Sell in May and go away." The phrase is thought to have origins in jolly old England, where merchants, bankers, and fancy gents would leave London and escape to the countryside for the hot summer months. Financial markets tended to take a snooze while the moneyed classes were away on holiday, the thinking went, before perking back up upon their return in the fall.
Well, sure, you might think, but most modern Americans, even financial honchos, don't summer at their country estates. But look into long-term seasonal performance in the broad stock market, and some patterns do begin to emerge. Investors who pay attention to them can boost the performance of their portfolios over time.
And historically, the end of October has been a great opportunity to take advantage. "October is prime time to make some portfolio tweaks," says Jeff Hirsch, editor in chief of the Stock Trader's Almanac, which tracks historical investing data.
The Stock Trader's Almanac shows the stark contrast in the performance of the stock market between the six-month periods beginning May 1 and November 1. From 1950 through 2018, stocks in the Dow Jones Industrial average posted an average annualized return of just 0.6% from May 1 to October 31. The average annualized return investing from November 1 to April 30: 7.5%.
To put that in perspective, a $10,000 investment in the May-October period would have netted you $1,461 after 69 years, according to the Stock Trader's Almanac. Investing during the November-April period would have made you more than $1 million.
The divergence in the data no longer comes down to fox hunts and polo matches, but rather to normal behavioral patterns, says Hirsch.
"The planet we live on is top heavy — most of the people live in the Northern Hemisphere," he says. "During the summertime, people are away from trading desks, away from their portfolio, and spending more time at pool clubs, in the backyard, and playing golf. That all takes away from the cash flows into the market."
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The old-school investing strategy designed to take advantage of these seasonal trends, developed by Hirsch's father, Yale Hirsch, suggests that investors hold stocks for the November-April period and bonds or cash during the May-October period.
But executing such a strategy can present problems for everyday investors. For one thing, if your stock portfolio has appreciated, liquidating a taxable account will trigger capital gains taxes. Anyone employing this version of the strategy should do so in a tax-advantaged account, such as a 401(k) or IRA, Hirsch says.
Keeping a major portion of your portfolio in cash is likely a bad idea, too, says Sam Stovall, chief investment strategist of U.S. equity at investment research firm CFRA. The seasonal performance gap is slightly smaller in the S&P 500, with stocks returning an average of 1.4% during the "summer" period since World War II, compared with a return of about 6% for the "winter" period.
That 1.4% may not be much, says Stovall, "but it's much more than you're going to earn in cash."
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Stovall favors a strategy that invests holds stocks of health care, and consumer staples firms (which are thought to perform well in down markets) from May through October, switching to stocks more sensitive to economic cycles — namely technology, industrial, consumer discretionary, and materials stocks — from November through April. The Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF (SZNE) puts Stovall's strategy into practice and charges 0.60% in annual expenses. The fund is having a tough year so far, having surrendered 7.8% compared with a 7.8% gain in the S&P 500.
An even simpler way to take advantage of the stock market's seasonality: Use October as a time to give your portfolio a tune-up, says Hirsch, who adds, "I've started saying, 'Buy in October and get yourself sober.'"
In anticipation of an uptick in stock market performance, now is the ideal time to retool your holdings, Hirsch says, either by rebalancing to your desired asset allocation or by jettisoning longtime underperforming stocks or funds in favor of outperformers.
The instinct may be to assess portfolios at the beginning or end of the year, Hirsch says, but doing so in October instead gives you a chance to get your portfolio in order just in time for a historically strong time of year for stocks.
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