You may have heard the saying ‘sell in May and go away’ before. This is a popular adage that gets thrown around in the investment media and by self-investors. It’s based on the idea that historically during the six-month period of May to October stock markets underperform compared to the six month period of November to April. In the past, this may have taken place a few years in a row and because it did, someone decided it was an annual trend that investors could count on repeating every year thereafter. Don’t believe everything you hear!
Here are some insights from a portfolio manager that will help bust the “sell in May and go away” myth.
The pros and cons of the ‘sell in May and go away’ strategy.
Con:
- The ‘sell in May and go away’ theory is that it’s not always true. In fact, if you were to look at the performance of the TSX and the S&P 500 over the last seven years, only once did the markets go down (in 2011) between May and October. In other words, if you had followed the ‘sell in May and go away’ strategy you would have been out of the market and lost money six out of seven years.
Pro:
- As for what’s the biggest pro, in my opinion, there isn’t one.
Why I don’t follow the ‘sell in May and go away’ approach.
Year to year the stock market is never the same. It’s always changing and evolving. That’s why, rather than rely on adages like ‘sell in May and go away,’ I rely on keeping a close eye on your investments and the markets and these are the indicators I look for:
- If there are positive signs, I will continue to hold a position whether we’re in the six-month period of May to October or November to April.
- If indicators are showing negative signs, I will sell a position to lock in gains or preserve capital.
The month we’re in is irrelevant when it comes to buying stocks as well. Buying opportunities can arise at any time of the year; you never know when stocks will encounter adversity. When they do they usually see their stock price drop. When equities are undervalued it’s the ideal time to buy, assuming there’s good reason to believe the next move is up, but if you’re following the ‘sell in May and go away’ approach, you’ll be out of the market and out of luck.