Sell in May and go away? If you listen to market pundits, you've probably heard that mantra a lot in recent days. It means that you should sell all of your stocks on April 30, stay in cash until November 1, and then go back into the market.
That's not necessarily bad advice, but, over the past 11 years, at least, you would have done even better if you sold in January and stayed out until October. In other words, you were in the market for only three months: October, November, and December. Here are the details.
Buy & Hold
Using the S&P 500 index as a proxy for the overall market, over the 11-year period from 2001 through 2011, you would have averaged a 1.5% average annual return if you followed a "buy and hold" strategy. That is, you didn't try to time the market. Instead you remained 100% invested the entire time. It would have been bumpy ride.
You would have ended up in the positive column seven of those 11 years, broke even one year, and suffered losses in three years. Your best year would have been 2009 when you gained 24%. Your biggest loss would have been in 2008 when the market dropped a staggering 39%.
Sell in May
The Sell in May strategy means you're in the market from November through April. By following that strategy, you would have increased your average annual return over the 11-year test period to 2.3% from 1.5% for buy and hold.
You would have enjoyed gains in eight of those 11 years and endured three losing years. But the ride would have been a lot smoother than following the Buy and Hold strategy. Your best years would have been 2010 (e.g. November 2009-April 2010) and 2011 when the strategy returned 15% in each of those years. Your worst year would have been 2001 when you would have lost 13%. In 2008, you would have gotten off easy with an 11% drop.
Buy in October
The Buy in October, Sell in January strategy did the best, scoring a 4.3% average annual return. Following that strategy would have netted you nine winning years and only two losing years. In the best year, 2003, you would have scored a 12% gain. Alas, in 2008, your worst year, you would have suffered a 23% loss.
Best & Worst Months
Looking at individual months, April, averaging a 2.7% gain over the past 11 years, was the best month to be in the market. In its best year, 2009, the market, at least as measure by the S&P 500. soared 9% April's biggest loss was 6% in 2002.
June, averaging a 2.2% loss, was the worst month. It only recorded gains in two of the 11 years, broke even three times, and lost ground six times. By contrast, April was up in eight of the 11 test years.
Academics would undoubtedly scoff at my relatively short 11-year sample period. They would be right in doing so. Nevertheless, in my experience, recent stock market data is more meaningful than older numbers. That said; keep in mind that the best strategies had losing years and vice versa. External economic and political events can move the market big time. Every year is unique.