"Sell in May and go away" is an investing adage that suggests an investor sells stocks ahead of the summer months. But why would an investor sell at this time of the year? Is there any relevance to this? Read on to learn the meaning and history behind the idea of selling in May.
Meaning Of 'Sell In May And Go Away'
"Sell in May and go away" is an investing adage that says an investor can improve annual returns by selling stocks in May and not reinvesting until November. The adage refers to seasonal stock market performance where the summer months have historically averaged lower returns compared to others.
The history of the adage is rooted in some of the worst stock market crashes in history, which occurred in October, including the Wall Street Crash of 1929 and Black Monday in 1987. In the past 30 years or so since then, stock market returns have averaged mostly lower from May through October, compared to November through April.
'Sell And Go Away In May' Statistics
Investors seek patterns and identifying seasonal trends is one example of this. Similar to other recognized performance patterns and theories, such as the Halloween Indicator, the Santa Claus Rally, and the Presidential Election Cycle Theory, there are statistics and trends that support selling in May.
'Sell in May and Go Away' statistics include:
- The three worst days for performance in stock market history occurred in October, two of which were during the crash of 1929, and the other was the 1987 Black Monday crash.
- From 1990 to 2022, the S&P 500 has returned about 2% from May through October, while November through April has averaged about 7%.
- A 1998 study on SSRN found that the selling in May and staying away through October held in 36 out of 37 developed and emerging market economies from 1970-1998.
- A 2013 publication in the Financial Analysts Journal noted that selling in May persisted from 1998 to 2012.
- The period of 2013 to today has not been as consistent, especially considering the sharp reversal of the trend in 2020, when the S&P 500 index jumped 46% in price from March 23 to November 1, 2020.
Stock Market Summer Slump
The stock market summer slump refers to a seasonal decline in trading activity during the summer months, which can at times create a low-volume, low-return environment. This seasonal trend aligns within the 'sell in May and go away' adage that points to lower average returns for stocks between May 1 and October 31, compared to November 1 through April 30.
'Buy In October And Sell In May' Strategy
An alternative and related strategy to 'sell in May and go away' is known as the Halloween Indicator, which suggests that investors return to the stock market after the end of October, coinciding with Halloween. After holding stocks through April, the investor would then sell May 1 to complete the cycle.
Alternative Trends To Follow
Seasonal trends are not consistent and investors are wise not to rely on them to determine the timing of stock trades. Instead of expecting history to repeat itself, a prudent approach is for investors to rely on their own investment objectives and risk tolerance to lead investment decisions.
For example, a long-term investor wanting to build wealth for a retirement date that is more than 10 years away, would be wise to reference the average stock market return, which is approximately 10% historically. In contrast, a short-term investor might use a swing trading strategy to capture a part of an expected price move over a few days or several weeks, rather than larger gains over longer periods of time. These are just two examples and are not intended to be recommendations.
Is 'Sell In May' A Good Strategy?
The 'sell in May' strategy has worked in the past but it is not generally a wise strategy to follow, especially for investors with a long-term time horizon. There's a saying among long-term investors: "Time in the market beats timing the market." This is because some of the largest single-day gains in stock prices follow the largest declines.
May is not a good month for stocks but it's not the worst, either, as summer months have historically trended lower than winter months. Since 1950, the best month for stocks is April, while December and January have also been amongst the top-performing months.
According to the 'sell in May and go away' investing adage, as well as the Halloween Indicator, November has historically been better for stocks than October, which has the distinction of containing the three worst days in stock market history
June is not a good month for stocks and is known as one of the most boring months for stock market performance. From 1945 to 2018, stocks were almost flat on average for June with a paltry 0.02% gain.
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