If repetition breeds retention, it’s time for an annual warning. Especially since it’s the first day of May.
At this time of year, countless media outlets can’t help but regurgitate the investing adage “sell in May and go away.”
Recent history promises to make this year’s warnings all the more urgent, too.
You’ll recall, the stock market sold off anywhere from 9% to 19% in the middle of 2010, 2011 and 2012.
But please don’t fall into the recency bias trap. That is, using the most recent market experiences to make sweeping conclusions about the future.
While the last three years make it seem like a “sell in May” strategy would be a no-brainer, the long-term data paints an entirely different picture.
Don’t Get Duped Out of Stocks
When you see a chart like this one from U.S. Global Investors, which I showed you last year, even I’ll admit that it’s hard to resist the temptation to bail on stocks right now.
Clearly, stocks enjoy higher (and more frequent) positive returns during fall and winter months than during spring and summer months.
But don’t be misled.
No matter what the headlines would have you believe, a higher likelihood of negative returns for one or two months doesn’t mean the entire six-month period – from May to October – is doomed.
In fact, the average returns for the S&P 500 Index from May to October have never been negative at all, according to Bespoke Investment Group.
Slow Growth is Way Better Than No Growth
Granted, the average returns from May to October are notably less than the November to April period. But who cares?
Making some money is better than making none at all – or worse, losing money – right?
It is to me. If you’re still not convinced, though, this chart from CXO Advisory should do the trick.
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It compares the performance of three strategies: 1) investing in stocks all year, 2) investing in stocks from May to October and cash during the other six months, and 3) investing in stocks from November to April and cash during the remainder of the year.
As you can see, small average returns from May to October add up in a big way.
Or as CXO says, “In support of conventional wisdom, being in stocks during November-April mostly beats being in stocks during May-October (terminal values $965 vs. $55). However, buying and holding the index substantially outperforms both seasonal strategies.”
I’d say so.
Not to mention, if we incorporate taxes into the equation (since selling every May would trigger short-term capital gains liabilities), a simple buy-and-hold strategy can’t be beat.
Last, But Not Least…
If you’re still not convinced to stay invested throughout the year, there’s no hope for you!
In all seriousness, this last data point should help any fence sitters…
According to Jim Stack of Investech Research, “While there were 13 double-digit losses during the May-October period in the past 83 years, all of them occurred during bear markets.”
Last time I checked, we’re not in a bear market. So the risk of a nasty May to October selloff this year is virtually non-existent.
Bottom line: Don’t be duped. Selling in May and going away is not all it’s cracked up to be.
So instead of panicking and selling out of stocks based on a mere flip of the calendar, I’d recommend a more sensible course of action. Like trimming up your protective stops and perhaps holding off for a 3% to 5% pullback before putting any new money to work.
Doing so promises to keep you invested. It limits your downside. And you can use any short-term volatility to your ultimate advantage. And who wouldn’t want all of that?
Ahead of the tape,