Don’t Sell in May; Don’t Go Away
Joel Dresang: Marc, every summer we hear financial pundits talk about, “Sell in May and go away.” What’s that all about?
Marc Amateis: Joel, that’s one of those old saws that’s based on the fact that the May through October period in the stock market is typically, on average, slower than the November through April period.
It’s a seasonality thing. But investors should understand that even so, since 1945, the May through October period has been positive in the stock market, to the tune of about 1.4%.
Joel: So why is that a bad thing – to sell in May and go away?
Marc: Well, if you do that, number one, you’re relying on averages. You’re taking yourself out of the market. There have been plenty of times during that period when the market has done very well. As an example, just this past May, the market was up 1.6%. So, if you buy into that and you get out of the market in May and plan to come in later in the year, you can miss some very big gains.
Joel: There are some other old saws, regarding seasonality too, right?
Marc: There are plenty of them. One of them is something called the January indicator. And what that says is, “So goes January, so goes the rest of the year.” So, if you have a bad January in the stock market, just get out for the rest of the year because the year is going to be negative.
Sell in May
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But again, that occasionally happens, but there are plenty of times when it doesn’t. January of 2009, the stock market was down 8.4% – the S&P 500 – yet returned 26% over the course of the year. So, again, if you bought into that January indicator, you really would have hurt yourself.
Joel: And there’s something called the October effect – where they’re worried about stock market crashes because that’s what’s happened in the past.
Marc: Right. October has this reputation of being the month when the stock market crashes. I mean, there was a big crash in 1907, 1929 and again in 1987. But again, those are just instances. If you look, for example, just last year, October of 2015, the S&P 500 was up 7.7% in October. So, it’s really dangerous to use those seasonal indicators to make any kind of valid investment decisions.
Joel: Besides the risk of missing out on gains, are there other reasons that you shouldn’t be doing the sell-in-May-and-go-away sort of thing?
Marc: Number one, it’s market timing, which is very dangerous. It’s been proven over and over that nobody can time the market effectively over the long haul.
Another reason is if you do get out of the market, now you need to find what you want to do with your money. Do you put it into cash which, right now, is earning nothing? Do you put it into something else? And then you have the decision of when do you have to get back in.
Joel: And if your stocks are paying dividends, you’d also be missing out on those.
Marc: Yeah, that’s a good point too. If you pull out, any dividends that are paid on those stocks you’re going to miss and that really helps your compounding. When you get those dividends, reinvest them right into the stock market and get the compounding effect.
Joel: So, long-term investors it’s best to focus on the fundamentals.
Marc: Always focus on the fundamentals. These seasonality factors that we’re talking about, those are really for the professional trader people that sit at their desk day in and day out, get in and out of the market on a daily or weekly basis. That’s the way they try to make their living.
It really disrupts that fundamental way of investing that we like to see, which is invest for the long haul, focus on fundamentals like valuations, and stick to a plan and a discipline. That’s the way to properly invest to do well over the long term.
Marc Amateis is vice president and an investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
(initially posted June 29, 2016)