The popular financial press is rife with common investing myths that don’t hold up under close scrutiny. One of the most common myths is that investors can successfully time the market by simply selling stocks and leaving equities out of their portfolio from May through October. This strategy is commonly known as "Sell in May, Go Away." The justification for this approach stems from the observation that over the past nine decades, the S&P 500, as one example, typically has worse performance from May through October than in any other six-month period. In other words — summers tend to be more volatile for stocks.
Does 'Sell In May' Really Work?
The short answer: No.
While it is true that adhering to a “sell in May, go away,” strategy would have helped investors miss out on a tremendous number of infamous market events in the past — including The Crash of 1929, Black Monday in 1987, the 2008 Lehman Brothers crash, and more recently, the 2011 summer correction— most proponents of this flawed “rule of thumb” forget to mention the major rallies that also occurred during these periods. There were several summer rallies in the 1980s, a 20% May to October market advance in 2009, and the summer rally in 2013 where the market leapt upward by 11%.
"If there's one thing worse than not having a crystal ball, it's making decisions as if you do."
As we head into the summer investing season, which indeed is typically more volatile, keep your long term plan in view. It is very dangerous to your future wealth to buy into the notion that you (or anyone) can predict short-term market moves. No one has a crystal ball — not me, not you -- and certainly not the financial press! And if there’s one thing worse than not having a crystal ball, it’s making decisions as if you do.
A Look At History
A $1,000 investment held consistently in the stock market from 1926 - 2014 would have grown to $5.3M . If instead, the same investment had been sold each year on May 1st, the proceeds placed in Treasury bills and later used to re-buy stocks on November 1st, the investment would have grown to only $1.2M. That’s over $4M less — a 75% reduction — in total return. "Selling in May," therefore, can dramatically reduce long term returns.
Successful investors prepare themselves for and expect market volatility -- they don't fool themselves into believing they know precisely what will happen next. So while a “Sell in May” strategy may feel good at the time, especially for nervous investors who are worried about riding through a bumpy summer, it increases their risk of losing money. Instead of attempting to time markets, they would be better served setting a strategic asset allocation that balances their need for return and tolerance for risk, and then sticking to that plan — in both good markets and bad — by rebalancing to buy low whenever markets offer them more favorable prices.
 S&P 500 performance, Morningstar Direct, as of 12/31/14.