You may have heard the popular idiom that when it comes to your investments, you should “sell in May and go away.”
It’s unclear exactly where this comes from. Investopedia suggests that it may originate with an old English tradition in which aristocrats and other businessmen left London to vacation for the summer — which, if true, would be a hilarious basis upon which modern investors are making decisions. Others suggest that it simply reflects the fact that professional traders have historically taken time off in the summer, leading to lower trading volumes and lower returns.
But is there any truth to it? Are investment returns worse during the summer? With Memorial Day weekend approaching and the month of May almost over, should you be selling out of your investments right now?
The answer is a definite no, at least if your only reason for selling is because of this idiom. Here are five reasons why.
1. Past Results Are Mixed
Truthfully, there is some data supporting the idea that investment returns are worse during the summer months.
Adam D. Van Wie, CFP®, fee-only financial planner and COO of Van Wie Financial points to data from Bespoke Investment Group showing that the S&P 500 provided a median return of just 2.8% from May through September over the past 28 years, compared with 10.97% during the other months. Additionally, Dan Gallinger from The Motley Fool points out that two of the three worst performing months over the last 90 years have been in May and September, while three of the four best performing months occurred in December, January, and April.
But that data is hardly conclusive. As Van Wie points out, even the data from Bespoke shows a positive median return during the summer, and it also says those returns were positive 64% of the time. Selling in May would have largely led you to miss out on growth.
And recent years in particular have generally provided good returns during the summer months. Using Morningstar to analyze Vanguard’s Total US Stock Market Index Fund (VTSAX), we see positive returns from May 1 through October 31 for five of the past six years, and annualized returns during that period of 15.8% in 2014, 18.6% in 2017, and 25.2% in 2013.
“This was an old adage or trend and it does not necessarily exist anymore,” says Sahil Vakil, CFP®, president at MYRA Wealth. “Astute investors have exploited inefficiencies in the marketplace, and reduced the predictability of low volume and decreasing stock prices.”
The bottom line is that the data does not consistently support the idea that summer returns are lower than normal, especially recently, and it definitely doesn’t support the idea that your investments are likely to lose money in the summer.
2. Past Patterns Do Not Predict Future Performance
According to Colin Overweg, CFP®, founder of Advize Wealth Management, the vast amount of stock market data makes it easy to find historical patterns that don’t hold any bearing on the future.
“The guru, chartist, or technician believes in these theories because he or she believes that history repeats itself,” Overweg says. “But there are an infinite number of patterns that one can find looking at historical data and therefore diminish any chance of using them to profit on. There is no theory that has been used to consistently out-perform the market.”
In other words, even if you were able to find a consistent pattern of under-performance during past summer months, there’s no reason to expect that that pattern would persist going forward or that you would be able to profit off it. It’s just as likely to be completely random.
3. The Real Danger of Market Timing
When the subject of market timing comes up, it’s often talked about in the context of avoiding negative returns. The “sell in May and go away” idiom is a good example of just that.
But there’s another, perhaps bigger, danger that market timing introduces, and that’s the fact that a large percentage of the stock market’s long-term return comes from just a few good days, and that being out of the market on those days could really hurt you.
“Missing just the 25 best single days from 1990 to 2017 would cut your S&P 500 annualized compound returns in half, from 9.81% to 4.53%,” says Dejan Ilijevski, president of Sabela Capital Markets. “Disciplined investors tend to perform much better than those who try to beat and time the markets.”
Negative returns are certainly harmful, but missing out on good returns is often even worse. And given that the stock market goes up more often than it goes down, being out of the market for a few months introduces a lot of risk.
4. Costs and Complexity
Even without the data showing that it’s not likely to work, the logistics of managing a “sell in May and go away” strategy would be tough to pull off.
First, selling your stocks each May would subject you to capital gains taxes every single year, in addition to any trading costs involved with both selling out of your stocks and subsequently buying back in. Given that cost is the single best predictor of future returns, and that lower costs are better, this would present a significant hurdle towards reaching your investment goals.
Second, dealing with both the sale and re-purchase of your stock investments each year introduces a lot of complexity and room for error, and puts more work on your plate than is really needed.
“Keep all things money related simple,” says Kalyn Hochstrat, a fee-only financial planner rooted in Idaho. “There is no need to reinvent the wheel or add unnecessary complications because someone, somewhere says it’s a good idea.”
5. Know the Difference Between Entertainment and Advice
Ilijevski cautions that there’s a big difference between snazzy idioms and actual investment advice.
“Catchy headlines are meant to attract viewership and readership, but the financial news media in general has nothing to do with investors’ best interest,” says Ilijevski.
A good investment plan focuses on setting meaningful goals, saving enough money, contributing to the right accounts, using evidence-based investment strategies, and sticking with your plan through the ups and downs.
Theories like “sell in May and go away” might sound good, and you may even be able to cherry-pick some data to make them look good. But they never take your personal goals into account and they should never be confused with actual investment advice.
They’re for entertainment purposes only, and your future is too important to think of them otherwise.
Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families.