Investor Psychology

Sell in May and Go Away: 5 Better Investing Tips

These tired clichés still have value, especially for long-term buy-and-holders

The historically strong six-month stretch for the market has just ended, and the beginning of May kicks off the weak six-month span of the year. Thus, it’s time for Wall Street to mull one of its most well-worn investing tips: “Sell in May and go away.”

But while this axiom is somewhat supported by a careful crunching of the historical numbers, for most long-term investors, it’s bad advice.

The History of “Sell in May”

The roots of the adage, and the recognition of the results that inspired it, aren’t entirely clear. It’s believed to have originated in England as “Sell in May and go away, and come on back on St. Leger’s Day,” but not for market-timing reasons. Rather, it was brief advice offered to London’s well-to-do crowd looking to escape the heat of summer.

St. Leger’s Day – referring to the St. Leger’s Stakes horse race – falls in mid-September, when the heat finally starts to melt into cooler fall temperatures.

“Sell in May and go away” wasn’t recognized as actionable trading advice until sometime in the middle of last century, when enterprising investors began looking in earnest for calendar-based tendencies.

They found one … sort of.

What Do the Numbers Say?

The November-April period is, on average, better-performing than May-October. The typical monthly gain logged by the Standard & Poor’s 500-stock index in each of the six months beginning in November is a respectable 0.85%, while the average monthly return during the six-month span beginning in May is a mere 0.35%.

But that’s a dangerously misleading approach in that it assumes a poor May is followed by a poor June, which is followed by a poor July, and so on. The market is rarely that consistent. Big monthly losses can be followed by big monthly gains, and vice versa.

A far more disciplined approach would be to look at how the market performed for the entire six-month stretch in question, scrubbing out the impact of wild swings (in either direction) that are anomalous and usually soon unwound.

To that end, “Sell in May and go away” still holds water, though not as much as one might expect.

Since 1950, the S&P 500 has averaged a total return (price gains plus dividends) of 7.0% between the beginning of November and the end of April. In those 68 instances, the index mustered some degree of gain almost 77% of the time. Between early May and late October using data looking all the way back to 1950, the S&P 500 has averaged a 1.5% gain for the six-month stretch, and only made net progress in about 64% of those 68 years.

The former clearly is better than the latter, but the latter still is net-positive, and net-positive more often than not.

The moral of the story? Sometimes you’re better off leaving well enough alone. After factoring in trading commissions and the likelihood that the timing of your exits and re-entries won’t be laser-precise, selling in May could easily turn into a losing proposition.

But that isn’t to say you should ignore all familiar Wall Street clichés. Here are five top tips that continue to prove their mettle for investors – especially those that have truly embraced the buy-and-hold approach.

Not surprisingly, they’re all ideas that the great Warren Buffett has at least hinted at in the past.

5 Better Investing Tips

“The time to buy is when there’s blood in the streets.”

Most investors have heard it, but perhaps without understanding where the grim advice allegedly came from.

Eighteenth century British banker Baron Rothschild is said to have first uttered this phrase in the midst of the panic leading up to the 1815 Battle of Waterloo, which ended up being Napoleon Bonaparte’s final defeat. England’s market rebounded shortly thereafter, but Rothschild had reportedly already taken on big stakes in beaten-down stocks.

Rothschild denies ever saying it, and the evidence that he did is admittedly flimsy. But it’s not bad advice. Investors can do extremely well by purchasing high-quality assets that have been deeply (and sometimes irrationally) discounted.

The phrase has gained traction because of the imagery, but also because it’s such a clearly savvy move – though an extremely difficult one for investors to make in the throes of such panics.

“Buy what you understand.”

It’s a well-established Buffett-ism, but the Oracle of Omaha isn’t the only investing veteran to dish out this advice on a regular basis.

The tip means different things to different people. Individuals employed in the tech arena will better understand what HP Inc. (HPQ) does well and doesn’t do well, for instance. Healthcare workers have a better understanding of the pharmaceuticals business.

The premise isn’t limited to vocation, though. For novice investors, simply owning a stock is a learning adventure. For a handful of trading veterans, using options to “collar” an existing stock position is second nature that makes little sense to that novice.

Whatever the case may be, the point remains the same: Stepping out of your depth and unfamiliar territory will probably burn you. So if you are wading into new waters, try not to bet the farm.

“Never lose money.”

The investing tip is obviously impossible, practically speaking. No serious investor ever expects an investment to never sour eventually. That’s just the nature of risk.

Instead, the mantra is meant to instill discipline, encouraging investors to cut losses short when it’s clear a trade can’t be salvaged. It’s also a tacit nod to taking profits when the opportunity arises, and before pullbacks take shape.

The advice has worked its way into the annals of great trading advice, however, because avoiding losses is terribly difficult to do when conditions get stormy. Panic can rattle rational thought. Emotions can sway good judgment. The key to mastering those portfolio-gouging stumbling blocks is by never approaching them in the first place – by bailing out completely (or at least taking some profits) at early signs of trouble.

“Make sure you choose the right news to focus on.”

It’s not one of the sage pieces of wisdom that Buffett passes along on a regular basis. Few other market gurus have said it directly. But most have alluded to it in one way or another:

Responding to the hottest headlines can prompt ill-advised decisions.

The modern media machine has not only turned news into entertainment; it has melded facts and opinions. The resulting product is one that’s fascinating to consume but not always meaningful. The fact of the matter is, most “news” shouldn’t inspire investors to take immediate action. The seeming sense of urgency is a means of selling advertisement space.

When all is said and done, earnings growth and other financial fundamentals remain the driving force for most stocks.

“Keep it simple.”

Finally, Kiplinger’s Janet Bodnar reiterated some familiar – and brilliant – investment advice in October when she encouraged young investors to keep things simple.

Wall Street loves to package and promote complex solutions, sometimes to problems that don’t actually exist. The promise of outsized profits or abnormal degrees of safety are often selling features of these products.

The market has a way, however, of punishing the fanciest of strategies and solutions by throwing curveballs it’s never thrown before.

Said another way: The stock market’s once-in-a-century floods are now happening about once every 10 years.

Bodnar’s tip, then, is keeping matters simple by doing things such as automating regular monthly investments and using index funds rather than chasing performance with nothing but individual stocks.

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