Markets

Why You Should Sell in May and Go Away

Almost all market-timing schemes are silly. This one isn’t.

Thinking of cutting back on your stock investments because you’re worried that the market will fall? Want to use some of your gains to buy a new car? Well, it may be the perfect time to take some money off the table. Why? Because history has shown that May 1 marks the start of the least-favorable six months of the year for stocks.

Look at the numbers. From 1929 through the end of 2014, Standard & Poor’s 500-stock index returned an average of 7.1% from November through April but just 3.9% from May through October, according to Morningstar. That’s an average of 3.2 percentage points per year better during the November-April period.

What’s more, the sell-in-May indicator has been getting stronger in recent decades. In the 1930s and 1940s, the summer months, on average, were more profitable for stock investors than the winter months. But in every decade since then, the November-April period has been stronger than the May-October period. In the 1950s, winter topped summer by an average of 4 percentage points per year. In the 1960s, the margin was 6.5 percentage points per year. In the 1970s, it was 9.5 percentage points, and in the 1980s, winter won by an average of 3.9 percentage points. In the 1990s, the margin was 7.1 percentage points, and in the 2000s, it was 2.6 percentage points.

The current decade is far from over, but through 2014, winter is ahead by an average of 10 percentage points per year. That includes 2013 and 2014, during which it was more fruitful to own stocks in summer than in winter.

The chief expert today on the sell-in-May indicator is Ben Jacobsen, a finance professor at the University of Edinburgh Business School. Along with Cherry Zhang, a former graduate student who now teaches at Nottingham University Business School in China, he studied stock returns for 108 countries stretching back as much as 319 years. The November-April period was stronger, on average, than the May-October period in 81 of 108 countries.

Pooling all their data, Jacobsen found that stocks averaged 6.9% gains in November-April, compared with 2.4% for May-October. The method even worked in the southern hemisphere, where November-April is summer—though the tendency of stocks to do best in November-April was strongest in Western Europe, followed by North America and then Asia.

Although Jacobsen is the leading proponent of sell-in-May, the strategy has been around for at least 80 years. Jacobsen found a reference to the strategy in a 1935 Financial Times article that referred to the “old adage” of “sell in May.”

Should you employ the strategy? That gets complicated. Jacobsen has used it himself for more than 20 years—and says he’s done very well with it.

Probably my biggest concern is that no one has advanced a convincing theory as to why stocks have done so much better in the winter months. The most credible explanation is that investors take vacations in the summer—and spend less time investing or trading. “Vacations are the most likely explanation,” Jacobsen says. That would also support the fact that the strategy works best in affluent countries, where people are more likely to be able to afford vacations.

Another problem is whether it’s a strategy many investors could actually stick with. A bad year or two at the beginning, and most would probably throw in the towel. It’s emotionally hard to stay in cash for six months if stocks are rising.

Besides, stocks have tended to go up even in most May-October periods—albeit not as much as during the winter months. Jacobsen counters that the returns you get in stocks in the summer months are often lower than what you could get in short-term bonds, which are much less risky than stocks.

My bottom line: If you’re convinced, cut your stock allocation by maybe 10 percentage points on April 30, and ramp it back up on October 31. And, of course, it’s best to use a tax-deferred savings vehicle, such as an IRA or a 401(k), for such short-term trading. No need to run up taxable, short-term capital gains.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Most Popular

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How
social security

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How

It’s always smart to maximize your Social Security benefits, and if you are divorced, one way to do that might be to take them based on your ex’s earn…
May 13, 2021
Refunds for $10,200 Unemployment Tax Break to Begin This Week
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Week

The IRS will start issuing automatic refunds in mid-May to people eligible for the unemployment benefit tax exemption.
May 14, 2021
Updated Exclusive Social Security Benefits Forecast: COLA Likely to Jump to 4.5% in 2022
Economic Forecasts

Updated Exclusive Social Security Benefits Forecast: COLA Likely to Jump to 4.5% in 2022

This would be the largest cost-of-living adjustment for Social Security benefits since 2008.
May 12, 2021

Recommended

7 Steps to Teach Kids How to Invest
investing

7 Steps to Teach Kids How to Invest

Not even half of U.S. states offer financial literacy classes in high schools, so parents have to pick up the slack. Here are 7 tips to teach investin…
May 15, 2021
11 Transformative M&A Deals You Should Care About
investing

11 Transformative M&A Deals You Should Care About

The M&A market is expected to heat up this year. Here are 11 noteworthy merger-and-acquisition stories we're following.
May 13, 2021
5 Pick-and-Shovel Solar Stocks for the Green Energy Gold Rush
investing

5 Pick-and-Shovel Solar Stocks for the Green Energy Gold Rush

With a progressive administration focused on climate change, these five solar stocks could be worth a closer look for investors.  
May 11, 2021
5 Ways to Make Sane Investments When Everyone Else Is Crazy
investing

5 Ways to Make Sane Investments When Everyone Else Is Crazy

When grandmas and Uber drivers are boasting about profiting on Bitcoin and SPACs, don’t get sucked in to the hype. Here’s how to make sure your invest…
May 7, 2021