For investors, a popular adage that “springs up” (pun intended) this time each year is “Sell in May and Go Away.” But what does it actually mean and is it beneficial for investors?
This investing adage is one of many market timing strategies that investors have debated for ages – and refers to selling investments in the spring and then reinvesting in the autumn when stock markets are presumed to start performing better.
While our portfolios are structured to help clients achieve their objectives within their time horizon and risk tolerance, our advisors are also dedicated to providing clients with professional advice. Often this advice requires assessing common investing adages and using analytical tools to determine if such strategies are sound.
Let’s dig in.
A quick history lesson
The original saying is, “Sell in May and go away; Don't come back 'til St. Leger Day.” It originates in Britain when the financial district structured business around sporting and social events. St. Leger Day is the final horse race in the British Triple Crown and takes place in September to mark the end of the summer social season. The idea behind the original “Sell in May” adage was to sell stocks before the summer holidays, when businesses would traditionally slow down.
Theories abound about whether it's best to “Sell in May” or “Stay and Play.” Original observations were that stocks typically do much better between November and April than between May and October.
Does it really work?
To determine if this investing strategy has delivered outsized returns to investors in recent years, we compare returns for the S&P 500 Index from 2008 to 2022. We segment returns from November to April and returns from May to October (i.e. “Sell in May”). The average rate of return from November to April is 5.40% and from May to October is 2.04%. Seemingly, this would support the “Sell in May” theory. However, to better understand the implications of such an approach we need to compare the returns of a “Sell in May” strategy against a “Stay and Play” strategy.
Source: Factset. Note that the November to April time period runs from November 1 of the previous year to April 30 of the year for which the data is presented.
For “Sell in May”, let’s assume that you sell at the end of April and sit in cash between October and May. For simplicity, we assume that you would not earn interest on this cash. For “Stay and Play.”, you would stay invested in the S&P 500 for the entire period (November 1 of the previous year to October 31 of the current year).
Below, we see that “Stay and Play.” compares favorably to “Sell in May”. The “Sell in May” strategy returned an average annual return of 5.4% per year, while the “Stay and Play.” strategy returned an average of 7.86% over this 15 year time period. In other words, “Stay and Play.” outperformed, “Sell in May” by an average of 2.46%!
Source: Factset. Note that the November to April time period runs from November 1 of the previous year to April 30 of the year for which the data is presented.
Conclusion
So, should investors still “Sell in May and Go Away”?
While the S&P 500 has typically appeared to do better between November and April versus May and October, performance varies dramatically year over year. However, by staying invested throughout the 15-year period, those who simply stayed invested would have outperformed those who sold their investments in May and reinvested later in the year. Additionally, our analysis does not account for dividends that you might earn on stocks which over the long term, are a key contributor1 to overall returns.
Timing the market can be a risky approach and just because markets have exhibited certain trends in the past, there’s no guarantee that markets would perform the same way in the future. Many market timers agonize over if they have entered or exited the market at the right time – which sometimes results in staying on the sidelines rather than investing their funds. Even if you have a crystal ball and time your investments perfectly, history shows you still wouldn’t substantially outperform investors who invest their money on a regular basis.
Overall, rather than trying to time the market with a strategy such as “Sell in May”, contributing to your investments on a regular basis with tools like pre-authorized contribution plans can mean more time to actually stop and smell the…tulips. Plus, at RBC InvestEase, we are available to assist you in establishing and maintaining a clear plan for your investments and can provide support to help you keep on track.
Looking to discuss your investing goals? Call us at 1-800-769-2531 to speak with our portfolio advisors!