04/29/2016
Weighing the Validity of “Sell in May and Go Away”

Weighing the Validity of “Sell in May and Go Away”

Historically, the six-month period beginning in May and ending October is a weak period of the year in the stock market. According to the Stock Trader’s Almanac, an investment of $1,000 in the Dow Jones Industrial Average, if invested only during May-October of each year for the past 64 years, would have returned a loss of $22. Over the same timespan, a $1,000 investment that was invested only during November-April compounded to a value of $81,698.

While history seems to support the old axiom, “sell in May and go away,” there’s good reason to believe that, with a prudent approach, there are valuable investment opportunities to be found at any time of the year.

A recent Forbes article set out to prove that, while “sell in May” isn’t wrong, investors would still be wise to ignore it.

No Magic Wand

According to an investment firm CEO quoted in the Forbes piece, the age-old advice to get out of the market in the spring and stay out until the fall is about as useful as “abracadabra.” Investors want to believe there is some magical trick to removing risk and boosting rewards, but no such thing exists.

The author noted that numerous studies show that missing out on the five or six best days of the year, whether they occur during June, December, or any month, likely means missing out on positive returns for the year. An approach that eliminates half the year increases the chance of missing out on the few massively bullish days of the year that make or break investors’ annual returns.

The Past is the Past

What is it that all disclosures say? Past performance does not guarantee future returns? This should be familiar logic to all investors.

The economy and stock market of today have little in common with the past. One reason for the historical drop-off in returns during the late spring-summer-early fall period is the fact that it’s traditionally the time for getaway vacations for investors. In the past, going away on vacation meant disconnecting from work, investments, and everything else. Thanks to ubiquitous internet accessibility and mobile technology, investors of today are always plugged in and ready to trade. May-October trading volume is much less affected by vacationing investors than it used to be.

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