Sell in May is not working out this year
I hear it every year: Sell in May and Go Away. But does it make sense? Does it hold water?
One year doesn’t make a rule but if a person would have sold this May 1st, 2018, so far today (June 14th) that person would be missing out on some serious gains.
In 43 days (from May 1 to today June 13) the s&P 500 has gone up 5.3% and the Nasdaq has gone up 8.4%. Those are some serious gains. A person coming back at the end of October would have missed out.
What does it mean “Sell in May and Go away”?
Many T.V. pundits who call themselves “students of market cycles” come on T.V. every year (mid-April) suggesting that you could avoid the cyclical market downturn of the stock market by selling at the beginning of May and start coming back mid-October. The theory is that during this time period, there is low volume, many traders are away for the summer, the volatility is too high and the general tendency is for the market to go down.
By the same token, the time period of November and April is supposed to be good.
We humans, we like patterns, we like predictability, and we like sentences which rimes, that’s why this theory has lasted for such a long time.
Where does “Sell in May and Go Away” come from?
This saying comes from the old-time in England, when the aristocracy, the merchants, and the bankers would leave the city of London because it was too hot during the Summer.
This custom was exported to the United States. In our agrarian economy of 100 years ago, all businesses slowed down during the Summer. The saying is also very convenient because today it coincides with the vacation time between Memorial Day and Labor Day.
Is there any truth to “Sell in May and Go”
Yes and no. In the old times, when people used to sell, and go away during the summer, yes, it would happen quite often, that the market would drop. Because there were fewer traders, there would be more volatility, which would make the market more dangerous, and more people would want to stay away.
As time has passed, and our economy has shifted from an agrarian economy to an economy of many industrial sectors with different cycles than the agrarian cycle, traders have found no reason to go away.
In addition, markets have become international. Memorial day means nothing to a trader in Asia or in Europe. International traders identify less and less with U.S. customs. Those in the United States, find themselves missing out by going away in May.
With Index Funds and ETFs becoming an increasing part of the stock market and professional mutual fund managers becoming a decreasing part of the stock market, investors will stay invested for a longer time period and there will be less portfolio rotation.
Disadvantages of Sell It in May and Go Away
- The big disadvantage is that you could miss out on some potential gains. If the tendency of the market is to go up. Every month you are not investing you are suffering a great opportunity lost.
- Transaction cost: Every time you do a transaction, you have to pay a commission. If you sell all your portfolio every May and buy it back every October, those transaction costs can accumulate and they will reduce your overall return.
- Tax consequences: If you sell at a gain, be ready to give a portion of your gains to the government (Unless your investments are in a registered account).
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