Should you sell in May and go away?

There is a popular saying among investors that you should sell stocks in May and then stay out of the market through October. Mark Hulbert wrote a piece in MarketWatch recently noting that stocks have turned in their best results between Halloween and May Day. Since 1896, the Dow Jones Industrial Average has returned an average of 5.2 percent during the winter months and only 1.7 percent during the summer.

While this is an interesting set of numbers, statistics are often misused. I examined the stay away in May strategy last year and advised against it, though not because I knew how stocks would perform.

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I believe that moving in and out of the stock market is likely to result in lower returns. I think investors benefit from a more consistent approach that includes regular rebalancing of an asset allocation mix that is appropriate for their goals. And I urge investors not to underestimate the tax consequences that result from too much trading.

Let's look at a near-term example: If you moved out of stocks last May, you missed out on the 12.2 percent return over the next six months. Adding insult to injury, you may also have had to pay capital gains taxes when you sold.

Admittedly, last year is a sample size of one. But it does show how you can quickly go astray by investing based on historical patterns.

My advice is to accept the reality that we don't know how either stocks or bonds will perform over the next six months and stop looking for a pattern that worked in the past that you think may continue in the future. For most individual investors, chasing past patterns is a sure way to underperform.

Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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