One of the more persistent investment myths is that it is a winning strategy to sell stocks in May and then wait to buy back into the market around November. The oft-repeated catch phrase is, "Sell in May and go away."
Well, this year if you sold your stocks in May, you would probably have lost out on some nice gains. The S&P 500 rose from 1883.68 to 1923.57 last month, an increase of 2.1 percent. And that doesn't include the impact of any dividends.
Of course, the real test of the sell in May theory requires five more months. I ran some numbers looking at returns from May through October in recent years.
I found that while it is true that stocks have provided greater returns from November through April than they have from May through October, since 1926 it has still been advantageous to stay invested in stocks from May through October. In other words, selling in May and going away hasn't been a good strategy.
In fact, from 1927 through 2013 the Sell in May strategy has underperformed the S&P 500 by more than 1.5 percent per annum. And that's even before considering any transactions costs, let alone the impact of taxes (you'd be converting what would otherwise be long-term capital gains into short-term capital gains which are taxed at the same rate as ordinary income).
The table below shows the returns of the S&P 500 Index for the last five May-October periods, a period when Treasury bills provided almost no return at all.
Note that the average return for the five six-month periods was 5.4 percent, an annualized return of about 11 percent, or greater than the S&P 500's annualized return from 1927 through 2013 of 10.1 percent.
Given this year's 2.1 percent May increase in the S&P 500, what does the rest of the six-month "Sell in May" period? Unfortunately, my crystal ball, as always, is cloudy.
I do know, however, that the most basic tenet of finance is that there's a positive relationship between risk and expected return. To believe that stocks should produce lower returns than Treasury bills from May through October you have to believe that stocks are less risky during those months -- a nonsensical argument.
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