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.
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.