Sell in May and Go Away? We Say Nay.

We're sorry.

We know that, if you pay attention to stock-market media whatsoever, you have been pelted for the past week or so with the phrase "Sell in May and go away" like a new car in a hailstorm.

We say "we're sorry" because we're tossing yet another opinion on the pile.

And that opinion is: We can all stop fussing over "Sell in May."

The Tea

Perhaps the only thing that Wall Streeters love more than silly stock-market indicators is cutesy dollops of wisdom. 

"It's a market of stocks, not a stock market." "The time to buy is when there's blood in the streets." "There is always free cheese in a mousetrap."

In this case, "Sell in May and go away" refers to the lopsided historical performance of the stock market in different parts of the calendar. Historically, stocks do their best work between the months of November and April … and tend to slack off between May and October. So the saying implies, that if you really want to do well for yourself, you should dump all your stocks in May, then buy them back at the start of November.

Of course, "Sell in May and go away" sticks in your brain better than "Sell in May and come back after you've finished up eating your Halloween candy," so there you go.

Catchy as the phrase might be, however, it's a horrid piece of advice for the vast majority of investors.

The Take

There are two distinct reasons why everyday investors shouldn't heed this advice.

1. Selling all of your positions, then buying back into them, is both a giant hassle and will penalize you financially.

Imagine you have a portfolio of 20 holdings, a mix of stocks, exchange-traded funds (ETFs) and mutual funds. Now imagine going into your brokerage account, going through the process of selling each one of them, then setting yourself a reminder to come back in a few months and buy them all back again. Then imagine doing that every year. Not fun.

You're also cutting a hole in your wallet, in several ways:

#1: You probably know that mutual funds charge you annual expenses—but did you realize that many of them also charge you when you make an initial investment … or that some of them even take out more fees when you sell?

#2: You could also be damaging your future income potential. Let's say you bought a stock five years ago at $100 per share, and at the time, it paid $5 per share in dividends every year. Your yield at the time was 5% ($5 / $100). Well, let's say since then, the stock has doubled to $200 per share, and the dividend has doubled to $10 per share. You bought the stock at $100, so your yield is 10% ($10 / $100). But if you decide this is the year to start doing "Sell in May" and sell the stock, and it's still $200 per share when you buy it back up in November, guess what? You're back to earning only 5% ($10 / $200).

#3: If you invest in a taxable brokerage account, guess what? You're locking in capital gains taxes! If you hold a stock or fund for years in a taxable account, you're really only on the hook for taxes on any dividends and distributions you collect in a given year—typically a small sum. But when you sell, if you made a profit (or a "capital gain"), you'll need to pay taxes on those capital gains. And worse? If you do "Sell in May" every year, you'll have to pay the much higher short-term capital gains rates!

(Also, years ago, this kind of behavior would rack up all sorts of trading fees—but most discount brokers and online brokerage accounts are commission-free nowadays, so you're at least avoiding that landmine.)

2. Stocks Don't Actually Lose Money From May-October … They Just Gain Less. 

Remember: "Sell in May and go away" refers to the seasonal weakness in the stock market—stocks perform much worse, on average, between May and October between November and April than they do between May and October.

But …

• Stocks, on average, have still delivered gains during that May-October period over the past few decades.
• More recently, the gap in performance between the May-October and November-April periods has been closing.

Just look at this chart from our friends over at Cetera Investment Management, Gene Goldman, Chief Investment Officer and Collin Martin, Market Strategist:

"Since 1990, the S&P 500 had a positive total return from May to October in 25/33 years (76%)," Martin says. "The total return [that includes both price performance and dividends] was positive 82% of the time from November to April.

"Looking at the average return chart, the trailing returns are positive for the prior 5, 10, 15, 25, and since 1990 periods for May to October, and November to April periods."

And in recent years, people who sold in May would've been really disappointed.

"The S&P 500 has closed higher during the month of May nine out of the past 10 years—so maybe the pattern should be 'Sell in June,'" say Jeffrey Buchbinder, Chief Equity Strategist and Adam Turnquist, Chief Technical Strategist for LPL Financial. "Also, consider that this seasonally weak period has actually been quite strong in recent years. In fact, stocks gained during this seasonally weak six-month period in nine of the past 11 years."

In short? While returns might be historically strong from November to April, "it would be unwise to sell in May and go away," Martin says.

Instead, buy when you can—and stay.

Riley & Kyle

Young & The Invested (Soon to be WealthUp)

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