BMO Private Bank: Should Investors Adopt the "Sell in May and Go Away" Strategy?

- $1,000 invested in the Dow Jones Industrial Average exclusively from May through to October, and kept in cash the remaining months would have grown to $2,167 from May 1, 1900 to October 31, 2012 - The same amount invested exclusively during the November to April months would have grown to $122,606 from November 1, 1900 to April 30, 2012 - Yet, despite the appeal of the 'Sell in May' strategy, trying to time the markets is never a good idea, in fact, being invested year-round is likely to deliver the best results

Marketwired

CHICAGO, ILLINOIS and TORONTO, ONTARIO--(Marketwired - May 23, 2013) - As the summer draws near, the old adage "Sell in May and Go Away" comes to mind for many investors. This seasonal approach to investing involves investors selling their stocks in May and returning to the equity market in the Fall.

A recent BMO Private Bank report examined this calendar effect on the market and found that the strategy does have some historical relevance.

To test the theory, the report divided the calendar year into two six-month periods, May to October and November to April. Dating back to the 1900's, the report tracked how USD $1,000 invested in the Dow Jones Industrial Average would fare if invested only during the months of April to November, switching to non-interest bearing cash for the remainder of the year, and the opposite strategy for the May to October time period. The results were as follows:

  • The USD $1,000 invested exclusively from May through October grew to USD $2,167 (excluding dividends) as of October 2012, an annualized price-only gain of 0.7 per cent
  • The November through April portfolio would have grown to USD $122,606 as of April 30, 2012, an annualized 4.3 per cent gain
  • The report notes that a USD $1,000 investment that held the Dow year round would have returned an annualized 4.7 per cent return

"While the 'Sell in May' approach to investing is an interesting one, we do not advise using this strategy as it is risky for the average investor," said Jack Ablin, Chief Investment Officer, BMO Private Bank. "What our research shows it that history can be a useful guide for navigating the investment markets, however there needs to be a fundamental rationale behind the calendar effect before investors attempt to time the market. We find that investors who remain in the market year-round generally garner the best results."

Mr. Ablin also noted that, based on the report's historical analysis, this strategy does not always hold true. Had investors sold in the spring of 2009 they would have missed out on substantial gains during those summer months, and would have incurred significant losses during the November 1969 to April 1970 period. Furthermore, in Canada, between 2003 and 2007, stocks rose during the summer months.

"Investors should adopt a long-term, diversified approach that maintains a return on investments, while hedging against unnecessary risk," said Mr. Ablin. "This includes building a portfolio that allows you to be active throughout the year and contains a variety of investments that are both conservative and aggressive. That way, if you prefer to lessen your exposure during certain periods, you can remain in the market and weather the highs and lows of the summer."

For more information on investing and wealth management strategies please visit:

www.bmo.com/harrisprivatebanking (Canada)

www.bmo.com/privatebank (U.S.)

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Media
Beth Copeland, Indianapolis
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Laurie Grant, Vancouver
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