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Should You Really “Sell In May and Go Away”?

Rebecca Lake

“Sell in May and go away.” It’s investing advice that some people advocate as a strategy for managing a portfolio through the summer months. The phrase grew out of the observation that markets often underperform during summer. That led to the belief that lower trading volumes between May and October increase share price volatility and often weigh on some stocks. Selling off some stocks before summer is a way to respond to that slowdown. But should you follow this bit of investing wisdom? When shaping your portfolio – whether on your own or with a financial advisor – it’s helpful to look at the arguments for, and against, selling in May and going away.

Sell In May and Go Away: What Does It Mean?

In a nutshell, this strategy involves managing your stock allocation before and during the summer months to insulate your portfolio against seasonal shifts in trading activity. You would sell off stock holdings in May, then sit out the market for the summer months, buying back in during the fall.

The reasoning behind this approach to investing is fairly simple. Historically, the stock market sees its strongest performance in the period ranging from November to April. The stretch from May to October, on the other hand, is when stocks may underperform or experience lower trading volume. This is often attributed to the fact that summer is when many investors and traders take vacations, which can lead to a lull in market activity.

Academic analysis of the adage has tended to vindicate it. In one frequently cited study published in the Financial Analysts Journal, investigators found that from 1998 to 2012 in 37 markets, the November–April returns exceeded those of the May-October returns by about 10 percentage points.

Benefits of Selling In May

By taking a break from the stock market during the summer months, you may not be as susceptible to the effects of any bouts of volatility that might occur. If you reinvest in the fall just before stocks begin trending upward, you might be able to generate a better overall return profile. The key with that is being strategic about which stocks to buy and when to buy them. That part can be tricky since timing the market isn’t an exact science and can be difficult even for the most experienced investors.

Besides protecting your portfolio from volatility-related losses, selling in May and not returning until October could be an opportunity to re-evaluate your portfolio’s tax profile and eliminate some losing stocks for tax-loss harvesting.

This strategy may work well for an investor who understands the nuances of the market and is well-versed in how specific stocks or stock sectors move during different times of the year. It could also be more appropriate for investors who are focused on the short-term and take a more active role in portfolio management, versus a buy-and-hold investor who relies on a more passive approach.

Why It Might Not Make Sense to Sell In May and Go Away

Sitting out the stock market during the summer months might sound tempting but there are a few reasons to think twice about doing so. Firstly and perhaps most importantly is the potential to miss out if the market does well during the summer.

This strategy is based on historical trends. What is true of a market overall is not necessarily true individual components of that market. The adage doesn’t take into account the performance of specific equities or current market or economic conditions, inflation or interest rate movements. It also doesn’t factor in how the political climate and government actions concerning things like tariffs could impact the market. If stocks hold strong over the summer, you could face an opportunity cost for being on the sidelines.

Even if stocks hold steady, moving neither up or down, you could be hurting your portfolio by not continuously investing through the summer. Time is arguably the most powerful tool you have at your disposal as an investor. The longer you stay invested, the more the power of time and compounding interest have to work and grow your money. If you’re constantly moving in and out of the market, it may be harder for your portfolio to compound and grow.

Some analysts criticize the notion that investors should spend summers on the equity market’s sidelines as just another form of the widely discredited practice of market timing. You can bank on the predictability of seasonal changes: summer will always follow spring, and autumn precedes winter. But no one has the omniscience to predict what the market will do over a few months’ period.

A sell in May and go away approach can also ding your portfolio in another way if it results in increased trading costs. While more online brokerages offer commission-free trading, not all of them do. And free trades may be limited to stocks or ETFs. If you’re selling off investments other than stocks at the start of summer – such as mutual funds, forex or options – with the intention of buying back in later, you could be increasing your investment fees. Even if the strategy works well performance-wise, more fees mean fewer returns you get to keep.

Lastly, selling in May and going away can work against you if it’s driven by a sense of panic or fear about where the market is headed. You may decide to get out of the market in May because of a perceived increase in volatility. But when fall rounds around and it’s time to buy back into stocks, you may continue avoiding the market. In the meantime, stocks rebound, prices rise but you’ve missed the chance to reap those returns.

Consider a Compromise

Rather than leaving the market completely behind in summer or sticking firm with your current stock positions, you might consider splitting the difference. Instead of selling off all your equities, you could sell off stocks associated with market sectors that have a history of underperforming in summer while moving into sectors that tend to do well during the May to October stretch.

For example, people may spend more on necessities during the summer so a move to consumer staples stocks could pay off. Once fall starts picking up, you could shift your holdings toward discretionary spending or tech, both of which tend to fare well and offer strong performance from November to April.

Another way to look at it is in terms of which investments you’re most interested in holding for the long-term and which ones are short-term buys. Once May rolls around, you may decide to sell the short-term investments if you can do so at a profit, while holding on to the stocks or other investments that are aligned with your long-term objectives.

The Bottom Line

Sell in May and go away is conventional investing wisdom that enjoys some empirical support. But that doesn’t mean you should accept it at face value. Depending on what’s happening with the market and how stocks are trending, you may be better off continuing to invest in the summer. Weighing the pros and cons of using this strategy against your investment goals can help you decide if it’s something you should try.

Tips for Investing

  • Consider talking to a financial advisor about selling in May and going away. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • Deciding whether to exit the market’s during summer starts with understanding what type of investor you are and which style you prefer. Here is an asset allocation calculator that can help you align your investments with your risk tolerance.

Photo credit: ©iStock.com/hocus-focus, ©iStock.com/gerenme, ©iStock.com/Animaflora

The post Should You Really “Sell In May and Go Away”? appeared first on SmartAsset Blog.

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