Don’t Sell in May and Go Away
Investors face tough odds trying to time the market.
“Sell in May, and go away” is a popular theory among investors that I have been hearing a lot about recently, especially in the news. The idea is that most gains in the equity markets are made between November and April.
There is some pretty interesting data that supports the theory. According to Standard & Poor’s Equity Research, the return since 1945 between November 30 and April 30 has averaged 6.8 percent. That’s compared to 4.1 percent average return for all 12 months.
But really, who cares?
Traders care. Investors should not.
Investors should be operating off of an investment strategy that is a product of a complete and comprehensive financial plan, and no plan should advocate trading as a strategy to accumulate wealth.
Also, while this historical information is interesting, it does nothing to help predict market performance this summer or any other summer in the future for that matter. In fact, a quick look back at 2009 and 2010 sheds some light on how fickle the market can be.
Using a quick price return calculation, the S&P 500 returned more than 19 percent between May 2009 to October 2009. “Sell in May and cry away” was the mantra there.
Let’s look at May 2010 to October 2010. The S&P 500 returned about 5 percent. Not bad. Now throw in some interesting analysis by Bespoke Investment Group. According to a recent report that looks at the Dow Jones Industrial Average (DJIA) over the past 20 years, May recorded positive returns 60 percent of the time, June 35 percent, July 70 percent, August 60 percent, September 50 percent, October 70 percent, and November 65 percent.
May is a positive return on the DJIA 60 percent of the time; however, in 2011 May’s numbers were down about 1.88 percent.
The reality is that you never know what you don’t know. The decision to sell in May and buy back in November is akin to a guess. Two guesses, actually. Selling and buying back in.
Let’s look at a very unscientific exercise to make a point and give the guess even odds: 50/50, a coin toss. An investor has a 50/50 chance of being right when they decided to sell and a 50/50 chance of being right when they buy back in. That means an investor has a 25 percent chance of being completely right.
Those odds stink.
Let’s assume that an investor wants to try their hand at timing this, regardless of how bad the odds are. Here are some questions:
- When do you pick the start day?
- When do you pick the finish day?
- How much will your summer stink when you are looking at the market every day, fretting over your decision and 25 percent odds of success?
Personally, I think number three is the most important question for any investor to answer.
Here is some free advice—just go away. Serious investors have a solid financial plan and a serious wealth management strategy designed to reasonably grow wealth over time. Serious investors should be worrying about spending time with family, enjoying the weather, and having fun over the summer.
Leave the guess work to the traders who want to stay inside all day, fretting over news, economic reports, and what the latest “talking head” on CNBC is saying.
Read the article on U.S. News & World Report here! >
David B. Armstrong , CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America’s Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual investors. To determine which investment is appropriate, consult your financial advisor prior to investing. All performance references are historical and do not guarantee future results. Asset allocation does not ensure a profit or protect against a loss.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.