What does “Sell in May and Go Away” even mean?
During May, we often hear the phrase in the media, “Sell in May and Go Away,” encouraging individuals to sell off stocks in their portfolios and move assets to fixed income in May to then re-enter the stock market in the fall. This strategy comes from historical evidence that stocks typically underperform between May and October. Since 1950, the Dow Jones has had an average return of only 0.3 percent during this period. And today, some individuals believe that sticking with this saying will help to avoid the seasonal decline in the equity market. Many who follow this adage think they will avoid the volatility from May through October by adhering to this rule. However, this idiom hasn’t worked for the past few years and if investors followed this investment advice, they would have lost on the upside.
While history may be a good starting point, it isn’t necessarily an indicator of future performance, and guessing when to get in and out of the market can be a dangerous game. There are strategies and risks to consider before following the advice from this well-known trading adage.
Stay in the market long-term
In many instances, staying invested long-term is favorable because investments that are held for longer periods of time typically exhibit lower volatility and yield higher returns. Also, in the long-term, you’re able to save on other expenses such as active trading transaction costs.
By investing in a variety of asset classes and industries, individuals are able to help protect portfolios from the downside of an underperforming sector. However, it’s important to understand the risks that come along with investing. While risk can never be eliminated, keeping a diversified portfolio will help provide protection in periods of volatility.
Check tax basis
If someone has determined they’d like to sell, it’s important to look at the tax basis, as to not incur adverse consequences on taxable accounts. Selling equities could produce short-term or long-term capital gains so if adamant about selling, it’s important to consider tax basis before trying to time market. If not, you may be in for an unpleasant surprise next April when tax season rolls around.
Nobody can predict or call what will happen in the market. Instead of taking the “Sell in May and Go Away” adage to heart, investors should be forward thinking and not reactive to the market. Rather than trying to time the market, it’s important to think strategically when to shift portfolio weight and rebalance.
That’s not to say you can’t sell, taking a profit when there’s been a run up in the market can be strategically sound, if in need of cash. If an investor needs to make a large purchase, they can sell a security for profit to have some cash on hand. But what investors need to keep in mind is that you can’t plan for a time of year to make portfolio changes, but rather consider the market environment and overall conditions.