- The ‘Sell in May and go away’ investing refrain originates in 18th-century England and has some modern statistical support.
- While summer returns are lower, they are not a period of uninterrupted losses, meaning that investors may miss out on long-term compound interest if they go to cash.
- Instead of completely exiting the market, you can put stretches of pessimistic sentiment to productive use by scanning for undervalued stocks at 52-week lows, rebalancing your portfolio, deploying extra cash and reviewing the core health of your investments.
The investing mantra, “Sell in May and go away,” stems from stock brokers in 1700’s England who figured it made sense to sell their stocks in the summer, when most investors are on vacation and too busy having fun to fiddle with their portfolios, strategically re-entering the market when capital allocation supposedly picked up again in the fall. The notion, no doubt rooted in idealism, has some solid data behind it.
This article is a journalistic opinion piece which has been written based on independent research. It is intended to inform investors and should not be taken as a recommendation or financial advice.
According to a report from the Canadian Press, the S&P 500 has averaged about a 7 per cent gain in the six months ending in May, but only about 2 per cent in the following six-month period, representing a statistically significant shift in US investor sentiment, reflecting more pronounced institutional activity in the beginning of the year as they right-size portfolios and re-set tax strategies.
A report from TradingView, as well as 2022 research from Bouman and Jacobsen, extends these positive results into European, Asian and select emerging markets, broadening the universe for investors keen on putting Sell in May in play.
That said, the data fails to mention, as pointed out by The Motley Fool, that cumulative returns represent a mix of positive and negative months, with the S&P averaging negative returns from 1950-2024 in only February, August and September. This means, should you go to cash in the summer, you’d be avoiding not a period of uninterrupted losses, but a stretch of volatility that is the price of admission for capitalizing on the stock market’s demonstrated ability to deliver positive, inflation-adjusted returns.
The lesson here is simple and eternal, and one you’ve probably heard dozens of times if you consume financial content: Your success as an investor doesn’t depend on timing the market, but on time in the market. This makes it paramount to nurture your ability to stay invested, through bull markets and downturns alike, so that you can benefit from compound interest over the long term.
While Sell in May isn’t a set-it-and-forget-it strategy, investors may still be able to capitalize on the negative shift in market sentiment that it highlights in a number of value-conscious and fundamentally sound ways.
1. Scan the 52-week lows
One of the most prospective moves investors can make to leverage the Sell in May phenomenon is to scan for stocks hitting 52-week lows, in the hopes of identifying companies being unjustly undervalued by indiscriminate selling.
If, in your relentless combing through of financial statements, you happen upon a stock in a pronounced downtrend, despite a recent history of profitability, or progress on a path towards it, you may have a bargain on your hands.
2. Rebalance your portfolio
Should a generalized market dip materialize, which may occur because of broader awareness of Sell in May, even though returns data doesn’t hold up over the long-term, you may find that your chosen asset allocation is a bit out of whack, requiring you to rebalance through strategic buy and/or sell orders.
The goal here is to increase your exposure to asset classes you’re under-allocated to and sell some of those you’re over-allocated to, such that the resulting mix is once again aligned with your risk tolerance and financial goals.
The research is clear that you only need to rebalance once a year, with any additional fiddling likely to eat into your returns through excessive trading fees and interrupted compound interest.
3. Put extra cash to work
Another way to put the Sell in May period to productive use is to invest a windfall or cash balance, taking advantage of a stretch of pessimistic market sentiment to buy more shares than you’d otherwise be able to. Scenarios where this might be relevant include an inheritance, a raise, a bonus, or an emergency fund that outweighs your realistic needs.
To maximize your probability of long-term returns, lump-sum investing, or putting the cash to work all at once, is the proven way to go, but no reasonable financial advisor would fault you for dollar-cost averaging the money into the market every month if it’ll help you sleep better at night.
4. Revisit your investment theses
One final opportunity every investor would benefit from actioning during a Sell in May downtrend is checking in on their investment theses. In layperson’s terms, this means verifying that every company in your portfolio is delivering on its growth initiatives, remaining on track to creating the value you expect of it.
A logical initial move to make would be to read a company’s past few quarterly reports, taking care to note the mention of any setbacks or unexpected obstacles and how leadership plans to overcome them.
Investors should also visit Stockhouse and scan a company’s most recent press releases, keen to intuit a sense of how operations are unfolding. Is the deal pipeline stagnant or accelerating? Are capital raises plentiful or few and far between? Is leadership firmly embedded or turning over at a worrying rate? Companies tend to lean into their successes and do a poor job of masking that trouble’s afoot, so trust your detectives skills and wherever they lead you.
If a given holding is no longer passing muster, the best practice is to cut your losses, remember that we are all flawed beings on this earth, and reallocate the capital into a better idea.
Takeaway
Whether it’s a reminder or you’re learning it for the first time, the stock market is a place of heightened emotions, where investors are trying to make decisions with their very livelihoods at stake.
Unsurprisingly, their relentless search for certainty, for proof that they’re making the right moves, has led to an abundance of popular refrains and rules of thumb about how the market works.
Some, like ‘Don’t put all your eggs in one basket’, referencing diversification, and ‘The best time to invest was yesterday’, highlighting the stock market’s reliable long-term returns, offer tangible utility, while others, such as ‘Buy the rumor, sell the news’ and ‘Sell in May and go away’, aspire to a level of practicality that will forever elude them.
The key is to put your faculty of discernment to work, remembering that there’s no shortcut around the volatility a stock will experience on any given day on the road to a handsome long-term return.
Join the discussion: Find out what investors are saying about the Sell in May and go away investing mantra on Stockhouse’s stock forums and message boards.
