May Is for Springtime Frolicking, Not Selling

Dearest readers, here is your annual reminder: "Sell in May" is a myth. Markets aren't seasonal. Tax-related matters aside, the calendar shouldn't factor into your investment decisions.

The full proverb, "Sell in May and go away, and don't come back until St. Leger Day," stems from 19^th century brokers' tendency to take very long summer holidays, limiting trading and liquidity on the London Stock Exchange. They'd scamper off in May and come back around the time of September's St. Leger Day horse race. Which does sound like one heckuva great vacation. But probably not terrific for business and productivity. With no one minding the shop, the logic went, best to pull money out until normal operations resumed. But what started as aristocratic shenaniganery turned to 20^th century investment advice as market data piled up, leading to the creation of the Stock Trader's Almanac and the observation that stocks have lower average returns from May through summer's end. Plenty others have noted the six-month stretch from April 30 through Halloween is the weakest rolling half-year. Sell in May and go away, they all say, and you can miss these bummer summers, then buy in time for the better winter and early spring months.

This argument is codswallop with a side of balderdash. Poppycock, if you prefer. For one, summer months aren't weaker every year. Two, even if they were, "relatively weaker" is not synonymous with "down." Last year, for instance, the MSCI World Index rose 2.2% from April 30 through Halloween, while the compound return from New Year's through April 30 and Halloween through year-end was 5.0%.^[i] What would you rather:

1. Get the 1.2% from New Year's through April 30, then sell everything-incurring commissions and realizing gains. Then sit on your hands for six months until you buy back in on Halloween (paying more commissions) and get the final two months' 3.8%, giving you a return of 5% minus whatever you paid tied to all that selling and buying?^[ii]

Or!

2. Do nothing, hang on the entire time, not pay all those commissions, and earn better returns. Seems like a no-brainer to us.

We know that's anecdotal evidence writ large, but you could run a similar exercise for any of the other 64 positive May to November stretches since 1926 (using the S&P 500).^[iii] To earn market-like returns over time, you must be invested while markets are rising. Even if May to November is sometimes weaker, it is still a part of stocks' roughly 10% long-term annualized return.^[iv] To be blunt, avoiding a six-month stretch that is positive in 72.2% of all calendar years since 1926 seems like a very bad way to capture markets' growth.^[v] It seems even worse when you factor in commissions and taxes.

"Yah, but what if this is one of those negative summers?" That is an entirely understandable objection. And hey, maybe this summer will be a downer. We're bullish and expect a great 2017 overall, but corrections and short-term dips can strike at any time, for any or no reason. Such is the nature of a sharp, sentiment-driven drop. If you sit out the summer and miss a correction, it probably feels nice. But it's luck, not skill. You could also encounter bad luck if you try to sit out a correction that never happens. Is the chance to avoid a sudden drop that ends as quickly as it begins worth the risk of missing something great? Participating in corrections won't keep long-term growth investors from reaching their goals. But missing rallies is always and everywhere a setback.

Markets are not like the city bus-there is no schedule when "negativity" will arrive at 11 Wall Street. So please take our friendly admonitions to heart, and resist the urge to do some seasonal fiddling with your investments. Just sit back, relax and think long-term.