Scott Pace
The Big Picture

Sell in May, and Go Astray

By, 08/27/2009
It's almost September, and investors who "sold in May and went away," as the old saying goes, probably wish they'd never left. After a tough start to the year, global markets fought back with a vengeance, posting a healthy piece of the rally this side of May 1 (over 22% for the MSCI World[i]).

Fans of the summer hiatus might say, so what? It's just one year, and after all, there must be some reason for the old saying. Where there's smoke, there's fire, right? Well, not always. Since 1926, 83 summers have come and gone (not including this one), and the average S&P 500 returns through 2008[ii] look like this:

May 1 – September 30 (5 months):         3.76%

October 1 – April 30 (7 months):             7.92%

Sure, the shorter summer half has lagged the longer winter half. But if you're going away, where to? Cash and bonds have both significantly underperformed stocks, even in the summer months. And don't forget, going away isn't free—jumping in and out means paying transaction costs and sometimes taxes, so you'll need to overcome those. The truth is, old adages usually die hard because they're catchy, not because they're necessarily useful. They can in fact be quite dangerous. This one particularly so because it advises trying to time market moves over a short period, which is like, well, playing with fire. Long-term historical averages mask some intense return variability. Ask anyone who went to cash in the tough going earlier this year and missed the 61% rally (as of this writing[iii]) from the March 9th bottom, or even the folks who went away on May 1st. If your goal is to capture market-like returns over time, you simply can't risk missing exceptional summers like this one.


But you might point out all the years when a summer exit would have helped—like last year. Last year, the adage would have worked, sort of, depending on the dates you use (more on this in a moment), although you'd still have been back in time for the bulk of the bear market. Regardless, the more important point is that you'd have to know in May, not looking back from September, whether this would be a year to be in or out. And it's just not possible to consistently predict short-term market moves. How many called for a 60% summer rally back in March?


Even if there once was some truth to the old saw, such a simple tactic would quickly lose its power as investors jumped on the bandwagon and moved ahead of expectations, crowding out the benefits. In other words, you'd eventually have to get out way before May and get back in way before…wait a minute, when were you supposed to get back in again? September 1st? The autumnal equinox? Kickoff? The getting-back-in part is half the equation and is a bit murky to say the least—which allows for all sorts of data mining possibilities, producing a virtually endless shelf life for the "sell in May" myth. Data mining is one reason for its staying power, but there's something more. 

Behaviorists call it confirmation bias. We tend to acknowledge events that confirm our beliefs and ignore those that don't. When confronted with pesky contradictions, we simply reframe the evidence. In the case of "sell in May," you might decide to swap May for March in some years, or that "going away" means buying gold or pork bellies or who knows what until you've screened out the contradiction. Eventually, you end up with, "Sell in May, maybe, and go away, but not too far," or some equally feckless it-works-only-when-it-works maxim. When you arrive at this stage, you're in a full-fledged state of denial. And don't expect the media to ride to the rescue. When stock returns don't confirm the adage, one thing that will go away—quietly—will be the headlines arguing for it.

Markets can be tough, and it's understandable investors are always looking for a leg up on one another. But they're better off in the long run by formulating an appropriate strategy and sticking to it than changing course based on lore. As investors who sold in May can tell you, the latter will only lead you astray.

[i] Through 8/25/2009. Source: Global Financial Data

[ii] Average returns, 1926 – 2008. Source: Global Financial Data

[iii] Through 8/25,/2009. Source: Global Financial Data

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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