The stock market has many old sayings, from "buy the rumor and sell the news" to "as goes January, so goes the year." And let's not forget this memorable one: "Bulls make money. Bears make money. Pigs get slaughtered."
But one old saw from Wall Street that you probably heard recently is "sell in May and go away." It means that you should sell your stocks in May, and come back to the market in the fall.
The full quote dates to 1930s London, when stock traders would tell each other to "sell in May and go away, stay away till St. Leger Day."
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This isn't a nod to Leger, the Catholic patron saint of sore eyes who had his own peepers gouged out in a dispute among French noblemen in 675 A.D. Instead, St. Leger Day is dedicated to the St. Leger Stakes, the final leg of the British version of the Triple Crown in horse racing that's held each year in late September.
Basically, those lazy, gambling English traders wanted to enjoy a long vacation—and ended up altering stock market behavior in the process.
Why? Because stocks have historically underperformed between May and October, compared to returns seen from November through April. Since 1950, the Dow Jones industrial average has returned an average of only 0.3% during the May to October period, compared with an average gain of 7.5% between November and April, according to the Stock Trader's Almanac. A less-pronounced "sell in May" effect is present in the Standard & Poor's 500-stock index as well.
Timing the Market
Ideally, the "sell in May" investor would pull his stocks out of the market May 1, and put them back in November 1. This type of stock trading is known as market timing, as opposed to "buy and hold" investing, a strategy that aims to benefit from the gains of stocks over time and isn't concerned with short-term price movements.
The "sell in May" strategy hasn't held up so far this year. The Dow rose 3% from May 1 to May 24, breaking 15,000 for the first time ever. The S&P 500 had a similar boost in May, hitting new highs. So any investors who sold May 1 missed out on the gains.
Selling in May has a mixed record over the long haul too. Larry Swedroe, director of research for the BAM Alliance, a network of wealth management firms, has extensively analyzed how the strategy has performed dating back to 1926.
He found that, from 1926 through 1959, selling in May underperformed the buy-and-hold strategy by an average of more than 5 percent points per year. But between 1960 and 1979, "sell in May" outperformed the buy-and-hold approach by an average of 2.8 percent points per year.
"There's no way anyone would have known that the strategy would work beginning in 1960," Swedroe notes. "By the time a sufficiently long period had passed to convince an investor that it actually might succeed, it would have stopped working."
"When it comes to investing, focus on time in the market, not timing the market."
Time in the Market
To implement a "sell in May" strategy, you'd have to pay transition costs, such as commissions, to pull your money out of stocks.
If you trade stocks in a taxable account, you'd have to pay capital gains tax on the trading. By selling stocks in May and buying them back in November, you may generate short-term capital gains, which are taxed at your ordinary income tax rate. That's more than the tax for long-term capital gains, which are zero if you're in the 10% or 15% income tax brackets or 15% if your total income puts you in the 25% tax bracket or higher.
The strategy also raises a question of where to park your cash until November 1. The average 6-month CD yields 0.45%, which isn't enough to keep pace with current inflation of roughly 1%. Yields on short-term Treasurys, another safe haven, are even lower at the moment.
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Despite the costs and complexities, investors still have the urge to sell in May. Brandie Farnam, a LearnVest Planning Services CFP®, says that she has received a lot of calls from clients recently asking if they should sell in May.
"When it comes to investing, focus on time in the market, not timing the market," she says. "Doing so should help limit transaction costs and minimize possible tax consequences—both of which play an important role in maximizing your net return."
Bottom line: When it comes to investing, the best thing you can do is stick to your strategy, and let the market do the work for you—regardless of what month it is.