Sell in May and Go Away: What is this strategy?
April showers bring May flowers. Every cloud has a silver lining. It's always darkest before the dawn.
Many of us have heard these sayings — but what about "sell in May and go away?" This traditional stock market adage suggests investors should sell their stock holdings in May and stay out of the market until the end of the summer, typically until around October or November.
But is this an effective strategy? Read on to learn more.
What is "Sell in May and go away"?
"Sell in May and go away" comes from historical observations that stock market returns tend to be weaker during summer months, particularly from May to October. This period is sometimes referred to as the "summer doldrums" or the "summer lull."
Why is this so? There are a few factors during this time period that may lend themselves to this saying, including historical patterns, seasonal factors such as vacations or activities outside of investing, and psychological influences that has an investor potentially embracing this as a self-fulfilling prophecy.
How does the "Sell in May and go away" strategy work?
Let's take a look at how this Sell in May and go away strategy is implemented.
Sell in May: At the start of May, investors sell their stock holdings, liquidating their positions. The idea is to exit the market (go away in May) before the anticipated period of lower returns begins.
Stay out of the market: Investors stay out of the market for the duration of summer, typically until around October or November. During this time, investors may hold their funds in cash or invest in alternative assets including bonds or money market funds.
Re-enter the market: Around October or November, when historically stronger market performance tends to resume, investors re-enter the market, reinvesting their funds in stocks or equity-based assets. With this re-entry, they aim to capitalize on potentially higher returns during a perceived favorable period.
Keep in mind that while this strategy is based on historical trends, it's important to note that past performance is not indicative of future results, and market conditions can vary from year to year.
For example, since 1990, on average the S&P 500 has gained about 2% from May through October as compared to an approximate 7% average rise for November through April. A more recent look at seasonal trends showed that from May 1, 2023 to October 31, 2023, the S&P 500 gained about 5% vs. November 1, 2023, through April 24, 2024, an approximate 20% gain. (1)
"Sell in May and go away" historical statistics
Investors considering this strategy may consider looking at "sell in May and go away" statistics. The chart below reviews data from the last 50-plus years, illustrating how stocks performed between November-April vs. May-October periods.
From the chart, the November-April period (2) shows the S&P 500 averaged a 6.5% gain vs. 1.6% gain over the rest of the year. The NASDAQ came in with a 5.9% gain differential and the DJIA at 6.9% difference.
Indexes are unmanaged and cannot be directly invested into. Past performance is no indication of future results. Investing involves risk and the potential to lose principal.
What to consider before selling in May
While the "Sell in May and go away" strategy is based on historical trends, an important reminder is past performance is not indicative of future results. Market conditions can vary from year to year. In other words, the saying isn't always based on fact.
In addition, some investors may choose to modify or adapt the strategy based on their individual circumstances, risk tolerance, and investment objectives. For example, they may partially sell their holdings in May rather than liquidating all positions, or they may implement hedging strategies to mitigate downside risk during the summer months, illustrating there is no best month to buy stocks.
Pros and cons of 'Sell in May and go away'
Like any investment approach, "Sell in May and go away" has potential benefits and drawbacks. Here are some pros and cons of the strategy.
Pros
Follows historical performance: Since 1990, the S&P 500 has averaged about a 2% return annually from May to October vs November to April's 7%. (3)
Reduces risk: Could potentially reduce risk by avoiding this traditionally weaker half of the year.
Avoids potential volatility: Lower trading volumes between May and October can increase share price volatility. Selling in May may help avoid this volatility.
Tax-loss harvesting: Could provide an opportunity to re-evaluate your portfolio's tax profile and eliminate some losing stocks for tax-loss harvesting.
Cons
Unpredictability: Historical patterns don't predict the future.
Could miss out on potential gains: Risk of missing potential summer gains
Transaction costs and tax implications: Undergo potential transaction costs and tax implications associated with frequent buying and selling of stocks.
Alternatives to 'Sell in May and go away' strategy
While this strategy is based on historical data, patterns don't always hold true as unexpected market events or data can impact potential sell on May activity. Here's a few alternative strategies to potentially consider.
Sector Rotation: Shift investment assets from one sector of the economy to another, based on certain indicators. This aims to capitalize on the economic cycle by investing in sectors expected to outperform during certain phases.
Tax-Loss harvesting: Selling securities at a loss to offset a capital gains tax liability. This strategy is typically used at year's end but can be implemented year-round.
Strategies focused on specific market trends or events
Halloween indicator/Buy in October and sell in May: Buy up stock at the end of October, coinciding with Halloween.
FAQs about 'Sell in May and Go Away'
Why sell in May?
Selling stocks in May is based on a historical market pattern where stock market returns tend to be weaker during the summer months, particularly from May to October. Some investors may consider selling stocks in May for different reasons, including seasonal trends, market volatility, historical precedence, and market sentiment.
It's important to note that while "selling stocks in May" is based on historical observations and market patterns, it's not a foolproof strategy as market conditions can vary from year to year.
Is sell in May a good strategy?
This depends on various factors, including individual investment goals, risk tolerance, market conditions, and the investor's ability to time the market accurately. Some considerations to help evaluate the strategy include historical market performance, market timing challenges, risk mitigation, missed opportunities, and transaction costs and fees.
How is May for stocks?
Some investors may ask, what are the best stocks to buy this month? Historically May has been a mixed month for stocks, with performance varying year to year and influenced by various factors.
Some key points regarding how May typically fares for stocks include investors embracing the Sell in May and go away strategy, the influence of economic data and events such as data releases, earnings reports and monetary policy decisions, the beginning of the summer season, and historical events including the Flash Crash (May 2010) and European debt crisis (May 2011).
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