One of the more persistent investment myths is that the winning strategy is to sell stocks in May and wait until November to buy back into the market.
While it’s true that stocks have provided greater returns from November through April than they have from May through October, since 1926, there has still been an equity risk premium over the months from May through October.
From 1927 through 2016, the “sell in May” strategy returned 8.4% per year and underperformed the S&P 500 by 1.6 percentage points per year. And those results are before even considering any transaction costs, let alone the impact of taxes (you’d be converting what would otherwise be long-term capital gains into short-term capital gains, which are taxed at the same rate as ordinary income).
So, how did the sell in May and go away strategy work in 2017? The total return for the S&P 500 Index over the period May through October was 9.1%. During this period, safe, liquid investments would have returned just 0.5%. In case you’re wondering, 2011 was the only year in the last nine when the sell in May strategy would have worked.
One of the most basic tenets of finance is that there’s a positive relationship between risk and expected return. To believe that stocks should produce lower returns than Treasury bills from May through October, you would also have to believe that stocks are somehow less risky during those months—a nonsensical argument. Unfortunately, like with many investing myths, this one seems hard to kill off. And you can bet that, next May, the financial media will be resurrecting it once again.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.