There are a few versions of the old saying: “Sell in May and go away”. That in itself isn’t much of a help unless you know when to get back in the game again. The British used the term “Sell in May, then go away – come back on St. Leger’s Day”. St. Leger is referring to a horse race in England which is scheduled to take place each year in September. Let’s take this simple rule of thumb for a test ride and see if it could enhance returns if applied to investing in stocks.
Looking at monthly data of the S&P 500 since 1950, the straight Buy & Hold strategy of owning say 10 units of the S&P 500 at a cost of $194.50 would have given you a final portfolio value of $10,894. That is a total return of about 5500% with a compounded annual return of 7% as of May 28, 2010.
We back-tested the same data by taking a position (10 Units of S&P 500) each year at the end of September and selling the same position at the end of May in the following year. The “Sell in May” method did even better with a compounded annual return of 7.4% over the same time period.
The performance graph results look like this...
These results are encouraging but of course there are very few investors (left) who might have bought stocks on a buy & hold strategy since 1950 or let alone, have the tenacity and discipline to follow the “Sell in May” strategy over such a long period of time. So let’s look at a shorter time frame to see if this method still makes sense. The decade of the naughties (00’s) is often referred as “the lost decade” and indeed, stock market returns as per benchmark have been negative for a buy & hold investor.
Doing the same data analysis for the period of September 2000 until May 2010, a “Sell in May” strategy would not only outrank the “Buy & Hold” method but investors would actually come out slightly positive with an annualized return of 0.6%.
Here is the comparison in a performance graph ...
The method seems to have worked comparing these two specific time periods. However, shorter time frames can give results in varying degrees. As luck would have it, the same strategy that worked so well for the “lost decade” would have resulted in a 21% loss during 2008/09, most of which would have been recovered by keeping the position until December 2009. There are evidently periods when investors can miss out on strong market movements by staying out of the market. We also examined different time periods by “staying out of the market” until October, November and December each year but found those performances actually resulted in weaker returns, even trailing the “Buy & Hold” strategy.
As with all backward looking hypotheticals, the caveat here too is that there is no guarantee that future performance can match previous results, something every investor needs to consider before implementing “Sell in May” each year.
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