If you’ve been reading about investing long enough, eventually you’ll run into the saying “Sell in May and go away”. The premise is that the markets haven’t given much return (on average) during the summer and fall months, so it’s better to get out of the market during this time. There are some pretty staunch advocates of this strategy – in fact I know of one advisor who routinely sells his clients’ holdings in May and re-enters the equity markets in October/November every year and he swears by it. (Wonder how that worked out this past cycle…)

Where’s The Beef?

Support for this particular seasonal investing strategy is simple to mine (perhaps, therein lies the answer to it’s future applicability?). Brooke Trackray noted in his book Thackray’s 2009 Investor Guide that if you had systematically put $10,000 into the S&P500 on May 6th, left it there until October 27th and then taken your proceeds from that run and deposited it back into the market on May 6th of the following year, and then further repeated this from 1950 (inclusive) to 2008, your annualized rate of return would be -0.2%.

If on the other hand you had only invested in the S&P500 from October 28th until May 5th of the following year, and repeated that cycle from 1950 to 2008, your annualized gain would be 7.6%. While I can’t see from the data source, I’m presuming these figures exclude dividends or re-investment of dividends (which make a big difference).

Sure looks convincing doesn’t it? How about if we frame it a different way (credit to Thackray for providing the numbers). If you had taken an initial $10,000 investment, those who were invested every year from May 6th to October 27th ended up with $9,465 in 2008 (after 58 cycles of doing this). Those who sold in May, and bought in October every year from 1950 to 2008 ended up with $806,204.

Additional Food For Thought

There are a number of considerations to highlight, however.

1. Transaction expenses – Your portfolio turnover will be 100% per year, generating substantial annual tax drag in taxable accounts.
2. You would receive roughly 50% of the dividends available. Dividends have accounted for a very significant portion of an investor’s total return over time.
3. You still got crushed in the past cycle.
4. You might miss out on great gains in the 2009 summer period (or not).
5. Somehow, I imagine that as hard as “buy and hold” is, forced periodic buying and selling would be psychologically harder to deal with.
6. Past performance is no indication of future performance.
7. As more people react on this information, the market will arbitrage any advantage away over time because the market is sufficiently efficient that gross pricing errors, once discovered, become negated (or priced in).
8. The S&P500 Total Return index annualized from 1950 to 2007 was 11.9% ($US). Even though 2008 was an outlier, the resulting annualized number would still be higher than the 7.6% for those who sold in May and went away. (Granted, that 7.6% number would be slightly higher with the half-serving of dividends you would receive.)
9. What did your money do for those other 6 months of the year? At 7.6% annualized, but for only half the time (even including half the dividends of the market) you had half as much time for your money to compound.

So while it sounds interesting, I’d prefer buying and holding an index fund and managing the risk with the proper use of options.

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