Sell In May and Go Away?

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.

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 9 comments
  • greg

    i would appreciate a concrete example of how to mangage the risk with options

  • Million Dollar Journey

    I second that, I would love to hear more about options.

  • EconStudent

    1) I think this strategy should be used in RRSP.

    7) Interesting. Would the market get less volatile over time?

    9) Short term bond ETF or Money Market seem to work well in this case.

    Why not use ETFs and use associated options for those ETFs? In the past, I was convinced that index funds are superior than ETFs. After Lehman collapse, I realize that options are a must and most ETFs have an associated options market. Therefore, ETFs are actually superior due to the options market available.

  • Preet

    @ Greg and MDJ: Will work on a post in the near future. In the mean time, suggest Mark Wolfinger’s book: Options for Rookies if you really want to learn (it’s worth it, trust me)

  • Preet

    @EconStudent – re #7: No. There are too many other factors (namely psychology). re #9: A short term bond ETF can still lose money and a Money Market ETF at best will preserve purchasing power. So your long term return is now reduced from 7.6% once you factor in these returns for “the other 6 months”.

    As for ETFs being superior due to the options market availability – yes, but not as much as you think. No one ever said you need a perfect hedge, and with cash-settled options (index options) you can use imperfect hedges and achieve virtually the same effect. No particular reason to pigeon hole yourself to a perfect hedge IMHO.

  • Acorn

    Maybe people just don’t want to follow the stock during summer vacation time…
    One more site for “October ” strategy –

  • Jordan

    The basic strategy of buy and hold index funds is dead simple, and I fully believe in it. But I keep wondering if an individual investor with time and effort might be able to improve their long term return with little tweaks like what you’ve just discussed, but without the down side.

    So what about a hybrid of both strategies, instead of selling everything and getting dragged down from taxes and reduced dividends, just use the knowledge that historically during that period prices are lower, so only Dollar Cost Average from May – October to buy more shares at a lower price?

    The difference wouldn’t be huge, but maybe worth it if you’re doing it yourself small improvements add up.

    What do you think?

  • Preet

    @Jordan – I’d be more inclined to go with the Dollar Value Averaging, which seems more intuitive (but requires a good estimate of long term returns going forward as you know). For other readers, note that Dollar Value Averaging is different than Dollar Cost Averaging.

  • Jordan


    Dollar Value Averaging over the 6 month period or use the strategy for the whole year?