68% of the Time, “Selling in May” is a Losing Bet
You’ve likely heard the old Wall Street adage that suggests you should “sell in May and go away”. The strategy sounds simple enough because it asks an investor to exit the stock market in early May and not return until the end of October to avoid a perceived summer slump.
At Schneider & Pollock Wealth Management, we do not employ this strategy for our clients. We avoid it because the data suggests that going away often means leaving money on the table.
The primary flaw in the sell in May theory is that it assumes the market stays flat or drops during the summer months. Historical data tells a different story. Since 1930, the S&P 500 has posted a positive return during those six months 68 percent of the time.
Since the 2008 financial crisis, the market has appreciated 72 percent of the time between May and October with an average gain of 3.6 percent. The cost of being out of the market becomes even higher when you factor in the missing dividends.
It is important to understand how this trade gained traction in the first place. Historically, selling in May did not mean sitting in a zero interest savings account. It meant rotating capital into fixed income securities like bonds.
In the 1980s, this made perfect sense. For example in 1981, the U.S. 10-year Treasury yielded nearly 16.0 percent. If you could earn a guaranteed high yield for six months while avoiding equity volatility, the trade carried significant weight.
Today’s market is very different. Even with recent increases, the 10-year Treasury yield sits around 4.3 percent today. When you account for transaction costs and the capital gains taxes triggered by selling your positions, the math for timing the market rarely adds up.
At Schneider & Pollock Wealth Management, we remain fully invested for our clients. We believe that chasing seasonal trends is a distraction from long term wealth building. Rather than exiting the market, we use incoming dividends to actively purchase more investments to ensure your capital is always working for you.
Time in the market almost always beats timing the market. If you would like a professional review of your current investment strategy to ensure your portfolio is positioned for the long term, feel free to reach out at info@schneiderpollock.com or 416-646-0756.
-written by Jeff Pollock
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