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Does it Pay to “Sell in May?”

Does it Pay to “Sell in May?”

May 18, 2020

It is human nature to try to make sense of the unknown. In this time of great uncertainty, it is not surprising that some investors may be tempted to try to use perceived market patterns or indicators to their advantage. This can take the form of trying to "time the market", by attempting to make short-term predictions on the direction of prices and investing accordingly. One such timing strategy that continues to get attention is based upon the adage "Sell in May and Go Away". We will take a closer look to see if market timing is likely to payoff.

What is "Sell in May and Go Away"?

The phrase "Sell in May and Go Away" is thought to originate from an old English saying, "Sell in May and go away, and come on back on St. Leger's Day." This phrase refers to a custom of aristocrats, merchants, and bankers who would leave the city of London and escape to the country during the hot summer months. St. Leger's Day refers to the St. Leger's Stakes, a thoroughbred horse race held in mid-September and the last leg of the British Triple Crown.[1]

Investors who adhere to this believe that during the six months from May through October, many US stock indices tend to underperform in comparison to the November through April period. The general premise is that this is due to diminished trading activity and volume as investors and traders are on vacations with investment flows picking up again in November. Investors seeking to benefit from this strategy, would choose to reduce their allocations to stocks and increase their exposure to Treasury bills during the May through October period while doing the opposite during the other six month period. While this strategy continues to maintain a following, it may be to the investor's detriment in looking at the chart below.[2]

Attempting to make asset allocation changes at the "right" time presents investors with substantial challenges. First and foremost, markets are fiercely competitive and adept at processing information. During 2018, a daily average of $462.8 billion in equity trading took place around the world. The combined effect of all this buying and selling is that available information, from economic data to investor preferences and so on, is quickly incorporated into market prices.[3]

Outguessing markets is more difficult than many investors might think. While favorable timing is theoretically possible, there isn't much evidence that it can be done reliably. Attempting to do so, may also impair your long-term financial health as shown below.[4]

The Good News

The good news is that investors don't need to be able to time markets to have a good investment experience. Over time, markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise. By focusing on the things they can control (like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes) investors can better position themselves to make the most of what markets have to offer. We understand how markets work and are here to help you make sound financial decisions.

Factset 2018. For illustrative purposes only and not intended as investment advice.,
Dimensional Fund Advisors LP
Bloomberg LP as of 12/31/2018. For illustrative purposes only and not intended as investment advice.