The stock market adage “Sell in May and go away” is based on the observation that the best-performing six-month rolling period historically occurs from November through April. During this time, average returns tend to outpace the subsequent six months (May to October). Investors are advised to sell their holdings in May, move into cash, and then return to buy stocks again in November.
The origins of the “sell in May and go away” saying remain uncertain, but it’s rumored to date back to old England. Stockbrokers would take summer vacations in May and not return until September. The original version of the saying was, “Sell in May and go away, do not return until St. Leger’s Day.” Stockbrokers would only resume work after the horse racing season concluded on St. Leger’s Day.
Since 1990, the S&P 500 has exhibited an average gain of approximately 2% from May through October, compared to a more robust average gain of around 7% from November through April. In addition, there have been notable stock market declines during the May-to-October period. These include events like Black Monday in 1987, the post-Lehman Brothers crash of 2008, and the 2011 correction following the U.S. government debt rating downgrade. This would lead one to believe there’s credence to this strategy. However, behavioral biases often lead investors to weigh negative returns more heavily than positive ones, contributing to misperceptions about this strategy.
Is it truly a good idea to time the market by selling stocks in May and buying them back in November? Researchers remain skeptical. A 2023 study by Manulife Investment Management analyzed returns from a hypothetical investor using the “sell in May and go away” approach (shifting from stocks to cash in May and back into stocks in November). Surprisingly, the buy-and-hold strategy outperformed the “sell in May and go away” approach over 50 years.
Investment Strategies: Buy and Hold vs. Sell in May and Go Away
In summary, consider the “sell in May and go away” theory more as a fun myth than a reliable investing strategy. Stock gains occur throughout the year, and each period is influenced by unique factors such as business & economic cycles, evolving earnings outlooks, sentiment, etc. Stock market sentiment remains unpredictable, and even if seasonality worked in the past, it would quickly get priced into the market. Volatility is the price you pay for stocks’ stellar long-term returns, so ignoring the short-term market noise is the approach to take.
Long-term investors should heed Nobel Laureate Eugene Fama’s advice: “Investing is like soap; the more you touch it, the smaller it gets.”
