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BAM Intelligence

Did You Sell in May?

One of the more persistent investment myths is that it is a winning strategy to sell stocks in May and then wait to buy back into the market around November. The oft-repeated catch phrase is, “Sell in May and go away.”

Well, this year if you sold your stocks in May, you would probably have lost out on some nice gains. The S&P 500 rose from 1883.68 to 1923.57 last month, an increase of 2.1 percent. And that doesn’t include the impact of any dividends.

Of course, the real test of the sell in May theory requires five more months. I ran some numbers looking at returns from May through October in recent years.

I found that while it is true that stocks have provided greater returns from November through April than they have from May through October, since 1926 it has still been advantageous to stay invested in stocks from May through October. In other words, selling in May and going away hasn’t been a good strategy.

In fact, from 1927 through 2013 the Sell in May strategy has underperformed the S&P 500 by more than 1.5 percent per annum. And that’s even before considering any transactions costs, let alone the impact of taxes (you’d be converting what would otherwise be long-term capital gains into short-term capital gains which are taxed at the same rate as ordinary income).

The table below shows the returns of the S&P 500 Index for the last five May-October periods, a period when Treasury bills provided almost no return at all.

060214-table.jpg

Note that the average return for the five six-month periods was 5.4 percent, an annualized return of about 11 percent, or greater than the S&P 500’s annualized return from 1927 through 2013 of 10.1 percent.

Given this year’s 2.1 percent May increase in the S&P 500, what does the rest of the six-month “Sell in May” period? Unfortunately, my crystal ball, as always, is cloudy.

I do know, however, that the most basic tenet of finance is that there’s a positive relationship between risk and expected return. To believe that stocks should produce lower returns than Treasury bills from May through October you have to believe that stocks are less risky during those months — a nonsensical argument.

This commentary originally appeared June 4 on CBSNews.com

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© 2014, The BAM ALLIANCE

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Larry Swedroe

Chief Research Officer

Larry Swedroe is Chief Research Officer for the BAM ALLIANCE.

Previously, Larry was vice chairman of Prudential Home Mortgage. Larry holds an MBA in finance and investment from NYU, and a bachelor’s degree in finance from Baruch College.

To help inform investors about the evidence-based investing approach, he was among the first authors to publish a book that explained evidence-based investing in layman’s terms — The Only Guide to a Winning Investment Strategy You’ll Ever Need. He has authored 15 more books:

What Wall Street Doesn’t Want You to Know (2001)
Rational Investing in Irrational Times (2002)
The Successful Investor Today (2003)
Wise Investing Made Simple (2007)
Wise Investing Made Simpler (2010)
The Quest for Alpha (2011)
Think, Act and Invest Like Warren Buffett (2012)
The Incredible Shrinking Alpha (2015)
Your Complete Guide to Factor-Based Investing (2016)
Reducing the Risk of Black Swans (2018)
Your Complete Guide to a Successful & Secure Retirement (2019)

He also co-authored four books: The Only Guide to a Winning Bond Strategy You’ll Ever Need (2006), The Only Guide to Alternative Investments You’ll Ever Need (2008), The Only Guide You’ll Ever Need for the Right Financial Plan (2010) and Investment Mistakes Even Smart Investors Make and How to Avoid Them (2012). Larry also writes blogs for MutualFunds.com and Index Investor Corner on ETF.com.

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