Sell in May and Go Away?

[Mulligan]

Everyone has heard of this saying Im sure, but I had never actually read a statistical number to it until today. I read about this in the USA Today online version. If you invested $10,000 in 1950 and invested it in DJI from May to October every year, it would be worth $6724 today. If you had instead invested this amount from 1950 from November to April every year only, it would be worth $1.6 million dollars (their source was the Stock Traders Almanac). Now I know most people dont invest only in the Dow and it did not specify the impact on S&P or other indexes, other than alluding to the fact that stocks have acted this way since around 1930. Has anyone ever used this methodology of investing to any degree?

 

[TromboneAl]

That sounds too good to be true. Did they also calculate if for the other five six-month pairs?

 

[Mulligan]

That sounds too good to be true. Did they also calculate if for the other five six-month pairs?

It says a $10,000 investment each May to Oct. period would net the small $6k plus and 10k would have grown to 1.6 million over the other 6 month period. I would provide a link but it wont allow it on the ipad tablet version and it wont let me copy and paste for some reason. You can check it out by going to the USA Today online and go to the Money section. If true, the difference is mind boggling. Im glad I didnt have a 62 year running bet with a friend that I could make more money on the Dow from May to Oct vs. than he could from Nov. to April. I would be one broke, bitter, grumpy old man by now

 

[MasterBlaster]

Here's an article from Barron's that discusses this phenomenon...

Standard & Poor's Sam Stovall on the 'Sell in May and Go Away' Strategy - Barrons.com

End-of year earnings revisions may also be a reason the market performs poorly in the third quarter. An investor may be forgiving of soft first- and second-quarter earnings per share on their way toward solid full-year estimates. Should the third quarter look like it's going to miss expectations as well, however, investors usually don't wait around. Like a veteran retailer, they'll "mark 'em down, and move 'em out."
As a result, this could be a reason September has been the worst-performing month of the year since 1929. What's more, five of the last 10 bear markets ended in October. Therefore, the S&P 500 traditionally entered November at a fairly low level compared with other months. Also, November is around the time of year that analysts begin looking ahead by five quarters, rather than just focusing on the final one.

The other issue (not discussed in the article) is that IRA and bonus money disproportionately flows in before April 15th spiking the market.

 

[M Paquette]

Everyone has heard of this saying Im sure, but I had never actually read a statistical number to it until today. I read about this in the USA Today online version. If you invested $10,000 in 1950 and invested it in DJI from May to October every year, it would be worth $6724 today. If you had instead invested this amount from 1950 from November to April every year only, it would be worth $1.6 million dollars (their source was the Stock Traders Almanac). Now I know most people dont invest only in the Dow and it did not specify the impact on S&P or other indexes, other than alluding to the fact that stocks have acted this way since around 1930. Has anyone ever used this methodology of investing to any degree?

Now recalculate with frictional expenses, like trading costs and those pesky short term gains generated most years. Don't forget the high short term capital gains rates of the 1950s and1960s. No sir, I don't like it.

Maybe in a 401k or IRA that doesn't hit this strategy with a trading penalty, but those were sort of hard to get for the first several decades of this benchmark.

 

[GrayHare]

Rather than buying and selling repeatedly, I interpret that saying to mean "Don't buy in the spring, wait until autumn" which is not nearly as catchy and memorable.

In Presidential election years the saying does not apply as well since in such years stocks often peak in August.

 

[Mulligan]

Now recalculate with frictional expenses, like trading costs and those pesky short term gains generated most years. Don't forget the high short term capital gains rates of the 1950s and1960s. No sir, I don't like it.

Maybe in a 401k or IRA that doesn't hit this strategy with a trading penalty, but those were sort of hard to get for the first several decades of this benchmark.

Real world costs certainly change fictional gains dont they. Preinternet, buying through a broker was certainly more expensive than today. So this means the poor ficticious May to Oct. investor had even less than $6700!

 

[donheff]

I didn't hear the number on investing $10k and leaving it in untouched.

 

[Bestwifeever]

I didn't hear the number on investing $10k and leaving it in untouched.

I wondered this too.

 

[Retire Soon]

During the past 10 years if someone had sold their entire stock portfolio on May Day and reinvested their entire stock portfolio on Halloween their annualized return in the Wilshire 5000 would have been 7% versus a buy and hold strategy of 5.4%.

Should you sell in April? - Mark Hulbert - MarketWatch

 

[Lsbcal]

Isn't it a shame that with such patterns there is always that small little itty-bitty niggling doubt ...

"maybe this year the market will make me look like an idiot"

i.e. you get out and the market takes off like a rocket.

 

[MichaelB]

I didn't hear the number on investing $10k and leaving it in untouched.

Buying Berkshihre Hathaway in 1962 and not doing anything would have made much more money.

 

[Spanky]

Buying Berkshihre Hathaway in 1962 and not doing anything would have made much more money.

Yes, hindsight is always 20/20.

 

[Billy]

I interviewed Sy Harding who according to Hulbert has a very good record using a system close to this. I am sure if you tell Sy I sent you he will give you a free newsletter.

If you want the link to the interview PM me.

Regards,
Billy

 

[MichaelB]

During the past 10 years if someone had sold their entire stock portfolio on May Day and reinvested their entire stock portfolio on Halloween their annualized return in the Wilshire 5000 would have been 7% versus a buy and hold strategy of 5.4%.

Should you sell in April? - Mark Hulbert - MarketWatch

I imagine that return did not include paying short term capital gains taxes.

Yes, hindsight is always 20/20.

Got that right. In my "could have been" portfolio I'm as rich as Warren Buffet, and I'm also a better major league baseball manager.

 

[Bestwifeever]

I interviewed Sy Harding who according to Hulbert has a very good record using a system close to this. I am sure if you tell Sy I sent you he will give you a free newsletter.

If you want the link to the interview PM me.

Regards,
Billy

No interest at all in a "free newsletter" from anyone, but I'd love to see a synopsis of the interview posted here.

 

[Andre1969]

My portfolio almost always sees a slump over the summertime, compared to the spring, but it doesn't consistently peak out in May. Here's a rundown on how my portfolio has fared, since I recovered from my divorce and started investing again in 1998...

1998: not enough data
1999: no dips, nowhere but up
2000: Peaked in March, ~9% dip in April, but more than recovered by May
2001: Peaked in May, then eroded over the summer, bottomed out on 9/21/01 about 29% below that May peak
2002: Peaked in March, bottomed out in July, lost about 24%, but mostly recovered by the end of the year
2003: Portfolio started taking off in late April, and went nowhere but up.
2004: Peaked in late June, by August had lost about 10%, recovered by October
2005: 5% drop in January, but a quick recovery and up every month thereafter
2006: Peaked in May, lost about 11% in June. Even though 11% isn't a huge amount, by this time my portfolio had gotten fairly large. So, on a dollar basis this was my first really big loss...about $31,000 in a month. It was a bit scary, but I was recovered by September
2007: Peaked in February, lost about 7% in March, recovered in April. Peaked again in July, and lost about 10% in August, but recovered in September. Peaked again in October, lost about 8% in November, but gained a little over half of it back by the end of the year.
2008: This was a wild ride. Lost about 11% in January. Got most of it back in Feb, only to lost 10% in March. Got most of it back in April, and by May I was close to my October 2007 high, although that's because I kept on investing. Lost about 5% in June, another 5% in July, very slight recovery in August. Then it all crashed, and by November 20, 2008, my official bottom, I was down about 45% from August, and about 51% from my October 2007 peak (more actually, since I kept on investing through that timeframe). By the end of the year though, my portfolio was up about 24% from that bottom
2009: Slight peak in early January, and by March 9, the "official" bottom I think, it slipped about 20%. From there it was nowhere but up for the rest of the year, and by November I was at a new record peak.
2010: 5.5% drop from Jan to Feb. Got it all back and then some for March, hit a new peak in April. Then lost about 13% in May. Another 1% in June, and again in July. Recovered most of it in August, and from there it was nowhere but up for the rest of the year.
2011: 6.3% drop from Feb to Mar, got it all back in April, went to a new peak in May. 5.7% drop in June, then a 7% gain in July, followed by a 14% drop in August. Since then, it's been mostly up, hit a new high in January of this year. Other than some day-to-day volatility, it's been pretty much up since then.

As for the "sell in May and go away", well I did a little rebalancing in February, when I thought my portfolio had already had a good, long run. Probably not going to sell any more at this point, but if there's a dip in the summer, I'm definitely buying some back!

 

[Billy]

Best,
Most retiree’s know that free is not a bad word.


If you do not want a free newsletter that is your prerogative. Some investors may find value in it, I know I did. I want all the information I can absorb and do not want to limit myself.



I have no dog in this fight. The thread is about Sell in May etc and Sy does a pretty good job with it.



The synopsis is that his system has proven itself.



Regards,
Billy

 

[Mulligan]

Buying Berkshihre Hathaway in 1962 and not doing anything would have made much more money.

I wonder if the sell in May rule applied to Hathaway, too.

 

[Letj]

Does selling and reinvesting your entire portfolio take into effect the income tax implication?

 

[Billy]

Letj,
The short answer is no.

No one knows what your tax rate is therefore it would be difficult to compute.

However if you use your IRA for this purpose then you will have no tax issue.

Regards,
Billy

 

[MichaelB]

"Sell in May", does not take into consideration taxes or transaction costs. It is [-]a slogan[/-] derived from looking at the months with highest volatility, calculating the averages, and calling it investment advice. Tax tables are public and rate assumptions are easy enough. But the people that promote these ideas actually need to do the calculations, and very few do.

Looking at the example cited earlier - 7% vs 5.4% - that difference almost completely disappears once short term capital gains taxes are applied yearly to the 7% and long term capital gains taxes are applied once to the 5.4%. Applying transaction costs probably takes away any remaining advantage.

Tax deferred account? Sure, why not. Of course, when there are losses, they can't be used to offset taxable gains, but every strategy has its shortcomings.

Value Line Investment Analyzer has developed a methodology that is even better, consistently identifying the stocks that outperform their markets. They have shown the data and historical comparisons that make this irrefutable. Still, they are unable to actually make that strategy work in a mutual fund. So, does "sell in May" work? Sure it does, and will continue to do so, until it doesn't. And then it will be something else.

 

[Billy]

Michael,
Transactions costs are so small now that I doubt they affect returns much. But the point that you might be missing, is that once you “sell in May” with your gains protected, you have cash available to make money on the downside.

Last year…. I know one year is not a sample, but for illustration purposes, …the market peaked in April, then dropped 20% inter-day. If you got out in April, went short, making 10-15% on the downside, then went long again in the fall you far out performed the averages for the year.

Could this pattern repeat again this April? I have my doubts this being an election year but that’s a whole other discussion.

Regards,
Billy

 

[NW-Bound]

It looks like people are selling in April now instead of May. Darn, they beat me out the door! It's not fair.

 

[MichaelB]

Michael,
Transactions costs are so small now that I doubt they affect returns much. But the point that you might be missing, is that once you “sell in May” with your gains protected, you have cash available to make money on the downside.

Last year…. I know one year is not a sample, but for illustration purposes, …the market peaked in April, then dropped 20% inter-day. If you got out in April, went short, making 10-15% on the downside, then went long again in the fall you far out performed the averages for the year.

Could this pattern repeat again this April? I have my doubts this being an election year but that’s a whole other discussion.

Regards,
Billy

Billy, the proposal isn't sell in May and protect your gains, it's "Sell in May and reinvest in October". It is a strategy that identifies the two months of greatest average volatility, one up and the other down and assumes those two months will continue to behave in that same fashion. That is like gambling, placing the bets based on past winning and losing numbers. There is no relation between past results and future outcomes on something this random. If someone wants to set aside part of their portfolio to do this and they can afford to lose, why not? Its as good as any other scheme based on past performance, and there are quite a few. But lets not kids ourselves into thinking this is investing that will lead to increased odds of portfolio survival.