Does Sell in May and Go Away Work?

It will be May soon, so you know what that means: An avalanche of articles with titles like the one above.

So, does the theory hold water? First, here’s how the “sell in May” idea is supposed to work.

Investors, it is presumed, will see a bump higher in stocks from Halloween through about May, then lower performance from that spring month through the following October. In general, we seem to be into the markets all winter and out all summer.

It’s an appealing thought. The idea that there’s a “secret” way to beat the market mechanically will always find an audience.

Yet academic investigators have found little evidence that it works consistently enough to matter. Rick Ferri took the argument to a long-term test and found it wanting, largely because of faulty assumptions regarding dividends and trading costs.

Essentially, the performance gap is narrow enough to be explained by wishful thinking. But you don’t need to do even that much work. You need only to understand the madness of crowds.

The trouble, in a nutshell, is that everyone already knows about the pattern and either tries to preempt it by selling sooner or use it to buy into the decline.

Some years, of course, it’s a disastrously bad idea to be out of the market by May. True believers write those years off as anomalies. Yet real investors get hurt by falling for the argument.

Rather, long-term investors should use short-term declines in stock values to buy in. The only way to achieve that goal consistently is to be consistent about your investing plan. If you buy monthly, always buy monthly. If you buy quarterly, stick with it. If you rebalance, be disciplined.

It’s a difficult idea to accept, intellectually, but lower prices for investments now do not signal the future value of your portfolio.

Nevertheless, people tend to mentally “mark to market” their retirement, even though they haven’t sold a single share. Similarly, they find lower prices unmotivating when they should be buying more.

Think about that: You have a chance to own more of a company at a lower price than just a few weeks ago. Presumably, nothing about the company has changed, right? It just went on sale.

If you were offered a $1,000 off a new car just for walking into the dealership that day, you would think of it as good news. If you went to the grocery store to buy dinner and got handed a 15% off coupon just for showing up, you’d be thrilled.

Sell in May and go away reconsidered

Investments are no different. As a retirement investor, you expect to be in the market for years, not days. If you are a retiree now, the small portion of your portfolio in stocks needs that same kind of forward thinking to do you any good.

Getting in at a better price and thus averaging down your entry point is an important strategy, one largely missed by market timers bent on outguessing everyone else at once.