Sell in May and Go Away

May 16, 2014 | Dian Chaaban


Share

The sell-in-May rhyme is a well-known trading adage that warns investors to sell their stock holdings in May (to avoid a possible seasonal decline in equity markets due to fun in the sun) and switch into the fixed income space. n, in the Fall, when the markets rally (back to school, school is cool), you reverse the process and sell your bonds or GICs to buy your equities back.

This strategy is based on the historical underperformance of stocks in the 6 month period starting in May and ending in October, compared to the 6 month period from November to April. According to the Stock Trader's Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.

But, just because it rhymes, doesn’t make it right. To get this strategy right, you would have to time the market perfectly to get your exit and re-entry points exactly right…and you’ve heard me talk about market timing in the past – it just can’t be done, not consistently anyway. You risk selling at a market low and buying back at a market high and throwing your entire long-term plan off for a short term market move. As the saying goes, “time in the market makes profits, not timing the market”.

Sell in May and Go Away isn’t the only rhyming misdemeanour out there – in fact, the preferred phrase to describe the market’s annual seasonality is “buy when it snows, sell when it goes” …after this past winter, I wouldn’t bet my money on mother nature’s extreme temper.

Rather than following seasonal rhyming strategies, my advice is to make sure you have a long term financial plan guiding your investments on the foundation of diversification and asset allocation – these two techniques combined have proven to be the most effective way to mitigate the systemic risk inherit in any market.

So while I recommend not going away when it comes to your portfolio, I do hope you are going away somewhere nice for the May-long weekend to celebrate Queen Victoria’s birthday (and more importantly, the official start of cottage season).

Enjoy the weekend.

D.

Dian Chaaban

Investment & Wealth Advisor

Chaaban Wealth Management Group

416.842.4234