If you’ve been investing for any length of time, you will have heard the phrase “Sell in May and go away”. It is a common refrain at this time of year and is based on the notion that investors should sell their stocks in May, take a break from trading over the summer, and then come back in November. This strategy is also known as the Halloween Indicator as it assumes that investors will start buying stocks again shortly after Halloween.
Does ‘Sell in May and Go Away’ actually work?
The answer to this question is. ‘Yes, but …”. Research conducted by US Investment Manager Manulife Investment Management does seem to show that US indices perform better between November and May. But, overall performance between June and October has also tended to be positive. As a result, those who have pursued this strategy over the long term have seen their portfolios grow at a slower rate when compared with those who remain invested throughout the year.
Why would stock markets perform better between November and May?
Understanding why markets tend to deliver better results over the winter months and into spring is complex. One key factor which likely contributes to a dip in May is the fact that the US deadline for income tax filing is in mid-April. This puts a dent in investment flows. The start of the year also sees money from end of year bonuses and incentives coming into the market. Again, this flow tends to peter out by the end of April. Seasonal patterns may also persist because of historical inertia with US, UK and European stockbrokers traditionally taking extended holidays during the summer months. It’s also important to keep in mind that the stock market collapses of 1987 and 2008 also happened between May and October, adding strength to the overall pattern of poorer performance during these months.
Reasons not to sell in May
A general trend or pattern hides the significant annual fluctuations in performance and just because something has been generally true over a number of years, it does not mean the trend will continue this year, or into the future. Life is full of surprises that can radically alter long standing realities. A great example of this is the Covid-19 pandemic which triggered a stock market crash in February 2020. Therefore, while ‘Sell in May and Go Away’ does have some historical backing, it is always important to review the actual situation at any point in time and take decisions accordingly. It certainly does not justify changing a long-term investment strategy.
Better ways to mitigate risk
‘Sell in May and Go Away’ is a fascinating phenomenon. There are better ways, however, to mitigate against the risk of downturns. First and foremost, stay informed, keeping an eye on market developments beyond seasonal trends. Additionally, a well-diversified portfolio goes a long way to protecting you.
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The information contained in this article is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information contained in this article is not intended to be a suggestion, recommendation, or solicitation to buy, hold or sell any securities and is not guaranteed as to accuracy or completeness. Investors must make their own informed decisions and seek their own advice regarding the appropriateness of implementing strategies discussed herein. If you invest in any product, you may lose some or all of the money you invest. The value of your investment may go down as well as up. Any income you get form any investment may go down as well as up. MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority to undertake the business of banking in terms of the Banking Act (Cap. 371) and investment services under the Investment Services Act (Cap. 370).
