‘Sell in May’ approach not as simple as it sounds
Stocks tend to underperform during the summer months, but a broad seasonal strategy can easily go wrong
By: GAIL JOHNSON
Date: April 1, 2016
Now that winter is over, some investors may be turning their attention to one of the oldest sayings in the book: “Sell in May and go away.”
It’s a catchphrase that makes the rounds year after year, but financial experts say those who act on it may turn out to be sorry.
The adage dates back to old England, where the full phrase went like this: “Sell in May and go away, do not return until St. Leger Day.” Stockbrokers would go on vacation in May and not return until the final horse race of the year in the fall.
In doing so, they would avoid the typically lacklustre performance of the market during the lazy, hazy days of summer. It’s also known as the Halloween effect, with Oct. 31 being the target date for investors to get back in.
The “sell in May” expression has hung on because, broadly speaking, equity markets do indeed tend to decline during the summer months. Going back as far as 1950, the Dow Jones Industrial Average has had an average gain of 7.5 per cent from November to April and a gain of only 0.3 per cent from May to October, according to the Stock Trader’s Almanac.
However, an investment strategy based on the concept of seasonality, specifically the idea that stocks perform better in the winter months than they do in summer, is one that appears better on paper than in practice.
First off, those who sell stocks face tax implications. “You can trigger capital gains if you’re in a taxable account,” says Edmonton-based chartered financial analyst Shawn Allen, president of InvestorsFriend Inc. Sellers also will pay transaction costs. All told, returns will be reduced by what you have to pay in commissions, fees and any tax paid on the money you make.
Mr. Allen says investors should not be asking themselves, “Will this stock or market rise soon?” because no one can predict that accurately.
“The correct question is, ‘Is this stock or market attractively priced at the moment based on reasonable long-term estimates of its future?’ It’s easier to predict that earnings will grow long term than it is to predict what the stock market prices will do over the summer.”
Seasonal strategies simply don’t usually work, says Andrew Beer, manager of product marketing at Investors Group in Winnipeg.
Mr. Beer has analyzed data from the S&P 500 total return in U.S. dollars since 1994, and he says that April has indeed proven to be the best month on record, with an average return of 2.17 per cent, while August has been the worst, with an average return of -0.72 per cent.
February, however, has performed poorly, with an average return of 0.14 per cent, while October has been the second best month on record, with an average return of 2.1 per cent.
The worst month overall has been July, with positive returns just half the time. However, since 1950 it has had a positive return of .64 per cent on average.
Certain years stand out for their results: In 2013, for instance, June was down 1.3 per cent, but July had a return of more than 5 per cent.
“The markets are so unpredictable, and that’s the whole problem with seasonal investing,” says Mr. Beer. “When you are market timing like this, you have two decisions to make. One is sell in May, so that’s made for you, but when exactly do you get back in? You don’t want to avoid October, because it’s been a great month.
“You could get back in in September, but when? If the markets are flying high, you are reluctant to get in because you’re going to wait for a dip. But if the market is in decline do you wait even further? And if you are waiting for a trend to emerge and positive performance, markets rebound so quickly that you can miss all that.”
Choosing when to enter and exit is indeed tricky, says Burlington, Ont.-based certified financial planner Léony deGraaf Hastings.
Investors who sell in May and want to re-enter the market typically “miss the initial rally and therefore miss a portion of the positive returns,” Ms. deGraaf Hastings says. “I don’t believe investors are better off taking their money out of the market in May and putting it back in November, as it’s time in the markets, not market timing, that works over the long term.”
Markets may generally be less active during the summer months, but the impact of global events on their performance can never be overlooked, says Mike Ser, co-founder of Ser Man Traders, a training and development centre for financial traders with offices in Vancouver and Toronto.
This year, consider potential effects of the referendum on EU membership in Britain on June 23, for example, among other factors. “It’s highly unlikely that the U.K. will leave the EU, but we never know. If it leaves, it could really cause a big catalyst to move markets and we may see a lot more activity,” Mr. Ser says.
“Then there is a lot of speculation among traders about whether [U.S. Federal Reserve chair] Janet Yellen is going to raise interest rates, and traders are positioning themselves for that. China is slowing down and there are concerns about its growth.
“There are certain trends in the market that tend to happen year after year, but seasonal investing won’t work when there are external factors that can cause the market to go up or down or against a certain trend.”
Rather than take on the challenges associated with seasonal investing, Mr. Beer recommends a disciplined approach.
“I understand you can pick out trends, and this is a noteworthy trend, but the whole idea of implementing it and staying consistent, given how unpredictable markets are, just doesn’t work out all the time. More often than not you can get burned by following such a strategy.
“Invest according to your risk tolerance and invest for the long term,” he says. “Timing the markets just doesn’t make any sense. There are more losers than there are winners.”
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