Key Takeaways
- Sell stocks in May, buy back in late October.
- Markets often underperform May to October.
- Strategy risks missing summer rallies and gains.
- Long-term buy-and-hold usually outperforms this approach.
What is Sell in May and Go Away?
Sell in May and Go Away is a market adage advising investors to sell stocks around May and re-enter the market in late October or November to avoid the historically weaker summer period. This tactic, also known as the Halloween strategy, is based on the observation that stock markets often underperform from May to October compared to the November to April period.
The theory originated from seasonal trading patterns in the UK and US, where liquidity and volatility tend to increase after summer holidays, affecting equity returns.
Key Characteristics
This strategy is defined by several core features that influence its application and effectiveness:
- Seasonal Timing: Investors typically exit equities by early May and stay out until late October, aiming to avoid summer volatility.
- Historical Data Support: Indices like the S&P 500 have shown stronger average returns during November-April compared to May-October.
- Market Behavior: The period from May to October often includes lower trading volumes and increased risk of negative rallies or corrections.
- Alternative to Buy-and-Hold: It contrasts with continuous investing by attempting tactical moves based on seasonal trends.
- Risk of Missed Gains: The strategy can miss significant summer rallies, especially in recent years when the pattern has weakened.
How It Works
You sell your stock holdings around the start of May and shift to cash or short-term instruments, such as money market funds, to preserve capital during the summer months. Then, you re-enter the equity markets around Halloween, capitalizing on the historically stronger market performance from November onward.
This approach relies on historical market seasonality and assumes that the summer months are more prone to underperformance and increased volatility. Some investors combine this with tactical asset allocation to adjust exposure based on market conditions, reducing risk during potentially weaker months.
Examples and Use Cases
Several practical examples illustrate how this strategy may impact your portfolio:
- Exchange-Traded Funds (ETFs): Using SPY, which tracks the S&P 500, you might sell shares in early May and avoid holding through summer downturns.
- Sector Rotation: Investors may rotate into defensive sectors or cash during May-October and switch back to growth-oriented stocks before November.
- Individual Stocks: Companies like Delta and American Airlines often experience seasonal demand fluctuations that align with summer travel peaks, which can affect stock performance during this period.
- Low-Cost Index Funds: For long-term investors, selecting low-cost index funds while timing exposure with the Sell in May approach may balance costs and risk.
Important Considerations
While Sell in May and Go Away offers a simple seasonal framework, it carries caveats. Market conditions vary yearly, and relying solely on seasonality can lead to missed opportunities during unexpected rallies. Transaction costs, taxes, and timing errors also reduce net gains.
You should weigh this strategy against your investment horizon and risk tolerance. Combining it with broader portfolio strategies, such as diversification and understanding behavioral biases like the gambler’s fallacy, can help mitigate risks associated with seasonal timing.
Final Words
Sell in May and Go Away highlights a historical tendency for weaker market performance during summer months, but recent trends have shown less consistency. Consider reviewing your portfolio ahead of May and evaluating whether a seasonal shift aligns with your risk tolerance and investment goals. Keep an eye on market volatility as summer approaches to decide if this strategy fits your plan.
Frequently Asked Questions
"Sell in May and Go Away" is an investment strategy advising investors to sell stocks around May and hold cash or equivalents through the summer, then repurchase around late October or November. It is based on historical patterns showing weaker stock market performance from May to October compared to November to April.
The strategy originated in the UK, linked to St. Leger's Day in late September when traders returned from holidays and boosted market activity. It also relates to avoiding the traditional summer slowdown in the US between Memorial Day and Labor Day.
Yes, long-term data shows the S&P 500 tends to perform better from November to April, averaging 6.7% gains, versus 2% from May to October since 1945. However, the pattern varies and is not guaranteed every year.
The strategy has weakened recently; in the past decade, May-October returns have been positive about 80% of the time with an average gain near 5%. This means investors risk missing out on summer rallies if they sell in May.
Risks include missing summer market rallies, paying transaction costs and taxes from selling, timing errors, and potential long-term underperformance compared to a buy-and-hold approach.
Buy-and-hold investing generally outperforms Sell in May and Go Away over the long term because it avoids missing unpredictable rallies and reduces trading costs. The latter aims to reduce summer volatility but can suffer from opportunity costs.
Yes, alternatives include rotating portfolios into summer-resilient or less cyclical assets during the May-October period or investing fully November through April while managing risk through diversification.
Effectiveness depends on socio-economic conditions, business cycles, market volatility, and investor behavior. Unexpected events like the COVID-19 pandemic can also impact seasonal patterns and outcomes.
