There’s an old trading adage that says to “sell in May and go away.” This investment strategy consists of selling stocks in May and re-entering the market in early November. It’s based on the belief that the market produces lower returns from May to October.
So, is it time to sell in May?
The stock market has historically generated lower returns during these six months:
Since 1950, the S&P 500 has been up only 1.5% on average for the May-October period. November to April is the best six-month period, with an average return of 7%.
But the strategy doesn’t work every year. In some years, the market produced high and positive returns. This has been the case for seven of the past eight years.
In 2013, for instance, the S&P 500 Index posted a return of 10% from May 1 through October 31. In 2017, the return was 8% for that period.
So, investors who systematically apply the “sell in May” strategy could miss big gains some years.
The year 2020 is unique because of the coronavirus pandemic. The Dow crashed by about 30% in March from its February high but has rebounded sharply since. The U.S. stock index has dropped by about 10% from November 1 to April 30.
Stocks are up more than 30% from the March lows, suggesting a well-deserved pullback during these troublesome months is quite possible.
Due to uncertainties surrounding the path of the coronavirus and the speed at which the economy will recover, the market might not have hit bottom yet.
But we cannot know for sure if and when a crash will happen.
It’s tempting to look for ways to improve our returns and limit our losses when we invest. But taking a short-term view like the “sell in May” adage is probably not the best way to have superior returns over the long term.
Taking a long-term view, looking for quality stocks that will produce higher returns over the years, and not worrying too much about what’s going on in the short term seems to be a better investment strategy.
For those worried about a stock market crash, buying stocks in defensive sectors such as consumer staples looks like a better strategy than selling all stocks. However, investors who have a low-risk tolerance might prefer to stay out of the market.
Disclaimer: The opinions expressed in this article should not be considered investment advice from CCN.com.
Last modified: April 30, 2020 8:02 PM UTC