Time to let go: selling in May could be a winning strategy
Are you a buy and hold kind of person who believes that despite the ups and downs in the market, patience will win out in the end like the tortoise racing the hare? In this week's column we look closely at that strategy in the context of a sharemarket adage often heard at this time of the year: "sell in May and go away".
That common northern hemisphere saying we found had some validity in the Australian market in a column we published this time last year.
Today we focus on the US market and take things further, looking at strategies to profit from the phenomenon, using three charts of the S&P 500 Index produced by Alan Clement, a member of the Australian Technical Analysts Association.
The top chart looks at the result of investing $US100,000 ($97,140) in the American market early in 1998 and holding on to the present. That strategy would have delivered an overall return of 55 per cent. But you would have had to hold on through a couple of harrowing collapses, the global financial crisis and the dotcom bust, where the markets retraced 50 per cent each time.
Alternatively, had you sold every May, moved into cash and bought back in October you would have achieved a 95 per cent return. And during the GFC you would have only experienced a 20 per cent decline in your portfolio value.
We also offer a third strategy. You sold in May and bought back in October but instead of going into cash you went into bonds or other fixed-interest securities. Those securities, like shares, see changes in their capital value over time due to factors such as movements in interest rates and levels of confidence in the financial system.
Using the fixed-interest strategy would have delivered an investor 124 per cent, with the fixed-interest markets often running in your favour, helped by bull markets in quality bonds in recent years.
So it seems the buy and hold strategy has some easily manageable alternatives that would yield better results for followers of the "sell in May" adage. Real-life results would be a little murkier than what we have produced here as there would be issues such as transaction costs and capital gains taxes to consider.
However, neither do the charts include compounding effects, or the boosting of your capital amount by the interest earned while you are out of the sharemarket. Include that and the tax and transaction costs would be somewhat balanced out or better.
Remember, nothing is definite in the markets and there is no guarantee these strategies will work in the future. But they do give you some alternative investment approaches that could be applied in several situations.
This column is not investment advice. firstname.lastname@example.org