Time to let go: selling in May could be a winning strategy
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. rodmyr@gmail.com
Frequently Asked Questions about this Article…
"Sell in May and go away" is a seasonal investing adage suggesting investors sell shares in May and stay out of the stock market over the weaker summer months. The article examines this idea using S&P 500 charts to see how the strategy might have worked in the US market.
According to the article's S&P 500 charts, investing about US$100,000 in early 1998 and holding to the present gave an overall return of roughly 55%. However, that period included two severe market retracements—around the dotcom bust and the global financial crisis—when markets fell about 50% each time.
The article's chart shows that selling every May, moving into cash, and buying back in October would have produced about a 95% return over the same period. The strategy also would have limited the portfolio decline during the global financial crisis to roughly 20% in the charted example.
The third strategy in the article had investors sell in May, move into bonds or other fixed-interest securities, then buy back in October. That approach delivered about a 124% return in the charts, helped by periods when quality bond markets performed well. The article also notes bonds' capital values can change with interest rates and market confidence.
No — the charts do not include transaction costs, capital gains taxes, or compounding effects. They also omit the interest or income you might earn while out of shares. The article points out that adding interest earned could partially or largely offset taxes and transaction costs in real-life results.
No. The article stresses that nothing is definite in the markets and there is no guarantee these strategies will work going forward. They are presented as alternative approaches illustrated by historical chart examples, not as certain outcomes.
Everyday investors should weigh market-timing risk, the impact of transaction costs and capital gains tax, changes in bond values if moving to fixed interest (due to interest-rate moves and confidence), and their own time horizon and risk tolerance. The article highlights these real-world frictions that make lived results murkier than simple chart comparisons.
The S&P 500 charts cited in the article were produced by Alan Clement, a member of the Australian Technical Analysts Association. The column explicitly states it is not investment advice.
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