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.
Alternately, 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, often returning in October. The article looks at how that approach has performed in the US market compared with a buy-and-hold strategy.
According to the article's analysis of the S&P 500, investing US$100,000 early in 1998 and holding to the present would have returned about 55% overall, but that required riding through severe market drawdowns such as the dotcom bust and the global financial crisis.
The article reports that selling every May, moving into cash, and buying back in October would have produced about a 95% return over the same period — higher than the simple buy-and-hold result shown for the S&P 500 sample.
In the article's example, the sell-in-May-then-return-in-October cash strategy would have limited the portfolio's decline during the GFC to around 20%, versus much larger drawdowns suffered by someone who stayed fully invested.
Instead of moving into cash after selling in May, the article describes a third option of moving into bonds or other fixed-interest securities until October. Using that approach in the example would have delivered about a 124% return, helped at times by bull markets in quality bonds — though fixed-income values also change with interest rates and confidence in the financial system.
The article notes several caveats: the charts don't include transaction costs or capital gains taxes, and they also omit compounding effects and interest earned while out of the sharemarket. Those omitted factors could materially change real-life results, and fixed-interest securities themselves carry value volatility.
The three S&P 500 charts used to illustrate the strategies were produced by Alan Clement, a member of the Australian Technical Analysts Association, and they focus on performance in the US market.
No — the article explicitly states it is not investment advice and warns that nothing is definite in the markets. Past results shown are not a guarantee that these seasonal or alternate strategies will work in the future.
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