The old market adage exhorting investors to "sell in May and go away; come back on St. Leger's day" appeared to find favor today, as U.S. stocks lost ground on this first day of the month. The S&P 500 (^GSPC 1.20%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI 0.69%) both fell 0.9%.
Consistent with those losses, the VIX Index (^VIX -7.38%), Wall Street's fear gauge, rose 7% to close at 14.49. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)
An all-season portfolio
A year ago, I examined the long-term record of a "sell in May" strategy and compared the returns to those of the converse strategy (i.e., buy in May) and to "buy-and-hold." These are how the results shook out (I've updated the data through yesterday):
S&P 500: Annualized Return (including dividends) April 30, 1926 to April 30, 2013 |
|
Sell in May, buy back in October |
8.5% |
Buy in May, sell in October |
5.1% |
Buy and hold |
10.1% |
The May through September period does appear less favorable to stocks over the long term, but note that both seasonal switching strategies underperformed a simple buy-and-hold strategy. Naturally, this has not been the case over every period within that 87-year span. In fact, over the past five years, selling in May and buying back in October has been the dominant strategy, beating buy-and-hold by a full 3 percentage points, on an annualized basis:
S&P 500: Annualized Return (including dividends) April 30, 2008 to April 30, 2012 |
|
Sell in May, buy back in October |
8.2% |
Buy in May, sell in October |
(2.4%) |
Buy and hold |
5.2% |
In light of this recent performance, should investors then sell their holdings to try to avoid a seasonal penalty? My answer is an emphatic no. Seasonal effects are unreliable and, assuming you're a fundamentally oriented investor, they have nothing to do with your reasons for owning equities. Finally, regardless of recent past performance, the long-term results of "sell in May" aren't convincing. My advice: Build an all-weather portfolio and don't deprive your stocks of the warmth of the spring and summer sun.