You Missed Your Chance to Sell

You know what really amuses me? People who think they can "beat" traffic.

You know the type -- they stand around at office parties like generals readying for battle, laying out their ingenious strategies for anyone who will listen.

There are the "early leavers" who duck out at 2 p.m. on a Friday, only to get out on the not-so-open road and find that thousands of other drivers had the same plan. There are the "night drivers" who sacrifice sleep and scenery, only to realize that nighttime really is the right time -- for road construction crews.

Then there are my all-time favorites -- the "lane changers." These people convince themselves that every lane but theirs is flowing smoothly. So they desperately dart back and forth, only to discover that, well, every lane but theirs is flowing smoothly.

Isn't this article supposed to be about stocks?
I see a lot of similarities between investing and traffic. Like our highways, the stock market constantly ebbs and flows. Sometimes it's smooth sailing, other times it's gridlock -- for reasons you may or may not be able to immediately perceive.

So I have about as much faith in people who claim they can "time" the market as I do in those who claim they can "beat" traffic. As a result, I tend to ignore the "buy the rumor, sell the news" camp, the "buy on cannons, sell on trumpets" folks, and, of course, the merry "sell in May and go away" pranksters.

But now I'm not so sure about that last group.

I used to think I was smarter than them …
Our in-house retirement expert Robert Brokamp recently investigated this old saw, only to discover that maybe you should have sold in May and gone away.

He looked at the returns (including reinvested dividends) for the Vanguard 500 Index Fund (VFINX) -- which is weighted toward market heavyweights like ExxonMobil (NYSE:XOM) to Bank of America (NYSE:BAC) to Apple (NASDAQ:AAPL) -- for every year since 1976. He then compared two segments: returns from Nov. 1 to April 30, and returns from May 1 to Oct. 31. Here are a few of his more eye-opening observations:

• For five-year rolling periods (1976-80, 1977-81, etc.) the November-to-April segment outperformed the subsequent May-to-October segment 23 out of 27 times.
• For 10-year rolling periods (1976-85, 1977-86, etc.) the November-to-April segment outperformed the May-to-October segment every single time.
• Even after removing the three best and three worst years from each segment, the average November-to-April return of 8.5% was more than double the average May-to-October return of 4.17%.

He also looked at the returns of the Vanguard Small-Cap Index Fund (NAESX) over the same periods. The average return for May to October clocked in at a miniscule 0.7%. Meanwhile, the average return for November to April was more than 15 times as much!

Even more shocking
Ever the self-interested skeptic, I decided to see whether this trend held true in my own portfolio:

Sure, this is an isolated sample over an isolated time period -- but few of us are invested in the whole market at any given moment.

As many researchers have discovered, a few key trading days are the basis of an investor's returns -- and you can't predict when they'll happen. Had I sold last May, I would have missed out on some incredible gains.

So, who's right?
Now that the results are in, it looks like my skepticism about this investment adage may be misplaced -- but I still wouldn't suggest that you ever try to "time" the market, and neither would Robert Brokamp.

He's the advisor for our Motley Fool Rule Your Retirement service -- yours to try absolutely free for 30 days. During that time, you can discover what may be fueling this investment phenomenon, plus learn about two bond funds and two ETFs that could help you take advantage of it.

You'll also get full access to all back issues, as well as a plethora of tips, tricks, and advice from across the investment world, all designed to show you how to secure the retirement of your dreams.

To begin your free 30-day trial, simply click here. There is no obligation to subscribe.

Austin Edwards owns shares of Altria, Apple, Coca-Cola, Freeport-McMoRan, and Transocean. Apple is a Motley Fool Stock Advisor recommendation. Coca-Cola is a Motley Fool Inside Value selection. Bank of America is an Income Investor choice. Even our disclosure policy is looking forward to Oct. 31 -- not because it will be time to buy stocks again, but because we all can't wait to see what Robert Brokamp dresses as for Halloween this year.