Every year, as the days get longer and April's legendary showers finally give way to the warmer part of spring, an annual ritual in the stock market begins. But even though May isn't even here yet, you've already probably heard all about how your best move is to dump every stock you own, head for the hills, and ride out an inevitable downturn between now and November.
I'm not going to tell you that I'm 100% positive that the market will go up over the next six months, debunking the "Sell in May" theory. But later in this article, I'll explain why most investors shouldn't even think about selling out solely because you changed your calendar. First, though, let's take a look at why the "Sell in May" theory is so popular.
Simple and effective
Everyone likes a simple way to get rich fast. The appeal of an easy-to-follow seasonal investing strategy is that you don't have to think too much. When May rolls around, sell. When November comes, buy everything back. What could be easier?
But an even bigger reason why "Sell in May" has gotten so popular lately is because it's worked -- at least if you don't look back too far. Looking at the past two years:
Last year, selling in May was almost perfect timing, as the market plunged for five straight months. Even after regaining more than 10% in a huge October for the market, the Dow fell almost 7% from May to November -- and since then, the average has risen more than 10%.
In 2010, the strategy was almost as lucrative. Stocks gained only 1% from May to November 2010, but in the ensuing six months, the Dow had a 15% jump.
Of course, the strategy isn't perfect. In 2009, selling in May caused you to miss out on a 19% jump. But the additional 13% gain from November 2009 to April 2010 helped cushion the blow. But in 2008, the strategy would have let you miss out on a 27% drop.
Even if the strategy doesn't always work, it has seemed to do a reasonably good job recently. So why shouldn't you go ahead and hit the sell button?
A market of stocks
One reason to treat the "Sell in May" strategy with skepticism is that it ignores the investing thesis behind the particular stocks you've chosen for your portfolio. Unless you own only index funds, it's important to realize that just because the overall market behaves in a certain seasonal ways doesn't mean that the stocks you own will behave that way as well.
For instance, looking at the stocks in the Dow, McDonald's
With other stocks, the strategy doesn't seem to make much difference. With Procter & Gamble
And of course, some stocks do show a "Sell in May" theme. The most extreme is Bank of America
The key here, though, is that there's nothing to suggest which stocks will follow the "Sell in May" rule. The success McDonald's has had overseas has occurred year-round, and Cisco's attempts to turn around ongoing challenges haven't been tied to the calendar. P&G and Wal-Mart may be at the top of their respective industries, but there's no reason why they would defy the rule while their competitors follow it.
Sell for a real reason
If you're nervous about the stock market, lightening up on your stock exposure may make sense -- depending on your investing strategy and your current level of risk. But dumping everything on May 1 isn't going to get you the results you need from your portfolio. Only if you know why you're selling can you make a smart decision that's likely to bring you profits over the long haul.
You're far better off taking a long-term approach with your investments. That's the philosophy you'll find in our special free report on retirement investing, which will help you not only establish a solid investing plan but also show you three stocks that could lead the way to a more prosperous future. But please, don't wait -- click here to get your free report today!
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.