Sell In May And Go Away?

June 9, 2021

May 2021 was a somewhat volatile month.  Markets moved higher early in the month, but then reversed and appeared destined to go lower. We were reminded of the  old stock market/investing adage that one  should "Sell in May and go away".  Like most "investing wisdom" this may have had some validity at one point, but like all things with investing, it's probably worth at least a cursory examination before believing it to the point where it becomes a cornerstone of investment strategy.

Let us first begin with some history.  From the research we have done it appears that "Sell in May" is an abbreviated version of an old English saying, "Sell in May and go away, and come back on St. Leger's Day."  This ostensibly referred to the practice of the upper crust of Londoners leaving the city during the hot summer months and retiring to the countryside.  Being away from the city, and therefore not easily able to keep a watchful eye on their investment assets, these bankers and aristocrats of the city could rest easy knowing that vagaries of the market would not affect them.  The investing crowd would then return to London on St. Leger's Day, or the day of the St. Leger's Stakes, the final leg of the British Triple Crown held in mid-September.

Again, from our research, it seems as if the phrase was adopted in America as investing advice and at some point was defined as the May-October period.

With this in mind, let us assume then that an investor would invest in the S&P 500. It is arguably the most widely known and used index, and is capitalization-weighted so it does not have the quirks of a price-weighted index like the Dow Jones Industrial Average.  In this example, an investor would sell each year on the last day of April and buy back the last day of October.

In an attempt to not bury the lede, let’s look at the most recent results. In the last 10 year period (2011-2020)1 there were two years in which an investor who "sold in May" would have done better, and eight years which would have done worse.  An investor who stayed invested over the entire period would have seen a return of just over 12% per year, while an investor who "sold in May and went away" each year would have experienced a return of just under 8% per year.  On the surface a 3% difference doesn't seem that bad, but when invested--and through the magic of compounding returns--it would mean the difference between a 198% return for the investor who never sold, and a return of 108% for the investor who sold and bought back each year.  Put another way, an ending value of 2,986 dollars vs. 2,077 dollars for every 1,000 dollars invested in each method after a decade.

Testing investment strategies and trying to determine what we might call "real wisdom" is part of what we do at Stadion.  By being investment "Myth Busters" of sorts we try to find what seems to work, and what is just so much useless "investment wisdom" passed down without anyone every trying to determine if it's worth following.

Rob Dailey
Portfolio Management Analyst

1S&P 500 data via Bloomberg terminal; Accessed June 8, 2021

The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.

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