Well, we’ve already hit June so it’s a little bit late to be talking about this but there’s a common adage in the market that tells people to sell their positions in May and ‘go away’ or stay out of the markets until October or November.

The question is, should you believe it?

There seems to be a compelling case as demonstrated by some academics from the University of Miami as highlighted in this CNBC article.

Fuerst, along with fellow University of Miami professors Sandro Andrade and Vidhi Chhaochharia, reported in a 2012 paper that stock returns were 10 percent higher in the November-to-April half of the year than in the May-to-October period.

 Importantly, this result isn’t solely based on historical American stock returns. In that case, the academics could be making the all-too-common mistake of “proving” an adage by using the same evidence that was used to bring about that line of thinking.
Rather, they examined returns across 37 markets within a 14-year time period that was not tested in a prior paper that also found support for the sell in May effect.
The problem with the paper is that it doesn’t consider any other alternative. After all, the alternative to “sell in may and go away” isn’t just to hold equities from October/November to May. Another more common alternative is to just hold your positions through it all.

Buy and Hold vs Sell in May

Another study found that while “sell in May” may beat “holding from May to Nov”, what’s beats “Sell in May” by a mile is Buy and Hold.

 

SellMayFig11.jpg

Just don’t go away.

Obviously, with all studies, there are assumptions made and whether actual investors could get the exact returns calculated is another question but I think with this, there’s no doubt that certain myths can be quite costly.

I can’t seem to find it but I distinctly remember a thread on Valuebuddies.com (or one of its earlier incarnations) talking about this exact same thing and it was another forummer who pointed out the problem with studies like the earlier one mentioned. What I also thought I remember is someone posting the calculations of Buy-and-Hold vs. Sell-in-May for the Singapore markets and the results were similar to the one above.

Some anecdotal evidence

I have a colleague who happened, for a personal reason, to sell his entire equities position almost two years ago in May and that saved him from experiencing quite a bit of the downswing in 2015. The problem is that he never really got back in the market and that meant that he’s missed the entire run-up in the market since then plus the dividends distributed.

As for myself, although my portfolio took quite a beating in 2015 all the way up to 3rd quarter 2016, sticking to an investment strategy, the opportunity to deploy more funds into equities as well as collecting dividends along the way meant that my portfolio is actually larger than ever.

Valuations Matter

However, I’m not saying that you should always be fully invested in the market. What’s important is to be able to identify when valuations are getting expensive. During such periods of time, you want to either allocate more of your portfolio towards cash or fixed income.

After all, it’s just mathematics that a 50% fall in your portfolio means that you’ll need a 100% increase in the market in order to break even. Even Warren Buffett closed his partnership in the late 60s when he couldn’t find any more compelling investments. He was also ridiculed in the late 90s/early 2000 for not understanding the dot-com boom. All that were just some signs that the markets were getting too rich.

In short, don’t believe strict rules which make no sense such as “Sell in May and go away”. What you want to do is get a good understanding of how to tell if markets are overvalued or not.

 

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