Have you ever wondered if the old investment strategy of “sell in May and go away” really works? With summer just on the horizon, BMO decided to put this popular investment strategy to the test in a recent Private Bank report. For those unfamiliar, this approach involves selling your stocks in the month of May, switching to non-interest bearing cash for the summer, before repurchasing your equities in the fall. How did investors who adopted this scheme fare?
Should You Sell in May or Stay Put?
The BMO report found that “selling in May and going away” does have some merit. Their investment experts put the strategy to the test by tracking the Dow Jones Industrial Average all the way back to the 1900’s. The calendar year was split in two six-month periods: May to October and November to April. During November to April you would actively invest in equities, while switching to non-risky non-interest bearing cash for May to October.
Is It a Solid Strategy?
While the “sell in May and go away” approach isn’t a guaranteed a slam dunk, it wasn’t a wash either, according to the experiment. If you had invested $1,000 in the Dow Jones Industrial Average using this strategy, your $1,000 investment would have grown to $2,167 invested in safe investments for an annualized return of 0.7 per cent. Meanwhile, by investing during the months of November to April in the equity market, your portfolio would be worth $122,606 as at April 30, 2012 for an annualized return of 4.3 per cent. Not too bad. So what if you simply invested in equities year round? You would have achieved an annualized return of 4.7 per cent, which puts a damper on the “sell in May” mentality.
Timing the Market vs. Buy and Hold
As an investor it’s easy to look to the past and examine your investment mistakes. What if you had of bought Nortel’s stock at the bottom and sold it at its peak before its eventual collapse? While you might think investing based on your gut reaction is a good idea that usually isn’t the case. The words “easier said than done” were never truer.
“While the ‘Sell in May’ approach to investing is an interesting one, we do not advise using this strategy as it is risky for the average investor,” says Jack Ablin, chief investment officer at BMO Private Bank. “What our research shows it that history can be a useful guide for navigating the investment markets, however there needs to be a fundamental rationale behind the calendar effect before investors attempt to time the market. We find that investors who remain in the market year-round generally garner the best results.”
Past Performance is No Guarantee of Future Results
This is one of the cardinal rules for investors; just because you see a pattern in the stock market doesn’t necessarily mean it will happen every year. As investors, we often think with our emotions instead of logic. Instead of selling high and buying low, we do the opposite. When the market takes a nose dive we sell, while we wait until the market has reached its peak before buying in. Investors who adopted the “sell in May” strategy would have missed out on the stock market rally in the spring of 2009 after the financial collapse in 2008. If that doesn’t make you think twice about this strategy, for five straight years – from 2003 to 2007, the equity markets actually did their best during the summer months.
Can a Long Term Approach Trump Timing?
According to BMO, instead of timing the market you need to select a long-term investment strategy. “This includes building a portfolio that allows you to be active throughout the year and contains a variety of investments that are both conservative and aggressive,” explains Ablin. “That way, if you prefer to lessen your exposure during certain periods, you can remain in the market and weather the highs and lows of the summer.”