Sell in May And Go Away...Maybe!

By: Gordon Pape Building Wealth, Published on Fri May 08 2015

Sell in May and go away

Stay away until St. Leger day.

According to an article by Tom Anderson on Learnvest.com, this old stock market maxim dates back to London in the Depression years of the 1930s. With market action slow and investors leery, traders would tell one another to relax, take the summer off and come back to work in late September after The St. Leger Stakes, the final leg in England’s version of the Triple Crown. At that time the movers and shakers would be back in their offices and the action would resume.

In recent years, the expression has been shortened to simply “sell in May and go away”, usually until late October to avoid the traditional volatility of the September-October period. The idea is to cash in your winnings in the spring, sit on the money over the summer months, and get back into stocks during the December-April period.

Does it work? Well, sort of. Moneychimp.com tracked the monthly performance of the S&P 500 every year from 1950 to 2014. It found that the two strongest months of the year are December, with an average gain of 1.59 per cent and November, which averaged 1.37 per cent. December showed a gain in 49 of the years and a loss in only 16 while November was up in 43 years and down in 22.

Over the November-April period, only February was a loser, down an average of 0.13 per cent. January was ahead by 0.94 per cent, March by 1.1 per cent, and April by 1.36 per cent. May was borderline, with a tiny average gain of 0.11 per cent.

Over the June to September period, only July registered an average annual gain. September was the worst month to be in the market, with an average loss of 0.65 per cent and red ink in 36 of the 65 years.

So based on this data, should you call your broker and sell everything? After all, the markets are in the seventh year of a long bull run. Something has to give, right?

Maybe. Certainly there is no reason to expect the stock markets to suddenly roar ahead over the summer. The Canadian economy is weak, there are concerns in the U.S. that interest rates will rise, Europe dealing with yet another Greek crisis – it might not be a bad idea to sit on the sidelines for a while.

But before you make the decision to sell, here are some issues to consider.

Taxes. Any sale outside a registered plan will trigger a capital gain or loss. If you are sitting on a lot of winners – and after a seven-year market run that’s quite possible – you could find yourself facing a hefty tax bill. I have an acquaintance that purchased shares of Keyera Corp. in a non-registered account back when they were around $6. They’re now trading at about $44. If she sells, she’s going to owe the Canada Revenue Agency a lot of money.

Costs. You’ll have to pay a commission on all your stock sales. If you use a discount broker it may not be too expensive, depending on how many stocks you own, but it will cost something. And that’s only half the story. When you buy back the stocks in the fall, you’ll have to pay commissions again. That can get pretty expensive.

Timing. One of the problems of market timing is to know when to get back in again. Investors sometimes become paralyzed, waiting for just the right moment, which never seems to come. This happened after the crash of 2008 and some people are still waiting to get back into the market. In the meantime, the major indexes have hit new all-time highs.

Finally, don’t lose sight of the fact that “sell in May” doesn’t always work. A paper published in the Financial Analyst Journal in 2013 found that between 1998 and 2012 stock returns were on average 10 percentage points higher in the November – April period than during May – October. That was true not just for the U.S. but also for Europe. But in 2014, markets generally fared well over the summer. If you had sold in May, you would have missed out.

Personally, I never believe in dumping everything and sitting in cash. It’s expensive and you could miss out on some significant gains. But if you’re holding some positions that you feel are vulnerable over the next few months, you might consider taking some of the money off the table. Ask your financial adviser about it.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is www.BuildingWealth.ca . F