Sell In May And Go Away…?
If you blinked, you missed it – This May saw a strong reversal from the market slump in April, with some softer economic data giving markets relief as hotter inflation fears took a back seat to the potential for interest rate cuts. The S&P was up roughly +5% for the month, making new highs in the market.
You may have heard the adage, “Sell in May and go away.” This phrase reflects the thinking that in the summer months, traders and investors take time off and leave their money on the sidelines, leading to poor returns. The phrase has roots all the way back to the late 1700s in London’s financial district. Originally, it was, “Sell in May and go away, come back on St. Leger’s Day,” with St Leger’s Day being a well-known horse race that took place in September every year in England.
So, does this phrase have any merit? Let’s take a look at what the data shows…
It is true that the period from May-October has delivered, on average, lower stock market returns than between November and April, but does that mean it’s not worth being invested over that time?
We researched how much money you would have if you sold in May and went away through October of each year vs being invested the entire time. It turns out this doesn’t help returns… it reduces them significantly.
Going back to 1950, had you sold investments for the months of May-September every year, your investment would have grown by over 12,000%. To put this in perspective, had you invested $10,000 in 1950 in the S&P500, you would have over 1.2 million today. Not bad!
Now, what if you had been invested the entire time? Though you avoided some of the more volatile months in the market, your total return over the period balloons to nearly 31,600%. Again, to put that in perspective, 10k invested in the S&P500 in 1950 would be worth over $3.15 million dollars today.
The difference is significant, with nearly 3x the amount of money at the end of the period. Oddly enough, though, the annual returns don’t look that much different, with a 6.67%/year average in the first scenario vs 8.04% in the second. The difference in growth reflects the power of compounding returns over a long timeframe.
It is important to acknowledge the power of markets to create wealth over time. Volatility can be scary (such as what we saw in April), but resisting the urge to time markets and positioning yourself to continue to stay invested through market volatility has proven to build wealth over the long run.
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