Testing Sell in May

I would like to revisit a topic we mentioned last year around this time. With the Nasdaq hitting a new high this week you’ll likely be seeing more “Sell in May and go Away” nonsense this year.  To review, this assertion is that most of the catastrophic crashes of the past 20 years have happened during the summer so if you simply abandon ship in May and get back on in October you’d be better off.

To be honest, I thought this strategy would work the first time I heard it. I mean how could missing most of the pain in 2001 and 2008 not put you in a vastly better place financially? So, I looked at total return data from the S&P and modeled a $10,000 investment in 1995. Adhering strictly to the school of sell in May, you would have $53,969 in your account at the end of last year. Not too bad, you doubled your money twice and then some. But if you’d have stayed in the market you would have been looking at $78,058†. A massive 44% out-earning of the market timing attempt.

“But gentlemen”, you say, “The market went straight up in the early 90’s so all you did was miss gains at the beginning.” Ah, touché, you’re right. But, have no fear, we would not mislead you. Put in 10K right before 2000 and sell in May wins by $300. Invest at the end of 2007 and you’ve got $800 more in your account for having stayed in the market.

So, there you have it. Even if you time it perfectly, missing gains in the long run will hurt you much more than missing losses. This is why it’s so important to stay the course to help achieve those long term returns you’ll need to reach your financial goals.

†Total return data from Y Charts. - Examples used are hypothetical and are for illustrative purposes only. No specific investments were used in these examples. Actual results will vary. Past performance does not guarantee future results.