Looking through our blog archives, you can find post after post aimed at debunking market timing strategies. We spend so much time on this issue because we’ve seen so many well-intentioned investors make changes to their portfolios at inopportune times. Successful investors keep the faith, but like diet and exercise, it is easier said that done.
One of our favorite market timing “strategies” to address is the old British adage sell in May and go away. The strategy suggests going to cash from May through October. The thesis is that stocks trade sideways or lose money during these months so staying out of the market is an investor’s best bet.
This adage came back into our vernacular in the 2000’s as we did see negative average returns over the summer months from 2000-2009. The problem is that investors who acted on this pattern got a good lesson in how random series of data often look patterned.
We suggested in 2012 and 2015 that this was a strategy worth avoiding. How did our prediction hold up?
From 2014-18 stocks gained, on average, in both time frames but gained more from May-October when the Sell in May strategy advises being in cash. An investor who invested $1,000 in the S&P 500 in 1990 saw their money grow nearly $3,700 more than an investor who engaged in the Sell in May strategy.
We don’t know ahead of time which months will bring the strongest returns but we do know that the top-10 trading days account for a huge percentage of the returns available in stocks. It is risky from an opportunity cost perspective being on the sidelines. Sell in May is an absurd strategy at its face that I doubt any serious investors are running. Still, it highlights the problems with market timing strategies.