Sell In May Revisited

Last month I compared three approaches to IRA investing and found that the “turtle” strategy of steady investments produced better returns.

Sell in May and Go Away is a mantra repeated in those years when the stock market experiences a summer roller coaster ride as it did in 2010.  May and June of this year have seen a progressively steady decline in the market, prompting market commentators to repeat this time worn refrain.

Is it true?  I looked at the S&P500 Composite for the past 11 years, running a “What If” scenario in which an investor bought the S&P500 index on the first trading day of September and sold on the first trading day of May.  In the four months that the investor is out of the market, the money is invested in a CD, bond fund or Treasury bill that pays 2% on average.   The scenario started in September 2000 and ended on May of this year.  Prices are adjusted for dividends and splits.

This approach (purple bars in the graph below) produced a modest 36% profit over 11 years but it beat the “Buy N Hold” (maroon bars) approach simply because the inital investment of $10,000 was made at a relative high mark for the market over the past decade.  John Bogle, the founder of Vanguard Group, has long been an advocate for a steady investing approach – that regular investments in the market produce better returns. 

I ran a scenario (green bars) in which an investor invested only 20% of his cash balance (initially $10,000) each September, earning the same 2% interest on the remaining money.  This strategy earned slightly more than the “Sell In May” approach but the “drawdown” (reduction in principal or value) remained consistently lower than the “Sell in May” approach.

This past decade has been a particularly tough one, including a recession in the beginning of the decade and the Mother of All Recessions starting in 2008.  Will the next decade bring hubris or heartache?  Who knows.  This comparison of scenarios may justify a more measured approach when adjusting our portfolios.  An advisor may tell us that we are too much in stocks and not enough in bonds.  What do we do?  Sell some stocks or stock mutual funds and buy bonds.  It might be more prudent in the long run to make that adjustment gradually, averaging our way out of one allocation model as we transition into another.

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