Why 'Sell in May' Doesn't Pay: Fisher Investments Debunks This Centuries-Old Myth

Investors have learned many lessons from history, but sadly Fisher Investments has seen many misconceptions that are not grounded in historical facts remain alive and well

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Fisher Investments
Apr 27, 2020
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Stock investing has a rich history that stretches back centuries. Investors have learned many lessons from that history, but sadly Fisher Investments has seen many misconceptions that are not grounded in historical facts remain alive and well. One misguided investing strategy comes from the adage, “Sell in May and go away, and don’t come back until St. Leger Day.” This saying stems from 19th century brokers’ tendency to take long summer vacations, limiting trading and liquidity on the London Stock Exchange until September’s St. Leger Day horse race. While this is an old custom, some investors still believe “Sell in May” is a viable long-term investing strategy. But the summer months’ returns are still positive a majority of the time, and historical data show selling in May every year leaves a lot of potential returns on the table.

2020 has been a turbulent year for stocks, and even investors who don’t typically adhere to “Sell in May” may exit markets to try to avoid downside volatility. But even in rocky times, “Sell in May”—or June or July—can be dangerous. Whether due to seasonal investing adages or otherwise, selling out of stocks introduces the difficult decision of when to re-enter the market. If you’re out of the market, you risk potentially missing out on positive returns, but if you get back in too early you may be in for more downside ahead. And too often, Fisher Investments has watched investors’ emotions get the best of them, causing them to sell after a downturn has already occurred and miss out on a strong initial rebound. “Sell in May” is just one example of how deviating from your long-term plan risks setting yourself back from reaching your goals.

Summer Returns Are Positive on Average

Most folks can’t afford to take summer vacations from May to September year in, year out, and data show their investments likely shouldn’t stop working then either. The premise behind a long-term “Sell in May” strategy is that summer’s returns aren’t great compared to the rest of the year, so you can skip those bummer summers and buy back in for the better winter and spring months. But in Fisher Investments’ experience, this can be very dangerous for long-term investors. Regardless of which months on average post higher or lower returns, stocks are still up more often than not, and missing out on any part of the year could mean incurring huge opportunity costs. For example, dating back to the S&P 500’s inception, during the six-month calendar period from May through October, US stocks have posted a healthy 4.2% average return.[i] That average includes some big up and big down months. You could try to get out, and maybe you’ll miss a correction—a sentiment driven downturn of roughly -10% to -20%. But that would likely be luck. You could just as easily end up sitting out while stocks charge higher, but your portfolio doesn’t.

Let’s suppose the summer months really did post lower relative returns compared to other parts of the year. Well, lower returns can still be positive—and you risk missing out on those positive, though potentially muted, returns if you sit out completely. And even muted returns are likely much better than cash or investing in low-yielding US Treasurys. Fisher Investments’ analysis has shown that stocks generally rise much more frequently than they fall, and this is true in the summer as well. In fact, from May through October, stocks have been positive roughly 72% of the time.[ii] Sitting those periods out completely and having your portfolio in cash would have worked well for you only about 28% of the time. The majority of years, however, selling in May would have been a losing strategy, and one that would likely set you back on the path toward your long-term financial goals.

Time in the Market, Not Timing the Market—We believe at Fisher Investments

“Sell in May” is a market timing strategy. Such strategies are risky because if you are wrong you likely miss out on positive market returns, and even small mistakes can quickly add up and lead to long-term investing results that substantially lag the market. Let’s look at what a “Sell in May” strategy does over several decades (a reasonable investment time horizon for retirement) versus staying invested.

Exhibit 1 shows how an initial $100,000 investment fares depending on whether you “Sell in May” (in this case on April 30th) and buy back in on November 1st, or you stay invested through the full year. A hypothetical initial investment of $100,000 held for the entire period from 1980 to 2018 would have grown to nearly $6.5 million. But if you followed a “Sell in May” strategy, you would end up with slightly less than $1.8 million.

Exhibit 1: “Sell in May” and Watch A Good Chunk of Your Returns Go Away


Source: Global Financial Data, Inc., as of 04/30/2019. S&P 500 Index total returns from 12/31/1979 to 12/31/2018. Sell in May Strategy assumes no returns between April 30th and October 31st of each year.

A huge difference! If you were fully invested you would have realized annualized growth of 11.3%, whereas if you sold stocks on April 30th every year and bought back in on October 31st, your annualized growth would only have been 7.6%. In the early years of this hypothetical example the discrepancy between the two strategies is quite small. Over the years, however, the differential annual returns compound and the two strategies diverge sharply.

Fisher Investments has seen that market timing strategies such as “Sell in May” tend to fail for several reasons. In the short term, stocks are unpredictable and volatile. Even though stocks’ long-term average annualized return is roughly 10%, markets are highly uneven from year-to-year and month-to-month. Volatility and uneven returns, however, are part of the price investors must pay in order to realize the very strong long-term returns offered by the stock market. If you try to dodge negative volatility, it is very likely that you will also miss out on significant periods of positive volatility—when stocks climb upwards quickly.

For long-term investors, rather than trying to time the market, Fisher Investments recommends time in the market: staying invested through all seasons and across the market cycle. Doing this successfully demands patience and discipline. It is hard not to sell when stocks are down sharply, whether in a bear market or a correction. Uneven market returns and short term volatility can test your patience. Exhibit 1, however, is a potential source of resolve, something to consider when you are tempted to sell out of the market. It is a reminder that historically markets have gone up far more often than they have gone down and by a much greater margin. Staying invested—time in the market—lets you realize the compounding benefits of such long-term growth.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[i] Source: Global Financial Data, Inc., as of 04/30/2019. S&P 500 Index total returns from 12/31/1925 to 12/31/2018. Average return from April 30th to October 31st of each year.

[ii] Source: Global Financial Data, Inc., as of 04/30/2019. S&P 500 Index total returns from 12/31/1925 to 12/31/2018. Average return from April 30th to October 31st of each year.

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