It’s May again, so that means you can’t turn on financial TV without being bombarded with advice to dump all your stocks until the end of the summer when it’s safe to buy them again.
This advice, “Sell in May and go away,” is based on analyses of average market performance by month over the past 50 years.
As you would expect (based on the aphorism), and as you can see in this chart, May has tended to be a weak month for stock performance, though stocks have still delivered a positive return in the month. June has been negative. July and August, meanwhile, have been good. September has been the real disaster. All other months, with the exception of February, have been strongly positive.
So if, on average, June has seen negative returns and September has seen very negative returns, should you sell your stocks now and go away?
Unless you don’t care about the tax and transaction costs you will incur by whipping in and out of the market, you should just sit tight.
For one thing, the magnitude of the average losses in June and September, about -0.2% and -0.5%, respectively, is hardly even worth mentioning (and certainly not worth the tax and transaction cost and hassle of selling and buying again).
Second, even if the market drops after you sell, you’ll never know when to get back in again. (It’s not as though a stop light turns from green to red to tell you when it’s time to buy).
Third, just because on average the market has declined in June and September over the past 50 years doesn’t mean that it will again this year. And if the market doesn’t decline, and you have dumped your stocks, you’ll never know when to get back in again.
To be clear:
The market may well crash in June (or this afternoon, for that matter).
It may crash 20%-50% and not regain today’s highs for years.
It may turn out that “sell in May and go away” will be spectacular advice this year and that you’ll feel like an absolute fool for not doing having followed it.
But that, unfortunately, goes with the territory.
You can’t buy stocks without assuming the risk that they could crash at any time. And although the folks on financial TV might have you think otherwise, no one will ever be able to tell you reliably when stocks might crash. So if you’re scared of a crash, you will never be comfortable buying or owning stocks.
The good news is that, over the long haul–many years–stocks should do OK. They should also do better than bonds, which are currently delivering very low yields. So if you’re a long-term investor–in which case the concept of “selling in May and going away” is even more senseless–you should feel OK owning stocks. They will never be “safe” investments, but over the long haul, they should do OK.
Aaron Task and I discussed this and the market in general on Yahoo’s Daily Ticker today. We talked about stocks vs. bonds and the market’s “real” valuation. Watch here >
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