Fun rhymes don’t equal solid investment advice

Have you sold your stocks yet? Well, you may have heard the adage, “Sell in May and go away.” It doesn’t end there. To complete the cycle you sell in May and stay out of the stock market until November. There are actually two reasons folks do this.

First off, there are the summer doldrums. During the summer the stock market tends to bounce lightly rather than aggressively. So being out of stocks in the summer really shouldn’t hurt you all that much—by doing so, you could use those funds to get some sure-thing returns in the bond market or other fixed-income investments.

The other reason is October. You know October—that’s when the stock market seems to like crashing. The most recent was the massive drop in October of 2008 during the financial crisis. My parents remembered October of 1929, the start of the Great Depression. I remember exactly what I was doing one fateful Monday in October of 1987. Yes, October seems like a pretty bad month, you might as well stay clear of it.

So what’s holding you back? Call your broker Monday and sell!

Or maybe not. The thing is--the reasoning is wrong. Yes, the summer doldrums are real. Some people think it has to do with so many people taking their vacations and not wanting to do much in the way of investing for the slow action in the stock market. However, the slow action in the stock market is still typically a lot hotter than the bond market, and certainly hotter than a bank account—especially in these days of low interest rates.

Then there is October. First thing, that crash in 2008—that wasn’t October. The big drop was in September. Yes, it kept going down in October, but September was when the bottom fell out. October has seen some tough years; 1907, 1929, 1987 had some spectacularly lousy days. But October is actually one of the better months historically to be invested in the stock market.

The bottom line of all this is that a simplistic rule doesn’t work too terribly well to time the market. I’m not even sure there is a good complicated rule. After all, if this one was true, then every pension fund and mutual fund manager would sell May 1 and stay out of the market until November 1. Of course if all of that money tried to get out of the market at the same time, it would crash. So smart traders would get out April 30…well, until that worked, then smarter traders would get out on April 29. I think you see the pattern. If it worked, humans would game the system to the point of it no longer working.

If that doesn’t convince you, consider a study done by Morningstar. It compared buying stocks in 1926 and holding them until the end of last year to a strategy where you’d get out of the market from May through November. The buy-and-hold strategy would have grown an initial $1000 investment to over $4.7 million. The Sell-in-May-and-go-away strategy? It grew to just a bit more than $1.2 million.

 Forget the selling.

This article was published under the title "Fun rhymes don't make good advice" in the Wichita Falls Times Record News on May 17, 2015.