It's now November, which means the snow is here and someone will ask me about the "sell in May and go away" adage. So what exactly does that mean?
According to Investopedia; a well-known trading adage warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The "sell in May and go away" strategy is an investor who sells his or her stock holdings in May and gets back into the equity market in November – thereby avoiding the typically volatile May - October period – would be much better off than an investor who stays in equities throughout the year.
This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. According to Stock Trader's Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3 percent during the May-October period, compared with an average gain of 7.5 percent during the November-April period.
While the exact reasons for this seasonal trading pattern are not known, lower trading volumes during the summer vacation months and increased investment flows during the winter months are cited as contributory reasons for the discrepancy in performance during the May-October and November-April periods, respectively.
This is sometimes referred to as the "Halloween Indicator," but is it true? Is the year really divided into a best-return six-month period, and worst return six-month period? According to Hanlon Investment Research Group, using the S&P 500 index, one of the most widely known market indices, they analyzed the returns of the period starting from the end of April 1950, through the end of October 2014. The six-month returns were calculated for each "favorable" period, May through October. This results in 64 favorable periods, and 65 unfavorable periods. They calculated the average six-month return for the 64 favorable returns periods as one group, and the 65 unfavorable return periods as another group.
The average return for the 64 favorable calendar periods is 7.2 percent, versus the average return for the 65 unfavorable calendar periods of 1.4 percent. The spread between these six month averages is a whopping 5.8 percent!
This persistent and recurring market anomaly has been recognized and noted by many academics, as well as ordinary market observers. The longevity and magnitude of the difference in returns between the favorable and unfavorable calendar periods has helped solidify this curiosity of market returns as real and not a fluke.
Remember the favorite saying of Winston Churchill; "Those who fail to learn from history are doomed to repeat it." Having market exposure for clients during favorable time periods, and avoiding the potential drawdowns during unfavorable time periods, is what active, tactical management is all about. Using history and analytical research, and active manager keeps a disciplined eye on market behavior, attempting to capture favorable risk adjusted returns and avoid downside volatility.
If you don't have a tactical money manager for your portfolio, you might be missing out on important money management strategies to maximize your returns.
Investment advisory services offered through Gradient Advisors, LLC (Arden Hills, MN 877-885-0508), a SEC Registered Investment Advisor. Gradient Advisors, LLC and its advisors do not render tax, legal, or accounting advice. Wolf Wealth Advisors Inc. is not a registered investment advisor and is not an affiliate of Gradient Advisors, LLC.