The stock market is full of weird stock market indicators that experts try to use to explain what to do at any given moment.
The January effect, the presidential cycle, which team will win the Super Bowl, how well stocks will do, and so on, there seem to be many ideas people put forward to determine their investment strategy.
As time goes on, it becomes harder to beat the stock market quotes, and timing the market is not something that many people can rely on.
Based on this month, you may have encountered “If you sell it in May, it will disappear.” philosophy. It may sound kitschy and superstitious, but does this theory have any real basis?
What exactly is “Sell In May and Go Away”?
The basic theory of “sell in May and leave” is that the stock market has been doing well over the fall and winter months (November to April). As spring and summer approach, the theory is that we’ll see some spring-to-summer declines.
If you adhere to this, you will sell your shares in late April or early May (hopefully at a significant profit). That way, you can hold the cash until the fall and then buy it back into the stock market.
Sounds easy, right?
If you think this idea is brand new, it’s actually been around for decades and has been studied by many stock market theorists. Some theorists support the validity of the May Sell Go Away Theory, while others claim it is sheer trolling.
That said, traders may not be as active during the summer months, so it might be a tempting notion to put one or the other on the back burner. Others might simply see it as an opportunity to time the market.
The issue of sell-in-go-away in May
It’s hard for a single individual investor to see a big impact when so many others are doing the same thing with their stock investments. Any quantitative gains you may have realized are diluted.
Beyond that, another big problem with this theory is that it doesn’t take into account your unique investment or financial situation. Listening to someone who doesn’t know your specific situation and basing your investment decisions on that is not the best way to increase your investment. Following sensible advice is another thing, but following a professional without doing enough research and consulting others about it is a mistake in the trade.
Selling some stocks may be beneficial, but only after analyzing your holdings against your investment needs and goals.
A historic return that will disappear if sold in May
LPL Financial Measuring May-October returns of the S&P 500 Index The decade of the 2010s averaged positive returns of 3.8% each year, with no significant declines.
The S&P 500 index also rose 10.5% from May to October 2021, but fell 5.3% over the same period in 2022.
Who are you investing for?
Ultimately, it all comes down to deciding on an investment strategy and sticking to it. Some may focus on the long-term fundamentals of the companies they invest in.
Others prefer to forget about money and invest in index funds because of the long investment horizon.
These are some of the basics, but the key is to have a plan to guide your decisions. This will help you plan for retirement and create a portfolio to get you there.
If you’re looking to invest for the long term, don’t worry if it’s time to exit the stock market. Instead, ignore CNBC’s experts and stick to your own plan.
So if you put new money into the market every month/quarter, you have to keep doing it. If you rebalance quarterly or semi-annually, keep doing it unless your underlying goals change.
Is there any benefit in not following the masses?
Long-time readers of The College Investor know that we love Warren Buffett and have named him one of the greatest investors of all time. Buffett says it’s his philosophy to not let the opinions of others influence his investment decisions and to hold his shares indefinitely.
It’s not the only investment strategy, but it’s one that’s clearly worked for Buffett throughout his long career. Whatever your investment strategy is, stick with it and don’t follow what others are doing.
Conclusion
If you take a long-term approach to investing in the stock market, you probably don’t want to sell in May (or any other time) just because it happens to be part of a catchy rhyme.
You may experience potential downsides, but you can also take advantage of potential gains if the market rises during the summer.
As time goes on, nothing beats the long-term returns of the stock market, and market timing is not something that many people can rely on.