The Investment Scientist

Shall You Sell in May and Go Away?

Posted on: May 10, 2011

Stock Market Seasonality

By now, you may have heard the stock market folklore: “Sell in May and Go Away.”

Well, let’s look at the statistics, shall we? Most stock market returns are delivered during the winter season from November to May. In the summer (June to October), however, the market seems to take a vacation. Not only does it not deliver much return, it is also more volatile.

It’s not just the US market; some European markets manifest this tendency as well. See the chart below based on market data from the US, the UK, Germany, the Netherlands, and Belgium.

How can you benefit from this seasonality effect? Surely, you can follow the strategy to “buy in November and sell in May.” This strategy sounds tempting in theory, but jumping in and out of stocks forces you to pay transaction costs and short-term capital gains taxes. These costs would more than make up for whatever gains the strategy might deliver.

It’s not good for mental health as well. 55% of the times, the market did register a gain in the summer season. In the summer of 2009, the market had a huge rally. How would you have felt like if you had been totally out of the market? Probably a complete idiot.

If you have a balanced portfolio like my clients, you really have nothing to fret about. Take a 50/50 portfolio, for example, where 50% of your portfolio is in stocks and the rest is in fixed income instruments. If the market goes up 20%, your portfolio will increase 10%. That’s a win. If the market drops 20%, the portfolio will become a 40/60 portfolio. During rebalance time, you sell bonds and use the proceeds to buy stocks at a 20% discount. That’s also a win. Whichever way the market goes, you win.

Life and complicated enough, why let stock market seasonality intrudes.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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