“Sell in May and go away” – the phrase doesn’t just rhyme, but has a certain allure to it, implying that it’s fine to shut down your investment portfolio and just decamp for the beach or the golf course. Of course, human nature being what it is, in practice few investors are able to manage to turn their backs on the U.S. stock market altogether for months at a time. That’s why many of the suggestions made by pundits that proliferate at this time of year focus instead on finding a way to take advantage of any midyear selloffs.

The data, however, doesn’t seem to support trying to be quite this clever. Those of us who think we’re smarter than the average bear, and can use market weaknesses as an opportunity to pick up stocks more cheaply, have been more badly burned in the last 11 years than if we had just held onto the stocks through that volatile and risky May through October period and done nothing. (We studied the “sell in May” phenomenon since 2000; although other studies have ventured further back in time, arguably the investment landscape we know today dates back to the time that U.S. stock indexes peaked in early 2000.)

We examined the outcomes of two scenarios: what happened to investors buying after a 5% drop in the market during the May to October period, and what happened to those who bought following a 10% correction during the period. The results in Figure 1, below, show that these “buy on weakness” strategies on average have generated losses. Buying stocks in the wake of any 5% correction during the May through October period would have lost 2.8% on average for the past 11 years, including four years when there was no 5% correction (and therefore no activity). Now waiting for an even better bargain after a 10% correction had taken place in the value of the S&P also generated a loss, of 2.5% annually, on average.

 
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Buying on Weakness: May-October Results

Figure 1: Waiting for the market to correct by 5% (in blue) and 10% (in green) have yielded worse results than the -1.9% annual returns being in the market the entire period. (source: Eikon)

A second strategy – for those who shun all attempts to time the market – was to simply own stocks year round, paying no attention to seasonal factors. That has generated average returns of 2.9% for investors in the S&P 500 index. So, buying and holding throughout the market funk was a far better option than trying to outsmart Mr. Market by jumping in on weakness and then holding until the end of October.

Investors willing to take a leap of faith that seasonal patterns will remain intact in the future can draw on recent history for support if they decide to “go away in May”, as the old adage suggests. Since 2000, those investors who bought into the S&P in November, and sold promptly by April 30 have fared far better than any other group, earning an average annual return of 4.5%, as shown in the chart below. (The results for this strategy are displayed in the red bars; the green bars represent holding stocks throughout the entire year.) The reason that “Sell in May, go away” is the subject of so much buzz can be easily seen in this chart. Investors who defied the saying and stuck around have seen, on average, the S&P slump 1.9% from May until the end of October, as seen in the blue bars in the chart below. That’s worse than keeping your money in a mattress.

Year by Year S&P 500 Total Return for Holding Periods:
May through October, November through April and November through April

Figure 2: Three equity strategies total return performance since 2000 reveals that holding stocks during the seasonally strong November through April periods (red bars) gained about 4.5% per year, and a full year November through April period (green bars) gained about 2.9% in total return. Holding stocks during the seasonally weak May through October periods (blue bars) lost an average of about 1.9% per year. (Source: QA Studio)

Certainly, the data suggests that if you are tempted to time the market, historical data suggests that you do, indeed, flee stocks this summer but return in November in order to participate in a seasonally stronger period. But while staying invested in stocks throughout the summer doldrums did cut back returns, sticking to a disciplined investment strategy and not trying to outwit the market by buying on any weakness is by far the best strategy. Indeed, buying on dips between May and October has generated the largest losses for the periods that we studied.

True, our back of the envelope study isn’t rigorous. Still, it does suggest that owning stocks throughout this May through October period may put a dent in your wallet, while trying to grab at what appear to be sudden “values” created by market selloff is even more treacherous. As another venerable saying reminds us, patience is a virtue.

 
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