Sunday, May 27, 2012

Sell in May and Go Away

There is a saying in the investing community to sell in may and go away, referring to selling your stocks and staying away from the market for six months before buying back in around October or November.  The reason is that historically, the six months following May tend to underperform the six months leading up to it.  In both 2010 and 2011, the stock market peaked at the end of April and it looks like this year has been the same.  For 2012, April had been the shaky month but the S&P 500 had increased about 11% until the end of April.  And since then, the market has fallen around 6%.

It is interesting to observe that the market seems to follow this pattern, and it seems all to easy to just put all your money in an S&P 500 ETF in October and sell it all in May and make lots of money this way.  I'm not quite sure the market is like a stage where the bull and bear change places every six months, but recently this seems to be the case.  People using this technique are trying to make money through one's skill in market timing.  The stock market goes through positive bull cycles and negative bear cycles regularly and those skilled at timing the market can make money even if they aren't good at picking stocks.  It seems easy enough, when the market drops you buy and when the market goes up you sell.  But no one can ever be certain they are buying at the trough or selling at the peak.  Catching the falling knife, as it is often called, can be quite painful when you buy a stock that has fallen 20% only to watch it fall another 20% because the bear hasn't run its course.  And sometimes you sell into your fear, holding onto whatever gains you already got and kicking yourself when the market continues to rally for the next couple months.

It seems quite difficult to be one of these short-term investors.  You get a lot of immediate feedback, which is good, but you have to fight against the strong short-term fluctuations.  It is much easier, in my opinion, to follow the long-term trend and buy into the market when it's relatively cheap with money you won't need for the next 10 years and get the higher average return stocks provide over time.  Especially for those who don't have the time to do adequate research on stocks, this seems to be a very solid investment strategy.  My advice is to not sell into the hype of this "Sell in May" and just hold onto your investments over time.

Especially for younger generations who will continue to be net buyers of the stock market year after year, we should be looking forward to some lower prices.  It even makes me cringe when the market drops after putting money into the market, but as long as you aren't selling prematurely, you won't even remember the drop when you cash out years later into a much rosier picture.  Could there have been more money to be made?  Perhaps, but that usually comes with much more risk.

What do I think will happen in the next five or six months?  I think the market will continue to drop for some time during this period unless QE3 is announced or some other catalyst jump starts the market.  People have been saying for the past two years that the U.S. will face slow, steady growth and they have repeated it enough for me to believe it.  Quarter to quarter, there might be some better performance in earnings as the economy continues to pick up, but it doesn't look like there will be any shortcuts back to overall economic health.

So should you sell in May?  I would say hold onto whatever you have, but feel free to go away.  Don't watch your portfolio since it should be funded by money you won't need for many years.  Go enjoy life, spend time with family and friends, and focus on more important things in the short-run.  It is the summer after all.

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