"Sell in May, and go away" is a popular theory among investors that I have been hearing a lot about recently, especially in the news. The idea is that most gains in the equity markets are made between November and April.
There is some pretty interesting data that supports the theory. According to Standard & Poor's Equity Research, the return since 1945 between November 30 and April 30 has averaged 6.8 percent. That's compared to 4.1 percent average return for all 12 months.
But really, who cares?
Traders care. Investors should not.
Investors should be operating off of an investment strategy that is a product of a complete and comprehensive financial plan, and no plan should advocate trading as a strategy to accumulate wealth.
Also, while this historical information is interesting, it does nothing to help predict market performance this summer or any other summer in the future for that matter. In fact, a quick look back at 2009 and 2010 sheds some light on how fickle the market can be.
Using a quick price return calculation, the S&P 500 returned more than 19 percent between May 2009 to October 2009. "Sell in May and cry away" was the mantra there.
Let's look at May 2010 to October 2010. The S&P 500 returned about 5 percent. Not bad. Now throw in some interesting analysis by Bespoke Investment Group. According to a recent report that looks at the Dow Jones Industrial Average (DJIA) over the past 20 years, May recorded positive returns 60 percent of the time, June 35 percent, July 70 percent, August 60 percent, September 50 percent, October 70 percent, and November 65 percent.
May is a positive return on the DJIA 60 percent of the time; however, in 2011 May's numbers were down about 1.88 percent.
The reality is that you never know what you don't know. The decision to sell in May and buy back in November is akin to a guess. Two guesses, actually. Selling and buying back in.
Let's look at a very unscientific exercise to make a point and give the guess even odds: 50/50, a coin toss. An investor has a 50/50 chance of being right when they decided to sell and a 50/50 chance of being right when they buy back in. That means an investor has a 25 percent chance of being completely right.
Those odds stink.
Let's assume that an investor wants to try their hand at timing this, regardless of how bad the odds are. Here are some questions:
1) When do you pick the start day?
2) When do you pick the finish day?
3) How much will your summer stink when you are looking at the market every day, fretting over your decision and 25 percent odds of success?
Personally, I think number three is the most important question for any investor to answer.
Here is some free advice—just go away. Serious investors have a solid financial plan and a serious wealth management strategy designed to reasonably grow wealth over time. Serious investors should be worrying about spending time with family, enjoying the weather, and having fun over the summer.
Leave the guess work to the traders who want to stay inside all day, fretting over news, economic reports, and what the latest "talking head" on CNBC is saying.
David B. Armstrong , CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual investors. To determine which investment is appropriate, consult your financial advisor prior to investing. All performance references are historical and do not guarantee future results. Asset allocation does not ensure a profit or protect against a loss.