The popular saying "Sell in May and go away" suggests that investors should sell their stock holdings in May and buy them back after the summer to avoid a seasonal decline in the equity markets. While this strategy may appeal to some traders looking to avoid short-term volatility, it is generally not advisable for long-term investors. Here’s why:
The Value of Time in the Market
One of the fundamental tenets of successful, long-term investing is the concept of “time in the market”, not “timing the market”. Historical data shows that the returns of investors who remain invested through various market cycles typically surpass those who try to time their entry and exits. By pulling out of the market, investors risk missing out on periods of significant gains which often come unexpectedly and can considerably impact the compound growth of an investment portfolio.
Lost Dividend and Interest Income
"Sell in May" could also mean missing out on dividends and interest payments that are distributed over the summer months. For income-focused investors, especially those who rely on their investment income, this strategy could reduce their overall annual returns. Dividends often contribute significantly to the total return of an investment portfolio and missing out on these can reduce the compounding benefits over time.
The Emotional Cost of Re-entry
Re-entering the market presents another challenge, particularly if the market performs well over the summer. Investors may find it emotionally difficult to buy back at higher prices, leading to further opportunity costs. The fear of overpaying or catching a "falling knife" can paralyze decision-making, resulting in prolonged absences from the market, which can detrimentally impact long-term investment outcomes.
The Opportunity Cost
The “Sell in May” strategy also incurs an opportunity cost. If the market rises during the summer months, investors who sold their holdings would miss out on these gains. Additionally, the costs associated with selling and then buying back—such as transaction fees and potential tax implications—can add up, further eating into any profits saved from avoiding a downturn.
While "Sell in May and go away" might seem like a prudent short-term defensive strategy, it is based more on superstition than on solid financial principles. For those invested in the long haul, staying invested and focusing on a well-diversified portfolio that aligns with their risk tolerance and financial goals is generally a more effective approach. Markets are unpredictable and we believe long-term gains will outweigh the short-term volatility. The key to successful investing lies in patience, discipline, and the ability to remain committed to one's investment philosophy, regardless of the market's short-term motions.