‘Sell in May and Go Away’ Manages to Hang Around

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on May 5, 2017.

“Matilda,” the Winner of the Great St. Leger Stakes at Doncaster, 1827, painted by John Frederick Herring, Sr.

It’s May! The tell-tale signs are everywhere — the temperatures are up, flowers are in bloom, Steeplechase is next weekend, students are taking final exams and the financial news is once again repeating the adage, “Sell in May and go away.”

Playing the ponies

If you’re not a market watcher, you may not be familiar with the expression. But even if you are, you may not know the origins. It dates back to merry old England when stock brokers would take the summer off to enjoy the horse racing season. With the first race of the season in May and the final race in September, their offices were pretty much empty the entire summer. Not surprisingly, that made for a pretty flat market those months. With the St. Leger Stakes the last of the big races (as it still is), the original saying was “Sell in May and go away. Do not return until St. Leger’s Day.” (Yes, I know. This story does nothing to dispel the idea of fat cat bankers and Wall Street types. But I’ll have you know, I haven’t had a summer off since I was a child!)

Stock market seasonality

While investors today don’t have to worry about stock brokers abandoning their profession for the whole summer, there is evidence of seasonality in the stock market. According to FactSet, since 1928 the S&P 500 Index has gained, on average, about 5 percent from November through April while adding just 2 percent from May through October. When we look at stock market performance by the month of the year, over the last 89 years May’s returns were positive 50 times and negative 39 times. While May is certainly in the bottom half of all months for performance, it has actually produced positive returns more often than not.

Trends, noise and hot air

All of this makes great fodder for market commentators, but there’s no way to know if this or any other market trend will hold true this year, next year or in the years to come. The vast majority of people are long-term investors, not traders. The talking heads love to buzz on noisily — after all, they have to fill airtime — about short-term strategies that simply aren’t in the best interest of long-term investors. For an investor to actually follow the “sell in May and go away” adage, they would need to liquidate their entire stock portfolio, racking up transaction costs and possibly capital gains tax, not to mention increasing their risk. What’s changing month to month in the stock market should be, for all intents and purposes, irrelevant to long-term investors.

One-liners don’t build retirement accounts

We can do four things with our money: spend it, save it, invest it or give it away. For the portion of your wealth that is allocated to investing, the stock market has historically been the best place to grow wealth, but there have been many periods of time when investors were disappointed. Investors (as well as market commentators) are constantly searching for the best way to earn more while taking the least amount of risk possible. Selling in May and going away is not the answer, nor is any other one liner. Even “sell high and buy low” is nearly useless. For all its obvious wisdom, what’s your success rate at consistently timing the market?

For long-term investors, investment decisions should be guided by your individual financial goals, risk constraints, investing time horizon, liquidity needs and tax circumstances. While that doesn’t sound snappy or succinct, by retirement you may think them some of the most beautiful words you’ve ever heard.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.