The Wall Street axiom, sell in May and go away, has a nice ring to it, but does it have any validity? The trading philosophy has its roots in the belief that stock market growth is significantly higher from November through April. Therefore, investors should buy stocks in early November, sell at the end of April, move to cash or bonds, and finally purchase stocks again in early November. Historically, the spring and summer months have underperformed the fall and winter as can be seen in the below chart.
Over the past three years the US stock market has seen significant spring downturns where the strategy of selling out of stocks in May and buying back in later in the year would have been beneficial. In 2012, 2011, and 2010 stocks reached a level at the end of April that they did not see again until August, February, and November, respectively.
To RWM this is just another market timing strategy, and market timing has been proven time and again that it doesn’t work. There is no basis behind the belief that stock prices will be down or flat in the middle of the year other than average historical trends, and there is no given history will repeat itself. The same reasoning applies to investing in the market based on the Super Bowl winner. If a team from the AFL (the majority of teams in the AFC) wins the Super Bowl than 80% of the time the market has fallen that year. Correlation does not mean causation. In addition, as can be seen in the chart, while stocks have not performed as well over the spring and summer months, they have still been positive in three of the five months. Also, even if this was a reliable occurrence, one must consider taxes and transaction costs. We believe any correlation to be spurious.
Looking at May 2013 so far, this strategy would not have paid off as the US stock market has climbed over 2% higher as of this writing. We believe trying to time the market is a loser’s game. Only by investing and then staying invested can one expect to benefit from the long term growth stocks have to offer. By sticking to a plan, your investment portfolio will be here to stay well past May.
Index Performance April YTD Trl 1 yr.
US Stock (Russell 3000) 1.64% 12.89% 17.21%
Foreign Stock (FTSE AW ex US) 3.85% 7.05% 14.81%
Total US Bond Mkt. (BarCap Aggregate) 1.01% 0.89% 3.68%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) 0.22% 0.38% 1.00%
Municipal Bonds (BarCap 1-10yr Muni) 0.70% 1.19% 3.28%
Cash (ML 3Month T-Bill) 0.01% 0.03% 0.12%
*Chart via Business Insider
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