“SELL IN MAY AND GO AWAY” – what should we do with this strategy?

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Financial experts have found that since traditionally business activity slows down in the summer, it is best to enter the stock market in October and November and exit in late April or early May. The “sell in May and walk away” strategy is commonly used in this situation.

This strategy may be used by institutional and individual investors alike.

By selling their stock in May and moving into cash, investors can use this approach. In November, they return to the market and buy their shares again.

The “Sell in May and go away” custom, which was prevalent in Britain during the 19th century, saw bankers and stock dealers sell their holdings before departing for the summer.

The strategy gained popularity thanks to the Stock Trader’s Almanac, where the strategy was proposed for Dow Jones Industrial Average stocks back in 1950.

However, since then, many researchers around the world have studied this strategy and have come to different conclusions about its effectiveness.

The seasonality in investing owes partly to year-end cash bonuses and also to the fact that tax returns in the United States are filed closer to mid-April.

For example, the last time the S&P 500 had a significant crash was in 2011, when the index of major companies fell 8.1% over the summer.

Advantages of the strategy and successful experiences

This strategy’s main benefit is that it protects against potential losses in summer markets. Low liquidity and potential volatility during the summer can cause stock prices to drop. On the other hand, the winter season is frequently more steady and dependable.

Additionally, it might be useful for people searching for a simple approach to profit from the financial markets without having to actively manage their portfolios.

History shows that this strategy has been effective in the past. In contrast to an investor keeping equities throughout the year, which would have yielded an average annual return of approximately 4.1%, the “Sell in May and Walk Away” approach has delivered an average annual return of 7.5% since 1950, according to a 2013 analysis.

In addition, a number of additional individuals and funds have had success with this tactic in the past. For instance, the investment portfolios of the hedge fund AQR Capital Management employ this method. The performance of the “Sell in May and Walk Away” approach is also monitored by a variety of indexes, including the S&P 500 May-October Seasonal Index.

Also in 2013, investors who sold Apple stock in May and went into cash were able to avoid the significant losses that were associated with the stock price drop in June of that year. And in 2018, investors who sold Facebook stock in May and went into cash also avoided losses that were related to the Cambridge Analytica scandal that occurred in March of that year.

Flaws and bad experiences

Before using this technique, each investor should carefully consider their investing goals and risks because previous success does not guarantee future results.

“Sell in May and Walk Away” is an investing strategy, just like any other, and there have been times in the past when it hasn’t succeeded.

For instance, the “Sell in May and walk away” plan did not perform as anticipated in 2020, when the global financial market was confronted with COVID-19 and economic restraints. Even though May was comparatively disappointing for investors, the market started to show noticeable improvements from June through October, and those who adopted this approach lost the chance to profit from growing stock prices.

The “Sell in May and walk away” method may be effective in the long run, but it might not be effective in the near run. For instance, the S&P 500 May-October Seasonal Index reported a little loss in 2019, despite the index’s year-over-year gain of 31.5%.

Also in 2019, investors missed out on the big rewards associated with share price increases in July and August of that year because they sold their Tesla shares in May and shifted to cash.

Going into cash might also result in lost earnings if the markets keep rising.

Several intriguing details on the “Sell in May and Get Out” strategy:

• It was identified in 2013 research by The Economist to be most effective on the London Stock Exchange.
• It had profitable results 63% of the time in the S&P 500 U.S. stock market between 1950 and 2013.
• This type of trading behavior has little to do with the unique characteristics of firms and is based on statistical data rather than company fundamentals.
• This strategy  may be modified in a number of ways, such as by buying and selling equities in other months, at varying intervals of time, or in combination with other investing techniques.
• According to some studies, the Sell in May and Walk Away method could cease to be effective in the future since most investors are likely to be familiar with it and may start using it, changing the market’s dynamics.
• The “Sell in May and Walk Away” investing strategy is among the most well-known and is still a topic of interest for investors and scholars.

Bottom line

In any given year, the seasonality factor can override other equally significant factors.

Successful experiences in the past provide no guarantee of future success.

Therefore, like any other investment strategy, “Sell in May and Walk Away” has its risks and limitations, and every investor should carefully evaluate their goals and risks before using this strategy.

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