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Brett Arends's ROI

May 4, 2021, 2:41 p.m. EDT

If you ‘sell in May,’ don’t go away

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By Brett Arends

Should you dump all the stock market funds from your 401(k) and IRA on the first of May, go away, and come back again for Hallowe’en?

Definitely, says an old Wall Street adage.

Definitely not, say most financial advisers.

As for the evidence of history? It’s more ambiguous. If the numbers say anything, maybe it’s that “sell in May and go away” is only half right. Since 1900, someone who sold in May actually could have retired earlier and with more money—but only if they hung around and waited to buy their stocks back during the usual summer panic.

Obvious note: If you want an easy life, ignore all trading advice from the Wall Street crowd. Set some basic rules—asset allocation, clearly established sell signals and so on—and stick to them.

On the other hand, there’s no point leaving money on the table if you’re willing to take a more active role.

The Wall Street phrase “sell in May” dates back at least to the 1930s. Originally it seems to have started in Great Britain, where the rhyme went “sell in May, go away, and don’t come back till St Leger’s Day”—meaning a famous horse race that takes place in mid-September. The theory was that the stock market’s returns over the summer months are usually so dismal that there’s really no point being in the market.

The updated version of this adage calls it “the Hallowe’en Effect,” and stretches the hiatus from May 1 to October 31: A full six months.

It sounds like superstitious nonsense, but there is some remarkable evidence for it. One exhaustive academic study looked at all the available stock market data from around the world going as far back as 1693 (coincidentally, the time of the Salem witch trials in Massachusetts—make of this what you will).

“In none of the 65 countries for which we have total returns and short term interest rates available—with the exception of Mauritius — can we reject a Sell in May effect,” report researchers Cherry Zhang and Ben Jacobsen. “Summer risk premiums are not only not significantly positive, they are in most cases not even marginally positive. In 45 countries the excess returns during summer have been negative, and in seven significantly so,” they write. In other words: Historically, all the stock market’s returns have come during the winter months. During the summer months, typically, the stock market’s returns haven’t been any better than the returns on keeping your money in the bank.

(Oh, unless you’re living in Mauritius.)

Smart money mavens have a number of pushbacks to all this. They’ll point out that this is somewhat random, and makes no logical sense. They’ll warn that likely gains don’t really compensate for the trading costs, the potential taxes (in a taxable account). And they’ll add that you risk missing out if the market rises.

Furthermore, they’ll say, once you and I get in the habit of getting into the market and then out of it again, most of us will simply mess it up. We’ll get back in too early, or too late, or not at all.

All reasonable points.

So the advice, “leave it alone,” is not wrong.

But…the mathematical criticism of “sell in May” is partly off-beam. That’s because critics assume we sell on May 1 and go away, and don’t come back until October 31.

I’ve looked through the history of the Dow Jones Industrial Average  /zigman2/quotes/210598065/realtime DJIA +0.21%  going back to 1900 and something amazing leaps out.

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
35,677.02
+73.94 +0.21%
Volume: 349.08M
Oct. 22, 2021 5:04p
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