Sell in May and Go Away? The Numbers Don't Lie

The old market adage exhorting investors to "sell in May and go away; come back on St. Leger's day" appeared to find favor today, as U.S. stocks lost ground on this first day of the month. The S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) both fell 0.9%.

Consistent with those losses, the VIX Index (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, rose 7% to close at 14.49. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

An all-season portfolio
A year ago, I examined the long-term record of a "sell in May" strategy and compared the returns to those of the converse strategy (i.e., buy in May) and to "buy-and-hold." These are how the results shook out (I've updated the data through yesterday):

	S&P 500: Annualized Return (including dividends) April 30, 1926 to April 30, 2013
Sell in May, buy back in October	8.5%
Buy in May, sell in October	5.1%
Buy and hold	10.1%

Source: Ibbotson Associates, Standard & Poor's, Federal Reserve Bank of St. Louis, author's calculations.

The May through September period does appear less favorable to stocks over the long term, but note that both seasonal switching strategies underperformed a simple buy-and-hold strategy. Naturally, this has not been the case over every period within that 87-year span. In fact, over the past five years, selling in May and buying back in October has been the dominant strategy, beating buy-and-hold by a full 3 percentage points, on an annualized basis:

	S&P 500: Annualized Return (including dividends) April 30, 2008 to April 30, 2012
Sell in May, buy back in October	8.2%
Buy in May, sell in October	(2.4%)
Buy and hold	5.2%

Source: Ibbotson Associates, Standard & Poor's, Federal Reserve Bank of St. Louis, author's calculations.

In light of this recent performance, should investors then sell their holdings to try to avoid a seasonal penalty? My answer is an emphatic no. Seasonal effects are unreliable and, assuming you're a fundamentally oriented investor, they have nothing to do with your reasons for owning equities. Finally, regardless of recent past performance, the long-term results of "sell in May" aren't convincing. My advice: Build an all-weather portfolio and don't deprive your stocks of the warmth of the spring and summer sun.

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