There are dozens of different strategies investors have used to time the market. I had a finance professor in college that identified the days of each month to be in stocks or bonds. I can’t remember the exact days but it was something about selling off stocks in the last 5 days of the month and then buying back on the 1st. There’s also the idea of selling off in December as investors dump ugly holdings for the end of the year. Then there’s the January effect, that assumes whatever January does for that year is what the whole year will end like. There are still more. The one I want to talk about today is called “Sell in May“. It’s got a number of names, “Sell in May then stay away” being a favorite. I prefer “Sell in May until All Saint’s Day,” due to its chronological accuracy.

Don’t know what I’m talking about? It’s probably for the best since you are a smart buy and hold investor and don’t try to time the market. *Good boy*

So what is this “Sell in May” stuff all about? It’s an investment phenomenon that believes you can make more money buy selling all your stocks in May, and buying them back some time in the fall. It’s based on observations of market returns from November-April vs May-October of every year. As it turns out, the market does really well from November to April and stays basically flat during the summer months. Scary stuff right?

But there’s no way this can be true right? Well, it all depends on what you believe really moves the market. So the feeling is that people often vacation and are otherwise distracted during the summer months. There’s always SOMEONE in your department on vacation. Productivity is down and everyone is focused on getting through the day so they can go home and enjoy the long summer evenings. Behavioral finance studies would agree with such ideas. There’s also the idea that the money managers sell off their holdings because they don’t want to have to think about fluctuations in the market while they’re catching rays on the sandy shores of West Palm Beach. And then when the Sun sets on summer people go back to work and start getting serious about making money again. But I believe that if people really want to win at this game they should stay away until All Saint’s Day, which is November 1st. Why? If you avoid October you miss the awfulness of 2008, Black Monday in 1987, and even the stock market crash of 1929. But is all this stuff legit?

This chart comes from one of my favorite blogs, EconomPic (don’t hate me for borrowing your picture buddy). It shows the return of the S&P 500 vs a version of the sell in May phenomenon called “The Special Sauce”. In the special sauce you take the money from selling stocks and put it in bonds, which many of us would do anyway. So you tell me if it works or not.

Now of course this post is not meant to recommend this as an investment philosophy. I do not do this myself, nor do I recommend you do it either. However, if a reputable mutual fund company came to me with a mutual fund that did this, I’d consider putting 5-10% of my portfolio in it.

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice.

categories: investing, personal finance