There are many weird stock market indicators that pundits try to use to explain what you should be doing in the stock market at any given time.
There seems to be many ideas that people will suggest to determine your investing strategy including the January-effect, the presidential cycle, which team wins the Super Bowl, and how well stocks will fare.
Over time, the of the stock market are hard to beat, and timing the market is not something that many people can do on a reliable basis.
Based on this month, you may have encountered the "Sell in May and Go Away" philosophy. While it may sound kitschy or superstitious, does this theory actually have any legs?
What Exactly Is ‘Sell In May And Go Away?’
The basic theory behind “Sell in May and Go Away” is that the stock market has had a nice run up during the fall and winter months (November through April). As spring and summer approaches, the theory suggests we will begin to see somewhat of a decline during the spring and summer months.
If you abide by this, you would sell your stocks in late April or early May (hopefully realizing nice gains). Then, you could sit on the cash until the fall where you would buy back into the stock market.
Sounds simple, doesn’t it?
If you think this idea is brand new, it has actually been around for decades and studied by numerous stock market theorists. Some theorists support the validity of the Sell in May and Go Away theory while others say it’s pure hogwash.
That said, it might be a tempting concept to get behind either because traders may not be as active during the summer months. Or perhaps some may simply think that it’s a possible opportunity to time the market.
The Problem With Sell In May And Go Away
When so many other investors are doing the same thing with their stock investments, it's hard for any one individual investor to see much of an impact. Any quantifiable benefit you possibly would have realized is diluted.
Beyond that, the other major problem with this theory is that it doesn’t account for your unique investing and financial situation. Listening to others who may not know your specific situation and basing your investment decisions off of them isn’t the best way to grow your investments. Following sage advice is one thing, but following pundits without fully researching or talking to others about it is a trading mistake.
While it may be beneficial to sell out of some of your stocks, you can only know that after analyzing your holdings in light of your investment needs and goals.
The Best Ways to Start Investing
Want to move beyond hazy investment philosophies? Here are 10 different ways to start investing with $1,000.
Sell In May And Go Away Historical Returns
LPL Financial measured the S&P 500 Index May-October returns during the decade of the 2010s and found an average of a positive 3.8% return each year, with no significant declines.
The S&P 500 was also up 10.5% from May to October 2021, though it was down 5.3% during the same period in 2022.
Who Are You Investing For?
At the end of the day, it all comes down to deciding on your investing strategy and sticking with it. Some people might look at the long-term fundamentals of a company to invest in.
Others may prefer investing in index funds and forgetting about the money due to a long-term investment horizon.
Those are some of the basics, but the point is to have a plan to guide your decision-making. That helps you plan for your retirement and create a portfolio that can get you there.
If you have long-term investing on the horizon, you don't need to worry about whether it is time to get out of the stock market. Instead, just ignore the experts on CNBC and stick to your plan.
That means if you put new money into the market every month/quarter, then keep on doing that. If you rebalance every quarter or semi-annually then keep on doing that—unless your underlying goals change.
Is There A Benefit Of Not Following The Masses?
If you have read The College Investor for long, you’ll know that we love Warren Buffett and has him listed as one of the best investors of all time. Buffett does not let what others say affect his investing decisions and says his philosophy is to hold stocks forever.
While that is not the only investing strategy, it is one that has obviously worked for Buffett over his long career. Whatever your investing strategy is, stick with it and don't follow what everyone else is doing.
The Bottom Line
If you take a long term approach to investing in the stock market, you probably won't want to sell in May (or any other time), just because it happens to be part of a catchy rhyme.
You may experience potential downturns, but you'll also take advantage of potential gains if the market goes up during the summer months.
Over time, the long-term returns of the stock market are hard to beat, and timing the market is not something that many people can do on a reliable basis.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Editor: Claire Tak Reviewed by: Chris Muller