Should You Sell Your Stocks in May and Go Away?

You may have heard of the old stock market adage “Sell in May and Go Away”.

The adage comes from the theory that stocks tend to underperform from May to September. As such, it is suggested that investors would be better off avoiding such months all together.

To dive deeper into this, an article on 1 May 2013 by fellow US Fool Alex Dumortier had some interesting figures to share.

Alex used the US-market indicator, the S&P 500 to measure the annualized returns for two different scenarios.

One scenario would be for the S&P 500 index to be sold on start of May and bought back at the start of October. The other scenario would be the reverse: buying at the start of May and selling at the start of October.

Here’s what he had to share:

Sell in May

Source: Ibbotson Associates, Standard & Poor’s, Federal Reserve Bank of St. Louis, article

Now that’s interesting, isn’t it? The data suggests that the old adage of “Sell in May and Go Away” may have some merit. But let’s not get carried away, just yet.

Don’t hit that sell button yet

Long time Foolish readers may have noticed that the idea of “Sell in May and Go Away” suggests that we should move in and out of stocks within months and not years.

This is hardly the stuff of Foolish investing.

The key message is this: Alex also added that if the investor avoided both scenarios above and simply bought and held the S&P 500 index over the same period – the annualized returns would be 10.1%, outpacing the returns of both scenarios above.

In fact, the returns of the SPDR STI ETF (SGX: ES3) – a proxy for the market barometer the Straits Times Index (SGX: ^STI) – is currently at 8.6% since its inception on 11 April 2002.

For the more adventurous among us, some Singapore shares did even better.

For instance, shares of tourist attraction company Straco Corporation Ltd (SGX: S85) went up by 19% from the start of May to end of September last year. Over a year, shares of Straco returned 60% in capital gains.

Foolish takeaway

The Foolish investor may be better served by focusing on buying good businesses that can endure for decades, and not between the months of May and September. Notably, dancing in and out of stocks will also incur trading costs which can further hobble your financial plan.

So, keep your Foolish eyes open for better businesses – and leave the old adage at the door as you head out to invest.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.