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Dissecting the Wall Street Adage: "Sell in May and Go Away"

Every spring, as flowers bloom and days lengthen, a certain financial proverb echoes through Wall Street: "Sell in May and go away." This adage suggests that the market's performance from November to April typically outperforms the period from May to October. But is there any substance to this saying? I've taken a deep dive into the past century of data to separate myth from reality.


The "Sell in May and go away" strategy suggests that an investor can outperform the market by selling their holdings in May, avoiding potential summer slumps, and buying back into the market in November. I examined 100 years of historical market data, focusing specifically on May's performance, to see if this strategy holds water.


Upon analyzing a century's worth of market data, I found that the majority of Mays did not instigate major bear markets or trigger significant sell-offs. In fact, only 11 out of the past 100 years witnessed substantial market declines in May, implying a hypothetical probability of just 11% for a major market downturn. This means that, based on the evidence from the past century, the adage "Sell in May and go away" doesn't stand up as a consistently successful investment strategy.


Hence, the reality of the "Sell in May and go away" strategy is that it's a low odds trade. The majority of the time, selling in May does not yield significantly better returns than a buy-and-hold strategy. However, on the rare occasions when a bear market does commence or makes an important pivot in May, the payoff can be substantial. It's akin to buying a lottery ticket. The odds of winning are small, but the potential payoff is huge.


Indeed, there have been several instances where selling in May would have been a wise move. For example, May 1940 saw the start of a bear market due to the escalation of World War II. Similarly, the tech bubble burst in March 2000, and by May, the market was in a free fall. More recently, in May 2008, selling would have helped avoid the catastrophic losses of the financial crisis that followed. These instances stand out in market memory, contributing to the persistence of the saying.


1930 and 1931


1937 and 1940


1946


1966


1969


1973


2001 and 2002


2008


The bottom line is that while the "Sell in May and go away" adage has occasionally proven true, it's not a reliable strategy for consistent investment returns. Historical data clearly shows that timing the market based on the month is less effective than a consistent, long-term investment strategy.


Moreover, the advent of algorithmic trading, the globalization of financial markets, and a myriad of other factors have dramatically transformed the investing landscape over the past century. The relevance of an adage based on a seasonal effect is even more questionable in today's complex market ecosystem.


Instead of trying to time the market based on the calendar, investors would be better served by focusing on fundamentals, diversifying their portfolios, and maintaining a long-term perspective.


In conclusion, "Sell in May and go away" might make for an interesting anecdote, but as an investment strategy, it leaves much to be desired. Investors should approach such adages with caution, taking them as part of market folklore rather than proven financial advice.

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