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. From the January effect to following the Presidential cycle to believing which conference wins the Super Bowl determines how well stocks will fare, there seems to be many ideas that people will suggest following to determine your investing strategy.
Being as that we’re in early May, now we get to see the preponderance of the Sell in May and Go Away philosophy. What may sound as a kitschy or superstitious theory is actually followed by many, and some without thought or research.
What Exactly Is “Sell In May And Go Away”?
The basic theory behind “Sell in May and Go Away” is that the stock market, in general, has had a nice run up during the fall and winter months (November through April) and that for various reasons stocks will begin to see somewhat of a decline during the spring and summer months. If you abide by this theory, you would sell your stocks in late April or early May (hopefully realizing nice gains) and sit largely in cash until the fall where you would buy back into the stock market.
Sounds easy, doesn’t it?
For those of you that might think that this theory 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, I know it’s a tempting theory to get behind because traders may not be as active during the summer months or some may simply think that it’s a possible opportunity to time the market.
The problem that this theory presents is that so many already know about it and thus any quantifiable benefit you possibly would have realized is diluted because so many other investors are doing the same thing with their stock investments. Beyond that, the other major problem I see behind blindly following this theory is listening to others who may not know your specific situation and basing your investment decisions off of them. Listening to sage advice is one thing, but blindly following pundits because they can point to one statistic or another 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.
Who Are You Investing For?
What Sell in May and Go Away makes me think of is asking yourself who you are investing for. We all have goals of where we want to go in life. For some it may be early retirement, for others it’s creating a revenue stream through high dividend paying stocks, and for others like me, we’re focused on the long term growth of our portfolios by adding to them regularly and making wise decisions that benefit our retirement planning.
Speaking personally, this is where my investment plan comes into play and it revolves around our goals as a family. It means knowing what I am looking for in a company to invest in and knowing what it would take for me to get out and using stop loss orders at times to help aid that. Those are the basics, but the point is to have a plan to form my decision-making around that all points to our retirement planning and creating a portfolio that I believe will take us there.
This means that I am not usually wondering about is it time to get out of the stock market, but sticking to our plan and making adjustments (as needed) that align with our goals. That is my encouragement to you as an investor – invest for yourself and not what the pundits on CNBC tell you that you should be doing. That means if you put new money into the market every month/quarter, then you should be doing that still and if you rebalance every quarter/semi-annually then you should be still doing that – unless your needs/goals change of course.
Is There A Benefit Of Not Following The Masses?
If you have read The College Investor for long, you’ll know that Robert loves Warren Buffett and, in fact, has him listed as one of the best investors of all time. I would have to say that I agree, as Buffett does not allow what others say affect his investing decisions and says his philosophy is to hold stocks forever. While I may not hold that strong to the forever philosophy, I do agree with the sentiment. Taking one look at what Buffett has amassed you can tell that he knows what he is doing and is not guilty of following the masses. That is the philosophy I want to emulate as I believe that there is benefit to that.
Another benefit to following the Buffett philosophy is to always be looking for opportunities to buy solid stocks at a good price. That is how I turn something like Sell in May and Go Away on its head. Instead of selling out of my stocks altogether, and racking up needless trading costs, I look for opportunities in a supposed downturn. If there is a stock that I have been watching that declines by 5 or 10%, that means I can get in and likely buy more shares at the discount.
Since I take a long term approach to investing in the stock market that means I see the benefit of taking advantage of any potential downturns, but it also means that I do not lose out on potential gains if the market does indeed go up during the summer months. Is it really that beneficial to follow the masses if they’re wrong and the stocks you sold out of in fact go up in value? The last thing you want is to be sitting in cash and having to pay more because you made the wrong call on trying to time the market.
What’s your take on Sell in May and Go Away? Are the pundits right, or will you be holding strong this summer?
John Schmoll is the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. He’s passionate about helping people learn how to make wise investing decisions so they can prepare for their futures and avoid the mistakes that he and so many others have made.