Should You Really “Sell In May And Go Away”?

Written by Gary Barford on May 23rd, 2017

Learn the truth behind this market myth and whether or not you should stick to it

Is there some magic formula that investors can use at specific times of the year?

The rate at which you hear about all of them, you’d certainly think so!

There are hundreds of stock market cliché’s out there that aim to simplify the world of investing.

Some have merit and others are just a trap…

One of the more popular sayings is “Sell in May, and go away”.

Today I want to look further into this and put it to the test and finally reveal the truth behind it. 

Should you sell in May and go away?

Let me show you…


Where Did “Sell In May” Even Come From?


The full saying is actually “Sell in May and go away, don’t come back until St Leger day”.

This basically dates back a few years in the UK, and it implies that you should sell your stocks on the first of May and stay out of the market until St Leger’s Day.

Simple enough to understand, but what’s St Legers Day?

St Legers is a well-known horse race that’s run in September (For the purpose of this article we’ll assume the period runs for 6 months from 1st May to 30th September).

It’s also viewed as the end of the British summer, which has a lot more bearing on what we’re talking about.



How Does This Market Timing Tactic Even Work?


The thinking behind this is that stock returns are poor in the period from May – October, and that you should only be in the market from 1st October to 30th April.

There are a few theories behind this but the main one has to do with the seasons.

May – September coincides with the British summer, with the summer “ending” on St Leger day.

It’s stated that given the summer months more people are typically on holiday, and thus there is less activity on the stock market.

The lower volumes are seen as part of the reason for stocks to potentially underperform in this period.

But is this even legit?


The Numbers Behind The ‘Sell In May’ Phenomenon


The world (including) stock markets have gone global and digital.

Which is why I want to look into the merits behind this theory and see if it actually stacks up.

So, let’s get to some hard numbers and look further into this stock market saying…

Seeing as the saying is linked to the UK, lets first have a look at how stocks in the UK have performed on a monthly basis over the last few years.

I’ve used the FTSE 100 index as a barometer for UK stocks:

Average Monthly UK Stock Returns

*Data from Yahoo! finance

And what do you know…

If we look at the average monthly returns from May – September, ‘Sell In May’ doesn’t look like a bad option.

May, June, August and September all average negative months.

Compare this to October – April where only January averages negative returns.

Let’s move over the Atlantic now and see how this stacks up to American stocks.

Here I’ve used the S&P 500 index as a barometer for stocks.

Average Monthly US Stock Returns
*Data: Yahoo! Finance

If we look at the average monthly return over the last 15 years May – September, it doesn’t look all that great compared to the other months.

Now finally let’s look here at home.

Here I’ve used the Satrix 40 ETF returns as a barometer for South African stocks over the last 15 years:

Average Monthly SA Stock Returns
*Data: Standard Bank Online Share Trading

Looking at things here at home they’re actually quite a lot different.

Overall, on average, stocks are marginally higher based on averages, thanks to good months in May and August.


The Big Question: Should You Be Selling In May?


Having looked at the numbers we can actually see some merit in the Sell in May principal in the UK and the US but not so much here at home.

But even though the international indices might say otherwise, I’m not convinced this is something you should be letting dictate your investing.

And here’s why…


Two Reasons You Shouldn’t Be Selling This May


Avoid The May Myth Reason #1: Fees And Taxes

Remember that as a long-term Investor you’re looking for long-term portfolio growth.

One of the biggest killers of that growth is fees and taxes (something I cover in depth in The SMART Investor).

They’re what I call the “silent killers of growth” because they eat away at your gains without you even realizing it.

You see, every time you buy and sell a stock you pay fees to your broker.

Let’s assume those fees are 1% to get in and 1% to get out.

So, by buying and selling every 5 – 7 months, to avoid the months of May – September, will cost you an additional 2% in fees every year!

Repeat that over 10 years and that’s a lot of your money thrown down the drain.

On top of that you also pay tax on your investment returns.

If you realize a profit on an investment within 3 years that gain will be taxed at your normal income tax rate.

However, if you bank a gain more than 3 years after making an investment that gain will be taxed as a capital gain.

Capital gains taxes are much lower than normal income tax rates so you’d much rather be paying CGT than additional income tax.

Buying and selling every few months to avoid the May – September period will mean you’re always going to be paying income tax rates on your gains.

Avoid The May Myth Reason #2: Dividends

One of the most powerful tools of long term investing is dividends.

Dividends are profits distributed to you by a company.

At the end of the day its money for nothing!

But by getting out the market for 5 months from May to September means you’ll be missing out on collecting your dividends.

This too has a long-term and detrimental effect on your portfolio not only because you are missing out on collecting your dividends, but you’re also missing out on the extra returns you could be earning from re-investing those dividends!

So overall it actually doesn’t pay to be selling in May.



Sell In May And Go Away: Myth busted!


As you can see whilst there are micro merits, as a whole it just isn’t worth sticking to “sell in May and go away”.

Over and above the fact that it just doesn’t pay to do so, do you really want to gamble your portfolio & returns on a cliché?

If you decide to stick to your guns and “sell in May and go away”, just remember you’ll rack up unnecessary fees & taxes, not to mention you’ll cut your dividends short.

That’s portfolio suicide if you ask me!

Rather stick to your long-term investment plan, cut down on fees & taxes, and make sure you collect and re-invest those dividends.

Until then, here’s to smart investing.

Gary Barford | The SMART Investor

Gary Barford
The SMART Investor
The Money Lab

PS: Every month in The SMART Investor I show you how to navigate tricky market timing cliches like these (this was actually an extract from one of my previous issues).

Not only that, but each and every month I also uncover the best stocks and assets, including buy and sell levels, you need to beat the market.

In fact, If you get your name down today, I'll send you the exact stock picks I'm adding to the SMART Portfolio this May!

It takes less than 5 minutes to join, so get your name down today!

I'll see you on the inside!