The old adage of “sell in May, go away,” believe it or not, did not originate on Wall Street. As it turns out, the conventional wisdom started in Britain, and was loosely linked to the idea that, because so many traders vacationed over summer, volume would not be substantive enough to make trading prudent. Efforts to substantiate this theory pop up pretty frequently (usually every April) and have shown that in the aggregate, there just may be something to this approach. But at the end of the day, long-term averages don’t always reflect any individual year, as we witnessed with this summer’s stock market. From Seeking Alpha:
Anyone who followed the advice was probably feeling smugly superior as the broad market bottomed in early June. They are not bragging about their ‘Sell’ decision anymore.
Of the 30 stocks in the DJIA, 90% (27/30) declined from April 30th to May 31st , some of them quite significantly. Twenty eight of the thirty (93.3%) were higher by last week’s close than they were on May 31, 2012. […]
Logical investors would have seized the opportunity to get in at bargain valuations. Instead, momentum chasers and the ‘Sell in May’ crowd, egged on by constant media reminders of negative seasonality, were busy dumping at bad prices.
Many were raising cash simply to be able to buy later at what they expected to be lower levels. Most of them are still waiting on the sidelines, praying for another big pullback. Meanwhile they have been earning mere basis points while the S&P 500 advanced almost 12% since May 31.
Trying to add alpha by timing the market usually proves futile over time. While everything works sometimes… nothing works every time.
Ouch. Effective timing seems to elude many investors, as evidenced by the reams of research showing that individual investors tend to buy in at market tops, and sell at market bottoms. When it comes to timing the market, people are often overwhelmed by their biases; everyone wants to invest in programs with the best recent returns, but in our experience, this is a recipe for disaster.
While past performance is not necessarily indicative of future results, many managed futures programs have seen cyclical performance in the past, which means that those that buy the high have been more likely to experience a drawdown. In CTAs we often recommend a prudent approach to booking profits and investing in drawdowns. So while we would agree timing your investments based solely on the date on the calendar is a little too simplistic, and didn’t work this year – don’t throw the baby out with the bath water. Timing your entry and exit (into stocks or managed futures) can pay real dividends if it’s done correctly.
No matter your investment, it’s better to have some data-backed strategy instead of just blind buy and hold. Better that than depending on an old adage…