It’s that time of year when investors pursue the “sell in May and go away” ideology. This refers to the strategy of stock investing from November to April, as it is believed these months will have better prospects than others. Those that follow this strategy will sell their equities around May and then repurchase equity investments around November.
Since 1970, the average return in May has been negative, however, in recent years equities have been performing better. Since 2000, equity return in May has seen more positive returns than negative and in the last five years, the market has been up every May. For example, in May of 2017, the FTSE All-Share index gained a return of 3.9 percent over the course of the month. Yet in May of 2000, the FTSE All-Share index saw a negative return of -0.4 percent. So is it smart to “sell in May and go away?”
Although the positive and negative returns in May are about equal, the returns are fairly low and market falls can be substantial. On average, the market trades in May are mostly flat for the first two weeks and then fall lower in the second half of the month. There are potential downfalls, however, to selling off your entire portfolio. Completely unloading your portfolio and repurchasing a new one a few months later can be costly and can create tax implications. There is almost no room for error, as there is a heavy reliance on many things going right. This greatly limits and narrows the investing path every year. In the event something goes wrong, you could create costly, long-lasting damages to your portfolio.
Due to the pitfalls of selling in May and then “going away”, using a different tactic when investing might be the better option for investors. Rather than putting all of the eggs in one basket so-to-speak, having a more diverse portfolio could ultimately result in a more beneficial long-term strategy. Having a mix of short and long-term assets will allow for a rebalance of measures and could help you better achieve your long-term investing goals.
It is important that you evaluate your assets and have a game plan for your long-term objectives when investing. Sell in May and go away or diversify your portfolio to account for fluctuating returns is a personal preference. Regardless of your investing strategy, be sure you make logical decisions and keep your long-term goals in mind.