The Case for Ignoring the "Sell in May and Go Away" Narrative Entirely

The phrase "sell in May and go away" dates all the way back to 18th-century England. In short, people in London's financial district thought they could sell their stocks in the spring, get away to enjoy the summer months, and resume business in the fall by getting back into the market.

Over time, that's evolved into the idea that investors should sell their stocks in May and buy back in November. The May-to-November window is when stocks have traditionally underperformed.

Data source: YCharts.

May, June, August, and September are four of the five worst-performing months for the S&P 500 (SNPINDEX: ^GSPC). But here's the problem with this idea of selling and then buying back in a few months later. You may be avoiding the historically underperforming months, but "underperforming" doesn't equal nonperforming.

Of the six months from May to October, four of them have averaged positive returns since 1950. Only September has averaged a meaningfully negative return. By being out of the market during that six-month time frame, you'd be passing up what's likely to be positive returns from the stock market. And returns could be higher during any given year.

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Buy and hold still wins out

While you could argue that there's a weak seasonal pattern here, it's not nearly enough to justify getting out of the stock market for half of every year.

Here's a very rudimentary example to consider. If you invest $10,000 in the S&P 500, earn the index's long-term average annual return of 10%, and keep it invested for 30 years, you'll end up with around $174,000. That's not guaranteed to happen, but it lets us do some math.

Let's say then that since you're out of the market for half of each year you earn half the return, or 5% annually. In that case, a $10,000 investment held for 30 years turns into just $43,000.

Your total return doesn't just drop in half. Because of the power of compounding and the ability to earn gains on your gains, according to my calculations, your total return would drop by roughly 75% in this hypothetical. Sure, you could invest in T-bills and earn some rate of interest during the six months you're on the sidelines, but the damage is clearly being done.

Avoid the advice to "sell in May and go away"

The direction of stocks at any given point in time depends on a number of factors: company earnings, the economy, inflation, interest rates, geopolitical shocks, monetary policy, investor emotions, and more. Those factors change throughout the year and don't follow any particular calendar. Stock returns don't drop just because July 31 turns into Aug. 1.

Investors can do a lot of damage to their own portfolios by trying to time the market. The "sell in May" thesis is simply an extension of that idea. Most investors should simply stick with a buy-and-hold strategy and let the markets do the work for them.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.