By: Dividend Sensei
It’s human nature to want to avoid losses. In fact studies show that humans are hardwired to feel the sting of a loss twice as much as the thrill of a gain. This is known as loss aversion and it’s one of the key reasons that stocks are so volatile. Or to put another way, loss aversion is why the stock market takes the escalator up, but the elevator down.
However this also leads to many people making terrible decisions in an effort to time the market and avoid this short-term pain. The result is often missing out on the incredible gains that a diversified portfolio of stocks can generate. So let’s take a look at one of the biggest and most popular myths about the market. One that if ignored is likely to boost your long-term returns, make you far richer over time, and possibly be the difference between a prosperous retirement and not retiring at all.
Sell In May And Walk Away
There’s a famous maxim that goes “sell in May and walk away. Come back in October when you’re sober.” The theory goes that during the summer not much important news breaks, and many on Wall Street join the rest of us in taking vacations. This can lead to thin trading volumes and much greater negative volatility. Some also believe that these months are just unlucky, because of when major stock market crashes have occured:
- 1929 market crash (October 24th through 29th)
- Black Monday, October 19th, 1987 (stock market fell 20% in a single day)
- September 11th crash (S&P 500, Dow Jones, and Nasdaq fell 11.3%, 14.0%, and 17.3% by September 21st)
- Financial Crisis (collapse of Lehman Brothers): S&P 500, Dow, and Nasdaq fell 30.6%, 34.8%, and 40.5% between August 14th and October 27th, 2008)
But guess what? May through October is not cursed and if you had listened to this old wives tale and tried to time the market you’d have missed out on some pretty good performance during this six month time period.
- 2009: S&P 500 rose 19.1%
- 2010: S&P 500 rose 0.7%
- 2011: S&P 500 fell 7.1%
- 2012: S&P 500 rose 1.5%
- 2013: S&P 500 rose 7%
- 2014: S&P 500 rose 10%
- 2015: S&P fell 0.3%
- 2016: S&P 500 rose 5%
- 2017: S&P 500 rose 6%
In the past nine years just twice has “sell in May” avoided a loss, and in 2015 that loss was insignificant. Missing out on the 2011 fall might have been nice but would have meant giving up numerous great gains as well including 2009’s epic May through October rally. The Dow Jones has had similar experiences in the last few years, with just one down year during this six month time frame since 2013.
But that’s just the last few years. To get a more accurate picture let’s take a long-term view to understand where this myth originates from. According to Fidelity since 1928 here’s how the six month performance of the market has broken down.
- November to April: S&P 500 rose on average 5%
- May through October: S&P 500 rose on average 2%
Note that most of the time the dreaded May through October time frame still creates a gain, just a smaller one than the other half of the year. Of course many active traders still want an edge and Fidelity has found that you can use certain strategies to effectively market time the May through October period. But there’s a catch.