Will You Sell in May and Go Away?

If you look at the calendar, then you know it’s May. Mind blowing, right? 😉 With May we know that summer is upcoming, as are summer vacations for many families.

Another thing that comes with May is the hoopla around the myth of ‘Sell in May and Go Away.’ You see, the financial talking heads have likely been talking about this for several weeks already and are doing their best to convince you that you need to heed their call. There’s a slight problem though, you know with investing in the stock market you need to follow what your investment plan is and stick to it and not follow the masses.

What is Sell in May and Go Away Anyway?

The basic premise behind Sell in May and Go Away is that the stock market has likely enjoyed some sort of gain in the fall through winter months and it’s time to step away with your gains. Part of it is due in part to traders going on vacation in the summer and less activity in general, but it’s largely a myth that has been tossed around for years.

There are various theories behind whether or not Selling in May and Going Away is valid. However, what many will attest to is that any potential upside you may recognize by following it is diluted because so many others are doing it. Sounds great, doesn’t it? Joking aside, whether or not Sell in May and Go Away is valid, the last thing you want to do is follow it blindly.

What is Your Purpose to Investing?

A question I would commonly ask investors who held to Sell in May and Go Away was ‘Why are you investing?’ and ‘What are you investing for?’ The point behind asking these questions is to determine what your goals are. Are these goals requiring a long term investing focus, or are you only interested in being in the stock market for the short term?

For those who are active or short term traders it might make sense for them to look at possibly selling out of some positions…but only if that is in line with their goals. Assuming you have a longer term vision then you generally should not be concerned about short term events as you will even out in the long haul. The key behind all of this is to have a grasp on your investment plan and what you want to achieve.

What is the Cost of Following?

The obvious cost to following the Sell in May and go Away is trading commissions through your online brokerage. Not only will you incur costs for selling out of positions but also, you’ll pay when you buy back in to the stock market.

The other cost, and one that is too often overlooked in this case, is what do you do when the stock market goes up in May? Take a look at 2013 for example, the S&P had a gain in May 2013 of just over 2% and at its high was a gain of 5.6%! That is nothing to scoff at and one that I would happily take. True, there are years where the market does go down in May, but that certainly is no guarantee. If you would’ve followed the Sell in May myth in 2013 then not only would you have lost out on those gains, but you would also have had to buy in at the higher price. Running into this situation once might seem harmless, but when done on a regular basis it can have a have a measurable impact on your portfolio.

 

What are your thoughts on Sell in May and Go Away? Will you be following it this year, or staying the course?

Need help on how to trade? Check out these articles

Trading and Term Literacy, Are CFD and Forex Trades Good For Small Investors?
Money Management Tips for Better Trading
High Frequency Trading: Man vs. Machine

 

Photo courtesy of: Prayitno

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About John S

John Schmoll is the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. He's passionate about helping people learn from his mistakes so that they can enjoy the freedom that comes from living frugally.

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