You may already be familiar with the catchy bit of investment advice to “sell in May and go away.”
Historically, the first day of May kicks off a seasonally weak period for stock prices that lasts through October.
That also means that most of the gains in the U.S. stock market come from the period between the start of November and the end of April.
This implies a shockingly simple strategy:
Invest in an index fund during November through April and then switch into money market funds until the next November, and you’ll be much better off than an investor who stays fully invested throughout the year.
In fact, I’m surprised there isn’t a “smart beta” exchange-traded fund (ETF) that puts this strategy into practice.
I’m guessing that’s because the “sell in May and go away” strategy is just too“shockingly simple.”
‘Sell in May and Go Away:’ A Remarkably Persistent Effect
Along with the “small-cap effect” — the basis of my recent $25,000 bet against Warren Buffett— the “sell in May and go away” market anomaly is one of the few that has stood the test of time.
A portfolio invested in the S&P 500 index starting with $10,000 in 1950 grew to $1,138,103 by May 5, 2012, simply by buying the index each year on Oct. 28 and selling the index on May 5.
In contrast, the same portfolio’s value actually decreased to $6,602 when an investor with $10,000 purchased the index each year on May 6 and sold the index on Oct. 27.
Now, that’s a strategy with a longer track record than Warren Buffett himself.
And according to my back of the envelope calculations, it also outperforms the S&P 500 by over 2% a year.
And recent market history is a terrific highlight reel of poor market performance in the summer months.
During the financial crisis of 2008, the S&P 500 lost 27.3% during the May through October period.
Two years later, the “Flash Crash” of May, 2010 wiped almost 1,000 points off of the Dow in a few minutes’ time.
August 2011 saw a 20% correction in the S&P 500 that threatened to be a reprise of 2008.
No wonder many investors think it’s a good idea to sit on the sidelines during this turbulent time of the year.
Still, it’s hard to get your head around why this anomaly persists.
Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.