Is Sell In May And Go Away A Good Advice?

As an investor you must have come across this advice, “Sell in May and go away.”  Is this sell in May and go away advice good? Sell in May advice is based on the fact the equity markets are usually more volatile between the months of May and October. Historically stock market has under performed between the months of May and October and over performed between the months of November and April. So it is a good idea to sell your stock portfolio in May and reinvest in November thus avoiding the stock market volatility for a few months. But you should take care of the transaction costs and the tax implications of getting in and out of the stock market.

Fuerst, along with fellow University of Miami professors Sandro Andrade and Vidhi Chhaochharia, reported in a 2012 paper that stock returns were 10 percent higher in the November-to-April half of the year than in the May-to-October period.

Importantly, this result isn’t solely based on historical American stock returns. In that case, the academics could be making the all-too-common mistake of “proving” an adage by using the same evidence that was used to bring about that line of thinking.

Rather, they examined returns across 37 markets within a 14-year time period that was not tested in a prior paper that also found support for the sell in May effect.

Sometime these type of sayings become self fulfilling prophecies. Markets do just what the people think. If the people think buy, market shows bullish sentiment. If the people think sell, market shows bearish sentiment. In economics we say markets work on the principle of expectations. If the people think that prices will go up, you will see the prices going up. If the investors think that FED is going to increase the rate, price will rise and this information will be incorporated into price long before FED actually increases the rate.

With all this in mind as the calendar keeps turning, should you “sell in May and go away,” as the oft-cited market adage suggests? Not necessarily, as we’ll demonstrate using historical data. If you are a long-term investor, there are more important factors that should influence your investment decisions—including your individual investing objectives, risk constraints, and tax circumstances. The same can be said for active investors, and there may be more appealing strategies—with sector rotation among those to consider.

All good investors are trend followers. It doesn’t matter what month it is as long as the trend is going in the direction that you want, you should not jump out. You should read this book: ” Trend Following, Learn to Make Millions In Up or Down Markets”.

Always make your our analysis before you make your decision to Sell in May and Go Away.