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Thinking of cutting back on your stock investments because you're worried that the market will fall? Want to use some of your gains to buy a new car? Well, it may be the perfect time to take some money off the table. Why? Because history has shown that May
Look at the numbers. From 1929 through the end of 2014, Standard & Poor's 500-stock index returned an average of 7.1% from November through April but just 3.9% from May through October, according to
What's more, the sell-in-May indicator has been getting stronger in recent decades. In the 1930s and 1940s, the summer months, on average, were more profitable for stock investors than the winter months. But in every decade since then, the November-April period has been stronger than the May-October period. In the 1950s, winter topped summer by an average of 4 percentage points per year. In the 1960s, the margin was 6.5 percentage points per year. In the 1970s, it was 9.5 percentage points, and in the 1980s, winter won by an average of 3.9 percentage points. In the 1990s, the margin was 7.1 percentage points, and in the 2000s, it was 2.6 percentage points.
The current decade is far from over, but through 2014, winter is ahead by an average of 10 percentage points per year. That includes 2013 and 2014, during which it was more fruitful to own stocks in summer than in winter.
The chief expert today on the sell-in-May indicator is
Pooling all their data, Jacobsen found that stocks averaged 6.9% gains in November-April, compared with 2.4% for May-October. The method even worked in the southern hemisphere, where November-April is summer--though the tendency of stocks to do best in November-April was strongest in
Although Jacobsen is the leading proponent of sell-in-May, the strategy has been around for at least 80 years. Jacobsen found a reference to the strategy in a 1935
Should you employ the strategy? That gets complicated. Jacobsen has used it himself for more than 20 years--and says he's done very well with it.
Probably my biggest concern is that no one has advanced a convincing theory as to why stocks have done so much better in the winter months. The most credible explanation is that investors take vacations in the summer--and spend less time investing or trading. "Vacations are the most likely explanation," Jacobsen says. That would also support the fact that the strategy works best in affluent countries, where people are more likely to be able to afford vacations.
Another problem is whether it's a strategy many investors could actually stick with. A bad year or two at the beginning, and most would probably throw in the towel. It's emotionally hard to stay in cash for six months if stocks are rising.
Besides, stocks have tended to go up even in most May-October periods--albeit not as much as during the winter months. Jacobsen counters that the returns you get in stocks in the summer months are often lower than what you could get in short-term bonds, which are much less risky than stocks.
My bottom line: If you're convinced, cut your stock allocation by maybe 10 percentage points on
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