If an investor has read or listened to the financial news over the past seven years, they have probably heard the phrase, “Sell In May and Go away”. The concept states that you should sell your equity holdings sometime in May and then repurchase them back at the end of October.  In fact, the number of articles discussing the “Sell in May and Go Away” theory of investing has grown exponentially since the Crash of 2007-2009. 

Many ideas, axioms and strategies are presented and debated in an attempt to find the “perfect model”.  However, no theory is flawless, and, therefore, many investors become frustrated when their selected methodology doesn’t work perfectly each and every year.  The reality is that few investors have the fortitude to stick with a plan or strategy for the long-term because of perpetual self-doubt or emotion.  Haven’t we all experienced naysaying or second guessing once the market goes against a portfolio strategy or market prediction even for a short period of time?

In researching market trends and tendencies, TRG feels that the “Sell at the end of May and Go Away” strategy works for the disciplined, tax deferred investor over time.  However, we apply a similar, yet different, strategy for those interested in protecting capital.  Our strategy is called Tactical Asset Allocation Portfolio (“TAAP”) and the goal is to sell at the end of May / beginning of June and place the proceeds into cash and / or fixed income.   The next step occurs at the end of September / beginning of October when we reduce the holdings of cash and fixed income by rebuilding the equity portfolio.  

In validating this strategy, we applied a  test to the S&P 500 (“SPX”) starting in 1950 and calculated the net change of the index for the May 31st-September 30th and October 1st-May 31st time periods. In our analysis, we excluded the reinvestment of dividends in order for any investor to recalculate the results on their own.   

The outcomes of executing such a strategy are stunning.  An investor that committed $100,000 to the SPX on May 31st, 1950, sold out on September 30th every year and placed the funds in a non-interest bearing account would have realized an account balance of approximately $119,000 at the end of September 2013.    (See Exhibit “A”) That amount is not adjusted for inflation!

Conversely, if that same investor only participated in the SPX from September 30th of each year beginning in 1950 and liquidated on May 31st of the following year, every year, that $100,000 investment would have turned into approximately $10,100,000 through May 7th, 2014!  (See Exhibit “B”) We ended the study on May 7th, 2014 because we haven’t completed the month of May thus far. That amount is not adjusted for inflation!

What’s amazing is that had an investor not adopted either of these options, but instead adopted a buy-and-hold mentality from May 31st, 1950 and “sold out” on May 7th, 2014, their $100,000 investment would be worth approximately $10,000,000.   (See Exhibit “C”) The rate of return was $100,000 less than what would have been realized by investing in the market for 8 months or 2/3rds of the year in the “sell in May” philosophy.

In addition, there are other striking results when you look at the 3, 5, 7 and 10 year rolling periods of time.   For investors buying on May 31st and selling on September 30th of each year beginning in 1950  26 of the 62 rolling three year periods, 26 of the 60 rolling five year periods, 30 of the 58 rolling seven year periods and 25 of the 55 rolling ten year periods generated negative annualized returns.  

However, for investors buying on September 30th and selling on May 31st of each year beginning in 1950, 10 of the 62 rolling three year periods, 5 of the 60 rolling five year periods, 1 of the 58 rolling seven year periods and 1 of the 55 rolling ten year periods realized negative annualized returns. 

In order to have a proper comparison of how each stacks up against the SPX as a whole, we calculated the rolling period averages on a May 31st to May 31st time frame beginning in 1950.  This approach captures both the May 31st-September 30th and September 30th-May 31st time periods and also reflects a “fiscal year” in order to determine if TAAP works.  Under the standard SPX,  11 of the 62 rolling three year periods, 5 of the 60 rolling five year periods, 1 of the 58 rolling seven year periods and 1 of the 55 rolling ten year periods produced negative annualized returns. 

Conclusion

While the buy-and-hold approach generally achieves the same results as the TAAP program, there is a 42%, 43%, 52% and a 45% probability of generating a negative period from May 31st-September 30th over 3, 5, 7 and 10 year rolling periods of time.  This type of negative results may encourage an investor to avoid this period because of the potential for emotional decisions during any serious drawdowns.  Therefore, for tax deferred account holders, a commitment with some or all of those assets might be worth considering.   If that is the case, you may want to contact TRG to discuss how to take advantage of the TAAP strategy for your portfolio.

Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.