If you had cashed out your stock funds on May 1 this year, you would have saved yourself a 5% loss on the S&P 500 and 8% on the Nasdaq Composite. As the old economics joke puts it, “I don’t care if it works in practice — it doesn’t work in theory!”
I’m talking about the old Wall Street saying, “Sell in May and go away.” In other words: Get out of the market for the summer.If you’d taken this adage to heart and cashed out the stock funds in your 401 and IRAs on the first day of May this year, you’re counting your blessings — and your money.
Over the years multiple finance researchers have found evidence that stock market returns have been consistently lower during the summer months. These culminated in a paper published a decade ago, and updated more recently, by finance professors Cherry Zhang and Ben Jacobsen at Massey University in New Zealand. They looked at the monthly returns of every stock market in the world for which they could find records: A total of 114 of them, including data from London starting in 1693.
Here in America, the sell-in-May rule is usually called the Halloween Effect: The general assumption is that you won’t get back into the stock market until the end of October. In Britain, where the adage supposedly began, it’s slightly different: The saying goes, “Sell in May and go away, and don’t come back till St Leger’s Day.
An investor could cash out their 401 stock funds on May 1 and resolve not to buy them back until either the end of the summer, or until the markets had fallen by 5% .
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