Why 'Sell in May' might be the worst thing you’ve done this month

Manulife co-chief investment strategist says buy and hold may produce better returns

Why 'Sell in May' might be the worst thing you’ve done this month
Steve Randall

The well-used investment strategy of divesting equity holdings as summer approaches in favour of cash and then buying back stocks in the fall may not be the best approach.

Rather than ‘Sell in May’ and go away, investors could see better returns using a buy and hold strategy according to strategists at Manulife Investment Management.

In an article published on the firm’s website, co-chief investment strategists Macan Nia, CFA, and Kevin Headland, CIM, reveal what they found in an analysis of returns for a portfolio that stuck to the Sell in May strategy vs. buy and hold.

Opting to convert equities into cash in May and then revisit equities in October produced returns of 5.5% over 10 years, 5.6% over 20 years, and 6.7% over 50 years.

But, had the investor bought equities without intention to sell in the short term, their portfolio would have produced returns of 10.4% over 10 years, 7.6% over 20 years, and 7.2% over 50 years.

Over shorter periods, the analysis found inconsistent performance results. While not every summer will produce positive returns, the strategists found that 80% of the May-October returns over the past 10 years were positive with a near-5% average. And as May 2023 began, Canadian, US, and international equities were all firmly positive.

“The strong rally in risk assets year-to-date, despite a slowing global economy and challenging central bank policy, has investors asking whether it may be prudent to reduce risk,” said Headland.

Investor bias

The strategist believes that investors’ behavioural biases may explain why Sell in May has become ingrained as a favoured strategy.

“The field of behavioural finance has shown that investors weigh negative returns far greater than the positive returns and are much more likely to remember negative outcomes,” he said.

And the May-October period has produced an overweight share of negative monthly returns (60% since 1950) including corrections of greater than -10%.

“Sell in May and go away has gained credibility among investors, given the number of infamous stock market declines that have occurred during the May through October period, including Black Monday in 1987, the post-Lehman Brothers crash of 2008, and the correction in August 2011 that followed the downgrade of the U.S. government debt rating,” added Headland.

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