Why 'Sell in May' doesn't work for investors

April 29, 2012 RSS Feed Print

You'd also be doing Uncle Sam a favor. Your profits from selling stocks in May are considered short-term gains. And so instead of paying a capital gains tax of 15 percent on your winnings, you'll pay marginal income tax rates as high as 35 percent. And you get to do that again next year and all the rest of the years.

Which makes you wonder whether "Sell in May" would yield even a penny more after you'd paid your fees and taxes. In the two out of three periods when Swedroe says "Sell in May" worked, the returns were higher than "buy and hold" by less than half a percentage point.

For all the wasted money and newsprint, you can blame the British. Some London traders believed they could make more money if they sold their holdings in May, then bought them back in September, when a famous horse race was run on "St. Leger's Day." The original saying was "Sell in May and go away, come back on St. Leger's Day" and dates back at least to the 1930s, when England still ruled India.

The empire is gone, but the saying has somehow survived despite time and logic.

The fact is, it isn't clear why stocks should rise more in colder months than in warmer ones. Some say it's because traders are largely on vacation in summer so there are fewer buyers pushing stocks up. But there are also fewer sellers, too. Plus, traders return in September and October while the markets are supposedly still lagging, so that explanation doesn't make sense.

Others have pointed to the fact that people tend to get depressed as the days get shorter in the fall. That leads them to sell, a perfect set up for a rally in the winter months. But the days also get shorter in November and December yet stocks are supposedly rising then, too.

If you're still intent on following "Sell in May," why not try variations on the theme?

Fisher, the "Debunkery" author, says slicing up the year differently yields "winning" strategies that offer that same magic mix of compelling and misleading. For instance, the S&P 500 over the past 85 years has gained an average 7.2 percent in March through August versus 4.4 percent in September through February. He wonders why people aren't saying "Sell in September and go away."

The answer: It doesn't rhyme.