Sell in May?

AN OLD WALL STREET adage tells investors to “sell in May and go away.” If you’ve been around long enough to remember that phrase—and you heeded it this year—you’re probably feeling pretty smug, having sidestepped the ugly, unforgiving bear that’s lately been roaming Wall Street.

But such pearls of investment wisdom often make better cocktail chatter than they do an investment strategy, and for good reason: The advice can’t always be counted on. Then again, sometimes it can. Like this year.

“Sell in May and go away” is based on what the Stock Trader’s Almanac has called the “best six months of the year.” The data backing it up are stock returns over rolling six-month periods. Historically, the best six-month period for stocks has, on average, been from November through April.

A few months back, you’d be hard-pressed to find any talking head suggesting investors sell all of their stocks by the end of April and forget about investing again until this fall. But if you’d done so, you’d be yahooing instead of fretting about the direction of stocks. At the end of April, the Dow Jones Industrial Average closed at 32,977.21. By yesterday’s market close, the Dow was at 30,483.13, or 8% lower.

How much credit should we give to investing quips such as “sell in May”? In a nutshell, the answer is not much. Let me explain: Once upon a time, way before the beginning of this century and the advent of the internet and all that it brought with it, investing wasn’t a 24-hour, seven-day-a-week, 12-month, press “send” to place your order kind of ordeal. Instead, Wall Street was more of a gentleman’s world—and those guys liked taking the summer off. Maybe it’s no surprise not much happened to share prices during those months.

The upshot: While the “sell in May” theory is a worthy historical read, the markets are a far different place now than they were even 20 years ago, let alone 80 or 100 years back. Today, people are looking to make money all year round and there’s no longer a seasonality to investing.

But suppose you did indeed sell at the end of April. What now? There’s always been just a handful of things we can do with our savings: Leave it in cash investments, buy bonds, invest in stocks, keep it in a can buried in the backyard, or wrap it in tin foil and stash it in the freezer. Whatever our choice, or combo of choices, all require one thing—that we take risk.

The funny thing about stock market risk is that it somehow disappears from our mind when share prices are going up and up. But the minute they head south, you’d think that risk was a concept we’d never before heard about.

Now that Mr. Market has ripped off our rose-colored glasses—as he does every few years—what can we do, given current market conditions? Well, our choices are simple: We can do nothing and ride this storm out. We can take a look at the type of stocks we own, as well as our mix of stocks and bonds, and perhaps alter it by, say, rebalancing. We can add money.

Or we can take money off the table, just like the folks who sold in May and went away. Right now, that might seem like the wisest strategy. But it raises all kinds of thorny issues. Is it smart to sell when the S&P 500 is 22% below its early January all-time high? What about the tax bill that selling might trigger? How will you know when to buy back into the stock market?

My suggestion: Stick with stocks—and look at things that offer a reinvestment opportunity, such as dividend-paying stocks and mutual funds. Money can grow fast when we’re regularly investing and reinvesting. You didn’t sell in May and go away? How about sticking around—and taking steps now to ensure your stock portfolio soars when this bear market ends?

Back in the day, Dian Vujovich was a nationally syndicated mutual fund columnist, wrote a handful of books about investing and retirement, and was a luxury travel writer who won a few awards for her work. Today, she’s grateful to still be able to string a few sentences together and create a story where there once was none. Dian lives in sunny Florida and is quick to tell anyone who cares to listen that living a long life has now become obscenely expensive.

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