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Brooke Thackray, research analyst, Horizons ETFs (Canada) Inc.

PIERRE GAUTREAU/Handout

During the next few weeks, you’re likely to read plenty of experts’ insights on the “sell in May and go away” investing strategy. And more often than not, these experts are likely to advise not to sell off stocks this month and reinvest the assets at the end of October. However, data show that over the longer term, staying out of the stock market during this six-month period is a more profitable strategy than not.

“Sell in May and go away” is based upon the premise that, historically, stock markets have performed poorly in the May-October period. Some pundits often say that “this time it’s different” and come up with reasons to stay invested during this time. Others focus incorrectly on the fact the stock market has been positive in most years during this period.

Yet, from 1950 through 2018, the S&P 500 index has produced a geometric mean loss of 0.2 per cent from May 6 to Oct. 27, the “unfavourable period.” This compares to a geometric mean gain of 7.9 per cent for those who invested only in the other six months of the year.

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For example, if an investor had started with $10,000 in 1950 and invested at the end of the day on May 5 (to be invested for May 6), exited the S&P 500 index on Oct. 27, reinvested the proceeds the next May 5 and followed the process up until 2018, the investor would have lost $1,410 of the $10,000. In comparison, if an investor had invested $10,000 on Oct. 27, exited the S&P 500 index on May 5, reinvested the proceeds the next Oct. 27 and similarly stuck with the process up until 2018, the investor would have gained $1.7-million.

Many pundits point to the fact the S&P 500 index has been positive 63 per cent of the time in the six-month unfavourable period since 1950 as a reason not to sell in May. Their rationale: Why exit the stock market if it’s positive for most of this time? Rather, investors should always ask themselves how much risk they’re taking. Staying invested in the stock market for a six-month period when the average expectation is a small loss or small gain may not be the best risk/reward investment.

For those making asset-allocation decisions in a portfolio, one of the big fears of being out of the stock market is if it moves substantially higher. For most investors, this can be particularly stressful as re-entering the stock market at higher prices is difficult to justify. There always is a risk in a move to hold part of a portfolio in cash. Historically, the risk of missing out on large returns in the stock market have been much smaller in the six-month unfavourable period compared with the other six months of the year.

In fact, the S&P 500 index has produced a gain of 10 per cent or more only eight times in the six-month unfavourable period since 1950. And all eight times have been in periods during which the economy has been in transition from recessionary conditions to rapid economic growth – not the current economic profile. In comparison, the S&P 500 index has risen by 10 per cent 28 times from Oct. 28 to May 5 since 1950. Thus, if there is a time of year during which the risk of the stock market producing large gains is small, it’s the six-month unfavourable period.

The best way to think of “sell in May” is not a binary decision to be either all in or out of the stock market. Most investors are “buy and hold” investors, and moving to 100 per cent cash could provide a lot of angst and lead to emotional decisions of making exceptions and poor timing. Furthermore, there are other considerations, such as tax and income implications, and that some investments tend to perform well at different points in the six-month unfavourable period, including biotechnology, utilities, gold, consumer staples, fixed income and others.

So, perhaps the best way to think of the “sell in May and go away” strategy is to look at the six-month unfavourable period as a time to decrease risk by increasing cash levels and investing in sectors of the stock and fixed-income markets that tend to perform well during this time of the year.

Brooke Thackray is research analyst at Horizons ETFs (Canada) Inc. He focuses on technical analysis and seasonal investing.

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