By Bernard Condon
NEW YORK — It's simple to understand, and has a nice ring to it. It's made some investors look like geniuses recently. Say it enough and you might even believe it.
Too bad "Sell in May and go away" doesn't work.
The idea behind the popular investing strategy is that you can make more money in stocks by avoiding the summer and early fall when prices tend to languish. Better to sell your holdings April 30 before they flatline, then buy them back November 1 before they rise.
The "Sell in May" folks are up big this past year, assuming the market doesn't crash Monday, April 30, when the high returns will supposedly end. Trading stocks this way has allowed them to ride a 16 percent gain in the past six months while avoiding the 7 percent loss that the "buy and hold" fools had to suffer the previous six.
Whether the strategy will produce big profits again this year is a matter of heated debate. Some money managers point out that "Sell in May" doesn't work in the last year of president's term when he's trying to stimulate the economy to get re-elected. Others argue that it doesn't work when the Federal Reserve is pumping money into markets like it's done recently.
One of the biggest fans of the strategy, Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac, thinks the strategy will succeed again, and that you should sell. "I suspect we're not going to gain a lot of ground between now and the presidential election," he said.
The math is compelling, at least if you look at the averages. Since 1926, the S&P 500 rose an average 4.3 percent in the six months of May through October versus 7.1 percent in November through April.
But "Sell in May" has a lot of holes in it.
For starters, note that stocks still rose nicely in those warmer months. For the strategy to work, you need to find an alternative for your money that yields more while you're out of stocks. And this alternative needs to be safe — 30-day Treasury bills, for instance — so you're guaranteed it'll all be there in the fall when you have to buy back your stock.
Larry Swedroe, head of research at Buckingham Asset Management, ran the numbers a few years ago using 30-day Treasurys during the off months, and says the strategy is bunk.
He looked at returns through 2007 from six start dates since 1950. "Sell in May" beat "buy and hold" if you started investing in 1960, 1970 and 2000, but not if you started in 1950, 1980 or 1990.
"It's pure randomness," Swedroe said. "How would you ever know when to start?"
Then there is the problem with using averages to say anything meaningful about stocks. If you know the average temperature for a month stretching back decades, you can pretty much guess how hot or cold that month will be this year.