Wall Street loves catchy phrases. From "Santa Claus rallies" to "June swoons," not to mention the countless acronyms that have been invented over the past decade. One of the most popular phrases is "sell in May and go away" -- it's also one of the most deadly. While it's correct to say that the third quarter of the year tends to have the greatest volatility and lowest returns, over time, staying invested is the smartest approach.
Since 1980, the S&P 500 has had a total cumulative return, assuming the reinvestment of dividends, of 4,958%, or roughly 11.5% annualized. By way of comparison, the same $1,000 invested on 1/1/80 but moving assets to cash on May 1 of each year and then reentering the market on November 1, your annualized return would have been about 8.5%. That 3% annual difference, compounded means that your total return would be less than one-third of the simple buy and hold with dividend reinvestments. Instead of your $1,000 investment growing to $50,583, it would have grown to $16,755. The clear catalyst behind the significant outperformance is the reinvestment of dividends, as well as the fact that the month of May has historically been kind to investors.
Some important facts to consider:
1. since 1980, May has brought positive returns (S&P 500) nearly 80% of the time.
2. Dividend reinvestment account for nearly 40% of the total return of the S&P 500.
3. While market returns are best for the six months between November 1 and April 30, it's far from a perfect record, so the risks of missing significant returns as a result of timing are there.
So what causes the performance divergence for the different periods of time? One explanation could be seasonal. Markets are forward-looking mechanisms, and while the first quarter of each years tends to have the weakest corporate earnings growth as well as GDP data, secondly, the summer does tend to bring lower trading volumes and a bit of lethargy, hence increased volatility and lower overall returns.
Conversely, the back-to-school season and holiday season tend to coincide with the greatest amount of economic activity, especially for a consumer-spending-driven economy like the U.S.'s. Most importantly, investors must recognize that there is always a "reason" to sell and go away, and that so far throughout history, that "reason" has rarely worked out in the short-term and certainly has never worked out in the long-term.
Stay invested, and if you're lucky enough to have some extra cash to invest, now is as good at time as any.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.