Unpacking the origins, meaning, and relevance of ‘Sell in May and Go Away’
I’m sure you’ve all heard the old adage 'Sell in May and Go Away,' but you may not know its origins or current relevance.
Let’s start with the history of 'Sell in May.' The saying originated in the late 18th century within the London financial markets as 'Sell in May and Go Away, come back St. Leger’s Day.’ Essentially, wealthy bankers and aristocrats would realize their gains for the year and take off to their summer homes to enjoy some much-needed time off, before returning to the market after the 3rd leg of the British triple crown the St. Leger’s Stakes.
How is this relevant today?
The saying remains relevant, as U.S. financial markets have actually adopted this trend, with some investors selling around Memorial Day and re-entering the markets after Labor Day.
The seasonality of the U.S economy is thought to play a major role in this investment strategy. During the months of peak consumerism, Nov-Apr, the markets generally have outperformed their counterparts in the summer months. This is thought to be attributed to year-end bonuses, Christmas spending, and Q4 pushes for U.S corporations also trickling into Q1.
The period between May-Oct is generally associated with summer vacations, international spending, and a more inactive investor as we embrace our inner 18th century broker. At the same time, the markets may experience some disruptions related to upcoming election season.
Such abnormal returns have not always occurred, and as markets have advanced, strategies like these have generally lost their appeal.
How should this effect your portfolio?
While strategies like ‘Sell in May’ may seem trivial, the underlying purpose of the strategy still holds true. Just like investors in the past, investors today can use periods after strong performance in the market as an opportunity to capture some gains and rebalance to be sure they remain in line with their personal investment strategy.
Why rebalance?
During periods of strong performance, such as we’ve seen in 2023 and year-to-date 2024, your portfolio may contain assets that have grown disproportionately to your desired investment profile. In the last year the S&P 500 has returned over 26% to investors largely led by the ‘Magnificent Seven’, ‘Fab Five’, and most importantly, Nvidia. More importantly the market has lacked breadth, meaning that most of this return can be attributed to just a handful of companies.
Why is this important?
Most of our major U.S. indexes are value-weighted meaning that as the stock grows in value (Market Cap), it will then be attributed more weight within that index. In recent years, this has taken the market by storm as we have seen the ‘Fab Five’ (Nvidia, Microsoft, Amazon, Meta, and Google) and Apple grow to account for over 30% of the S&P 500.
This means the same thing that is happening to the S&P 500 may also be happening to your portfolio. Periods of strong performance can lead an investor who desires an 80% stock portfolio to drift upwards to 85% stock effecting their long-term profile.
How can I rebalance?
Use discussion like ‘Sell in May’ as an opportunity to evaluate your investment positioning. Being aware and consistent with your rebalancing strategy will pay dividends on the road to reaching your long-term financial goals.
Rebalancing can be achieved through various methods. However, it's important to maintain consistency to mitigate potential timing risks.
1) Time Based Rebalancing
Investors can set dates quarterly, semi-annually, or annually that fit their personal plan. Setting these dates will allow investors to plan periods in which they wish to re-evaluate their standing and adjust back to their desired allocations.
2) Percentage Change Rebalancing
This leaves timing out of the equation and gives investors a structured approach to rebalancing. Percentage change rebalancing refers to an investor setting specific guidelines on how far a particular asset can drift from its desired allocation before a rebalance occurs.
3) Hybrid
A hybrid strategy combines the two approaches. This allows investors to set dates to evaluate their investments, and have a bit more flexibility with their rebalancing. For example, the semi-annual review date may take place, but an investor with a 5% overweight tolerance may not need to rebalance if nothing has neared or breached that threshold.
Key Takeaways
Given the strong performance we have seen in the market this past year, it may be time to implement a rebalancing strategy or evaluate your portfolio’s current standing. Ensuring that your portfolio remains on track with your desired risk exposure is key to a successful long-term plan.
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GuidePoint Financial Planning - A Reston Virginia Financial Advisor
All material above is for educational purposes only and is no way a recommendation to buy or sell investment securities. You should always review investment changes with qualified professionals. The data referenced is very short-term in nature and is used for educational means.
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