Stocks: Sell or Stay in May?

Over the history of the stock market, the six months starting in May have underperformed. Should investors "sell in May, and go away" this year?

By Ben Steverman

The oft-repeated investing cliché is "Sell in May, and go away." So far, investors aren't taking that advice.

In the first two weeks of May, the broad Standard & Poor's 500-stock index is up about 1%, a sign that as many investors are buying as are selling this month.

The "Best Six Months"

"Sell in May, and go away" is an old English proverb, but it does have some basis in reality. In the 1980s, Yale Hirsch, founder of the Stock Trader's Almanac, crunched the numbers and put forward his "Best Six Months" strategy.

From 1950 to 2007, the market from May to October provided an average annual gain of 0.6%, enough to earn $1,021 on $10,000 in those years. But if you had invested only in the "best six months," from November to April, your average gain would have been 7.6%, netting you $531,444 over those 58 years.

Why such a difference? "That's the rhythm of the financial year," says Jeffrey A. Hirsch, who took over from his father as editor-in-chief of the almanac.

It doesn't always work. The last two "best six months" have been the worst since the 1970s, Hirsch notes.

However, as S&P Chief Investment Strategist Sam Stovall noted recently, staying out of the market from May 2008 to October 2008 would have saved investors from a 30% decline in the S&P 500. Generally, the strategy has worked two out of every three years, he says.

Coincidence or Psychology?

The strategy has plenty of skeptics. "Over the long term, I don't think it's anything other than a coincidence," says independent market strategist Doug Peta. "I don't think there's any fundamental basis for it."

There are plenty of theories on why May-through-October have been such perilous months for investors. Unfortunately, it's hard to prove any one of them is the real reason.

Hirsch says it might reflect "human nature" throughout the year. Early in the year, new money flows into the market. By summer, enthusiasm wanes as traders take vacations. For some reason, the market has been especially prone to big corrections in the fall—think 1929, 1987, and 2008. But by November and December, investors are often looking ahead hopefully to the next year, Hirsch says.

Yet as investors are often warned, past performance is no indication of future results. Is this a practical strategy for the future? Even if it is, what are the chances it could backfire in 2009?

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