asset management

Shift or Stick? Should we really ‘sell in May’?

jsanchezalmaraz

18/05/2017

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Back in 2015, Business Insider published an interesting article that used the well-known investment (or disinvestment) phrase ‘Sell in May and go away’.

This expression advocates an investment strategy based on the period of November to April generally having better market growth than May to October. Hence, selling stocks in May and ‘going away’ until the market is less volatile – usually in the following November.

Although it’s true that data from the S&P 500 index shows an increase of 11.39% in the year 2014 with a May-September contribution of just 4.69%, I found it quite surprising that not being invested for so many months could bring any value at all.

In addition, we’re aware of the models’ adaptability to the analysed intervals, so before it’s possible to validate other periods, we must repeat the experiment in a broader way so as to review its consistency.

For this test, we will take the price series of the S&P 500 from 1966 at 5-year intervals until 2015. We’ll then show the difference of annualised profitability between the portfolio that disinvested in the period from May to September, compared to remaining within the index.

Annualised return

Hmm, it seems that in the two decades preceding 1995, it would have been tough to justify this approach.

We can normalize this spread by multiplying the number of previous years by the differences of annualised profitability, measured at the end of May 2015 for each of the portfolios created year after year. In doing so, we can see that to beat an index, it’s not convenient to take such a long holiday.

While in the last 20 years, the pause between May and October may have worked, the last five years (we can already include 2016) has turned the scene around, and the phrase is no longer a cliché.

Starting point dependence

Certainly, in May 2017, the S&P 500 rose by 8.05%. From June to September, will the bearish hour arrive? Will we face another year where the exposure benefits us?

Who knows. The only thing that seems clear is that in this case, following the advice of an old saying does not give us money…

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