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Did You “Sell in May”? The Better Month May Be December

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SELL IN MAY AND GO AWAY

Not a good idea …

Every serious activity has time-honored rules requiring adherence by those involved. Journalists have to make their deadlines or collapse in the attempt. Doctors have to be ‘right’ 100% of the time. Teachers have to stay calm, no matter what their students do or say.

And investors sometimes confront the ’Sell in May and Go away …’ rule.

Many believe that this rule has its roots in the agricultural sector where an individual would pull out their capital over the Summer months to pay for production and then return it to the market in the Fall as crops were harvested.

The ‘Sell in May …’ strategy was also based on the premise that the six Summer months typically registered lower gains than the six Winter months, according to Investopedia.

However, as with so many old time rules, this one is being called into question.

Basing big-dollar investment decisions on a rhyming cliché may not be the soundest investment strategy and this one has been a target of several studies.

Analysts at Merrill Lynch, as quoted in Investopedia, say that May has registered a stock market advance 57% of the time, and that the average decline is a mere .06%

Merrill Lynch also studied data going back to 1928 and says that the June-August period is typically the second best in the year with gains 63% of the time. They also say that a weak May usually means what they term ‘a more robust’ June-August period.

In a slight anomaly, the ‘Sell in May…’ strategy can work in the third year of a U.S. presidential term, but not in other years, according to Mark Hulbert in his Marketwatch column. That being the case we can re-visit this discussion in 2019.

Meanwhile, Argus Research points out that selling in May can mean ‘dead money’ over the Summer, as the proceeds of the sale languish for months in the investment account. Nowadays it can also mean missing share appreciation if a company comes out with a good quarterly report during this period.

Argus also points out that while Summertime capital gains have often been low historically, the current bull market does not fit that pattern. During the years from 2009 to 2017, the June through September period has averaged a capital gain of 3.3%. Most of the ’bull summers’ have been profitable except for 2011 (down 16%) and 2015 (down 6%), but during the past two years’ growth has been up an average of 4%.

To a point, this is part of the larger picture that has seen questioning of other old time rules such as the need to reduce or eliminate equity investments at the age of 65. With some specific exceptions, we no longer suggest that individuals get out of equities completely at that age.

Both rules are rooted in earlier conventional wisdom formed when the markets operated very differently than they do now and do not necessarily make for good investing sense in the current investment markets, suggests Jay Nash, Senior Vice President and Portfolio Manager of the London Office of National Bank Financial.

Moreover, market weakness in the summer months has been less pronounced in recent years than earlier, he recalls.

Selling in May on the basis of this rule instead of on the basis of solid market considerations can mean serious opportunity costs including dividends and greater share appreciation. Implicit in the ‘sell in May’ concept is a hope that markets will fall and that the investor can buy back in at cheaper stock prices.

As well as being careful in May, investors should not let seasonal considerations drive investment decisions at any time, Nash argues. A coherent portfolio strategy should define investments — and investment opportunities — to be explored.

Currently investors looking for momentum cannot ignore the energy sector and within that Suncor (SU) is a strong name, he says. At the same time, dividend names have been under pressure and creating a portfolio with a high yield is not difficult and BCE (BCE) and Enbridge (ENB) could play a part in this strategy. Those looking for deep value names could consider General Electric (GE) or IBM (IBM). These strategies are much more useful than the ‘Sell in May …’ concept.

Nash says that whether we choose an asset allocation model or a dividend strategy or the deep value approach we must understand and accept that no one strategy will be 100% right all the time. Investment success comes from choosing a strategy, sticking to it and resisting the temptation to chase a short-term trend.

Related: Before You Fall in Love with Online Trading

Realistically, almost any rule can be brought into question. That reinforces the idea that a major challenge for modern investors and their advisors is to decide which investment “rules” are right for them and which rules they can comfortably stick with consistently.

Still, any rule needs to be examined or re-examined when the underlying rationale for the rule comes into question, Nash explains. In another classic example, many lived by the phrase ‘Don’t sell the Bell’, referring to retaining shares in BCE Inc. Many investors who followed that rule reinvested BCE dividends and would never sell their shares. They valued the positive management and overall stability of BCE and staked their savings on those features.

By comparison the same strategy failed miserably when Nortel was spun out of BCE. Nortel had no dividend, was never profitable and filed for bankruptcy protection in January 2009. Generally, Nortel lacked all of the positives that re-assured investors about BCE. Nortel investors had initially achieved great share price appreciation and then watched it all disappear. Some investors, sadly, never made the shift from the ‘Don’t sell the Bell’ rule to the realities at Nortel.

Nothing is absolutely correct at all times, of course, but in some cases December would be a better month to sell than May. ’Santa rallies’ do not materialize every year but Fall is historically a strong time in the markets and the end of it can be a good time for selling, Nash explains.

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