(MoneyWatch) One of the more persistent myths about investing is the "sell in may" strategy. The idea is simple: Stocks perform better during November through April than May through October, so you should sell your stocks at the beginning of May and buy them back at the beginning of November.
However, investment results this year showed yet again why that's a bad strategy.
On April 30, 2012, the Standard & Poor's 500 Index closed at 1,397 (adjusted for dividends and splits). On Oct. 31, it closed at 1,412 for a gain of 1.1 percent. In the four years since the financial crash of 2008, this is the third when the S&P 500 produced positive returns for the period, with an average gain of 3.7 percent (The exception was 2011, when the index registered a loss of 7.1 percent.) By comparison, over the same period putting your money into one-month Treasuries would have paid 0.04 percent.
Earlier this year, my colleague and co-author Kevin Grogan took a look at the historical record of the sell-in-May strategy. He created two portfolios:
- One buys the S&P 500 on Jan. 1, 1926, and holds that position.
- One buys the S&P 500 on Jan. 1, 1926, and holds that position through April 30, 1926. On May 1, we swap the S&P 500 with 30-day U.S. Treasury bills and remain in T-bills until Nov. 1. Then we trade back into the S&P 500. This process is repeated every May and November, ultimately ending with data March 2012.
The results tell the story. If you had followed this strategy, you would have been worse off than if you just held stocks. The "sell in May and go away" portfolio produced an annualized return of 8.34 percent, compared to simply holding the S&P 500, which produced an annualized return of 9.90 percent.
Image courtesy of Flickr user 401(K) 2012