My Insurance Insider and Finance Blog

Image via WikipediaInvestor that’s been around for a while has heard the popular saying: “Sell in May, but remember to come back in September”. The basic logic behind this theory of selling your stocks and coming back to the market is simple. It’s been seen that in the summer months the stock markets normally don’t perform as compared to other months of the year.

A probable explanation, that is often heard is that investors tend to be slightly less positive about the economic developments around the summertime than they were at the start of the year.This seasonal phenomenon that occurs in share market really surprises some investors. You can find plenty of theoretical evidences in support of this theory as shown in various studies on the Sell in May principle.

Most of these studies were completed keeping in mind the performance of US markets. And the theory seems to hold true. From the year 1950 and onwards, stock performance was significantly lower around this period than during the rest of the year. Interestingly the Sell in May effect is not limited to US markets only. Apparently it was found in over 30 different countries or in other words, stock market returns were significantly lower during the summer months. The effect not only found in nearly every country, it is indeed a recurring phenomenon.

If you were to do some research on your own you would find that the average stock market return during the months of May through August are indeed quite a bit lower than in the period of September through April. Whereas volatility, and the related risk, is also lower in the summer. Therefore higher returns during the winter months can simply be considered as compensation for the higher risk.

Applying this simple method you might conclude that selling your stocks in May and buying in September is indeed a smart move. Of course there is no guarantee that this phenomenon will continue to occur in the future. However there are some other factors that you might want to take into consideration before you close all you positions. First of all, overall returns in the summer are still higher than the interest rate you will get in a savings account. Of course if you decide to sell and buy back later you also have to take into account the fees or brokerage for your transactions.

If you were to sell and park your money temporarily in a risk free investment like a savings account, you will have to pay a small percentage in transaction fees. You will end up losing your money if the stock has appreciated slightly. The only winner in this case is your broker. If the stock took a dive during your leave you could make a nice profit, but that doesn’t always happen.

Another important factor that should not to be forgotten are dividends. Dividends are often paid out from May until August. When a stock goes ex-dividend this also causes a slight drop in stock price. This factor is partly responsible for the lower returns in the summer when looking simply at the price of stocks. However if you own the stock you will receive the dividends and therefore your true return during the summer months will be higher than what is earn by the movement of the stock. Taking this into account can make selling in May into an even less profitable strategy.

Conclusively the Sell in May effect does occur in most financial markets. Stock market performance has proven over the years to be significantly higher during the winter months. However the summer months still show positive returns and are less volatile and thus less risky than the rest of the year. Then of course there are transaction fees that lower your results. The more transactions you make, the larger the amount that is deducted from your returns. And last but not least the months of May until August are often used for paying out dividends. A factor that is often overlooked when comparing stock market returns over different periods.

Taking all these facts into consideration will at least help you gain some perspective on that simple piece of stock market wisdom. As a matter of fact you might just prefer to hold on to your portfolio during the summer. In many cases this will turn out to be the wiser investment decision. After all, Warren Buffet doesn’t sell all his stocks in May. So why should you?