Sell In May and Go Away!
There’s a saying in the financial industry, “sell in May and go away!” This refers to a phenomenon that the period between May and October has historically led to inferior returns relative to the period between November and April. While this may hold some merit, following this mentality to the tee would not have been beneficial.
Between May of 1928 and April 2024, the average return for the periods May through October were +2.16%, meanwhile, the average return for the periods November through April were +5.30%, as measured by the S&P 500. Looking at these two return figures it’s pretty clear that you could have earned more than double the return while only staying invested for the better six months of the year. It’s worthy to note that in the grand scheme of things you would have ultimately missed out on additional returns because, collectively, the periods May through October, also yielded an overall positive return.
Comparing these two time periods against each other we can see that approximately 59% of the time, the November to April period, yielded superior returns, relative to the preceding May to October period. This only means that 41% of the time the exact opposite was true.
Additionally, sitting uninvested between May and October would have led to missing 8 out of the 10 best months for the S&P 500.
Aug 1932 +40%
Jul 1932 +36.4%
Apr 1933 +32.2%
Jun 1938 +24.7%
May 1933 +23.1%
Oct 1974 +16.4%
Apr 1938 +15.3%
Sep 1939 +14.3%
Jun 1931 +13.8%
Jun 1933 +13.5%
Granted the majority of these “best months” happened to take place nearly a century ago. Looking at more recent results, here are 3 months from the current century that fall into the top 25 months for the S&P 500.
Apr 2020 +12.7%
Oct 2011 +10.8%
Nov 2020 +10.8%
You’ll notice that 1 of these months falls within the so called “slower” period of the market. Missing even one great month can cost you dearly in the long run.
Clearly, the sell in May and go away market adage should not be followed. But what it can tell us is that we should expect the market, on average, to slow down during the summer and early fall. And be more volatile in the winter and early spring.
So why am I talking about this today.
If any of you have been following the results of the 3DGR portfolio on a daily basis, as I have. You may be aware that the portfolio is grossly underperforming the S&P 500 this month.
While the portfolio did have a “few” good days earlier this month, and even sat ahead of the S&P on occasion, things quickly turned sour. A few bad earnings reports, a few good ones that lacked investor sentiment. Call it what you will, the chosen 20 stocks have failed to perform as expected.
However, its important to remember that this strategy was developed to be held, and evaluated, based on a full year of activity. A few bad days and a bad start don’t necessarily mean its time to throw in the towel.
I’ll have a full breakdown of the first month for you in next weeks episode.
What I can share with you today is a deeper insight into the backtested model. I decided to look at how each chosen portfolio in the backtest performed on a monthly basis. And just as I expected, there were prolonged periods of underperformance, countless months of trailing the S&P 500’s return, and yet all final returns led to outperformance. The point is we have to be patient.
Patience truly is a difficult quality to master. Looking at your portfolio underperform day after day can be daunting. When will it end? Will I recover the missed gains? What have I gotten myself into? All fair questions to ask. It’s one thing to look at long term statistics that suggest a strategy will work, and quite another to live through it one day at a time.
I’m holding long and staying strong. I have no idea how the 3DGR portfolio will perform in the next 11 months, but I’ve committed to seeing this test through.