Sell in May and Go Away?
Sell in May and go away? Catchy tune. Should you pay attention to this Wall Street “strategy”? Does it make sense to take six months off every year from your investment strategy?
A 35-year history of the Vanguard S&P 500 Index fund shows some interesting results. An investment on May 1, 1981 generated an average annual return of 10.84%. The returns jumped to 11.20% per year by waiting until November 1, 1981 to purchase this fund. The spread is .36%.
Let’s say your investment portfolio is worth $1,000,000 and it generates 2%, or $20,000, per year in income. If you sell in May and buy in November, you’re giving up six months of income. You’re leaving $10,000 on the table or 1% of your account value.
Your portfolio has $300,000 in unrealized gains. When you sell your stock the gains become realized and you have to pay a capital gains tax. A capital gains tax rates of 20% applied to your $300,000 gain will trigger a tax of $60,000.
Flanked by the loss of income and your capital gains tax you have “lost” 7% of your account value.
Between 1950 and 2015 the month of May has returned .13% to investors. June lost -.10%. July gained .84%. August lost -.27%. September lost -.68%. October gained .80%. A $1 million investment on May 1st would be worth $1,007,130 at the end of October.
The buy and hold strategy for May to November generated a gain of $7,130. In addition, you received $10,000 in income for a total return of $17,130. This compares favorably to losing $70,000 because of something that “May” happen.
Let your stocks run. If the market drops, use it as an opportunity to buy quality companies to get ready for the November launch.
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February. ~ Mark Twain.
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com