Is there any truth behind the old adage: Sell in May and Go Away? The definitive answer is: Maybe and it depends. Whatever the case, clean-outs are good for portfolios just as they are for basements and attics. And you can use the ‘sell in May and go away’ wisdom as a good excuse to tackle the hard job of cleaning up after a tough winter and spring.
Each MarketFlex Portfolio gets an update from time to time. And this year I’ve combined my rebalancing and update efforts in each MarketFlex Portfolio to include the ‘sell in May’ approach as well. But why?
Throughout the month of May, I did some ‘spring cleaning’ of the investment portfolios that I manage for my Boston-area clients. After tax season and FAFSA or CSS Profile financial aid forms have been filed for clients, I typically turn my attention to analyzing each MarketFlex Portfolio to update strategies, allocations and investment holdings. This year was no different.
The goal of each MarketFlex Portfolio is to provide a globally diversified, low-cost, tax-efficient allocation that matches to a client’s Risk Number.
With the stock market struggling and showing signs of increased volatility at the end of May, I decided it was a good opportunity to ‘clean house’ and restructure the Risk Number for each portfolio.
Looking at a chart of the S&P 500 or a proxy like Vanguard’s S&P 500 Index (VOO), you would see that the market struggled through January and by mid-February was down nearly 10%. Since that bottom it climbed back more than 14% through the end of May. But the month of June has not been so kind with the ‘market’ off and giving back a bit more than 1% through June 22.
In the big scheme of things, this is all just noise and doesn’t matter. For long-term investors, the reality is that you’ll likely not be able to successfully time the market. More likely, if you’re out of the market trying to be safe, you may miss the almost inevitable rallies that follow a downdraft or correction eventually.
Seasonal Factors: Sell in May Truth?
But there are undeniable seasonal tendencies. And the summertime does exhibit a clear pattern with June, August and September being down months. According to Sumit Roy of ETF.com, the average monthly returns for the S&P 500 going back to 1950 show that May is typically weak and June, August and September are typically off.
There doesn’t seem to be any tangible reason why this pattern exists. Perhaps investors and professionals are busy with graduations, birthdays and vacations.
Regardless of the ‘truth’ of this pattern, I needed to rebalance anyway And given the potential for other near-term events to make markets skittish – like the Fed announcement on interest rates mid-June, the Brexit vote on June 23, the austerity vote in the Spanish parliament on June 30 and continued weakness in China, it was a good time to raise cash to get dry powder available to buy into the newly reconstituted MarketFlex portfolios.
And it’s not like folks are out of the market. Since early May, I’ve moved everyone back into a risk-appropriate model by using a time-tested volatility management tool: dollar-cost-averaging. This is not unlike what most folks do when they buy into their 401(k) with weekly or biweekly payroll deductions. Most everyone is about 40% to 60% reinvested in the market depending on their risk profile. And with bi-weekly or monthly dollar-cost-averaging my investment clients will be nearly 95% invested by late August and early September.
And let’s not forget that cash is an asset class as well. Most investors win by not losing. So protecting what you have is a good thing. And dry powder – or cash – gives us all a little more leeway to take advantage of opportunities when the market is ‘on sale’.
Ask any hunter. Dry powder is a good thing to have.
