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Sell in May? Hardly.

Sell In May? Hardly.

Even with its current army of algorithm-toting day traders and data heads, Wall Street, in general, is a superstitious bunch.

There’s plenty of superstitions flowing around and even programs designed to gauge social media activity on stock returns. (Yes, that is actually a real thing).

Much of that folk-lore and superstition has been boiled down into easy digestible concepts or phrases. Ideas like Santa Claus Rallies or the January Effect are commonplace among sophisticated investing circles as well as mom-and-pop investors.

One of the most famous lines is Sell in May & Go Away.

The problem is many of these adages aren’t necessarily true nor offer sound advice. That certainly is the case for “Sell in May.” For investors following these catchphrases, there could be serious consequences.

All About Horse Racing

The original British saying: “Sell in May and go away and come on back on St. Leger’s Day,” has to do with horse racing. The St. Leger’s Stakes is the long leg of the British Triple Crown thoroughbred horse racing. It happens in mid-September. The idea is that a majority of British stockholders at the time — i.e. the very wealthy — were taking summer vacations and not playing in the stock market.

Similarly, in the U.S., many brokers take their vacations during this time and are out playing in the Hamptons rather than watching the tape tick by.

There is a more sound reasoning behind the difference in the returns between the two halves of the year besides brokers hitting up the Modern Snack Bar on the North Fork. The vast bulk of the market’s return has come during the front half of the year – thanks to mega-capital inflows. The beginning half of the year has many pension funds, endowments and other institutional investors adding to their holdings. You get an inflow of tax refunds and IRA money before April — bonuses begin hitting people’s pockets — which doesn’t happen after May.

With no one watching the store or chucking mega-money into stocks, the market has generally gone sideways from May to October. According to the Stock Trader’s Almanac, the markets have only produced a meager 0.3% average annual return from May to October since 1950.

May Really Isn’t That Bad

Given just how poor this May has been, the idea at first blush looks like it has merit. But investors may want to rethink “Sell in May.” The reason has to do with why you signed-up for this newsletter in the first place – dividends.

What those return figures don’t include is the reinvestment of dividends. Remember, that the time period we are supposed to be selling and holding cash includes two dividend payments.

Since 1980, the broad S&P 500 would have returned 11.5% annualized when including dividends that were reinvested and had you followed a “Sell in May” strategy and cashed-in from May through the end of October, your total average return would be only 8.5%. That 3% difference is significant and means having a portfolio worth nearly $50,600 vs. $16,500 on a $1,000 investment.

What’s more is this example doesn’t include any sort of transaction costs for selling or rebuying the index. Brokerage fees and taxes can take a huge bite out of returns.

Ignore the “Sell In May” Noise

In the end, if you are sticking to your plan of buying quality dividend stocks and reinvesting those payouts into more shares, then “Sell in May” is just bunk. The dividend reinvested returns are the proof. There’s no reason to flee to cash or bonds. Just stay the course.

In fact, given that the market moves sideways during this time – on regular return basis – now would be the best time to do some buying of quality stocks. With everyone partying in the Hamptons, you’ll have the first picks.