Should You Take a ‘Summer Vacation’ From the Stock Market?

There’s an old saying with some stock investors: “Sell in May and go away.” The saying implies that investors should liquidate positions sometime in the month of May, take the summer off from the stock market, and invest again around Halloween. Those who support this concept suggest that the market has historically performed best in the period between November and April. The belief is that as the weather warms up, investors and traders pay less attention to the market, and performance fails to keep up with the long-term average for the stock market over this six-month period. 

It sounds simple, but does it make sense as part of your own investment strategy? Not necessarily. Here are five important reasons the “Sell in May and go away” concept may not be the best strategy: 

1 – It is a strategy built around ‘timing’ the market

The idea of selling most or all of your equity positions for a period is simply another form of trying to time the market. It is a tactic that can often backfire on individuals who happen to be in the wrong place at the wrong time. If your expectation is that the market will always underperform during the summer months and always outperform during the November to April period, history does not back you up. What’s more, the historical average does not indicate that stocks generate negative returns from May to October, just that they have often underperformed the other six-month period. In reality, there have been years when stocks have generated strong performance between May and October. There is simply no way to predict what will happen in any given year, which make the concept of timing the market very difficult. 

2 – Not all investments perform the same

There may be particular stocks or sectors of the market that perform better than the market as a whole in the May-to-October period. If you sold positions in stocks that were still performing well, you might sacrifice an opportunity to capture favorable returns. Anytime you sell an investment that was intended to be a long-term holding, you take a risk that you’ll miss out on some positive performance. 

3 – The costs of selling may outweigh the benefits

Moving money into and out of investments generally costs money. There may be trading costs on one or both ends of the transaction. In addition, if your investments generated capital gains, you will owe taxes on those gains (if the money is held in a taxable account). Also, if you held those investments for less than a year, they would be considered short-term capital gains and would be taxed at your ordinary income tax rate, which means you could potentially forfeit a large percentage of the return you earned. 

4 – You won’t collect dividends

If stocks or funds you own pay dividends, you won’t be collecting them once you have sold out of the position. Dividend-paying stocks in your portfolio generate returns that aren’t affected by the ups-and-downs of the market. Selling these holdings means you are again sacrificing a portion of the return you could have earned. 

5 – Discipline is required

If you sell your positions in May, will you truly purchase them back by the end of October? What if those stocks became more expensive and you lost money in the process? What if the market suffered a major downturn just before November (the biggest market crashes in history have occurred in October) and the environment seemed unstable. Would you still be willing to invest into that kind of market? A better approach from a disciplined perspective may be to continue making regular investments irrespective of timing or market conditions, and try to accumulate wealth over time by consistently saving and keeping your money invested. 

Don’t veer from your long-term strategy

Investment theories like the “Sell in May and go away” concept can be fun to contemplate, but the big question is whether they are truly practical as part of your own strategy. If you have a long-term investment plan, the best approach is to stick with it, regardless of market conditions. Trying to choose the right time to buy or sell can be difficult, even for professionals who invest for a living. Consider working with a financial advisor who can help you invest in a way that is most comfortable for you and consistent with your long-term goals.

Rob Davis lives in University Place with his wife Lorri and sons Wesley and Parker. He is a Financial Advisor and CERTIFIED FINANCIAL PLANNER practitioner™ with Ameriprise Financial Services, Inc. in Tacoma, Washington. Rob specializes in fee-based financial planning and asset management strategies and has been in practice for 36 years. He is licensed/registered to do business with U.S. residents only in the states of Washington, Idaho, Arizona and California. You may contact Rob at ameripriseadvisors.com/robert.g.davis. 

Ameriprise Financial Services, Inc., Member FINRA and SIPC

Ameriprise Financial does not offer tax or legal advice. Consult with a tax advisor or attorney.