Now that May is in the rear vision mirror you will no doubt be bombarded by invocations to sell In May and go away. The rationale being that the markets best months are behind it and you are best off leaving and coming back in October. I have always found finances little myths quite quaint because they simultaneously reveal the lack of critical thinking around data that have been the backbone of the industry for generations and the desire of people to have things that are complex reduce to simple homilies.
It is possible to get a sense of where this myth came from – someone in the past has generated a table of returns for the market and then graphed them and produced something similar to the chart below for the All Ordinaries.
It is obvious that returns taper off after May so why not sell everything and go away for the winter? The problem is simply looking at average returns over time lacks any nuance you are much better advised to look at the variance in the returns and in doing so you start to get a sense of why simply blindly selling in May may be a bit of a stupid idea.
All of a sudden you can see that supposedly bad months can actually be very good with July and October capable of producing above average returns. This capacity to generate above average returns in what are supposedly dead months changes the complexion of possible returns and goes some way to negating the argument of moving out of the market. Once again the devil is in the detail.
To get a better sense of what would happen to your returns if you sold the All Ordinaries Total Return INdex each May and returned in November I compared it to simply buying and holding the index – not something I would recommend but it does provide a powerful control.
The stark differential is a function of the power fo compounding – some return over time is better than no return over time. The power of compounding returns is such that it overcomes the poor months. There are undoubtedly times to be in the market and times to be out of the market but that should be a decision that is guided by the market, not by a simple superstition that makes for a trite soundbite.