Sell In May? BMO Private Bank Tests The Theory

Harriet Davies

23 May 2013

There is a statistical basis for the “sell in May then go away” adage, but investors are still better off staying invested year-round, says BMO Private Bank.

The bank released a report which divided the year up into six-month chunks (May-October and November-April) and compared stock market performance dating back to 1900. The report tracked how $1,000 would fare if invested for six months of the year in the Dow Jones Industrial Average, and six months in non-interest-bearing cash, for each period.

The results showed a stark difference. If the original $1,000 had been invested in stocks from May through October each year, and cash the rest, it would have grown to only $2,167 in October 2012 – a yearly nominal increase of 0.7 per cent. However, using the opposite policy – investing in the DJIA from November through April, and cash the rest of the year – it would have increased in value to $122,606 as of April 30, 2012, yielding an annual gain of 4.3 per cent in nominal terms.

While it is tempting to conclude from this contrast in performance, which with compounding effects leads to some $120,000 differential in value by 2012, that the stock market is best avoided from May till October, this is not the case, says BMO Private Bank. This is because $1,000 invested year-round in the Dow Jones over the same period delivers a 4.7 per cent annual return, which is 40 basis points higher than the “sell in May” policy.

"While the 'sell in May' approach to investing is an interesting one, we do not advise using this strategy as it is risky for the average investor," said Jack Ablin, the private bank’s chief investment officer.

"What our research shows is that history can be a useful guide for navigating the investment markets, however there needs to be a fundamental rationale behind the calendar effect before investors attempt to time the market. We find that investors who remain in the market year-round generally garner the best results," he added.

Ablin also noted that while over long periods of time the theory held true, it didn’t hold true for each year, meaning that investors attempting to market time could miss out on significant gains. Investors who sold in the spring of 2009 would be a case in point. The Canadian stock market between 2003 and 2007 also bucked the trend, rising during the summer months.

"Investors should adopt a long-term, diversified approach that maintains a return on investments, while hedging against unnecessary risk," said Ablin. "This includes building a portfolio that allows you to be active throughout the year and contains a variety of investments that are both conservative and aggressive. That way, if you prefer to lessen your exposure during certain periods, you can remain in the market and weather the highs and lows of the summer.