Why ‘Sell in May and go away’ doesn't work for SA investors
- 'Sell in May and go away' is a well-known trading adage on Wall Street.
- The strategy seeks to avoid the worst months in the US market, which are usually between May and September.
- A study by a local trader shows that it only worked in one out of three years in SA.
'Sell in May and go away’ has long been a popular investment adage on Wall Street. Supporters of this strategy believe this is a great way to avoid the worst months on the market. Most market crises seem to happen between May and October.
Since 1926, total returns delivered by the S&P 500 during the May to October period are about half those of the seasonally strong November to April.
However, 20 years’ worth of data from the JSE Top 40 index, compiled by Andrew Todd of the investment platform Traders' Corner, show that SA investors will have lost money if they sold in May and went away.
His analysis shows that losses were avoided only about a third of the time:
On average, the index gained almost 2% during the period over the past two years. In all, you would have missed out on a gain of 37% if you sat it out.
However, the adage proved to be correct during times of market crises: the index suffered large losses during the 1998 Asian crisis (-37.80%), the Dot Com bubble (-28.71%) and the 2008 financial crisis (-24.16%).
For investors who have a long-term time horizon, it is better to remain invested, says Todd. In fact, if the market does lose ground during May and October, you would do well to buy into weakness and get stocks at cheaper levels.
Also remember that you would have to keep transaction costs and capital gains tax issues in mind if you sell out at the end of April, says Todd. This could result in even lower returns.
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