Sell in May and go away?

A recent BMO Private Bank report examined this calendar effect on the market and found the strategy does have some historical relevance.

To test the theory, the report divided the calendar year into two six-month periods: May to October and November to April. Dating back to the 1900’s, the report tracked how USD $1,000 invested in the Dow Jones Industrial Average would fare if invested only during the months of April to November, switching to non-interest bearing cash for the remainder of the year, and the opposite strategy for the May to October time period. The results were as follows:

• The USD $1,000 invested exclusively from May through October grew to USD $2,167 (excluding dividends) as of October 2012, an annualized price-only gain of 0.7%
• The November through April portfolio would have grown to USD $122,606 as of April 30, 2012, an annualized 4.3%
• The report notes that a USD $1,000 investment that held the Dow year round would have returned an annualized 4.7% return

Read: Set-and-forget investments

“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, chief investment officer, BMO Private Bank. “Our research shows 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.”

Ablin also noted that, based on the report’s historical analysis, this strategy does not always hold true. Had investors sold in the spring of 2009 they would have missed out on substantial gains during those summer months, and would have incurred significant losses during the November 1969 to April 1970 period. Furthermore, in Canada, between 2003 and 2007, stocks rose during the summer months.

Read: U.S. entitlements and CEO confidence top concerns: BMO expert