Should you Sell your Stocks in May?

It’s the most treacherous time of the year for stock market investors, the dreaded month of May.  This is the time of year when the stock market most often tanks and heads into the summer doldrums.  Most investors will ride it out and take it on the chin, while others will attempt to beat the market by timing it.

Why is May so Bad for Investors?

Your Stock Fortune

Image by Bran Sorem

It’s a well known fact to most traders that the stock market underperforms in the summer months.

According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has risen over 7% on average from November through April, but only 0.3% from May to October.  However, that’s just an average and some summers have been disastrous.

To be fair to May, it’s not usually that bad of a month for the stock market.  The worst month is September and most of the biggest losses come later in the summer.  May is just the start of the flat market season, so it gets all of the attention.  The average S&P drop for May since 1929 is only -0.1%.

Why I am Staying the Course

After trading commissions and tax liabilities, it doesn’t make much sense for me to sell my stocks, in order to avoid a 0.1% drop.  I may put some trailing stops on some of my larger gaining stocks, but I won’t be liquidating my portfolio to run for cover.  Typically, summer is a time when I add to my investments and look for stocks that have been beaten down.  It’s a better season for buying than for selling.

The Bottom Line

The bottom line is that timing the stock market is a fool’s errand.  If you have substantial investments, it could be a good time to take a more conservative position.  It could also be a good time to buy some great stocks at a low price.

“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor -the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”

– William Bernstein

Recommended Reading

Money Counselor – Best Long Term Investment?
Out of Your Rut – Did the Meltdown Wreck your Retirement?
Squirrelers – 4 Types of Income

4 comments to Should you Sell your Stocks in May?

  • Most people I know think they’re smart enough to time the market dependably, yet I’m unaware of any study that concludes even “professionals” are able to do so successfully. Strange paradox…

    Thanks for mentioning my piece on the Best Long Term Investments!
    Kurt @ Money Counselor recently posted..Best Long Term Investment?My Profile

    • Any time Kurt. It was a great article.

      Studies have definitely shown that individual investors and professionals are unrealistically optimistic about their stock picking and market timing skills. My own experience has shown a bit of overconfidence as well. That’s why I have gone to a value strategy and stay mostly invested.
      Bret recently posted..The Great American Money GrabMy Profile

  • I’ve read a lot of stock market strategy, and there seems to be a general consensus that thinking in the long term is key. Trying to play the market in terms of months doesn’t seem to make much sense. You should be working in terms of years, not months.
    The Wallet Doctor recently posted..How to reduce your food costsMy Profile

    • In the short term, the stock market moves based on fear and greed. In the long term, it moves based on earnings. It’s a lot easier to figure out if a company has good earnings and fundamentals than to figure out if investors will get spooked.
      Bret recently posted..The Great American Money GrabMy Profile