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The Independent Adviser for Vanguard Investors
•
June 2015
•
5
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I THOUGHT WE’D CLEARED
this up
long ago, but after reading countless
articles over the past few weeks about
the purported benefits of a market-
timing strategy known as “Sell in May,”
Jeff and I figured we’d better put this
one to rest once and for all (or at least
until next year).
The stock market’s rocky start to
May coupled with Federal Reserve
Chair Janet Yellen’s comments that
stock valuations are “quite high” appar-
ently fed some investors anxieties about
whether they shouldn’t follow the old
adage, “Sell in May and stay away.”
Various pundits have tweaked the
data, or ignored certain real-world con-
cerns to make
Sell in May
look a lot
more attractive than it is. Don’t buy the
hype.
I put the
Sell in May
strategy—
which in its most basic form requires
that you rotate holding stocks and cash
every six months by selling stocks at
the end of April and buying them back
at the end of October—to the test. I
ran the numbers using
500 Index
and
Prime Money Market
from October
1976 through the end of April 2015.
At first blush there does appear to be
something to the
Sell in May
strategy.
And this is about where most propo-
nents of the strategy end the discussion.
You see, during the November through
April period when you are holding
stocks, 500 Index returned an average
8.4% compared to an average return
of 3.3% over the May through October
stretch. Furthermore, the
Sell in May
approach, despite holding cash half of
the time, grew at a 10.9% rate, very
nearly matching the 11.1% annual rate
of buying and holding 500 Index over
the entire period.
That sounds pretty good for the
Sell
in May
strategy. Unfortunately, what
you have to know is that the
Sell in
May
strategy only worked a third of the
time. In other words, two out of every
three years, stocks beat cash in the May
through October period. In fact, on
average, as I noted before, 500 Index
returned 3.3% during the May through
October period, versus a 2.7% return
for Prime Money Market.
The low success rate of the
Sell in
May
strategy isn’t merely academic.
The numbers I ran assume you fol-
lowed the strategy to the letter.
But reality has a nasty way of mak-
ing the averages look a whole lot worse
than the numbers suggest. In fact, fol-
lowing a
Sell in May
strategy over
the past almost 40 years would have
required nerves of steel and an unwav-
ering commitment that I doubt most
investors could muster.
For instance, leaving the safety of
cash and buying stocks at the end
of October 1987, with Black Monday
still fresh in investors’ minds, would
not have been easy. Nor would it have
been easy to sell stocks at the peak of
the tech bubble in April 2000, particu-
larly given the fact that the strategy had
failed in eight of the nine prior years.
In short, back-tests are one thing, but
investing real money is quite another.
The other issue that most people
forget about when looking at various
market timing strategies is the tax cost
of implementing the trades. The reality
is that the short-term gains and income
taxes
Sell in May
creates are a head-
wind that cannot be overcome in a
taxable account. And again I believe
most investors would be loath to gamble
their retirement money—those IRAs
and SEPs they’ve spent so long build-
ing—on a timing strategy with such a
rocky history.
Again, I did the math, applying a
straight 25% tax rate to all gains and
income the strategy generated. Not sur-
prisingly, this cut returns by more than
half over the 38-year period I examined.
“Sell in May and stay away” may
have a nice ring to it, but in fact, it’s
almost impossible to implement suc-
cessfully. Market timing doesn’t work,
particularly once you factor in taxes,
fees and frequent failure.
n
MARKET TIMING
Sell in May? No Way!
The Tax Bite of Selling inMay
4/79
4/83
4/87
4/91
4/95
4/99
4/03
4/07
4/11
4/15
500 Index
Sell in May
Sell in May
after taxes
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Note: Chart shows growth of $100.00 in Vanguard 500 Index, the
Sell
in May
strategy (holding 500 Index from November through April and
Vanguard Prime Money Market from May through October) and the
same strategy after paying a 25% tax on all gains from October 1976
through April 2015.
YIELDS
Money Market Waivers Continued
taxable money funds, six tax-exempt
money funds and single variable annuity
money fund, the fee waivers amounted
to about $24.1 million, which is a 17.3%
Vanguard’s still waiving fees to keep
yields in the black.
Totaling the data from the most recent
six-month reports for Vanguard’s three
THE BLEEDING CONTINUES
at
Vanguard’s money market funds as
fee waivers grew more than 17%
overall over the past six months. Yes,