"Sell in May" bad advice

Between 1980 and 2000, traders acting according to the stock market adage "sell in May and go away, but remember to come back in September" would not have earned the maximum from their investments on the Dutch market. To earn an extra return on shares they would have done better to sell in August and come back in October. This would have increased their profit by an average 2.6% annually compared with traders who kept their stock for the whole year.

A clear seasonal patter can be discerned in the return on shares. On average, the return on Dutch shares is highest in March. May too, according to the saying the best month to sell stock, is one of the most profitable months. Once the leaves start to fall, returns on shares also drop. Total returns are negative in September, while they are barely positive in August and October.

Average monthly return on shares, 1980-2000

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Because of the seasonal pattern, it is possible to optimise profits on stock by buying and selling at the right moments. A clear seasonal patter can be discerned in the studies daily figures of the CBS total return index returns show a long-term wave pattern. The top of a wave of the daily figures is on 20 August, (selling moment). This is followed by a decrease to the lowest point on 5 October (time to buy). After that the wave starts to build up again.

Average cumulative return on shares, 1980 - 2000

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Traders selling out their portfolios on 20 August and buying them back on 5 October would have increased their profits by an average 2.6% in the last twenty-one years, compared with those who kept their shares in their portfolios throughout the year. This calculation does not incorporate the effects of transaction costs and any interest earned on the money available in the intervening weeks.

Traders who take the advice to sell in May and buy back in September would have lost out quite heavily, on the other hand. Compared with those who had retained their shares in this period they would have missed out on 6.1% of profits.

Average annual return on shares, 1980 - 2000

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Paul van der Beek and Jos van Heiningen