Weekend Reading – Does Sell in May work?

Weekend Reading – Does Sell in May work?

Well hello!

Welcome to a new Weekend Reading edition, and given it is mid-May, I wonder if there is any truth to the Sell in May (and go away) seasonal investment strategy?

A few highlights on that in a bit…

First up, a few reminders:

I recently shared our latest dividend income update here, our portfolio that earns about $5.16 of every hour of every day even in our sleep or about $124 per day. 

If you have debt, you might be interested in learning about the 30-30-30-10 budgeting rule of thumb. 

And, while taxable dividend income is taxable, I still believe Canadian stocks (that pay some dividends i.e., lower-yields and higher growth stocks in particular) can be a great home in your non-registered investing account – I will continue to invest this way myself. 

Weekend Reading – Does Sell in May work?

As the phrase suggests, investors can employ a seasonal buying and selling pattern for their portfolio where historically there is at least some evidence that suggests stocks perform better during the colder months (November to April) compared to the warmer months (May to October).

According to some Morningstar research I found, there is some evidence that selling in May can outperform the broader TSX market – but it’s not a winning formula when measured by decades or over decades. 

Source: https://www.morningstar.ca/ca/news/221204/reminder-dont-sell-in-may-and-go-away.aspx

For the U.S. market, I found that the S&P 500 has typically grown by around 2% on average from May to October, compared to a much stronger average gain of about 7% from November to April, according to Fidelity.

Source: https://www.fidelity.com/viewpoints/active-investor/sell-in-may

So, there is something small to this…but I don’t subscribe to any of it for these key reasons:

1. Past performance does not guarantee future results. Just because a seasonal investing pattern suggests certain results have occurred doesn’t mean things will continue. While these seasonality studies are very interesting, I simply don’t want to actively readjust my portfolio every year based on market history. If I was more active with my portfolio, there is the cost of my personal time, there are transaction costs to pay, and simply too much speculation/risk involved.

2. Compouding opportunities disappear when you’re not invested. As the Morningstar article explained:

“Perhaps the most powerful argument against doing so is when look at the effects of compounding. When you pull your money out of the market, the magic of compounding returns disappears.”

The entire meaning behind investing is to remain invested. And, since I love dividends, selling some or part of my portfolio in May would mean I miss out on not only dividends earned during the summer months but also some potential growth too. 

Sell in May (and go away) has roots in behavioural finance – a field of study that leverages psychology to understand how investors make financial decisions – studying sets of rational but usually irrational decisions.

There are many investing behavioural biases to avoid – I found a good list of biases of late for your reading pleasure.

My takeaway on any investing biases: the key is not always to go out of your way to avoid all biases all the time, every single time, rather, understand them, recognize them and where possible, limit the impacts of making decisions with them.

We wouldn’t be human after all if we didn’t have the odd hunch, intuition or investing itch to scratch. While optimizing decisions is great (to a point) I tend to live with the approach that usually good is good enough. 

I’ll leave you with this thought that I’ve mentioned on this site before:

Image Source: Pexels, Karolina Grabowska

More Weekend Reading – Beyond Sell in May (and go away)

This theme aligns to this older Bill Miller investing letter, he perfectly captures the posture that most investors ought to have:

“When I am asked what I worry about in the market, the answer usually is “nothing”, because everyone else in the market seems to spend an inordinate amount of time worrying, and so all of the relevant worries seem to be covered. My worries won’t have any impact except to detract from something much more useful, which is trying to make good long-term investment decisions.”

Amazing stuff.

Accidentally Retired shared a few nuggets of investing wisdom on X this week designed to simplify his investing life…

In 2020, I fired my financial advisor and sold off 20 mutual funds.

In 2021 and 2022, I sold off over 90 individual stocks.

I committed to simplifying my life, and reinvested all the gains/losses into only $VTI and $VXUS.

The results: less stress and better performance!

— Accidentally Retired (@AcdntlyRetired) May 12, 2024

Yes, you can be Your Own Advisor. 🙂

Walmart (WMT) stock popped this week thanks to besting earnings predictions.

For fun, you can see how WMT has performed in recent years compared to BRK.B (that we used to own) and XAW (that we currently own) at this time of this post.  

Source: Portfolio Visualizer.

Over at Cashflows & Portfolios, we wrote about the Bucket Approach to manage portfolio organization for retirement income planning and spending. Some very successful DIY investors we know follow this approach. We mentioned in the article:

“The Bucket Approach gives you some flexibility to adjust to market conditions, inflationary conditions, tax regime changes (i.e., new capital gains proposals!) so that you remain flexible with your spending patterns over time.”

Nice Q&A at Tawcan with Nelson Smith on his lessons learned realizing some incredible investing success that allowed him to retire/semi-retire at age 39.

Dividend Growth Investor Q&A series – Nelson at Canadian Dividend Investing

Some key moments from that interview you might want to know about:

“I want cash flow today, along with a little capital appreciation over time. Dividend stocks are the best way to get this.”

And…

“My dividend portfolio should generate approximately $74,000 in 2024.”

And…

“This hybrid approach, combined with an average of 4-5% annual hikes in the dividends of the portfolio, and I figure I’ll easily have enough to ensure my withdrawals can increase at the rate of inflation.”

Very, very well done…geez…$74,000 per year earned from your portfolio. 

Inspiration from this Q&A reminds me of this post: how long should your stock market time horizon be? Probably as long as possible.

Big fan of Dividend Growth Investor. Did you know that Warren Buffett’s portfolio at Berkshire Hathaway is expected to generate almost $5 billion in annual dividend income?? OMG.

5i Research did some heavy lifting for you and I as DIY investors: here are a few Canadian companies with very friendly shareholder policies.

Save, Invest, Prosper!

Enjoy your weekend. 🙂

Mark