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Should You 'Sell In May And Go Away'? Not So Fast…

 April 19, 2012 02:24 PM

(By Street Authority) If you're like a lot of investors, then you might be getting prepped to "sell in May and go away," shedding stocks in anticipation of the historical market-wide weakness that kicks in during the middle of the year. And the math supports this assumption. Every month from May through September registers, on average, the poorest performances for the year, with a couple of them likely to dole out a loss.

But before you dump the bulk of your holdings -- especially your "Forever Stocks" -- out of fear of what might happen to them during a summertime lull, it pays to take a closer look at the numbers behind this old axiom. As it turns out, investors may be better off just standing pat. Here's why...

Selling in May makes some sense...
The "Sell in May" premise actually has a superficial logic to it. The next five months are indeed poor performers. Since 1950, June and September have averaged -0.1% and -0.6% dips. August's results have generally been near breakeven levels. Even the two winning months have been tepid winners: May's average change is a mere 0.2% gain, and July -- the best in the bunch -- typically registers only a 1.0% return.

No wonder investors are encouraged to steer clear. But month-by-month averages alone just don't paint the whole picture.

... but the logic is incomplete

While it is true that every month between May and September is, on average, historically weak, it's not true that the average five-month span is weak. The average change for the S&P 500 between the end of April and the end of September is actually a 0.6% gain. In addition, it's still more likely that every one of those months will post a gain rather than a loss, except for September.

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I know this average 0.6% move still isn't a move worth writing home about. But it's also not a move worth selling your core portfolio holdings over, and especially not your Forever Stocks (remember, these are the stocks that rain or shine -- you can feel confident holding practically "forever.").

So how is it possible that each of the weakest five months of the year doesn't translate into a losing five-month span overall? It's simple. While we've seen some of the market's biggest declines materialize in the summertime months, it's a rarity to see big declines in back-to-back months in the same year.

Take 2010 as an example. The S&P 500 lost 8.2% in May of that year, adversely affecting May's average results. Things got worse in June, as the market fell another 5.4%.

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