(PUB) Investing 2015

MARKET TIMING Sell in May? No Way!

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

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 Tax Bite of Selling inMay

$6,000

500 Index Sell in May Sell in May after taxes

$5,000

$4,000

$3,000

$2,000

$1,000

$0

4/79

4/83

4/87

4/91

4/95

4/99

4/03

4/07

4/11

4/15

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- 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

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,

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%

The Independent Adviser for Vanguard Investors • June 2015 • 5

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