Young Investors: Ignore ‘Sell in May’ Mania

by Alyssa Oursler | May 3, 2013 9:00 am

This is the first May I’ve really been following — much less invested in — the stock market.

youngInvestorsB.png Young Investors: Ignore 'Sell in May' Mania[1]Needless to say, I had no idea that in the weeks leading up to it, I’d be hearing “Sell in May and Go Away”[2] more than I hear Taylor Swift on the radio or guys saying “bro” in a frat house.

For those of you unfamiliar with “Sell in May and Go Away,” it refers to the fact that stocks historically underperform in the six-month period from May to October, compared to the stretch from November to April.

Considering the time and courage it took for me to actually pull the trigger on investing in the first place (I talked about it months before finally opening my brokerage account[3], then sat on my hands awhile before making a purchase), the advisory quip had me worried at first.

Like a little kid who got to the pool just in time for the lifeguards to blow the whistle for adult swim, I kept thinking: ”I just got in! Now everyone is saying it’s already time to get out?”

But, since first hearing the “Sell in May” sound bite, I’ve done some reading and questioning, and am going to tell you the same thing I’ve come to tell myself:

Keep calm and carry on.

For one, the “Sell in May” phrase might be wildly catchy, but the actual numbers behind it [4]aren’t nearly as bad as the perception.

But more importantly, if you’re a young investor and are buying stocks and funds with a time horizon of 40 or 50 years, one summer’s dip will be a relative blip for your long-term investments. And staying put through that blip probably will be more beneficial than trying to time the market anyway.

If you have a relatively modest portfolio — as many youngsters do at this stage of the game — then when you buy a stock or fund, it’s probably not going to be a giant stake. Maybe a couple hundred dollars here or there. Heck, my first purchase[5] of McDonald’s (NYSE:MCD[6])? A whopping five shares.

And if that’s the case, it’s very likely that any extra returns you make by trying to exit and enter at the “right time” will be eaten up by transaction fees.

Consider this example:

You buy five shares of McDonald’s stock at $100 each. Total cost: $500 — plus a flat $10 transaction fee. (In this case, that breaks down to $2 in fees per stock; if you bought 10, it’d be $1, so on and so forth.)

But now it’s May, and the “Sell in May” overload has you fearing a downturn. It’s time to sell! So, expecting your MCD shares to drop in value with the rest of the market, you sell your five shares in May, hoping to buy back in later on when they’ve gone down in value. That’s another flat $10 transaction fee ($2 per stock again). When you eventually do buy back in, that’s another flat $10 transaction fee ($2 per stock again).

Add it up. To just buy the stock and hold it through the summer would cost you $2 per share. If you try to time the market, you’ll actually be shelling out another $4 per share on top of that. Since you originally bought in at a price of $100, then, you theoretically would have to buy in at $96 — $4 (or 4%) lower than when you sold in May — just to break even.

Which means if you’re doing this on a stock you planned on holding for a long time in the first place (as is the case for many invested in MCD), you’re handicapping your returns by roughly 4%, and for the sake of what? Playing ball with an overblown adage?

Not to mention, the example above assumes that MCD dips in the first place — which it might not.

And it assumes that a rookie investor will properly time the market on two ends — which the odds really don’t favor.

“Sell in May” becomes significantly more important if you’re a day trader, sure. But if you’re a long-term investor — and especially if you’re young with little money to play with — don’t run yourself through the market turnstiles.

The one facet that might benefit you is the potential inherent in a dip — namely, if there is a stock with great long-term prospects, but maybe a little overvalued, a summer selloff could present a better buying point. Then again, so could a fall selloff. Or a winter selloff. Or a spring selloff. The point is to watch for such dips at any time of the year, not just when headlines tell you to.

Otherwise, relax. You have time to ride out the short-term bumps and lumps in the market and let your investment grow.

As of this writing, Alyssa Oursler was long MCD.

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Endnotes:
  1. [Image]: http://investorplace.com/hot-topics/young-investors-series/
  2. “Sell in May and Go Away”: http://investorplace.com/2013/05/sell-in-may-and-go-away-our-experts-weigh-in/
  3. finally opening my brokerage account: http://investorplace.com/2013/02/so-ive-decided-to-invest-now-what/
  4. the actual numbers behind it : http://investorplace.com/2013/05/sell-in-may-and-go-away-the-real-story/
  5. my first purchase: http://investorplace.com/2013/02/buying-a-stock-simple-concept-but-a-complex-process/
  6. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  7. Sign up for our Young Investors e-letter: https://order.investorplace.com/index.jsp?sid=QL8104

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