So here we are in late March, and we’re quickly approaching the dreaded summer doldrums of the stock market. Somehow, the notion came about that returns in the market are worse during the period from May through November.
The old adage, then, to “Sell in May and go away” has caught on.
Interestingly, it is less important to know if you should sell in May, but rather to understand why you are investing in the stock market and what your goals are.
Check out this academic paper, or better yet, just take a look at this chart from CXO Advisory Group:
OK. Question answered. You do not want to sell in May and go away. Do not stash in cash. You will not like it, Sam I Am.
The chart demonstrates what I’ve preached for a long time: Create a long-term diversified portfolio across many asset classes, then hold. Anyone who says “buy and hold is dead,” think again.
Still, this raises a very important question about investing and risk tolerance. If you even clicked on this headline, it demonstrates that you may have lingering questions about risk tolerance, and wanting to preserve capital. Perhaps you want to find ways to enhance returns but limit risk, or you want exposure to the market with a more risk-averse strategy.
For now, you want to take a close look at ETFs that may provide you with avenues that will refine your strategy, rather than just sell in May and go away.
Equal-Weight ETFs
Equal-weight ETFs can be a great tool for risk-averse investors who still want exposure to the market. With equal-weight ETFs, you still can hold all the stock in an index, but do so in a manner where each stock counts the same toward the overall price of the fund.
With cap-weighted indices, you are beholden to the movement of a few big names … for better, but of course, for worse, too.
Interestingly, Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP) moved almost in lock-step with the cap-weighted approach from peak to trough in the financial crisis. However, it has vastly outperformed since then, up 296% vs. the cap-weighted 209%.
This will depend on the fund, however. The Guggenheim S&P 500 Equal Weight Financials ETF (NYSEARCA:RYF) behaved in much the same way. However, the Guggenheim Russell 1000 Equal Weight ETF (NYSEARCA:EWRI) matched performance of the cap-weighted index on both up and down cycles.
Hedging ETFs
If you are concerned about selling at a certain time, you may be indicating a risk profile that seeks to offset possible large corrections with hedging strategies. There are so many ways to go with these strategies, but they depend somewhat on timing.
In that case, you are expressing a desire to potentially get the timing wrong, but have the piece of mind of having some part of your portfolio hedged. There’s nothing wrong with that at all. That’s why things like ProShares Short S&P500 (ETF) (NYSEARCA:SH) were created. You can simply buy an ETF that shorts the index, to hedge against your long position.
Likewise, you can use some very simple options strategies to give you some income and hedge at the same time. You can sell covered calls against the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), collect some premium for the sale, and if the market is correcting, the chances are slim you will have that stock called away.
I’ll be launching The Liberty Portfolio, a low-cost subscription newsletter, in a few weeks, and my strategy incorporates all of these issues — discussions about risk, how to best use ETFs, and how to use selective trading and options to give you the financial freedom you are seeking.
You’ll never need to sell in May and go away.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 20 years’ worth of experience in the stock market and has written more than 1,200 articles on investing. As of this writing, he did not hold a position in any of the aforementioned securities. He can be reached at TheLibertyPortfolio@gmail.com.
