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Sell in May and Go Away? Not When Cash Doesn’t Pay.

by Matt King, CFA, Chief Investment Officer, Managing Director

May 2011

As an investor, you have likely heard the old Wall Street saying, “Sell in May and go away.” This adage refers to the strategy of being invested in stocks from the six-month period that runs from November to April while sitting on the sidelines in cash in the relatively weaker six-month period of May to October.


                S&P 500 Index


 Total Return

 Annualized Return

 Nov to Apr



 May to Oct



  Data range from 4/30/1950 to 10/31/2010

While we stand strongly against investment strategies that involve trying to time the market, we must admit that the long-term results of this strategy are fairly striking as shown in the table to the right. While it didn’t necessarily make sense to avoid stocks in the May to October timeframe because they still made money, those gains obviously pale in comparison to those of the November to April period. And looking at it on a risk-adjusted basis, the performance of stocks from May to October barely outperformed 3-month U.S. Treasury Bills (2.60% vs. 2.32%), so sitting out of stocks for six months each year would have left you with significantly less gray hair and only slightly less money—probably an agreeable trade for most investors.

Now that we’re into May, should you consider adopting this seasonal timing strategy for your portfolio given its impressive long-term results? Before you stop reading this article to rush to sell your equity investments, there are two things you should consider.

Waning Results in Recent Years

The stock market has always been home to trends that work for a while for no explicable reason then stop working for equally inexplicable reasons—the January Barometer and Super Bowl Indicator come to mind as two prime examples. The “Sell in May and Go Away” strategy may be no different than other anomalous trends of the past.

As noted above, it only makes sense to sit out of stocks in the safety of cash if stocks don’t make meaningfully more than the risk-free asset. What is meaningfully more you ask? Well, the risk premium (i.e. the return in excess of the risk-free rate) for the S&P 500 Index over 3-month U.S. Treasury Bills has been about 6% per year on average since 1950. So, in keeping with history, we should expect stocks to outperform cash by about 3% in a six-month period to obtain a satisfactory risk-adjusted return.

From 1950 to 2002, the S&P 500 Index failed to meet this hurdle 56.6% of the time, which actually suggests that you have a better chance of earning superior risk-adjusted returns in cash than stocks during the May to October timeframe. However, since then, cash has earned better risk-adjusted returns during this period just 37.5% of the time, which leads us to our second point of consideration.

Right Now Cash Has a Huge Opportunity Cost

Since 1950, the average annual yield on 3-month U.S. Treasury Bills was 4.7%. Currently, it’s 0.01%, as close to zero as it can possibly be. When cash yields are close to 5%, stocks have their work cut out for them, having to return nearly 11% per year to justify their additional risk based on the historical risk premium of 6%. With zero percent yields, stocks need only return 6% per year to match that historical risk premium.

To get a historical perspective, we went looking for past periods in which short-term yields were next to nothing, which we defined as less than 1%. We found four such periods in the last 80 years: 1933 to 1947, 1954, mid-2003 to mid-2004, and our present state of low short-term rates which has been in place since October 2008. Given that the longest period of near-zero rates occurred prior to the S&P 500’s inception in 1950, we switched to the Dow Jones Industrial Average Price Index to gauge how the “Sell in May and Go Away” strategy fared during periods of near-zero cash yields.

The results of our analysis, as displayed in the table below, were more than a little surprising:



 Price Return

 Average of All May to Oct Periods


 Average of All Nov to Apr Periods


 Average of All May to Oct Periods w/ <1% Cash Yields


 Average of All May to Oct Periods w/ >1% Cash Yields


 Data range from 4/30/1929 to 10/31/2010

As you can see, the success of the “Sell in May and Go Away” strategy remains intact with the Dow Jones Industrial Average going back to 1929 as the strong six-month period of November to April produces a significantly higher return on average than the weak six-month period of May to October (5.39% vs. 1.00%). But once we focus on the periods within the May to October time period that occur in conjunction with near-zero short-term rates, the strategy breaks down. The “traditionally weak” six-month periods in low cash yield environments produced an average gain of 8.33%, which even manages to outdo the average return of the “traditionally strong” six-month period between November and April.

As long as cash yields next to nothing, it is less likely that it will be able to outperform stocks, even on a risk-adjusted basis in the traditionally weak period for stocks that lasts from May to October. And with positive, albeit low, inflation present in the economy currently, you will actually lose money in real terms sitting in cash for six months of the year. So rather than selling your stocks and sitting in cash until November, you’ll likely be better off staying invested, at least until the Federal Reserve’s overly accommodative monetary policy goes away.

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