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Sell in May and Go Away?

A common saying on Wall Street is “Sell in May and Go Away” – meaning May’s a good time to sell your stocks and take a vacation from trading because the stock market is going to drop in the summer months.

Is this based on fact? Or is it some kind of myth?

Long-term statistics reveal that most market down periods do, indeed, occur over the six months from May to October. I crunched the numbers back to 1950, and it appears that the old adage holds water.

According to my calculations, if, for example, you’d invested $10,000 into the S&P 500 in 2008 with a strict “sell on May 1, buy on October 31″ strategy, you’d have had more than $500,000 on May 1 of 2009. If you’d just bought and held the S&P 500 during that same period, you’d have wound up with less than $80,000.

So “Sell in May and Go Away” has a history of success. It also has some other factors working in its favor: the so-called Santa Claus rallies that typically boost November, December, and January performance due to holiday spending, as well as the market boost in April due to optimism about upcoming first-quarter earnings reports.

But past performance is not indicative of future returns, and this strategy does not work every year. Plus, there are negatives. You pay a higher capital gains tax rate on stocks you hold for less than a year, and you pay more in commissions than you do with simple buy-and-hold investing.

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