After seeing the nice first-quarter return followed by the same investment treading water in April, some are already thinking of selling.
The reason for this thinking can be summed up by the old saying, “Go away in May and come back in October.” While this aphorism sounds nice, and some justification can be made for lower volume in the summer, it doesn’t always work.
To satisfy my curiosity, I looked back over the last 10 years to see how this strategy of "sell in May and go away" has worked. Please understand that I’m a guy who buys the company based on the good value I can get for my money. I sell when that company becomes overpriced based on many factors, including the cost of the earnings, sales, book value and cash flow.
However, I know you, the investor, hear all kinds of crazy ways to “make money in the market,” and I will try to help you through the maze of misinformation and get you on the correct path of investing.
Over the last 10 years, this plan would not have worked well for you. If you sold on the first trading day of May (using the S&P 500 as a guide) and bought back in on the first trading day of October, you would have only been right 40 percent of the time. There were a couple of years where it would have saved you 15 to 20 percent, but there were also years where you missed some good gains.
Another thing I noticed from the first trading day of the year to the first trading day of May: 40 percent of the time, the S&P 500 was down over that time frame. You should also be aware that 40 percent of the time, when the S&P 500 was down from January to May, if an investor stayed put, the negative return would have turned into a positive return. In 2009 the turnaround was in double digits.
If investors just stayed put, they would have had only two losing years in their portfolio. Granted, your return would be small over that time frame, but trying to use some trading strategy would have only reduced your returns. Think about this: What if you forgot to do the trade on the right day? Out of a 10-year period there are 20 chances to make a mistake; a 10 percent error rate could have cost you dearly if you zigged when you were supposed to zag.
On top of all that, don’t forget about taxes. By going in and out, your holding period from October to May would only be seven months, missing the long-term capital gains rate by five months. For 2012 the top capital gains rate is only 15 percent, but if you sell early and you’re in the 28 to 35 percent tax bracket, you could end up paying an additional $2,000 in federal taxes.
I know you may be thinking, "What about next year when the current tax rates expire?" While no one knows for sure what the new tax rates will be, the talk has been that they will go back to the old 20 percent capital gains rate, still giving up to a $1,500 advantage over a long-term gain.
If you haven’t looked at tax rates lately, it doesn’t take much to get to the 28 percent bracket. If you file a joint return and your combined income hits $142,701, or you're single and are making $85,651, congratulations — you’re in the 28 percent bracket. And if you are doing a lot of selling, creating short-term gains, it won’t take much to add $10,000 to $12,000 to your income.
So don’t let this happen to you. Forget about trying to “beat” the market by playing all these silly games you hear or read about. Do the research to find some good, quality businesses, watch them closely by reading the financial statements and seeing what the business is doing, and enjoy being an investor.
Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.