Seasonal proverbs can stunt a 401(k)

Making investment decisions based on seasonal proverbs could squash your 401(k) retirement savings.

U.S. stocks dropped more than 6% last month – their worst May since 2010 and second-worst since 1962. That sour four-week stretch seemed to prove the old adage, “Sell in May and go away.”

But don’t let coincidence fool you. Markets don’t heed calendars.

Such seasonal myths as “Sell in May and go away” have lingered for eons. Bedfellows include “The January effect,” which argues January’s returns (or its first few days) predict the year. Then comes the “Santa Claus rally,” which 2018 disproved, and “financial hurricane season” – which supposedly means awful September and/or October returns. All of these proverbs work occasionally. None work often enough to help you.

Sell in May at least started with logic. Its original name – sell in May and go away until St. Leger Day – came from U.K. stockbrokers traditionally taking summers off until a famous September horse race (the St. Leger Stakes). The reduced liquidity supposedly brought sharper swings and weaker returns. Avoiding the summer months dodged this problem.

But decades of stock returns destroyed this logic. Modern sell-in-May thinking argues that avoiding the six months from April 30 to Halloween spells success. Yes, stocks’ average returns over that period – 4.2% since 1925 – trails returns from Halloween through April 30, which are 7.4%. But 4.2% isn’t negative. If you want the stock market’s 9.9% annualized return, you need those spring and summer months along with autumn and winter. Otherwise, your return will be lower and reaching your retirement goal harder.

Seasonal adages “work” just often enough to sustain their myths. January predicted full-year returns in 65 of 92 years – a 70.6% success rate. April 30Oct. 31 was negative 28.3% of the time. September stunk 47.8% of the time, while October sank 39.1% of years. The Santa Claus rally paid off an amazingly high 78.3% of years.

Calendars didn’t drive any of these past returns. Consider January. Stocks are positive on a yearly and monthly basis more often than not, making it logical that good Januarys would happen in “up” years. And the bad? It’s normal for a “down” January to occur during a bear market. That’s a coincidence.

And what happens when seasonal myths overlap? While the six-month “sell in May” stretch is lackluster, July is the calendar’s best month. So if you sell in June, you’ve sold too soon! Do you sell in August to avoid “financial hurricane season” in September and October, then buy in November? September’s average – a negative 0.6% return – might seem to support that. But that is dragged down by a handful of awful Septembers in the 1930s and 2008. Is it wise to stake your retirement on a few outliers? Or is it better to remember September and October are positive more often than not?

Short-term timing your 401(k) generally puts your retirement savings at risk, especially if you invest based on calendar trivia. What happens if you sell after a down May, like in 2019, but the rest of the year is fine? That happened in 2010, when U.S. stocks fell 8% in May, then went on to climb 16.8% from May’s end through Dec. 31.

So ignore seasonality. Always think long term. Your 401(k) needs to provide for your lifetime.

Ken Fisher is founder and executive chairman of Fisher Investments. Follow him on Twitter: @KennethLFisher. The views expressed in this column do not necessarily reflect those of USA TODAY.

Short-term timing your 401(k) puts your savings at risk, especially if you invest based on calendar trivia.