Claire Benoist for MONEY
By Carolyn Bigda
May 2, 2016

You’ve probably heard the Wall Street phrase “sell in May and go away.” Chances are, you’ve also ignored the advice—because it runs counter to buy-and-hold investing and dates back to a bygone era when London stock traders would take an extended holiday in May, leading to light trading volumes and low stock returns for several months. Today, of course, Wall Street remains open throughout the summer and pretty much around the clock, thanks to international markets. Yet there’s a compelling case for at least heeding the spirit of the saying this year.

For one thing, history shows that midyear doldrums are in fact real. Since 1945, the S&P 500 has gained just 1.3% from May to October—about a fifth of the average returns in the following six months. What’s mre, stocks have outperformed during the November to April stretch 72% of the time. “That’s an incredible batting average,” says Sam Stovall, U.S. equity strategist at S&P Capital IQ.

As if that’s not enough, the recent spike in market volatility, coupled with the global economic slowdown, hints that the second-oldest bull market may be nearing an end. Surely, taking some precautions now would make sense, as long as you don’t go overboard.

“Too many people get the saying wrong because they take it literally and go to cash,” Stovall says. In fact, moving out of stocks and into cash or Treasury bonds in the May-to-October period has historically led to lower returns than staying the course. That’s because cash and bonds don’t typically beat meager stock returns in the summer, especially after considering lost dividends, trading costs, and taxes. But other steps can improve your gains and reduce big swings in your portfolio.

Rotate in May this year

While equities in general languish in the summer months, defensive sectors that don’t require strong economic growth do better than most. This includes “consumer staples” makers, which sell essential goods such as toothpaste, and health care companies. So you don’t have to head to the sidelines to respond to the change of seasons. Just tilt defensively.

Had you invested in the S&P 500 year-round since 1990, you would have averaged gains of 7.5% annually. By shifting to a defensive stance with U.S. blue chips—investing only in consumer staples and health care stocks—each May through October, your annual returns would have climbed to 11.3%, with less volatility.

Consumer staples and health care stocks also hold up better in downturns. Vanguard Consumer Staples VANGUARD WORLD FDS VANGUARD CONSUMER STPLS ETF


VDC
-0.4%

fell less than half as much as the S&P 500 in 2008, while Vanguard Health Care ETF VANGUARD WORLD FDS VANGUARD HEALTH CARE ETF


VHT
0.32%

lost 14 percentage points less.

Understand this is still a major move that can trigger a big tax bill, so the strategy is best suited for your IRAs and 401(k)s.

Retrench in May this year

If you’re worried about an impending pullback, James Stack, president of InvesTech Research, suggests trimming your stock allocation now by, say, five or 10 percentage points—whatever lets you sleep better at night. “Then come back and revisit your portfolio and the outlook for the economy in November,” he says.

Calculator: How should I allocate my assets?

To get there, jettison frothy and volatile equities, such as speculative small stocks, which enjoy their biggest gains from November to April anyway. Instead, favor blue chips with stable earnings, such as those in PowerShares S&P 500 Quality Portfolio POWERSHARES EXCHAN POWERSHARES S&P 500 QLTY PF


SPHQ
0%

, which is on our MONEY 50 recommended list.

Rebalance in May as a rule

Conventional advice is to reset your mix of stocks and bonds at year-end so you won’t forget. But that requires selling equities just as they’re entering the fruitful November-to-April stretch. Instead, rebalance in May, when stocks are entering a period in which they barely outpace bonds and cash.

True, this is market timing. But so is rebalancing. This way you’re at least moving to sell stocks when timing is on your side.

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