Sell in May and Go Away – the truth behind the adage

TSP allocation guide May 2016In late spring each year, I start getting emails and message board questions asking why I don’t sell my TSP stock funds and move to the TSP F (or G) Fund for the summer. After all, “everyone knows” that all the stockbrokers go to the Hamptons, volume goes way down, and the stock market loses ground during that period every year.

There are a number of variations on the adage, but they all revolve around selling near Memorial Day and buying back into the stock market after Labor Day. Calendar based strategies are always appealing, but how has this one actually played out?

From 1970 to 2017 (so let’s call that the modern stock market), the S&P 500 has been up 32 times during the summer months, and declined 15 times. So better than two years out of three the market is up during that dreaded period. I’m not saying that the market will be up during the summer in any given year, but the odds are that it will.

To be fair, stocks were up 5.8% during the up years, and down 8% during the down years, so that evens things out a bit in terms of total return. But on average the S&P 500 has gained 1% during each of those 47 summers. (Going back further, the S&P 500 averaged 2.2% from May to October from 1950 to 2017). And in 2017, the S&P 500 was up 7.4% from the beginning of May to the end of October.

But let’s stick with that 1% number. 1% doesn’t sound like very much money – that’s only a penny per dollar invested. It sounds like such a negligible sum that it might be worth sitting out the summer months just so you don’t have to worry about it.

math-plus-funAnd that brings us back to fun with math. What if I told you that in a very realistic scenario, 1% a year could turn into hundreds of thousands of dollars in your Thrift Savings Plan by the time you were ready to spend it?

To work those numbers, let’s go to our compound interest calculator at:

Once we get there we will start with $1 in current principal (to simulate being a brand new employee), $1000 monthly addition (which is probably a little high for a new employee and very low for a more experienced one), 30 years to grow (which reflects a nice long government career), an interest rate of 8% (which is fully 2% under the S&P 500’s average return during the period 1928-2016), and we will compound that 12 times per year. That gets our TSP balance to $1,490,370 after 30 years. Not bad.

Now just make one little change – turn the 8% into 9% to account for that 1% average difference between sitting out the summers and staying invested. That results in a Thrift Savings Plan balance of $1,830,758 – a difference of $430,388. And roughly 19% more than the guy who didn’t do the math.

And that is why my money doesn’t go on vacation during the summer.

thrift savings plan retirement

8 thoughts on “Sell in May and Go Away – the truth behind the adage”

  1. “we will compound that 12 times per year”

    How does the TSP compound?
    From my understanding, the TSP reinvests dividends and earnings back into the share price. If that is the case, how do we benefit when we take into account dollar cost averaging with the fact that share price infinitely increases?

    1. That is a pretty high monthly contribution – I just picked round, unchanging numbers to make it simple. I will add a more typical example before I republish it next May. But the bottom line of a 19% larger balance after 30 years (using historical averages) would stand for any sized monthly contribution.

      1. I dropped the monthly contribution from $1500 to $1000 in the example. That is still a bit steep for a new employee, but well below what someone who is maxing out their TSP contributes.

  2. Joseph, you are mistaken. One can contribute more than $1500/month on a whole lot less than a $10,000/month income. Your contributions are not tied to your income. You can contribute 50% of your income if you want. There have been times that I contribute 90% of my check.

    1. I’ve done 97% of my base pay. Granted, I was collecting a lot more than just my base pay, in the form of housing allowance, and $1000 a month language bonus.

  3. Why are you just randomly compounding 12 times a year? TSP doesnt calculate out a percentage and compound interest on a schedule. It is just based on a share price going up or down.

    1. The gains (or losses) in TSP funds (which include share price changes and dividends) accrue daily. Compounding daily seems excessively complicated, so for the example I picked monthly. (The difference between compounding daily and monthly over 30 years is about 1/10th of 1% if I lucked into doing my match correctly).

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