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Rotate, Don’t Retreat Again Outperformed the S&P 500

Despite its detractors, the “Sell in May” strategy of remaining invested, but rotating into the defensive sectors from May through October beat the market once again. By now many are well aware of the old Wall Street adage to “Sell in May”. But how versed are they on the S&P 500’s performance during the other six months of the year?

A hypothetical investor could have done one of three things using ETFs that mimic market and sector indices:

  1. He could have owned the S&P 500 all year long, earning a compound annual growth rate of 7.1% since April 30, 1995,
  2. He could have engaged in a semi-annual rotation strategy, owning the S&P 500 from November through April, but then taking a 50% stake in the S&P 500 Consumer Staples and Health Care sectors from May through October. This strategy would have earned him 10.5% per year.
  3. If this same investor engaged in a full-year sector-rotation strategy, in which he had a 50% exposure to the S&P 500 Consumer Staples and Health Care sectors from May through October, and a 1/3rd exposure to the S&P 500 Consumer Discretionary, Industrials and Materials sectors from November through April, his CAGR would have jumped to 13.4%.

Finally, this strategy succeeded when using sectors from the S&P Equal-Weight 500, the S&P SmallCap 600 Index, and the S&P Global 1200 Index.

Compound Annual Growth Rates for the Semi-Annual Sector Rotation Strategy

So there you have it. Sometimes investing is a lot like life. You just have to go with the flow. In this case, investing from a seasonal standpoint could be equated with white water rafting. You let the market take you where it wants to go, and just hope you get to enjoy the ride

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