Will you sell in May and go away?

For those of you unfamiliar with the adage ‘sell in May and go away, don’t come back till St. Leger’s Day’, it refers to the custom of London-based aristocrats, merchants and bankers going to the ‘country’ to escape the heat of the city in the summer months and, instead of working, they would attend social or sporting events.

As a result of less trading, fewer stocks were bought or sold, so any sudden market sell-offs were amplified. So the adage suggests that investors are better off selling their investments and reinvesting after St. Leger’s Day, when the St. Leger’s Stakes – a thoroughbred horse race and the last leg of the British Triple Crown – which marks the end of the summer festivities and a return to work.

A strategy worth following?

So should you follow the adage? The short answer is almost certainly no. For one thing, the headline numbers don’t include transaction costs (it may cost you money to sell your shares or funds today, and there could be more to pay when you buy back into the market). Secondly, there could be tax implications – capital gains, for example.

And while there is a certain logic to the saying, times have changed. Technological advances mean that stock market traders and fund managers can now monitor the markets and their investments without having to be anywhere near London or any other city.

There is also very little evidence to suggest that the strategy works. If you look at the FTSE All Share over the past three decades*, it’s not clean cut at all. Whilst people following the adage in 2001 and 2002 would have avoided losses of 9% and 18% respectively, they would also have missed out on 18 out of 30 years of positive returns*. Last year, investors would have missed out on gains of more than 4%**.

If you extend this analysis to other global markets, the results are equally inconclusive. Bloomberg recently published some data (see table) showing the historic average returns from 1 May to 15 September each year over the same 30-year period (1988 to 2017). The 30-year average returns of the MSCI Asia Pacific index was negative at 1.2%. Europe’s Stoxx 600 index lost 1%, while the FTSE 100 index fell 0.4%. Conversely, the US’s S&P 500 index made a 1.2% gain on average.

Stay invested

Once you factor in possible charges and tax implications, not to mention the extra effort, there is nothing to suggest that selling in May and going away until St. Leger’s Day is a strategy worth following.

At FundCalibre, we are strong believers that investors should spend time in the market, not spend time trying to time the market.

If all else fails and the summer is a washout in terms of equity returns as well as the weather, there’s always the Santa rally to look forward to the week before Christmas and New Year!

*Source: Fidelity, September 2016

**Source: FE Analytics, FTSE All Share, dividends reinvested, 1 May 2017 to 11 September 2017