Sell in May? A fruitless exercise
This used to work quite well when the City was all belts and braces and traders would disappear for ‘The Season’ – Ascot, Henley, Wimbledon – and then come back after the summer holidays. Volumes fell and prices weakened, not picking up until everyone returned to work.
Research by Seven Investment Management (7IM), shows that the summer months (30 April – 14 September) have been in positive territory 60% of the time over the last thirty years. It ran two competing scenarios, the first – where the investor sold on 30 April and not reinvested until September saw an annualised performance of 8.6% to the end of December 2017. In contrast, the ‘buy and hold’ approach saw an annualised performance of 9.3%.
While this isn’t a big difference year-on-year, it stacks up over time. Over the 30 years, the buy and hold strategy is up 1,349%, while those who sold in May would ‘only’ have got 1,100%.
Justin Urquhart Stewart, co-founder and head of corporate development, 7IM said: “It’s definitely time this rule was put to bed…the bottom line is that time in the market is your friend, not trying to time the market, due to the positive effects of compounding. What might not look like a huge difference over time, adds up.”
Of course, it depends how you crunch the numbers. Bestinvest looked at 32 years of data for the FTSE All Share Index and found that share prices have declined and risen an equal amount of times (16 each) during the period between May to mid-September, suggesting no firm conclusions for the theory either way.
However, it points out that once dividend payments are factored in and returns are measured on a total return basis, UK stock market returns have been positive 66% of the time during the summer. This compares to markets generating positive returns 78% of the time across the full calendar years in question.
Fidelity’s analysis is more in line with that of 7IM. It found that if you had invested £10,000 in the FTSE All Share 30 years ago and remained invested throughout the whole time you would have a pot worth £128,033. If, on the other hand, you had followed the adage, sold in May and bought back in September every year, you would have a portfolio worth £126,950.
These statistics don’t factor in trading costs, which will reduce your return and they don’t factor in the hassle of buying and selling out of all your holdings. All in all, selling in May and going away would seem to be an entirely fruitless exercise and the whole thing should be laid to rest once and for all, rather than confusing future generations of investors.