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Sell in May: Should you take a summer holiday from equities?

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30/04/2014
We find out whether investors should "sell in May and go away" for the summer as the old piece of investment advice instructs.

Dating back to the days when the City would shut down for “the season” so that brokers could enjoy sporting events like Ascot and Wimbledon, an old rule recommends investors: “Sell in May and go away, don’t come back till St. Leger Day”.

Brokers would return to the office following the St. Leger flat race in the second week of September, at which point it was safe to reinvest.

Translated for the modern-day investor, the “sell in May” rule suggests they should take a step back from underperforming shares or equities in the summer months and move into more defensive areas.

Missed opportunities

However, over a 25-year period, despite a number of market slumps which have taken place during summer months, investors would have missed out by following the old adage.

Jason Hollands, managing director of Bestinvest, says: “Gone are the days when the City brokers departed to spend a leisurely summer at sporting events. These days markets trade globally and around the clock.

“The evidence since the Big Bang City reforms suggests that while there have been a handful of significant summer sell-offs-which mean that ‘average’ returns for the summer months are low-there is no compelling case to automatically get out of the market.”

Data from Bestinvest indicates that during the period between 1 May and the second week of September, the FTSE All Share Index has delivered positive returns for 15 out of the past 25 years, meaning investors would have made positive returns over the summer 60 per cent of the time.

Average annualised market returns of 10.9 per cent over 25 years would have dropped to 9.8 per cent for investors methodically exiting the market each summer, excluding transaction costs.

Constantly exiting and re-entering the market, Fidelity’s Tom Stevenson notes, allows dealing costs to cut further into overall performance.

Stevenson says: “My initial response is that these seasonal attitudes sometimes work and sometimes don’t. To use them as a reliable investment guide doesn’t make sense at all.”

“Even if there had been logic to this in the past – and I don’t think there ever was – it would have been arbitraged away by traders long ago.”

Gloomy summer

After a bumper 2013, Hollands says we could be in for a period of choppy waters. China’s economic slowdown, geopolitical strife in Ukraine and the prospect of future interest rate rises in the US and UK are all looming over the markets as we head into the summer months.

He also notes that recent weeks have also seen a rotation out of more speculative growth stocks like social media and internet companies.

But that doesn’t mean sell, Hollands says.

He explains: “Time will tell whether or not this takes some of the head out of the market. In the event of a broader correction, a canny strategy for long-term investors should be to buy rather than sell on such dips. That’s the art of successful investing.”

Stevenson concludes: “My recommendation at this time of year is just to ignore the ‘sell in May’ adage.”

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