You are here: Home - Investing - Experienced Investor - News -

The truth behind the ‘Sell in May’ advice

0
Written by: Adam Lewis
29/04/2016
Despite the recent cold snap summer is nearly upon us, and with this in mind some investors might be turning their attention to the old investment adage of: “Sell in May, go away come back again on St.Leger day”. 

With the St.Leger horserace not taking place until the 10 September, the saying goes that investors would be best served selling up their investments during the summer months. This is mainly because of the idea that many of the City’s top professionals spend a good deal of that time out of the office to enjoy a summer of sporting activities.

This has led to the belief that the summer months are a dangerous period for investors, with a high incidence of market sell-offs.

So how much of the myth is true? Here are the key facts you need to know.

The cold hard statistics

AJ Bell has studied the FTSE All-Share from 1965 onwards to test out the market saying, by looking at the performance of the index in three distinct time periods: 1 January to 30 April, 1 May to 10 September, and 11 September to 31 December for all 51 years.

At first glance, the AJ Bell stats would suggest there is some weight to the idea of selling in May. This is because, on average, the 1 January to 30 April was the most rewarding period for investors, with the FTSE All-Share generating an average capital return of 7.3%.  Meanwhile the 1 May to 10 September was the most challenging, with the index down 0.2%.

However, before you rush to sell up, the AJ Bell stats go onto reveal that despite the averages, in reality the approach falls short. This is because over the course of 51 years, on only 14 occasions has the market followed the prescribed pattern of rising in the first four months of the year, then falling until to September and then rallying again. Indeed investors who sold in May would have missed out on double-digit returns no fewer than 10 times (1968, 1971, 1977, 1980, 1987, 1989, 1995, 2003, 2005 and 2009).

Research from Tilney Bestinvest adds further weight to the staying invested in the summer camp.  Looking at 30 years of data for the FTSE All Share Index (including dividends reinvested), it reveals that during the period between 1 May and the second week of September, the FTSE All Share Index has delivered positive returns in 19 out of the past 30 years, meaning 66% of the time investors would have made positive returns by staying invested over the summer.

Jason Hollands, managing director at Tilney Bestinvest, says: “While true believers in this Old Wives tale can point to the some notable summer sell-offs, selective memory means they too often ignore the soaring summers when the markets posted double digit returns.”

The costs

One problem with the idea of constantly selling up in May and returning in September is the costs that are incurred in doing so.

Russ Mould, investment director at AJ Bell, says: “Trading involves paying stamp duty, traders’ spreads and brokers’ commissions, as well as potentially tax, so frictional dealing costs would start to rack up pretty quickly. There is also the danger the investor misses out on valuable dividend payments, whose reinvestment is the real secret to making the most of equities over the very long-term.”

The importance of dividends

Adrian Lowcock, head of investing at Axa Self Investor, notes that since 1986 the FTSE 100 has lost 16.48% between 1 May and 30 September. Over the same period, excluding dividends and charges, the index of the UK’s largest 100 companies has ended down 15 out of 39 times.

However, with dividends reinvested but excluding costs, from 1986 to 2014 the FTSE 100 has returned a total of 32.4% over the summer months, delivering a negative return just 38% of the time.

“It is just not significant enough each year to justify investors selling over the summer,” Lowcock says. “Once dividends have been factored into the figures, the FTSE 100 makes a positive return on average.”

Time in the market

Tom Stevenson, investment director for personal investing at Fidelity International, says while those who followed the ‘Sell in May’ adage last year will have done well, there have been 11 other occasions in which they would have been left out of pocket.

Instead he says a more prudent strategy  is for investors to stay invested throughout market cycles, because missing out on even a handful of the best days in the market can seriously compromise your long-term returns.

He concludes: “If there is one stock market adage that investors may want to stick to, it is ‘time in the market matters more than timing the market’.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Comments are closed.

ISAs: your back-to-basics guide for 2018/19

Here’s everything you need to know to make the most of your unused ISA allowance ahead of the 5 April deadli...

A guide to Sharia savings accounts

A number of Sharia savings products have upped their game in recent months, beating more familiar competitors ...

Five ways to get on the property ladder without the Bank of Mum and Dad

A report suggests the Bank of Mum and Dad is running low on funds. Fortunately, there are other options for st...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
A guide to investing in the film industry

Investing in film is not for the fainthearted but with possible returns of 10% per annum, it’s no wonder investors...

Close