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Time to sell in May?

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After an exceptionally strong start to the year for stock markets, never has the idea of ‘selling in May and going away’ been more tempting.

The stock market adage ‘sell in May and go away, don’t come back till St. Leger Day’ dates from the time that stockbrokers would typically leave their desks to enjoy the summer ‘season’ –Royal Ascot, Wimbledon, Henley Royal Regatta, Cowes Week, ending with the St Leger flat race in Doncaster in mid-September. As such, nothing much happens over the summer months, so investors can reasonably sell their holdings and buy them back later.

This is particularly tempting this year; UK shares have posted the best beginning to a year since 1998. A number of investment platform providers have put the theory to the test:

Bestinvest looked at more than 30 years of data (1987-2018) and found that UK share prices declined across these four months 50% of the time and rose 50% of the time, indicating no strong overall pattern of either losses or gains.

However, when dividends payments were included, as well as price movements, the months of May to August have delivered a positive total return for investors 62% of the time.

This highlights the key problem of selling in May – not only do you have the trading costs of buying and selling, you also miss out on dividend or interest payments. It may not be much, but it can mount up if you make a habit of it.

Nevertheless, Bestinvest’s analysis of the last 30 years of average monthly returns showed that June has been the worst month overall, with an average decline in UK share prices of 1.35%. Returns have also been negative in August and meagre in May, with only July standing out as a strong summer month. In contrast, December has proven the best month for returns, a phenomenon known as the Santa Rally (though this was notably absent in 2018 when UK shares sunk by -3.7%).

“Far from convincing”

Jason Hollands, managing director of Bestinvest, said: “While there have certainly been some volatile summers for stock markets in the past which have likely shaped perceptions, there have also been numerous times when thumping returns have been made during May to August. In our view, the case for systematically selling your shares each May and buying them back in September is far from convincing and it can also result in unnecessary trading costs or potential tax charges.

“In truth, unless you have a magic crystal ball to see into the future, trying to accurately predict what the markets might do over a short period of a few months is incredibly difficult. If you have a long-term time horizon for when you will need to use your investments, it is far better to stay invested and let the passage of time in the market do its work rather than gamble on theories of seasonality.”

Interactive Investor has found similar results. It went back to 1986 and found that between 30 April to 15 September (typically the date closest to St Legers Day), the FTSE All Share and the FTSE 100 have fallen 15 out of 33 times (45% of cases), making the old adage inconclusive.

“Dated concept”

Richard Hunter, head of markets, interactive investor says: “Some investment adages stand the test of time, but the “Sell in May” offering is a dated concept, harking back many decades when the City did indeed pretty much close down for the summer.

“In the modern age, with information available every minute of the day, the propensity for the market or the economy to shock or please is ever-present. As such, one of the adages which does stand the test of time is that time in the market is important, not timing the market. In any event, the data is inconclusive one way or the other suggesting that this particular saying may have run its course.”

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