Is now the time to dust off this November-based investment strategy?

Christopher Ruane digs into the thinking behind an old investment strategy and explains whether he’ll be using it this November.

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May seems a long time ago now that the long, sunny days of summer are a fading memory. But, according to one long-established investment strategy, investors should “sell in May and go away”.

When are they supposed to come back? November. In other words, tomorrow!

Might this investment strategy make sense – and can I learn anything from it more generally?

Why sell in May and go away?

The basis of the saying is that May to October is perceived to be a weaker time for stock market performance than November to April.

Does that have any basis in fact?

Different reasons have been suggested as to why it might. Summer holidays slow down market activity, for example, and the end of a calendar year brings new insight on how companies expect to perform in the future.

Whatever the explanation, a number of academic studies have concluded that, indeed, stock market returns in the period November to April are on average stronger than those from May to October.

Taking the long-term approach to investing

Not all studies agree, but there is enough support for the thesis that I think it may have merit over a decades-long period (though not necessarily in any given year, crucially).

However, as a long-term investor, that puts me in something of a bind. I try not to time the market but rather to buy and hold shares for the long term.

Selling all my shares every May and investing the funds again each November risks me being out of the market during some great bull runs.

It would also probably add a lot of costs in share-dealing fees.  

Great companies at bargain prices, whenever

So although I may buy shares this November, that is not because I am following this investment strategy.

Rather I will be doing what I would do in any month of the year. That involves looking for a mismatch between share price and value when it comes to businesses I think have brilliant prospects.

Looking around the UK stock market as we head into November, I certainly see some companies that I think could fit that description.

Finding cheap shares to buy

For example, one share I am eyeing for coming weeks if I have spare cash to invest is Legal & General.

It combines a strong brand and large target market with a proven model of profitability. The single-digit price-to-earnings ratio and 9.2% dividend yield also appeal to me.

Sometimes shares are cheap for a reason, of course. Choppy markets could lead to lower profits at Legal & General, for example. But I find the business quality and share price attractive enough to make me want to buy more of the shares.

So, as the old investment strategy suggests, I may well be active in the stock market in November. It is just that I did not go away in May!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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