Should You Sell In May And Go Away?

With the FTSE 100 hovering around all-time highs, is now the time to take profits and wait for a better opportunity to put your money to work at lower prices? 

The old adage goes “sell in May and go away”. But will this approach help investors to profit from the potential of a stock market correction?  Possibly, and possibly not – let me explain…

The Case For The Bears…

The whole idea behind this perennial problem is based on the historical underperformance of stocks between the months of May through to October.

With City traders escaping the rat race for a few weeks in the summer, trading volumes are thinner.  The result can be that the shares of companies releasing news releases often swing by more than normal, due to the lighter volumes being traded.  If that swing is downwards then investors often panic and sell their investment, causing the price to fall further.

This year, however, investors could do well to follow the advice.  Immediately after the last general election the FTSE 100 fell by nearly 11%, as the major political parties fought it out to form a coalition government. As we all know, the stock market hates uncertainty: this was not good news for markets back in 2010, and the 2015 election results could usher in another period of uncertainty.

At this point in time, it is difficult to predict what a coalition government would look like… If the polls are to be believed, it could mean that neither Mr Cameron nor Mr Miliband will be able to form a government with an absolute majority. Another coalition government — with either the Lib Dems or the SNP — could well be on the cards.  A government led by Mr Miliband could well spell bad news for the likes of Centrica, Barclays and Lloyds, with the possibility of an increased banking levy and fuel price freezes.

The Case For The Bulls…

It is true that there is a significant possibility of a correction, the magnitude of which is unknown.  Personally, however, I wouldn’t be inclined to sell all of my stocks simply based on the possibility of the price dropping, possibly on a temporary basis.

If, for example, I held around 30 stocks and sold the lot, only to buy them back a few weeks later, I would be looking at charges of £600 at £10 per trade, plus the addition of stamp duty depending on the size of the trade.  It is fair to say that some investors may get lucky if events play out as expected, but is often the case that the bottom is missed, leaving investors having to buy back in at higher prices than they sold.

Whilst I wouldn’t be surprised to see the market fall following the bank holiday, I do think we are in a bull market currently.  If our leaders get their act together and form a coalition quickly, I think we could well see the FTSE 100 at 7500 or higher before the year end.

What’s The Best Way to Play This Market?

There are numerous ways that investors can profit from volatility, such as:

  • CFDs (contracts for difference);
  • Spread betting;
  • FTSE ETFs (exchange traded funds) that will make money if the market rises (long) or falls (short).

I would urge caution here, as some of these products use ‘leverage’.  This is good if you make the correct call, but get it wrong and you can lose more than your original stake.

Personally, I’ll be sitting on my hands, waiting for an opportunity to buy some shares on offer at cheaper prices.

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Dave Sullivan does not own any share mentioned in this article. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.