May is upon us, and that old adage that we should “Sell in May and go away” raises its head once again.
It would free us up to forget our financial affairs for the summer and instead enjoy the, er, rain, but is there anything behind it?
The idea is that stock markets typically advance during the October to April period, and then start to fall back in May — and that we’d be better off selling all our shares and sticking the cash in a savings account, or gilts or bonds, or some such. I reckon that would be a silly idea, for a number of reasons.
You would certainly have made a mistake had you tried it last year. From 1 May 2016 until 30 September, the value of the FTSE 100 rose by 11.5%, and you’d have done very well to get anything close to that from any alternative investment — you wouldn’t have come near it from interest on a savings account.
Now yes, that’s just one year, and in 2015 you’d have lost about the same amount — with the previous three years showing minor moves in both directions. Overall, I reckon you’d have just about broken even (on share prices alone) following a Sell in May strategy every year for the past five.
There is an effect
And historically, academic studies have actually found there is a correlation between the summer months and poorer share price performance across the stock markets of most developed Western economies.
In fact, several studies have found the Sell in May effect present in more than 30 different markets under examination, and that the May to September period really does provide poorer average returns than the other months of the year. (Although a recent study from the University of Queensland suggests it’s also swayed by the US presidential election cycle, just to further muddy the waters.)
Quite why the effect happens, nobody really has any idea. According to the Efficient Markets Hypothesis, which says that if all relevant information is known to all players then nobody can get ahead, such a thing can not happen — but most investors already know the Efficient Markets Hypothesis is pants.
What should we do?
Any possible marginal long-term gains would be at the mercy of several other factors if we tried to follow it in practice.
One is that, whatever the prices of shares are doing, a portion of each year’s ex-dividend dates come along during the summer, which you’d miss. And if you invest in high-yielding blue-chip shares (which I reckon is probably the best long-term strategy there is), you can’t afford to turn your nose up at what could be a significant pile of dividend cash.
You’d also face trading costs twice a year too, when you buy and when you sell — and even at today’s low-cost dealing charges, you really don’t want to set yourself back an extra couple of percent per year.
Oh, and you could be faced with capital gains tax bills just when you don’t want them, too — you should be timing your investment buys and sells when it works best for you, not to satisfy some old rule of thumb.
So no, the Sell in May thing is is definitely an intriguing effect, but in reality it’s no guide to timing the market.
