If you’re new to investing, you may not have heard of the ‘sell in May’ effect. Allow me to explain.
This is the trend for (institutional) investors to reduce their activity from the beginning of next month on the belief that performance over the following six will be less stellar than from October – April.
Research conducted by author Stephen Eckett backs this up. He found that the market tends to trade fairly flat in the first two weeks of May before drifting lower in the second half of the month.
Eckett’s research also shows that, while the market doesn’t necessarily always generate negative returns over the summer months, falls can be fairly heavily when they do occur.
In light of this, it’s only natural for private investors to consider doing the same as those in the City. No one likes to see the value of their holdings dip, albeit temporarily. Here, however, are three reasons why I’ll be sitting tight.
1. No one knows what will happen next
The problem with basing any decisions on patterns in investing is the assumption that they’re reliable. Truth is, they work until they don’t.
What’s that? You’ll jump back in before activity in the market returns? But who’s to say stocks will definitely rise in October? Aren’t we due to leave the EU then?
Star fund manager Terry Smith (of Fundsmith) is a critic of those who attempt to time the market. Either these people fail, or they don’t yet know that they’ll fail, according to Smith. I very much agree.
Deciding whether to part with a particular stock should be based on what the company is doing, not other investors.
2. Loss of dividends
Unless you believe that all spare cash should be used to enable a company to grow, receiving dividends is one of life’s small pleasures. The challenge comes in not spending the cash sent your way, unless you’re using the income generated to help fund your retirement, of course.
For all long-term investors, the rule is simple. Re-invest what you receive back into the market and turbocharge your wealth over time.
Don’t take my word for it. The Barclays Equity Gilt study showed that £100 invested in the UK stock market in 1899 would have been valued at 35,000 at the end of 2017, assuming all dividends had been reinvested. Had they not, it would be worth just £203.
Returns like this are far less likely to happen if you’re consistently ditching stocks that return cash over the summer months.
3. Where else can you put your money?
Even if you were to liquidate your holdings at the beginning of next month (which, depending on the size of your portfolio, might mean not-insignificant transaction costs), you’re faced with the problem of where to put your money.
If it stays idle in your ISA or SIPP, it’s not earning you anything apart from a very, very low rate of interest.
The best cash savings account pays 1.5% but that’s lower than inflation, meaning that your money will still be losing value. That’s a lot of hassle for pretty much no reward.
In sum, I intend to ride out any volatility over the next few months, remembering investment is a long-term game. Should you do the same, your future self will surely be grateful.
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Paul Summers has no position in any of the shares mentioned. 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.