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‘Sell in May’ runs the risk of missing potential summer gains!

‘Sell in May’ runs the risk of missing potential summer gains!
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‘Sell in May’ is an investing strategy that some investors really believe in based on old traditions and past data.

But what does this approach involve and is it worth your time? Let’s take a look.

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Where does ‘Sell in May’ come from?

The full version of the saying is ‘sell in May and go away, and come back on St. Leger’s Day’.

It actually dates back longer ago than people realise. Wealthy merchants, bankers and aristocrats would leave London during the warm summer months and escape to the country. They would then make a grand and extravagant return to the races in Autumn!

This idea developed and transferred to the American stock market. Investors are more likely to spend time on holiday between Memorial Day and Labor Day, which roughly translates to the summer period. Interestingly, some market data has shown trends and patterns that tie in with the summertime.

What does ‘Sell in May’ mean?

These days, the saying refers to the idea that some stocks tend to underperform between May and October.

The theory is that markets are quieter during the summer with lower trading volumes. So some investors choose to offload their investments and then buy back in during September.

However, it appears like a lot of this is based on superstition rather than actual data.

Should I sell my stocks in May?

Analysis from Willis Owen shows that over the last 34 years, the MSCI World (a global equity index fund) fell in only 13 out of 36 summer periods from 1985 to 2020.

Adrian Lowcock, head of personal investing explains: “Investing is about far more than following theories or sayings blindly, and anyone following the ‘Sell in May’ adage is taking a significant risk.

“It is simply impossible to tell what is going to happen, as evidenced last year when markets looked well set to be a classic ‘Sell in May’ year, given investors were coming out of lockdowns, only for them to continue to rally through the summer months.”

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Is May a bad month for stocks?

Part of the reasoning behind this whole theory is that people’s focus moves away from work and investing during the summer. Instead, going on holidays and enjoying life becomes a higher priority.

However, these are unprecedented times. Anyone who thinks they know exactly how things will unfold in the markets may have spent too much time in the sun.

Lowcock goes on to say, “The fact that markets have rebounded so strongly also means the focus has already shifted to the recovery, so investors might be less concerned about missing out on potential gains.
“However, as an investment strategy, it is far from failsafe. There are reasons to remain positive on markets. For one, confidence is high that economic activity will recovery strongly and earnings are expected to reflect that rebounding economic activity.

“Whilst markets are higher than they were, the cyclical and value areas are still some way off their pre-Covid levels and could benefit from further relief rallies.”

What is the best month for investing?

It’s always important to remember that past performance doesn’t dictate future results. Just because selling in May has performed well or poorly in the past does not mean history will repeat itself. During any month, your investments could make or lose money.

Rather than trying to time the market and potentially dealing with capital gains tax, there are other options. Using a share dealing account to build yourself a good portfolio will help carry you through many summers.

In addition, using a stocks and shares ISA could make things easier. This type of account will help to make sure you don’t get burnt by high taxes on your investments.

Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.

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