Spring officially starts in a few days. It’s the season in which some investors may be tempted to follow the old adage that you should sell your stocks before the summer lull.
But is there any truth to this theory? Let’s take a look.
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What does ‘sell in May and go away’ mean?
‘Sell in May and go away’ is an old saying, popular in investing circles, that suggests stocks traditionally underperform between spring and autumn. While the saying refers to the month of May, it loosely refers to selling stocks in the spring.
It’s suggested that stocks fall over the summer due to less trading activity, partly due to the warmer weather and a higher number of people taking time off work. It’s believed this can put stock prices ‘out of touch’ with reality.
Interestingly, the adage is closely related to the supposed ‘Halloween indicator’ that suggests investors should buy stocks from October. That’s because the saying carries an expectation that stocks will rise during the autumn and winter months, following the spring and summer ‘lull’.
Is there any truth to ‘sell in May and go away’?
According to Schroders, the UK’s largest share indexes have generally fallen in the summer months more often than in other seasons. However, its data also revealed that stocks seem to particularly struggle in January, dampening the ‘sell in May’ theory somewhat.
Schroders also highlighted how in 2016, anyone following the ‘sell in May’ strategy by selling stocks in spring would have likely missed out. That’s because the FTSE 100 rose roughly 8% between spring and autumn of that year.
Meanwhile, research in the United States reports the Dow Jones Industrial Average delivered lower returns during May to October from 1950 for around 60 years. However, since the early 2010s, this trend has reversed. Consequently, investors following the ‘sell in May’ strategy in recent years are likely to have missed out on big gains.
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Is it wise to sell stocks in the spring?
Whatever your thoughts on the ‘sell in May’ theory, it’s worth bearing in mind that the performance of the stock market is extremely difficult to predict.
With this in mind, selling stocks in spring may and re-buying in the autumn may indeed prove a winning strategy if the stock market tumbles over the next few months.
Yet, it’s also possible that the stock market will rally over spring or summer. That’s because, aside from normal movements in the stock market, there are a number of factors right now contributing to economic uncertainty. Obvious examples are rising inflation and the ongoing war in Ukraine.
Should one or more of these factors change substantially for the better, it’s entirely possible that the stock market will rally over the spring and summer.
In other words, without the benefit of hindsight, it’s pretty much impossible to say whether you should sell some of your shares right now. However, there are two good reasons why you may prefer to keep hold of your stocks.
1. Savings rates are very low right now
If you sell your stocks you’ll need somewhere to keep your wealth. Unlike in years gone by, stashing your cash in a savings account will no longer give you a decent return.
Right now, the highest easy access savings rate available is just 0.82%. And even if rates start to creep up, they’ll almost certainly fall short of the current rate of inflation. As a result, you may wish to keep your wealth in stocks.
2. A long-term investing horizon is often sensible
When investing, taking a long-term approach can pay dividends (literally). It can also make you less likely to panic sell during a stock market crash, reducing the chances of crystallising losses and missing out on any quick recoveries. In other words, if you follow this approach you shouldn’t look to sell stocks based on the time of year.
For more on the benefits, see our article that explains the importance of a long-term investing approach.
Are you looking to invest? If you’re looking to buy in spring rather than sell, then take a look at our list of top-rated share dealing accounts.
