Sell in May and go away, dont come back until St Leger Day. So goes the well-known stock market saying. But shareholders should be very careful if they are thinking of following the phrases advice.
This allegedly sage piece of wisdom, which has roots in an Old English saying, recommends that investors should sell their holdings in the spring, and not buy back into markets until the famous St Leger horse race held in mid-September, which is seen as the end of the summer season.
While the St Leger Stakes are a British tradition dating back to 1776, US investors also adopted the saying, as it roughly matched the period between Memorial Day at the end of May and Labor Day at the start of September, when American traders were likely to take more time off for their vacations.
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The mantra is based on evidence that stock markets typically performed worse during the summer months and better during the winter months.
For instance, since 1950, the US Dow Jones Industrial Average has made an average return of 0.3 per cent during the May to October period, compared to an average profit of 7.5 per cent from November to April, according to Investopedia. October has a particularly bad reputation with investors – the 1929 Wall Street Crash, Black Monday in 1987, and the start of a two-year US bear market in 2007 all occurred during this month.
The saying may have held some truth in the past – with more investors likely to travel during the summer months, there was generally less trading, and fewer stocks were bought and sold. This would mean the effect of sudden market sell-offs could be amplified. But in the modern day, technology allows people to trade at any time, day or night, and anywhere in the world.
“The traditional stock market adage suggests that markets struggle for direction over the summer months,” says Chris Beauchamp, chief market analyst at IG.
“This held true perhaps in a more genteel age, when the City and Wall Street decamped to the races and their country houses. Now, activity goes on all year.”
You can't time the markets
In fact, new research suggests that following this old advice is more likely to leave investors out of pocket.
Trading platform Fidelity analysed the returns of the FTSE All Share index between May and September for the past 30 years, and found that the index produced positive returns in 18 of those.
While the index fell more than seven per cent in 2015 (indicating that this would have been a good year to sell in May), it grew 9.72 per cent in 2016, and 4.41 per cent in 2017 – someone who had followed the saying would have missed out on this growth.
This isnt a smart strategy – rather, investors following this advice face potentially losing out in three ways
Fidelity found that if a person had invested £10,000 in the FTSE All Share index 30 years ago and remained invested for the whole time, they would be sitting on a pot worth £128,033. In contrast, someone who sold in May and bought back in September each year would have a portfolio worth £126,950 – they would have lost out on £1,082 of growth.
The findings suggest that time in the market is more valuable than trying to time the market, according to Tom Stevenson, investment director at Fidelity.
“While many stock market adages have a ring of truth to them, they should invariably be taken with a pinch of salt,” he warns.
“The St Leger Day saying is no different. In fact, as our analysis shows, this old market maxim really is a bit of a non-starter, and the smart money would have been on keeping your money invested in the market throughout the past three decades.”
Dipping in and out of the market will also lead to higher trading costs, points out Laith Khalaf, senior analyst at Hargreaves Lansdown. Frequent dealing can be expensive, depending on your trading platform, and can quickly eat into an investors returns.
“The idea that investors should sell out in May and come back in September is utter bunkum. It makes no rational sense and isnt borne out by historical statistics, so following this adage is only likely to lose you returns,” he says.
By sticking to the sell in May motto, investors not only risk missing out on stock growth – Beauchamp says that they will also face the possibility of buying back into the market at a higher price in September and October.
“Remember, this is still a bull market – dips are there to be bought. It may not be easy or as calm as 2017, but the long-term trend is still up.”
The aim of the saying is to avoid investment losses in the summer, and while all investors want to avoid making losses, selling in May isnt a smart strategy. Rather, investors following this advice face potentially losing out in three ways: missed returns, higher trading costs, and buying into the market at more expensive values.
Instead, investors are likely to be better off staying calm, leaving their money in the market, and simply enjoying the warm summer weather.