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An old wives’ tale with some truth (you should ignore)

12 October 2018

David Prosser tells us why there is no need to change investment approaches during the summer months.

Did you follow the advice of the stock market’s old hands and cut back on your exposure to shares over the summer months? If so, you may be feeling pleased with yourself. The old stock market adage, “Sell in May and go away, don’t come back until St Leger’s Day”, proved prescient this year. The UK stock market fell by more than 3 per cent between the beginning of May and 15 September, the date on which Doncaster Racecourse hosted this year’s St Leger’s.

This isn’t unusual. Stock market historians’ research shows the UK stock market very often underperforms during the summer months of the year compared to the winter. You’re more likely to lose money over the summer from an investment in shares and more likely to gain in the winter. It’s not clear what drives this trend, which is also in evidence in other global stock markets, notably the US. Some analysts think that because the summer is quieter, with fewer trades, there is more scope for volatility, but there are no definitive answers. Still, what is true is that over the past 30 years or so, the UK stock market has fallen around half the time over the summer.

Time for a new approach?

So, should you change your approach to investments, selling up each May and buying back into the stock market around now? Well, the short answer is no.

For one thing, the figures are misleading. The 3 per cent loss this year doesn’t include dividends you would have received on your shareholdings. Taking this income into consideration, your loss would come down to less than 1.5%. And looking backwards, investors would have lost money less than a third of the time over the summer if dividends are included in overall returns. Also, remember that dealing costs to buy and sell investment will apply if you trade in and out.

More fundamentally, however, investment is about long-termism. You’re building a portfolio of savings and investments to help you achieve your long-term financial planning goals; you’re not trying to second guess how the market will move over a short-term period. Indeed, trading in this way very often misfires. While the data shows the stock market has indeed fallen in one out of two summers over the past 30 years, you’d still be worse off for having spent every summer out of the market: over time, the good summers have more than made up for the bad ones, even before you take dividend and dealing costs into account.

Regular savings pays

A better approach to this question, particularly for those who don’t have large lump sum investments to make, is regular savings – that is, consistently drip-feeding money into your portfolio on a monthly basis. Investing in this way has all sorts of advantages. Not least, it’s an affordable way to invest – putting £50 or £100 a month, say, into a regular savings plan is less daunting for most people than finding several thousand pounds once a year.

Also, regular savings plans benefit from the statistical quirk known as pound-cost averaging. This is the idea that your fixed monthly investment buys more shares in months when prices have fallen; these shares then help your investments rebound once prices recover. The effect is to smooth out the ups and downs of the market.

The regular savings plans offered by most investment companies offer an excellent opportunity to manage your saving in this way. They’re certainly a smarter bet than following the old wives’ tale about selling in May, even if it does have a grain of truth in it.

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