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Don’t sell in May and don’t go away

7 May 2020

David Prosser questions the old financial adage.

It’s easy to scoff at seemingly old-fashioned financial advice such as the once widely-followed rule that investors should “sell in May and go away, and not come back until St Leger’s Day”. After all, this hoary adage took root in a different age, when the City’s brokers took the summer off, only returning in September following the St Leger horseracing meeting in Doncaster. But before you chuck this saying in the dustbin of history, it might just be worth checking the data.

Figures just published by the investment service BestInvest show that over the past 40 years, the UK stock market really has fallen in both May and June, at least on average. There have been good years and bad, but over the period as a whole, equity prices in each month have fallen by an average of 0.24% and 0.4% respectively. And in each case, prices have fallen in more years than they’ve risen.

What does that mean if you’re planning your savings and investments for the months ahead? Well, it’s worth saying that BestInvest’s research also shows average stock market performance has been better in July and August, potentially undoing some of the damage done in early summer. And factoring in the effect of the dividends that investors earn on shares improves May and June’s figures.

Still, if ever there were a time to be questioning your commitment to staying invested in stocks and shares, this would be it. The volatility we’ve seen on stock markets in recent months amid the Covid-19 pandemic has been remarkable. And with so many companies feeling compelled to slash or cancel their dividends, we can’t be confident that these payments will compensate us for capital losses in the months ahead if there are further market setbacks.

On this basis, maybe we should listen to the old advice. Maybe investors should pull their money out of the markets, ready for a return in the autumn.

Missing the bounce

Well, let’s not be hasty. For one thing, selling your existing stock market investments today crystallises the losses you’ve suffered this year. So far, these losses have been on paper only; if you sell up, you’ll turn them into reality, missing out on the potential for a recovery. Indeed, from its low-point in late March, the UK stock market was up by more than 20% by the end of April, all of which investors would have missed out on if they’d sold at the bottom.

Moreover, in the longer term, what seem like cataclysmic bouts of volatility when you’re in the midst of them are really just blips. From time to time, the stock market does take a nasty tumble, but viewed with hindsight these mishaps look much less serious. The UK stock market almost doubled in value following the setbacks seen during the global financial crisis of 2008 and 2009, for example.

We don’t know what the future will bring, but we can learn the lessons of history, which teach us about another old stock market saying that is worth keeping front of mind: “It’s time in the market that counts, not timing the market”. For long-term investors with horizons of five or 10 years, or longer, equities have in the past outperformed all other asset classes.

What about new investments in the stock market, if you’re in a position to maintain the savings habit? Well, what goes for your existing investments is true for your strategy in the months and years ahead too. If your financial goals and timeframes haven’t changed, nor should your approach to achieving them.

Regular saving through your investment platform may offer a great way forward at this time. This will allow you to drip-feed money into the stock market – often as little as £25 or £50 a month – and provide pound-cost averaging benefits. If markets do fall once again, your fixed monthly investment will buy more investment company shares, so you’ll benefit when the rebound comes; this is a way to smooth out market volatility.

Keep calm and carry on, in other words. That “Sell in May” counsel might have a kernel of truth at its heart, but not enough to prompt you to change direction. Stay focused on your long-term goals, try not to be spooked by the ups and downs of the short term, and keep saving if you possibly can.

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