Don’t sell in May — even if you go away!
David Prosser explains that there’s a grain of truth in the old adage.
It’s one of the oldest stock market clichés of them all. “Sell in May and go away, don’t come back till St Leger’s Day,” old City hands still say sometimes.
To be fair, like so many clichés, there’s a little truth to this one. It dates from a time when many City brokers would down tools for the summer, spending their days at events such as Wimbledon and Cowes Week before returning to work after the St Leger’s Day horse racing meet in mid-September. And while no-one works that way today – so there should be no drop-off in demand for shares in the summer months – the data does suggest the market often underperforms at this time of the year.
City brokers would down tools for the summer, spending their days at events such as Wimbledon and Cowes Week before returning to work after the St Leger’s Day horse racing meet in mid-September.
David Prosser
Analysis published this week by the investment platform Bestinvest underlines the point. Looking back over the past 50 years, the UK stock market – as measured by the MSCI UK Index – lost money in capital terms on 24 occasions between the start of May and mid-September. In other words, you’d have done yourself a favour by heeding the cliché almost half of the time.
Nine of those summers saw market corrections, where share prices declined by more than 10% between May and September. These setbacks were much more likely to occur over the summer than the winter and have taken place roughly twice a decade since the 1990s – but not yet at all during the 2020s.
Still, before you push the sell button, let’s consider the counter arguments. First, BestInvest’s analysis also concludes that once you take dividend payments into account, the number of losing summers drops to 17. In other words, you’d have made money in almost two thirds of summers over the past 50 years, when counting both income and capital returns.
Also, while the summer has seen a number of nasty corrections, there have also been some very profitable periods. On eight occasions the market rose by more than 10% when including dividends. If you’d sold in May each year, you’d have missed out on those “soaring summers” – and there hasn’t been once since May 2009.
The broader point is that trying to second guess the market in this way is something of a fool’s game. Volatility goes with the territory of stock market investment – you need to keep your eye on the long term, rather than worrying about ups and downs along the way. And if you are uncomfortable with short-term dips, you probably shouldn’t be holding shares in the first place. While the stock market has historically tended to outperform other asset classes over longer periods – say five years or more – the ride has often been bumpy.
It’s also worth saying that if you own investment trust shares, there are additional reasons to remain invested.
First, many investment trusts pay dividends more regularly than other stock market-listed companies – quarterly or even monthly, for example. You don’t want to miss out on those distributions.
Also, many investors are drip-feeding money into investment trusts – committing a fixed sum each month through an investment platform or their stockbroker. The advantage of this approach is that you benefit from a statistical quirk known as pound-cost averaging. If prices do fall – over the summer months or any time – your monthly contribution buys more shares in the investment trust, helping you to rebound when the recovery comes. The effect is to smooth out some of the volatility of stock market investment.
Finally, if you’re invested in investment trusts with a remit to look beyond the UK’s shores, you’ll be interested to know that Bestinvest also ran the slide rule over international share price performance.
Looking at historical returns from the S&P 500 Index in the US and the MSCI World Index going back 50 years, you’re even less likely to have been better off by disinvesting from international holdings over the summer.
None of which is to say you shouldn’t go away, in line with the second part of the advice from the old cliché. Rather, forget about trying to call the market and enjoy your holidays.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
