Sell in May and go away?

Happy May Day. Are you celebrating the Spring bank holiday by calling your stockbroker or independent financial adviser? If so, it’s probably because you know all about one of the stock market’s oldest sayings: “Sell in May and go away; don’t come back ‘till St Leger’s Day [the famous horse race at Doncaster, which takes place in September]”.

Anyone who thinks this adage is an old wives’ tale hasn’t studied the statistics. Investment analysts struggle to explain why this should be so, but the evidence of the past performance data is pretty compelling – stock markets do appear to perform significantly better during the winter months of the year than during the summer.

In the UK stock market, the October to May period has outperformed the June to September period on no fewer than 27 occasions since 1982. The average annual outperformance of the FTSE All Share Index was 8.8 percentage points over these years. More recently, based on the FTSE 100 Index, the saying would have worked in your favour in every year since 2010 except 2013 – even that year, share prices were more or less unchanged over the summer.

You might think this is a relatively short-term phenomenon, but remarkably, this statistical quirk seems to have applied for much of the past 300 years. Nor is it a theme only in the UK stock market – one recent international study found evidence of the same performance pattern in stock markets in 36 out of the 37 countries examined.

So is it time to dump your stock market investments and move all your money into cash for the summer? Well, probably not. First, there’s the effect of dealing charges to take into account – you’ll have to pay transaction charges to sell your holdings (and possibly tax in certain circumstances), and another set of fees to buy them back again in the autumn.

Also, the problem with past performance data is that it doesn’t tell us anything about what will happen in the future – this is why regulators have such strict rules about the way financial services companies are allowed to use such information. The summer may have been a less profitable period for investment in years gone by, but that is no reason to think stock markets will underperform over the next few months of 2015.

Investors who get their stock market exposure via collective fund managers should also reflect on what they pay these managers for – their fees, at least in the case of actively-managed funds, are charged on the basis that they have the expertise to do better than the market average.

Interestingly, in 2014, investment company managers did exactly that. Over the nine months to the end of September last year, closed-end funds made an average return of 5 per cent, but 4 percentage points of that had come during the summer months – investors who sold out in May therefore missed out on 80 per cent of the gains.

In the end, this is a question of attitude. Equity investment works best when investors take a long-term view, by choosing their investments and then sticking with their strategy. If you enjoy trading in and out of positions, and revel in trying to second guess how markets might move, that’s fine too, but this activity is speculation rather than investment.