David Prosser examines market volatility in August and how regular investment through investment companies can benefit in the long run.
It’s the world’s oldest classic horse race. But the St Leger Stakes at Doncaster Racecourse, which this year takes place on 14 September, is also a key moment for stock market investors. The old hands of the stock market traditionally advised investors: “Sell in May and go away, don’t come back ‘till St Leger Day”. The idea was that as stock markets tended to under-perform during the summer months, investors were better off taking their money out until the autumn.
Does that sound daft? Well, investors following the old advice this year would certainly have done themselves a favour. Market volatility in August meant that the UK stock market, as measured by the All-Share Index, lost 1.09 per cent between 1 May and 1 September. If you’d sold up, you wouldn’t have suffered that disappointment.
Still, there are no guarantees. Research just published by Fidelity International reveals that the UK stock market has lost money over this period in just 12 of the past 30 years. On the other 18 occasions, you would have missed out by dropping out of the market from May until September. Often, the returns foregone would have been considerable: in 2016 and 2017, for example, the market gained 9.7 per cent and 4.4 per cent respectively over the summer.
Play the long-term game
The reality is that trying to call the market in this way – attempting to pinpoint when very short-term market movements will take place – is just too difficult. When you choose your horse for the St Leger, you’ll study the form guide, as well as a broad range of other criteria, in order to give yourself the best possible chance of picking a winner. But in stock market investment, past performance is no guide to the future, as financial advisers and fund managers are legally required to tell you.
Even if it were, the evidence of Fidelity’s figures is patchy. The form book tells you there was a two in five chance of losing money over the summer months between 1990 and 2019, or a three in five chance of ending up ahead. Those are hardly compelling odds.
There are other calculations to make too. Selling up and then buying back your investments will incur costs that you need to take into account when considering returns. Also, simply missing a handful of the best days for the stock market can have a dramatic effect on your long-term returns; unfortunate if those days come during the summer.
In truth, all the evidence of the last century or so is that stock markets tend to outperform other asset classes, but only over long-term periods – say five to 10 years or more. If you’re not prepared to take that view of your investments, you probably shouldn’t be invested in the stock market in the first place.
How investment companies can help
What’s the best way to get that long-term exposure? Well, assuming that you want a collective fund approach – with a professional manager picking a diversified portfolio of shares on your behalf - regular investing via an investment company could be an ideal solution.
Investing in this way makes it easier to be disciplined about saving. Plus investment companies will often accept relatively small sums – as little as £25 a month in some cases – which makes stock market investment more accessible.
There’s another advantage to investing in this way too. You’ll benefit from a statistical quirk known as pound-cost averaging. In months where the market has fallen, your fixed monthly investment buys you more investment company shares, which then gives you a boost when the market rebounds. The effect is to smooth out some of the ups and downs of the stock market – including during those hit-and-miss summer months.