Kyle Caldwell on which market maxims are worth mulling over.
As Mark Twain reputedly said: “History doesn’t repeat itself, but it often rhymes”, and when it comes to the stockmarket, there are certain trends and patterns evident in which history is clearly rhyming.
But for most private investors such stockmarket adages should be treated with plenty of caution. Even if the “trend is your friend”, the trading costs associated with constantly buying and selling every year in an attempt to turn a profit in line with a particular theme can prove detrimental. Moreover, the virtues of “time in the market rather than timing the market” should in theory stand long-term investors in better stead.
- DIY Investor Toolkit: Three investment mistakes and lessons I have learned
Yet there is a long history of investors trying to determine seasonal patterns in financial markets. For some, history shows October to be a particularly dangerous time, with some of history’s largest market crashes happening within the month.
For others, the end of year offers the chance for solid gains via the so-called Santa Claus rally. There’s also a theory that the best time to buy gold is in September, as it marks the start of India’s gold-gifting season ahead of the Diwali festival.
Many of these seasonal investment theories are little more than superstition. Others, once based on real patterns of investor behaviour, now appear out of date, including one of the most famous adages: “Sell in May”. The rule recommends selling UK shares at the beginning of May and then repurchasing in September after the St Leger’s race day, which signals the end of summer. The idea is that markets tend to be quieter in summer months, with the City of London winding down for holidays.
- DIY Investor Toolkit: How to boost investment returns from a quirk of maths
But there are two major flaws, with the first being that it has become a dated concept, harking back to the decades when the City did indeed pretty much close down for the summer.
Second, data provides no conclusive proof that the trend exists. Data from interactive investor (our parent company) shows that between the end of April and 15 September (typically the date closest to St Leger’s Day), the FTSE All Share and the FTSE 100 have fallen 15 out of 33 times (45% of cases).
Other seasonal quirks have a higher success rate, one being the idea that some shares tend to perform better in the winter months. To play this trend, interactive investor (our parent company) set up two winter portfolios five years ago – a “consistent” basket of reliable performers and a higher-risk “aggressive” portfolio.
Each is made up of five stocks from the FTSE 350 index that have a proven track record for outperforming in the winter months.
Each year both portfolios have beaten the index. In the six months to the end of April, the aggressive portfolio returned 29%, while the consistent portfolio gained 20.3%. In comparison, the FTSE 350 benchmark index managed just 6.40%. All figures are on a total return basis.