Should investors sell in May? Data casts doubt over the old adage

It is that time of year again when investors are reminded of the old adage to 'sell in May and go away, don't come back till St. Leger Day'.

The theory is that as stock market traders treat themselves to a leisurely summer 'season', attending sporting and social events, including Royal Ascot, Wimbledon, the Henley Royal Regatta and Cowes Week, share prices dip because there are fewer investors buying and selling.

This causes thin trading volumes, which is often cited as a reason behind sudden market sell-offs.

The old adage says investors should return to the stock market once the St Leger Day horse race has taken place.

This year the race takes place on 10 September.

POSITIVE RETURNS

But data from Tilney Bestinvest, the adviser, casts doubt on how useful the old saying actually is.

The firm looked back at 30 years of data for the FTSE All Share Index (including dividends reinvested) from 1 May to the second week of September.

It found the index had in fact delivered positive returns in 19 out of the past 30 years, meaning that 66 per cent of the time investors would have made positive returns by staying invested.

Over this period there have been some heavy sell-offs during the summer months, most notably in 2001 and 2002 when the tech bubble popped. Those who followed the old adage those two years would have avoided losses of 18.4 per cent and 21.2 per cent respectively.

But overall over the past 30 years, systematically taking your money out of the markets each year between May and mid-September would have actually reduced your average annual return to 9.57 per cent, versus 10.73 per cent if you had stayed invested.

Jason Hollands, managing director at Tilney Bestinvest, says: 'These days, if a City professional is off on summer holiday, they're almost sure to be forever checking news from the markets on a mobile phone or tablet, as information is now incredibly accessible and the boundaries between working hours and personal time have eroded.

'Therefore when putting seasonality theories such as 'Sell in May' to the test, it is probably more relevant to only consider data since the 'Big Bang' deregulation of the City in 1986 rather than longer periods when the London markets operated as a gentleman's club.

'And over this 30-year period there is not a convincing case that it makes sense to generally exit the market between May and mid-September and that's without factoring in the impact of trading costs or potentially crystallising capital gains tax liabilities.'

It is worth pointing out, however, that the market does tend to be weaker from May to October than it is in the other half of the year. Over the past 33 years this has played out 28 times.

 Summer returnAnnual return
May-Sept (%)Ex May-Sept (%)Annual (%)
19861.425.427.2
198713.8-4.78.4
19880.41111.5
19891221.636.1
1990-1.1-8.7-9.7
19916.613.320.8
1992-11.636.320.5
19938.618.228.4
19940.1-6-5.8
199512.79.923.9
19964.21216.7
19979.31323.6
1998-12.630.113.8
1999-4.730.324.2
20004.2-9.7-5.9
2001-18.46.3-13.3
2002-21.2-1.9-22.7
200314.25.820.9
20042.510.112.8
200514.36.822
2006-0.917.816.8
2007-1.87.25.3
2008-13-19.5-29.9
200921.37.230.1
20101.612.714.5
2011-10.98.4-3.5
20124812.3
20134.715.420.8
20141.3-0.41.2
2015-9.611.41
Average1.19.610.7

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment