Bestinvest urges caution over ‘Sell in May’ strategy22 April 2013
With May just around the corner, investors will be reminded of the old adage of “Sell in May and go away, don’t come back till St. Leger Day”, which advocates getting out of the stock market for the summer months. The saying has its origins from the days when City brokers packed off for the “the Season”, a period of Summer sporting and social events including Royal Ascot, Wimbledon, Henley Royal Regatta, Cowes Week and which ends with the St. Leger flat race in mid-September.
This year the St. Leger is set to take place at Doncaster race course on 14 September, and the total prize fund looks set to top 2012’s record pot of £550,000. With the FTSE All Share Index of UK shares having already delivered an impressive total return of 8.3% since the start of the year, is now the time for fans of the seasonal investing approach to cash in their portfolios or could they find themselves caught in the starting gates?
One thing is for certain, following such an approach last year proved a costly move. While shares did fall in May 2012, a major rally began in June. During the period from 1 May to 15 September 2012, the FTSE All Share Index returned 4.0% on a total return basis (and has pushed higher since).
Over a lengthier period too, research by Bestinvest suggests a general strategy of exiting the market during the summer is far from convincing. During the period between 1 May and the second week of September, the FTSE All Share Index has delivered positive returns in 17 out of the past 27 years, meaning 63% of the time investors would have made positive returns by staying invested over the summer.
However, there is evidence of a greater incidence of down periods during the summer months as on a full year basis (to 31 March) the FTSE All Share Index delivered a positive return in 20 of the past 27 years (74% of the time). Notable Summer periods when the market fell sharply were 1992 (-11.6%), 1998 (-12.6%), 2001 (-18.4%), 2002 (-21.2%), 2008 (-13.0%), and 2011 (-10.9%) which together helped pushed the average returns made in the summer months down to just 0.7% pa.
Percentage returns on the FTSE All Share Index
Source: bestinvest.co.uk / Datastream
From 31 March 1986 to 31 March 2013 average total annual returns from the FTSE All Share Index were 10.0%. For investors who exited the market from May to September each year, the average return would have reduced to 9.2%. Data from Bestinvest shows a similar pattern for the FTSE 100 Index and the US S&P 500 Index, though the strategy of getting out of the market during the summer would have boosted average annual returns for investors in European equities where average annualised returned from May to mid-September have been negative.
|Index||FTSE All-Share||FTSE100||S&P 500||Europe ex UK|
|Fully invested throughout the year||10.0%||9.8%||9.5%||8.0%|
|Average return May-mid-Sept||0.7%||0.8%||1.4%||-1.4%|
Commenting on the research, Jason Hollands, Managing Director, Bestinvest, said: “It has been many years since the City hung up its bowler hats en masse to spend a prolonged summer at sports events. These days markets trade globally and around the clock. So if there was ever any truth in the ‘Sell in May’ theory, the evidence since the Big Bang City reforms which suggests that while there have been a handful of significant summer sell-offs which mean ‘average’ returns for the summer months are low there is no compelling case to automatically get out of the market each May. Investors also need to consider that doing so would incur transaction costs and you may miss the benefit of year-end dividend payments if you are invested in funds.”
Hollands concluded: “Of course markets have had a strong run of late as share prices have been playing catch up with the earnings increases of recent years, so investors may be wondering if a correction is due at some point. The truth is that it is impossible to predict short-term movements in the markets. Equity valuations do not look stretched and dividend yields are attractive, so we think investors should focus on the long-term outlook. For those wanting to reduce the risks of short term volatility, a sensible strategy is to drip feed cash in on a regular basis and use any weakness in the markets as a buying opportunity.”
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The value of your investments and the income from them can go down as well as up, and you can get back less than you originally invested. Past performance or any yields quoted should not be considered reliable indicators of future returns.
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