Should investors bet on the ‘Sell in May’ strategy?22 April 2014
With the start of May just days away, should investors follow 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 maxim has its origins from the days when brokers left the City for the “Season”, a period of summer sporting and social events including Royal Ascot, Wimbledon, Henley Royal Regatta, Cowes Week and which ended with the St. Leger flat race in mid-September.
This year the St. Leger race is set to take place at Doncaster on 13 September, and the total prize fund could top 2013’s huge £600,000 pot. With the FTSE All Share Index of UK shares delivering disappointing negative returns of -1.30% since the start of the year after a cracking 2013, is now the right time for stock market investors to cash in their portfolios or could they find themselves backing the wrong horse?
Looking over a 25-year period, research by Bestinvest suggests that while a number of market slumps have taken place over the summer months, a general strategy of exiting the market during this season 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 15 out of the past 25 years, meaning 60% of the time investors would have made positive returns by staying invested over the summer. Indeed over the last quarter of a century, average annualised market returns of 10.9% would have dropped to 9.8% for investors methodically exiting the market each summer (and that’s excluding the additional impact of transaction costs).
Notable summer periods when the market did fall sharply were 1992 (-11.6%), 1998 (-12.6%), 2001 (-18.4%), 2002 (-21.2%), 2008 (-13.0%), and 2011 (-10.9%).
Percentage returns on the FTSE All Share Index
Source: bestinvest.co.uk / Datastream
Jason Hollands, Managing Director, Bestinvest, said: “Gone are the days when the City brokers departed to spend a leisurely summer at sporting 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 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; indeed such a strategy rigorously followed would have reduced average returns.
“Will this year see a poor summer for stock market returns? It is of course impossible to predict short-term movements in the markets with accuracy. However after a bumper 2013 when developed markets were supercharged by the tailwinds of ‘Quantitative Easing’ and valuations in some parts of the market have been looking a little stretched, we could be in for a period of choppier waters. Key concerns hanging over the markets are the slowdown in the Chinese economy, the prospect of future interest rates rises in the US and UK next year and of course the crisis over the Ukraine.
“In recent weeks there has been some evidence of a rotation out of more speculative ‘growth’ stocks, such as social media and internet companies. Time will tell whether or not this takes some of the heat out of the market. In the event of a broader correction, a canny strategy for long-term investors should be to buy rather than sell, on such dips. That’s the art of successful investing.”
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