Investors in UK equities would have been better off if they had followed the longstanding proverb of selling out of the market during the summer months over the past 14 years, according to research by FE Trustnet, although other evidence suggests this would be an imprudent strategy to implement in a portfolio for the future
The belief that City folk would be largely absent from London – and the stock market – between May and the late summer celebration of St Leger Day led to the popular maxim: ‘Sell in May and go away and don’t come back until St Leger Day.’
The thinking goes that sporting and social events including Royal Ascot, Wimbledon, the Henley Royal Regatta, Cowes Week and ending with the St Leger flat race in mid-September meant many brokers would be away from their desks. A side effect would be that trading volumes were thinner and markets more prone to volatility.
In 2016, following the adage would mean selling out about now and holding cash until 13 September. Being out of the market for more than a third of the year flies in the face of many other investment maxims from some of the most successful investors of the 20th century: to stay fully invested come rain or shine.
“Being out of stocks is one of the biggest mistakes long-term growth investors can take,” said stock market guru Ken Fisher of Fisher Investments.
With the start of May upon us, in this article we have crunched the numbers to see if investors would have been wise to follow the old adage of selling up for the summer or by being a buy and hold bull.
In order to do this, we looked how an investment of £1,000 made on 13 September 2001 and held untouched for the following 14 years would have fared in various indices and fund sectors. Then we looked at how an investment of £1,000 made on 13 September 2001 that had been cashed out on 1 May and reinvested in September would have done over the same period.
St Leger Day can move around year to year but for succinctness we have standardised it to 13 September. Our data does not include trading costs but does include dividends being reinvested.
Of course, it must be kept in mind that past performance is no guide to future returns and many investors believe trying to time the market is an impossible task. Furthermore, while the below data shows following the maxim may have worked over a 14-year period, there were individual years were it would have been more beneficial to stay invested over the summer.
Source: FE Analytics
The data shown in the table above suggests investors would have turned their initial £1,000 into £2,113.86 if they had stayed invested over the full period in question. But if they had sold in May and reinvested on St Leger Day, they would have ended up with £2,196.99.
Going for the average fund in the IA UK All Companies sector would have seen a buy and hold investor end the period with £2,376 but they would be sat on £2,442.57 if they’d followed the maxim.
Performance of sectors and index since 13 September 2013
Source: FE Analytics
However, things are quite different for smaller cap investors. The average fund in the IA UK Smaller Companies sector made £2,982.89 from an initial £1,000 if following the sell in May philosophy. But those that stayed invested came of better with an end result of £3,852. tHE
A similar relationship is true if investors had simply bought and held the FTSE 250 and the IA UK Equity Income sector.
Source: FE Analytics
Of course, the most important thing to point out is that just because this has worked out over the past 14 years, there is no forecasting value that it will be repeated in future time periods. Indeed, some commentators are adamant that the old proverb has little value in it.
Tilney Bestinvest’s Jason Hollands says the FTSE All Share Index has delivered positive returns in 19 summers out of the past 30 years (with dividends reinvested), meaning 66 per cent of the time investors would have made positive returns by staying invested over the summer.
He said: “While true believers in this old wives’ tale can point to the some notable summer sell-offs, selective memory means they too often ignore the soaring summers of 1987, 1989, 1995, 2003, 2005 and 2009 when the markets posted double-digit returns.”
“This year, however, there is no doubt that many investors might be holding off committing to the markets or inclined to cash up due to the forthcoming Brexit vote at the end of June. That’s not surprising as they are being they are fed a daily diet of alarmist warnings about the potential impact on the economy.”
