As May approaches, some investors will be minded of the investment adage of ‘Sell in May and go away, don't come back till St Leger Day’.
However, advisers have questioned whether this maxim is relevant to today’s investor and, more importantly, what impact it actually has on performance.
Justin Urquhart Stewart, co-founder and head of corporate development at Seven Investment Management (7IM), says the adage stems from a previous era that is unlike today’s business environment.
He said: “The saying dates back to the days when senior traders liked to head off for the London summer social season – from Ascot, Wimbledon and Henley to Lord’s – followed by a relaxing holiday swanning around the south of France.
“Volumes fell and prices weakened during this period, not picking up until after the second week in September.”
Jason Hollands, managing director at Tilney, added: “The days of City professionals packing up shop for a long summer sipping Pimm’s and champagne at social events are a distant memory: not least because accepting lavish corporate hospitality is now frowned upon.
“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.”
While past performance is not a guide to future performance, several advisers below have considered the impact of selling in May on returns.
Tom Stevenson, investment director for personal investing at Fidelity International, says investors should focus on long-term goals and stay invested.
Analysis by Fidelity revealed that in 10 of the previous 20 years, the FTSE All Share would have returned positive returns between 1 May and 30 August.
It further noted that missing the best 10 days of the year could have a significant impact on annual returns, further emphasising the need to remain invested.
Source: Fidelity International
Stevenson said: “Like many stock market adages, the St Leger Day adage should be taken with a pinch of salt and, as our analysis shows, the chances of success are rather hit and miss.
“Predicting the best time to be in and out of the market is a fool’s errand and trying to time the market and getting it wrong can be very costly.
“Missing even a handful of the best days in the market can seriously compromise your long-term returns. Furthermore, there’s the cost of trading in and out of the market to consider – frequent dealing is costly and will eat into your returns.”
Over a longer 30-year period, 7IM’s Urquhart Stewart says the FTSE All Share was in positive territory 60 per cent of the time.
Source: 7IM
He said: “Our research shows that if we strip out 2001 and 2002 – two particularly bad years that had nothing to do with the ‘sell in May’ narrative, the FTSE All Share would have seen an annualised average return over the summer months of 7.5 per cent since the beginning of 1987 until the December 2016.
“This is versus 2.7 per cent if we include those two years, confounding the old theory that summer is a sluggish time for markets.”
He added: “Whilst staying invested has proved the best investment strategy over the last 30 years, during times of uncertainty this patient approach can be challenging for the best of investors – professional investors included.”
While noting that investors would have been better remaining fully invested in most of the past 31 years, Tilney’s Hollands point out that there have been some years of steep sell-offs in the FTSE All Share between 1 May and 15 September.
He says there have been seven big sell-offs of the past 31 years: in 1992, 1998, 2001, 2002, 2008, 2011 and 2015. The worst sell-off came in 2002 when the FTSE All Share fell by 21.2 per cent.
“True believers in the ‘sell in May’ mantra can undoubtedly point to notable summer sell-offs – some of which actually came in the early weeks of September,” said Hollands. “However, selective memory might mean ignoring the soaring summers of 1987, 1989, 1995, 2003, 2005, 2009 when the markets posted double-digit returns.”
With dividends reinvested in the index, the ‘sell in May’ adage fails to hold up, says Architas investment director Adrian Lowcock. For the FTSE 100 the figures showed a return of 26.88 per cent on average during the summer months between 1986 and 2015, compared with a 31.83 per cent loss without dividends reinvested.
Lowcock said: “Even though stock markets are meant to be efficient this sort of seasonal behaviour still exists, but whilst the summer months don’t tend to perform as well as the winter months the differences are not significant enough each year to justify investors selling over the summer.
“Once dividends have been factored into the figures, the FTSE 100 makes a positive return on average over the summer.”
He added: “Last year is a reminder the ‘sell in May’ adage is not guaranteed as markets rallied in the summer months following a short sharp sell-off after the Brexit vote.
“Markets continued to rally throughout the remainder of 2016 and this year the markets seem to be following the trend having performed well in the winter months with the FTSE 100 reaching new highs at the end of April.
“With markets at new highs it is reasonable to believe that they may take a breather as markets wind down for the summer and investors perhaps take a different view of the global economy.
“The future is always uncertain and it is impossible to predict short-term trends with enough accuracy to bet hard earned savings.
“Sell-offs in the summer are not uncommon but the timings vary and the triggers are not always obvious or easy to predict.”