An old industry adage tells investors to “buy in May and go away, don’t come back until St Leger’s day”.
The St Leger festival began today, but following the saying would have been a bad idea this time around.
From 1 May to 11 September the FTSE 100 made 1.45 per cent while the average fund in the IMA UK Equity Income sector made 4.33 per cent.
Investors who had sold out in May would have not only missed out on those gains but also incurred dealing costs for selling and buying.
Performance of sectors and index
Source: FE Analytics
The reasoning behind the adage was that the summer was a time of lower dealing volumes in which a large number of investors would reduce their positions, meaning the market would tend to shrink.
In May, FE Trustnet showed that following the saying in the two previous years would have improved returns, but today’s research shows this lucky streak would have ended in 2012.
Seven Investment Management’s Justin Urquhart Stewart points out that even if markets were once calmer in summer, the current volatile environment continues year-round.
"The summer months are just as likely to be as volatile as any other month and thus to think about relying upon an old wives tale for investment would be seen to be about as useful as taking a share tip from a pompous git in red braces," he said.
"So all in all, a complete waste of time, money and worry."
In fact, rather than a placid environment with low trading volumes and reduced volatility, August 2011 saw a severe market correction that was responsible for the success of the strategy that year.
Performance of indices May to September 2011
Source: FE Analytics
An analysis of the stock market returns over the 2012 period underlines the importance of reinvesting dividends. The FTSE 100 would have lost 0.33 per cent over the period without their contribution to total returns.
Performance of FTSE 100
| Change 1 May - 11 September 2012 | |
| FTSE 100 | -0.33 |
| FTSE 100 Total Return | 1.45 |
Source: FE Analytics
Over the period in question the Dow Jones Euro Stoxx 50 performed particularly well, boosted in August by the rumours and eventual announcement of the Draghi rescue plan for the eurozone.
Performance of indices
Source: FE Analytics
This means investors who had sold out of their European holdings in May in order to buy back would have been hit particularly hard by the strategy.
Although some commentators have pointed out that regardless of the Draghi plan, the same political obstacles remain – for example Germany must still agree to a course of action it is strongly opposed to – there is renewed optimism about the near prospects for markets.