Selling in May is a costly strategy
The old adage suggests investors should sell in May, go away and come back on St Leger's Day. Over the longer term this has proved to be a costly strategy that would have disappointed investors.
According to research by Hargreaves Lansdown, selling in May and buying back after St Leger's Day, or 16 September, would have left investors in the FTSE 100 better in only four of the last 10 years (from 1 January 2003 to 31 December 2012). Buy and hold is a more effective strategy
Further analysis shows that following the old adage could actually be extremely damaging to your wealth.
A buy-and-hold investor with £100,000 in the FTSE 100 on 1 January 2003 would have made £47,627 more than an investor who sold on 1 May each year and bought back on 16 September for 10 years. The table below shows the difference in returns.
Impact on portfolio of using the St Leger's strategy
| Investment | Buy and Hold* | Sell in May** | Difference |
|---|---|---|---|
| £10,000 | £21,517 | £16,754 | £4,763 |
| £50,000 | £107,583 | £83,770 | £23,813 |
| £100,000 | £215,166 | £167,539 | £47,627 |
Source: Hargreaves Lansdown
- A buy and hold strategy produced an average annual return of 9.11 per cent on the FTSE 100 from 2003 to 2012. Selling in May and buying back on St Leger's Day would have reduced this return by more than one-third, to an annual average of 5.59 per cent.
- In 2009, a sell in May strategy would have returned 5.52 per cent, missing out on most of the recovery as the FTSE All Share returned 30.12 per cent that year.
The table below shows the annualised returns of the FTSE 100 using a buy and hold strategy versus selling in May and buying back on St Leger's Day.
| Year | Buy and hold annual return* | Sell in May annual return** |
|---|---|---|
| 2003 | 17.89% | 4.94% |
| 2004 | 11.25% | 7.97% |
| 2005 | 20.78% | 5.66% |
| 2006 | 14.43% | 15.01% |
| 2007 | 7.36% | 7.89% |
| 2008 | -28.33% | -15.03% |
| 2009 | 27.33% | 3.73% |
| 2010 | 12.62% | 10.96% |
| 2011 | -2.18% | 8.67% |
| 2012 | 9.97% | 6.12% |
Source: Hargreaves Lansdown, Lipper Hindsight
*Investment held from 1 January 2003 to 31 December 2012
**Investment is sold each year, from 2003 until 2013, on 1 May and reinvested on 16 September
Is "sell in May" working this year?
The strategy does not seem to be working this year either. From 1 May to 22 August, the FTSE 100 and FTSE All Share are up 1.36 per cent and 2.17 per cent respectively, meaning investors would have been better off staying invested. There are still 14 more trading days to go before St Leger's Day.
Performance of indices since 1 May
Source: FE Analytics
Over 10 years the results are conclusive: trying to predict when markets will rise or fall is a very dangerous and potentially costly strategy. Far too much time is spent on trying to anticipate when you should buy and sell investments. It is much better for your financial wealth to adopt a buy-and-hold strategy and invest for the longer term.
Investors should think about fundamentals rather than trying to pick the right day to invest. I recommend concentrating on finding the best managers to run your portfolio. If investors are nervous about market volatility, they should consider drip-feeding money in through a regular savings plan to give them some peace of mind.
Adrian Lowcock is a senior investment manager at Hargreaves Lansdown. The views expressed here are his own.
