Should you sell up before the summer?
Tim Bennett Apr 27, 2012
“Sell in May and go away” is a stockmarket adage that’s been around for decades. It says that you should dump stocks about now, and look to pick them up again just ahead of St Leger Day in September (when the famous St Leger horse race takes place).
But beware – as is almost always the case with these simplistic rules of thumb, blindly following this instruction could lead to disappointment.
The logic of ‘sell in May’
The idea of selling in May is at root a sensible one. As a smaller retail investor, you’ll make more money by watching what the bigger corporate investors do and where their money is flowing. Most big British fund managers and institutional investors take their longest holiday in the summer, and also spend time attending corporate events, such as Wimbledon and Ascot (and this year the Olympics plus the Queen’s Diamond Jubilee).
So they don’t want to suffer any nasty surprises in their portfolios until the holiday and corporate entertainment season is well and truly over. Hence the idea that most risk-taking is done and dusted by the end of April.
This means that, in theory, no one who matters is back in the market properly until the autumn (the big summer events season traditionally ends with the St Leger Day race). So it would seem to make sense to follow the smart money: sell in May, then sit on your hands until the big buyers rejoin the fray well after the summer season has ended.
Does it work?
Whether or not this strategy works depends on which market you look at and over what time period. The evidence of this theory working is perhaps strongest for the S&P 500 and the Dow Jones. According to Bespoke Investment Group, for example, since the end of World War II, if you’d started off with $100 and invested it in the S&P 500 only between October and April of each year, then you’d now have $9,329. If you’d done the same for the May to September periods, you’d be left with a paltry $99. That’s quite a difference.
It’s a similar picture for the Dow Jones. Over the last 20 years, the average return for the Dow from the start of May to the end of October has been 0.44%, while the average return from the start of November to the end of April has been 6.86%. If you change from an average to a median reading, the return for the May-October period rises to a healthier 4.29%, but the median for November-April also rises to 7.18%. So, it seems to work, then? Not quite. Exploiting this isn’t as easy as it first looks. One reason is costs.
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Timing and costs
John Mauldin of Millennium Wave Advisors points to a study of the MSCI world indices across 18 different markets from 1969. He concurs that the best time to be out of stocks is indeed the period from May to the end of October (slightly later than St Leger day).
But to extract the best gain each year, you need to get your timing just right. You also need to find a way to whittle down your trading costs (for a British investor these include stamp duty, commissions and bid-to-offer spreads). Otherwise, for a typical investor who just bought and held the S&P 500, the annual return comes out at 11.9%. That’s 0.7% a year better than the (still respectable) return achieved by someone following the ‘sell in May’ adage every year. And there’s another problem – history may no longer be a reliable guide.
Times they are a-changin’
Turning to Britain, the stockmarket historian David Schwartz notes in the Financial Times that, “from 1920 to 1970, shares rose 65% of the time in the period between November and April versus 58% of the time between May and October”. But while this gap is statistically meaningful, the problem is that “investors couldn’t capitalise on it”. That’s basically for the same reasons Mauldin identified – the gap between the two halves was too small, and trading costs were too high.
The tactic worked better during the last two decades of the century. Between November and April, shares rose 19 times out of 20, to post a gain of 12.5% on average. They climbed just 50% of the time during the rest of the year, for an average gain of just 1.5%.
However, here’s the rub – “we now know this was a brief window of opportunity”. Since the start of the century, the British market has risen in 70% of May to October periods. For November to April, the figure is 60%. The last year or two may have looked a bit more promising for trend-followers.
Last year, the FTSE 100 fell from 6,082 on 1 May to 5,214 on 9 September, a drop of 14.3%. From there it’s risen by around 12%. A similar pattern occurred in 2010. But it’s hard to conclude from this that the ‘sell in May’ adage is of much use.
It’s old news
The problem is, everyone knows this adage now. Any chance it had of working in the past will have been eroded away as more and more people cottoned on to it. In the age of the internet, more investors than ever before have access to real-time data, trends and trading strategies. So knowledge levels are being driven up and costs driven down. Seemingly obvious stockmarket opportunities are therefore constantly arbitraged away as everyone tries to take advantage. As Schwartz notes, “such behaviour will eventually affect the money flows that created the trend in the first place”.
So what should you do this year? Given the uncertainty on both sides of the Atlantic over whether there will be further quantitative easing, plus the mounting problems in the eurozone, I’d put my portfolio on hold over the summer. Selling on the say-so of an old adage is unwise – the historic performance data don’t justify it. But equally, given the headwinds, buying stocks after the recent strong rally seems foolish.