Here’s why you shouldn’t “sell in May and go away”
May is upon us, and that old adage that we should Sell in May and go away raises its head once again.
It would free us up to forget our financial affairs for the summer and instead enjoy the, er, rain, but is there anything behind it?
The idea is that stock markets typically advance during the October to April period, and then start to fall back in May and that wed be better off selling all our shares and sticking the cash in a savings account, or gilts or bonds, or some such. I reckon that would be a silly idea, for a number of reasons.
You would certainly have made a mistake had you tried it last year. From 1 May 2016 until 30September, the value of theFTSE 100rose by 11.5%, and youd have done very well to get anything close to that from any alternative investment you wouldnt have come near itfrom interest on a savings account.
Now yes, thats just one year, and in 2015 youd have lost about the same amount withthe previous three years showing minor moves in both directions. Overall, I reckon youd have just about broken even (on share prices alone) following a Sell in May strategy every year for the past five.
There is an effect
And historically, academic studies have actually found there is a correlation between the summer months and poorer share price performance across the stock markets of most developed Western economies.
In fact, several studies have found the Sell in May effect present in more than 30 different markets under examination, and that the May to September period really does provide poorer average returns than the other monthsof the year. (Although a recent study from theUniversity of Queensland suggests its also swayed by the US presidential election cycle, just to further muddy the waters.)
Quite why the effecthappens, nobody really has any idea. According to the Efficient Markets Hypothesis, which says that if all relevant information is known to all players then nobody can get ahead, such a thing can not happen but most investors already know the Efficient Markets Hypothesisis pants.
What should we do?
Any possible marginal long-term gains would be at the mercy of several other factors if we tried to follow it in practice.
One is that,whatever the prices of shares are doing, a portion of each years ex-dividend dates come alongduring the summer, whichyoud miss. And if you invest in high-yielding blue-chip shares (which I reckon is probably the best long-term strategy there is), you cant afford to turn your nose up at what could be a significant pile of dividend cash.
Youd also face trading coststwice a year too, when you buy and when you sell and even at todays low-cost dealing charges,you really dont want to set yourself back an extra couple of percent per year.
Oh, and you could be faced with capital gains tax bills just when you dont want them, too you should be timing your investment buys and sells when it works best for you, not to satisfy some old rule of thumb.
So no, theSell in May thing is is definitely an intriguing effect, but in reality its no guide to timing the market.
Don’t be quick to sell
Warren Buffett famously said that hisfirst rule of investing is “Don’t lose money“,and selling your shares just because it happens to be May is risking exactly that. Buying and selling for irrational reasons can bea big mistake.
But what other mistakes can you make that couldseriously damage your wealth? Well, at theMotley Fool we’ve asked our top investors from all over the world what advice they have for avoiding some of the Worst Mistakes Investors Make.
If you want to see the results, just click here now and your free copy will be on its wayto your email inbox as fast as ourelectrons can carry it.