Money Matters

Sell in May

“Sell in May, and go away; come back on St. Leger’s Day”, is an old stock-market adage.

Have you sold? Should you? Well, I like a nice adage, but let’s have a look at whether this particular one has any factual base to it. But before that, I should let you have the common explanation of where the saying started. Back in the “good old days”, stock brokers used to have much better things to do during the Summer than work. They would be more inclined to while away the warmer weather, watching sporting events, picnicking and supping the finest of claret and champagne.

Tough work, you may say, but someone had to do it. As a result, fewer trades were made (nowadays referred to as “low volume” or “thin trading”) making for increased volatility. Of course, when people see markets falling and as a result might be inclined to sell some shares, then the more there are available and hence the greater the supply – and the lower the demand from buyers, (you can see where this is going) the greater the potential for prices to fall. After the St. Leger (a horse race run in September) the brokers would tend to get back into the swing of things, and the demand for stocks would increase and consequently, so would the prices.

In reality, things are not so clear-cut. It appears that, depending on where in the world you are looking at, the adage is either highly accurate, reasonably so, or complete rubbish! As with so many financial matters, there is a deal of truth in the theory, some of the time, and in other years it would have been better to have remained fully invested. Just to increase the confusion, the theory seems to work better in some parts of the world than in others. European markets seem to suit the adage better, as do the more risky financial sectors. Manufacturing and production do not produce their best returns over the Summer, but the providers of life’s basic, regular requirements seem to fare better.

In the USA it is known as the Halloween Effect, as investors are encouraged to return to the market at the end of October. Over the last 25 years, however, using the S&P500 index, you would have made a gain of about 12% less by following the adage than you would have by staying in the market.

All this aside, one should also consider the other factors that might persuade you to act, or not, on the basis of the adage. Firstly, are there any additional costs involved? Clearly, if it costs you to deal, then such costs have to be factored into the equation. Secondly, selling equities could produce a potential Capital Gains Tax liability if that gain, when added to any others in the same tax year, exceed an individual’s personal allowance. The third point is that life is too short to be worrying over when to fine tune one’s portfolio. I like to invest through monthly subscriptions, in all sorts of different sectors – financial and geographical. If markets go up, then so does the value of my holdings; if they go down then my new purchases are, in effect discounted, buying me more shares (or units) at a lower price. If markets go horribly wonky (a technical term) and I am lucky to have a few pounds spare, then I like to invest some more to take advantage of the sale prices. To me, investing is not a sprint, but a marathon. Let the economic cycles do as they will, worry not about “casting a clout – when May is out” and have a little flutter – if you wish – on the St. Leger. There are more important things in life to think about.

Enjoy the Summer!

David Foot

Categories: Money Matters

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