Sell in May and go away, don't come back till St. Leger Day
Or in other words, sell out of the stock market in May and stay in cash over the summer, before going back in at the start of September when the St Leger Stakes horse race is run. The theory is that by doing so you avoid the more volatile summer months which historically have also tended to underperform the rest of the year.
2015 was the year to sell in May and go away!
The chart below shows that during the summer of 2015 (i.e. between 1st May 2015 and the St Leger Stakes on 12th September 2015) investors in the FTSE 100 would have lost over 11%. Based solely on last year it would seem Sell in May and go away is a sensible investment strategy. Yet one occurrence doesn't prove the rule. So has the adage worked historically and how did it come to be anyway?
The roots of Sell in May and go away
The roots of this adage probably lie in the days when the City brokers used to hang up their bowler hats for the summer and spend their profits watching sporting events. The result would be thinly traded markets (i.e far fewer trades) with lacklustre performance due to the increased volatility (the greater ups and downs caused by having fewer market participants). When the City returned in the Autumn so did their animal spirits and money which would drive up markets once again.
While those days are behind us it doesn't stop the world's media and commentators dusting it down every year to dedicate column inches to it. But does the seasonal effect actually exist or is this conventional wisdom complete nonsense.
Does the Sell in May effect actually exist?
While the days of endless summer holidays may be a thing of the past there still remains seasonal trends when it comes to money. From personal experience January to April were always peak months when it came to clients wanting to invest money. The summer was much quieter before things picked up in the Autumn once more , then slowing ahead of Christmas. Part of this is of course dictated by the tax year end being in April. Yet the leaner summer months is also a result of the 'I'll pick it up once I'm back off holiday' mentality.
If you look at the number of Google searches for the term 'investing' throughout 2014 (as shown in the chart below) the volume is 40% lower in the summer months (shown by the dot) compared to the Spring and Autumn. It's no longer just the City who switch off from investing in the Summer - we all do!
But does the Sell in May effect still exist in investment markets? The best piece of research on the matter, in my opinion, was carried out by Dr Ben Jacobsen. I won't bore you with the details but his key findings were:
- The Sell in May effect was present in 36 out of 37 countries he looked at (so not just the UK).
- It is strongest in European markets
- There is evidence of the effect in the UK going back as far as 1694!
Can you make money from following it?
Now this depends on who you ask and over what timeframe you look. A recent study compared the returns of buying and holding the FTSE All Share index every year since 1986 versus selling out in the summer months. The findings claim:
- The Sell in May approach outperformed only 34% of the time
- Those following the Sell in May strategy over the full term would have made 9.8% a year on average
- Investors who'd just stayed in the market would have made 10.9% a year
While I'm not dismissing the research it does depend on the timeframe and the asset you interrogate.
A better way to Sell in May?
I was interested to read an article in the US titled This is a better way to ‘sell in May and go away'. In a nutshell it concludes that rather than Selling in May and going into cash you would be better off switching in to defensive shares (utility companies, drugs companies etc). More importantly this would beat buying and holding (i.e not Selling out in May but staying invested all year) as shown in the chart below. Interestingly, Interactive Investor pitched the same concept in The Telegraph last year but with examples of shares to buy - some of which outperform because they are seasonal businesses. They claim their Summer Portfolio would have made an annual return of 8.9% over the past decade between 2004 and 2014.
So what should you do?
'Sell in May' is a fascinating phenomenon which is actually far more useful than people realise - but not as an investment strategy in its own right. As I pointed out earlier Sell in May is a natural extension of our own human behaviour and it clearly exists. Yet the fact it still exists despite everyone talking about it is the most interesting thing.
Remember that most of the studies on Sell in May are fairly recent yet the effect can be traced back as far as 1694. So for most of its existence people didn't have the evidence to determine its reliability yet believed it enough to form the adage anyway. Yet despite this investors don't follow it en masse because if they did then its effect would either be much more marked or it would have been arbitraged out of existence. Investors are emotional creatures and the reason they don't follow it also lies in their lack of discipline.
While Sell in May might not work all of the time, adapting it slightly by going into defensive sectors seems to improve its consistency. So why does tweaking Sell in May by buying defensives suddenly improve the results? If you read the research pieces they seem unsure as to why. Yet I believe the reason lies in three simple facts that most people overlook:
- the fact that they have reviewed their portfolio at the start and end of summer
- and they are buying stocks that perform well (or in other words applying a form of momentum)
- they are using a process
This is exactly what 80-20 Investor is about, regularly reviewing your investment and applying our algorithm which harnesses the power of momentum.
So if Interactive Investor's Summer portfolio produced an annual return of 8.9% over the decade between 2004 - 2014 what would the process behind 80-20 investor have managed - the answer is 14.88%
Also bear in mind that putting your faith in just 5 shares, as in the case of the Summer Portfolio, is incredibly high risk. Instead by applying 80-20 Investor's process you are buying a number of funds containing shares from hundreds of different companies so reducing your investment risk yet increasing your return. In addition during the summer months the funds that you will naturally be buying will be investing in the shares of companies that are outperforming (i.e. defensives).
The proof: 2015 Summer Portfolio vs 80-20 Investor vs my actual £50k portfolio
It's all well and good talking about average returns during the decade between 2004 and 2014 but when the gloves were off in 2015 how did the various approaches fare? You can read Interactive Investor's analysis of their portfolio's result for yourself but to sum up:
In 2015 Interactive Investor's Summer Portfolio finished down over 8% versus a loss of 11% on the FTSE 100 while the 80-20 Portfolio finished down just 5% and my own £50,000 portfolio was down 5.2%. A convincing win for 80-20 Investor and my own real life £50,000 portfolio.
So should you Sell in May and go away? No. Why would you when there is a far more reliable and profitable investment process to follow.
(image by arztsamui - freedigitalphotos.net)
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