Ads 468x60px

About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Tuesday, 29 April 2014

Sell in May and go Away - this year?, I fancy a vacation!

What do you think?........

It is a saying familiar to many investors, and it's based on an historical tendency of stockmarket under-performance during the six month period starting in May and ending in October. The advice to investors is to get out of equities over the Summer period, and re-invest in October, ready for a Winter upswing. The logic underpinning this advice is that holding your portfolio in cash or bonds through the Summer period will provide a better rate of return.

The saying originated in the City of London, and when quoted in full goes: 'Sell in May and go away; come back on St. Leger's Day'.  St. Legers is a reference to the St. Leger Stakes, one of Britain's oldest horse races, established in 1776. It normally takes place on the second Saturday in September. I don't know when the saying originated, but a professor of finance in New Zealand claims to have found an article in the 1935 Financial Times that mentions 'Sell in May' as a long established strategy.

But is there any truth to it? The effect was first noticed in America, but has also been applied to the UK and Europe. In 2012 Ned Davis Research produced data showing that had you invested $1000 in the S&P 500 between 1950 and 2012, using sell in May and buy back in October, your investment would have grown to $75,539. On the flip side, had you bought in May and sold in October over that period you'd have amassed a measly $1032. On the face of it, pretty impressive numbers. Comparable research from the Stock Trader's Almanac since 1950 shows the Dow Jones Industrial Average returning 0.3% from May through October as opposed to 7.5% from November through April.

Of course there are years that buck this trend. In 2009 for example, the FTSE 100 gained 20% between April 30 and October 30. In 2012 the FTSE All Share Index finished almost 3% up between May and October, which represented a small gain for those investors who chose to stay in the market. And in 2013 The Dow gained 4.8% over the Summer period. Based on those figures, 'Sell in May' can hardly be taken as gospel. Gospel or not, it remains a staple concept of stock market investment.

So what causes this seasonal shift? It could be down to the natural business and economic cycles of the year. Over the December period for example, technology stocks may tend to rise on the back of new products released for the Christmas market. In the New Year companies can place large orders that boost their recipients' sales results, and which subsequently  feed through to higher share prices. Perhaps the Winter time could be said to be a period of increased consumer consumption, which in turn encourages investor confidence. In the Summer, however, investors can close their positions when they go on holiday. According to the Stock Trader's Almanac, June, August and September are the historical low points for the Dow Jones. The increased investor activity levels of the Winter are simply not reflected in the Summer, and the market simmers accordingly.

The 'Sell in May' phenomenon has been around a long time, and has been used as an allegedly successful strategy by many long term investors. But before committing to it there are some caveats to think about. The transaction costs of getting in and out of the market need to be considered, along with the possible capital gains tax that could be incurred. For those holding dividend paying shares there is a case for staying invested and using the principle of compounding to re-invest those dividends. Then there is the simple alternative of just buying and holding. According to a study by Motley Fool, based on the S&P 500 Annualized Return between 1926 and 2012, buying and holding produces a 10% return. This is in contrast to 8.4% when selling in May and buying back in October, and 5.1% for buying in May, then selling in October.

There's also the issue of how much return your cash can generate while you're out of the market. When interest rates are high then it becomes an attractive option, but given current rates, not one you might wish to exercise right now!

So what about 2014? As we enter May the markets are experiencing uncertainty over the continuing and unpredictable situation in Ukraine. If sanctions imposed on Russia start to hurt, we may see a response from the Kremlin that adversely affects those in the West who currently do business with Russia. Another downside factor in possible market performance is the incidence of mid-term election year in the U.S. Historically stocks have weakened from May through October in a mid-term election year, (as opposed to presidential election years, where they strengthen), and the expectation from pundits in the States is that 2014 will be no exception.

On the up side, there is optimism over continuing economic growth in America, with Britain leading Europe in the GDP growth stakes at a projected growth rate of 3% this year. And finally there's the unknown, such as an unexpected world event or economic announcement. There is obviously no way we can factor these in to any outlook we might care to have for the market this Summer.

In summary, 'Sell in May' has some good historical data to back it up as an investment strategy. As outlined above, a decision to use it is dependent on consideration of whether you think you can do better over the Summer with your liberated cash, whether you think it might just be better to hold onto your stock regardless, or whether you will liquidate your holdings, forget about the stockmarket, and spend the time relaxing in your chosen stress free holiday hideaway.

Darren Winters 


Post a Comment

Blogger Templates