Sell in May and go away, or stay invested whatever the weather?
J.P. Morgan Asset Management research underlines danger of trying to ‘time the market'.
With developed stock markets around the world having performed strongly so far this year, investors may be wondering whether 2013 might be a year to ‘sell in May and go away, come back on St Leger day'.
But a comparison of returns from the FTSE All-Share Index during the 10 summers from 2003 to 2012 shows that the index rose in six summers and fell in four, meaning those who ‘sold in May' were more likely to lose out than they were to gain. And in four of the six ‘up' summers, the All-Share actually rose more on an annualised basis during the summer than it did for the year as a whole.
Period - May to St Leger - Full Calendar Year
2003 13.62 20.86
2004 2.34 12.84
2005 13.75 22.04
2006 -1.21 16.75
2007 -1.79 5.32
2008 -9.60 -29.93
2009 20.76 30.12
2010 0.59 14.51
2011 -12.90 -3.46
2012 5.46 12.81
FTSE All-Share total returns. Source: J.P. Morgan Asset Management
Keith Evins, Head of UK Funds Marketing at J. P. Morgan Asset Management, said: "Looking back just at the summer of 2012, at the beginning of May the FTSE All-Share stood at 3021 points. At the beginning of September it stood at 2973, suggesting a marginal win for the ‘sell in May' brigade. But what this really does is illustrate the difficulty and the danger of trying to time the market. Taking the period under consideration on to the nearest trading day to the St Leger (14 September - the race was run on the 15th), the All-Share was at 3089 points - a win by about the same margin for the ‘stay invested' strategy. And with May 2012 having been a pretty poor month for the All-Share, the end result of a ‘sell in May' strategy would very much depend on when in May you sold - getting out at 3021 on 1 May, or 2870 on 9 May, or 2739 on 18 May would have produced quite different results overall."
Another thing to bear in mind is that even if an investor had sold out on 1 May and bought back in on 1 September, there would have been dealing costs to pay on both sides of the trade. Perhaps more significantly (because investors are likely to hold the companies that make up an index, rather than the index itself), they would have missed out on any dividends paid during the period, which have historically made up a large part of the total return on investments. (By way of illustration, the All-Share rose 2.25% in points terms from May to St Leger day in 2012, but the total return including dividends was 5.46%.)
Evins added: "With hindsight, as the All-Share reached its low point for the summer of 2733 points on 1 June, ‘buy in June' would have worked far better than ‘sell in May' -- but it doesn't rhyme with ‘go away', and investors do not have the benefit of hindsight. A regular investor would have seen the benefit of the dip in prices throughout May, buying more shares in June, which would then have participated in the recovery through the rest of the summer. The J.P. Morgan WealthManager+ platform allows regular savings from £50 a month across a wide range of funds from J.P. Morgan Asset Management and more than 30 external managers.
"A further really important point for Individual Savings Account (ISA) investors is that your ISA allowance can only be invested once in any tax year, so you may not be able to reinvest any money you take out of an ISA, depending on how much of your allowance you have used," Evins concluded.
Given it is impossible to tell in advance what will happen over any particular summer, and that there is no discernible trend of summer underperformance, investors would arguably be better off remaining invested throughout. Investing in shares is best viewed as a long-term business, as markets do fluctuate from day to day but have tended to rise over the longer term.
‘Sell in May' - a history lesson
The old adage dates from the days when the London market would effectively shut down over the summer ‘season', allowing City folk to enjoy such events as Wimbledon and the Henley Regatta without worrying about what was happening back at the office. The St Leger, the last classic race of the flat racing season, is run on the second Saturday in September, after which it would be back to business as usual.
In modern times the phrase is often used to suggest investors would be better off out of the markets over the summer holiday period, when in spite of the rise of electronic trading and the globalisation of markets, low trading volumes can lead to greater volatility - even without the kind of macro shocks that characterised the summer of 2011, when concerns over the US debt ceiling and the Eurozone sovereign debt crisis sparked big market falls during August.