St Leger Day gloom for those who ‘sold in May'

Each spring, investors are reminded of the old saying ‘Sell in May and go away, come back on St Leger Day'.

The idea is that with markets effectively ‘closed' over the summer as City-types enjoy an endless round of social occasions, shares at best trade sideways, and at worst are vulnerable to the slightest shock, because of wafer-thin trading volumes.

But this year, as we approach the St Leger - the last English Classic horse race of the season, which takes place at Doncaster this Saturday (12 September) - ardent followers of the old ‘sell in May' adage will have little to cheer about, having missed out on one of the best summer stock market rallies in living memory.

Even over the longer run, figures from Lipper (produced by F&C in May this year using FTSE 100 capital returns) show that over the last 20 years, investors who sold in May would have been wrong as many times as they were right. The summer just gone has now tipped the balance in favour of staying invested, with gains (on a total return basis) of 17.7% from 1 May to 31 August.

In fact, missing the summer months of 2009 would have produced a significant impact on longer-term returns too. Over 10 years to 31 August an investment of £10,000 in the FTSE 100 would have grown to £10,926, but cashing out at the end of April 2009 would have turned this modest gain into a loss, at £8,926. Likewise, a five-year investment of £10,000 from 31 August 2004 would have grown to £13,234, reducing to £11,322 if the investor had ‘sold in May' this year. (Total returns, figures from Lipper, to 31/8/09 and 30/4/09. Past performance is not a guide to the future and the value of investments and any income from them can go down as well as up.)

Of course it was impossible to tell back in May that the market rally begun in March would continue deep into the summer - just as it is impossible to tell at the start of any year what investment returns will look like by the end. Rather than relying on outdated adages (a look back at recent history will prove there have been some pretty rocky autumns as well as summers), investors would do better to stick to a sensible, long-term investment strategy, accepting that equity markets can be volatile but that the ups and downs should iron out over time.

Jason Hollands, Director at F&C Investments, says: "Attempting to time the market accurately is incredibly difficult. Back in May the UK market had already seen a significant rally from the lows of early March, but anyone who took their money off the table then in the expectation of a difficult summer would have missed out on substantial gains. Likewise, if you are out of the market it can be difficult to judge the moment to come back in.

"Following a long-term investment strategy, with a decent spread of investments, perhaps using regular investment as a way to smooth out the ups and downs of share values, is a far more sensible route in the long term than diving in and out of the market based on whether or not there is an ‘R' in the month."