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Motley Fool examines truth behind old stock market adage

11th September 2009 Print
There may be some truth in the stock market adage that urges investors to "sell in May and stay away until St. Leger's Day." The five months from May to September have not been rewarding for private investors in 12 out of 25 years according to calculations by financial website The Motley Fool - Fool.co.uk.

Historically shares have fallen around 0.7% between May and September
The summer of 1997 was the worst year to sell in May and stay away
The summer of 2002 was the best year to heed the adage

By following the advice, investors would have sidestepped the severe stock market falls of 2008, 2002, and 2001, when shares fell 19.5%, 28% and 17.8% respectively. Additionally, selling your shares in May 1998 would have protected your portfolio from the collapse of Long Term Capital Management, which saw shares crumble almost 15% during the five summer months.

But selling your shares this year would not have been clever. The London market has climbed 13% between May and the start of September. The summer surge accounted for almost all of the stock market gains to date this year.

David Kuo, Director at the Motley Fool, says: "If you stare hard enough at any set of data a pattern will eventually emerge. It may not mean anything useful, but it is a pattern nonetheless.

"On the face of it, the summer months do not appear to be the best time to hold shares. The London stock market has risen around 8% a year between 1984 and 2008. By comparison, shares have fallen around 0.7% during the summer months of May through to September. So, selling in May and buying back in September could be marginally beneficial.

"But it's important to consider other factors before you liquidate your portfolio at the start of every summer. It's essential to take into account selling and buying costs of around 3% of your portfolio value. Then there's Capital Gains Tax to pay if your gains exceed the current allowance of £9,600. And don't forget you will have to forgo your dividends too.

"Truth is, between May and September shares have fallen in 12 out of 25 years. So you have slightly better than a 50:50 chance of being right. Anyone have a coin handy?"