Should you sell in May?

Fri 13 May 2022

By Ben Debney

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Investment research

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Should you follow the “Sell In May” adage? Here we look at whether there is any basis for following the Sell in May process. The results are fascinating.

researchEvery investor is seeking out the Holy Grail, that is an easily applied process which can generate consistently outstanding returns – we might define “outstanding” as performance at a decent margin better than the stock market index.

According to Stock Trader’s Almanac, selling in May:

“is the strongest – and strangest – seasonality effect in the market.”

Their research found that most market gains occurred during the months of November through to April, after which you should “sell in May and go away”.

An Extraordinary Difference – The Evidence

In our analysis below we have a 6 month “Summer” period starting on 1st May and a 6 month “Winter” period beginning on 1st November.

Is there really any significant difference between the winter and summer returns?

We looked at the FTSE All Share going back to 1986 and found the following:

  • Winter returns:                 8.14% annualised return
  • Summer returns:              1.29% annualised return
  • Buy and Hold:                   9.43% annualised return

The difference between the Summer and Winter is extraordinary.

For example, if you only invested during the summer (selling out over the winter) in every year since 1986 you really didn’t make much money for the effort.

For those tempted to “Sell and Forget” every 1st May, and go on holiday for 6 months uninvested, the results were pretty good.  Not quite as good as “buy and hold” for the whole year, but damn close. 

Your approach might be dictated by how much you value peace of mind while on your summer hols!

So Sell Every Year In May?

Averages can hide substantial differences from one year to the next.

For example, for 2007/8 the summer returns were 4.60%, followed by winter returns of -8.52%.  We could give more examples.

The progress of 2022 to date certainly makes it feel like a year when you should stand to one side, and Sell In May, if you haven’t done so already.  Just don’t be too presumptuous.

Just Buy An Index Tracker?

Whether you only invest for the Winter or the whole year, for ultimate simplicity and low costs you should simply just buy an index tracker, right?  Not so fast…

Let’s not forget that the only reason why anyone explores the “Sell In May” idea is because they are seeking out that perfect investment process – consistent outperformance of the stock market.

If you are only going to buy an index tracker, and hold this in perpetuity, you have already given up seeking outstanding returns.  But please don’t give up just yet – because the returns from an alternative process are staggeringly good, and it is very straightforward.

For example, how straightforward is it to buy the best three performing UK growth funds every 6 months?  Very.

If you did that every year since July 1994 (our research only goes back that far) you would have generated a return of 2,108%...

…that is 1,624% extra growth than buying and holding an index tracker over the same period (Aviva UK Index Tracking – 484%).

This is our Dynamic UK All Companies Portfolio in action.

Conclusion? The lazy “buy and hold” option has a very high cost.

 

ACTION FOR INVESTORS

  • Sell in May? There are better options.
  • Make sure you establish a process and apply it with discipline.
  • Think your funds need some attention? Check your funds here.

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