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‘Sell in May and go away’ is a well-known investing adage that suggests stock prices usually perform poorly between May and October.
But is there really any truth to this theory? And what does past data tell us about average stock market performance between these months?
Keep on reading for all the details or click on a link to head straight to a section…
“Sell in May and go away” or – as it’s sometimes referred – “Sell in May and go away, come back on St. Leger’s Day” is an adage that suggests stocks typically underperform over the summer.
St Leger’s Day, if you were wondering, is a major event on the UK racing calendar which usually takes place around mid-September.
Proponents of the ‘Sell in May and go away’ theory may be inclined to offload stocks during the month of May, and then re-purchase them on the cheap after the summer has passed. This is because believers in the theory will expect stock prices to fall between May and October, so selling stocks in May and re-buying them post-summer should earn them a profit.
It should be noted that ‘Sell in May and go away’ is closely aligned to the ‘Halloween Effect’, which suggests investors should buy stocks in late Autumn, and hold on to them throughout the winter. Again, this follows a belief that stocks should typically rise once the summer is over.
There are a number of reasons why stocks might suffer between May and October. Arguably the most obvious reason is the fact that the summer is usually the time when people head out to enjoy the warm weather and perhaps take a holiday. With this in mind it’s not difficult to understand how the summer months may lead to a slowdown in the economy.
Yet it’s not just workers who may decide to take it easy when the sun’s out. Between May and October, there is often a fall in trading volumes, presumably because investors also like to make the most of summer! Again, this is another reason why stocks may suffer during this time of year.
Now you know the reasons why many investors believe stocks typically slide over the summer, let’s attempt to answer whether there’s any truth behind the the theory that stocks actually do fall between May and October.
While we can’t analyse the performance of every stock market index out there, here at Money Magpie we’ve taken the time to compare average market returns of the FTSE 100, FTSE 250, and the American S&P 500 since these major share indexes were founded.*
As you’ll see in the table below, we’ve compared the average market returns of each of these indexes from May to October, and November to April.
|Average Annual Return
|Av. Return (May-Oct)
|Av. Return (Nov-Apr)
*Note: The FTSE 100 was founded in 1984, the FTSE 250 in 1987, while the S&P 500 began in 1950.
There’s no doubt that the data in the table above shows that, on average, all three of these share indexes have performed better during November to April compared with May to October. As a result, any investor who has religiously followed the ‘Sell in May and go away’ adage over the past few decades is likely to have come out on top.
However, let’s not get carried away…
Past performance should never be used as a reliable indicator of future returns. Just because stocks have performed well during the winter months, there are no guarantees this trend will continue.
Also, the table above only looks at average returns – there were years over where stocks under-performed between November and April. For example, in 2013 the FTSE 100 saw a gain of 9.36% between May and October, compared to a gain of 5.17% between November and April. Likewise, in 2009 the FTSE 250 saw a gain of 28.62% between May and October, compared to a gain of 14.88% between November and April. The S&P 500, meanwhile, saw a gain of 9.53% between May and October in 2017, compared to a gain of 9.09% between November and April in the same year.
All of these examples go against the teachings of ‘Sell in May and go Away’ theory. So, while, in the past, stock prices have usually performed sluggishly over the summer months, this hasn’t been true every year.
Even if you’re a firm believer in the ‘Sell in May and go away’ theory, it should be noted that timing the market is a notoriously difficult, even for expert investors.
So if you’d rather not sell all of your stocks in May, only to re-buy them a few months down the line (and pay the applicable share dealing fees), you may wish to instead focus on a long-term investing strategy and accept that falling stocks is just part and parcel of investing.
The beauty of investing for the long-term is that time is on your side, so you needn’t worry too much about short-term market swings.
Think of it in a football context: Say your team is playing its first game of the season and ends up 1-0 down. While you may be disappointed that your team has conceded, you probably won’t be overly worried about the impact of the goal on your team’s entire season. This analogy can apply to investing in the way that worrying about a potential short-term swing in the stock market shouldn’t be a reason to offload your portfolio like there’s no tomorrow.
As we know, all investing carries risk. However, there are ways you can minimise your exposure to risk. Arguably the most obvious way is to diversify your investments by holding a mixture of assets in your portfolio.
Another way to minimise risks while investing – especially if you’re worried about your portfolio suffering from a big fall – is to consider ‘pound-cost averaging’.
Pound-cost averaging is a strategy where you invest a fixed amount of money at regular intervals, regardless of whether the market is up or down. With pound-cost averaging, you buy more shares when prices are low and fewer shares when prices are high. Over time, the price you pay for your investments should average out to a decent price.
To learn more about ways to invest, take a look at our article that explains how to create your investing strategy in 5 simple steps.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When it comes to any type of investing, be mindful that your capital is at risk.