AT THIS time of year, you can be sure that a debate will break out over whether there is a reliable pattern of seasonality in investment returns, with some investors still ardent believers in the old adage of “Sell in May and go away, don’t come back till St Leger Day”.
The origin of this saying is believed to be a reference from the days when stockbrokers and wealthy investors vacated the City for a summer of sipping Pimm’s and champagne during “The Season”, a series of to-be-seen-at sporting and social events including Royal Ascot, Wimbledon, the Henley Royal Regatta, Cowes Week and various cricket test matches.
“The Season” traditionally ends with the St Leger flat race, a prominent date in the horse racing calendar since 1776 that takes place at Doncaster in mid-September. Yet over time it has come to be associated with a belief that the summer months are somehow a dangerous period for investors, with a high incidence of market sell-offs. But should investors really pay heed to this old wives’ tale?
The “Big Bang” reforms of 1986 ushered in the age of electronic trading and looking at total returns for the FTSE All-Share Index (including dividends reinvested) over the intervening three decades we have found that during the period between 1 May and the second week of September, the index has delivered positive returns in 20 out of the past 31 years.
That means that 65 per cent of the time investors would have made positive returns by staying invested over the summer. This compares to markets rising 77 per cent of the time across the full calendar years over this 31-year period.
In simple terms, therefore, the data is clear that there is no compelling case to automatically cash up your investments every year for the summer months. Indeed, doing so could also incur dealing costs or crystallise capital gains tax liabilities as well as resulting in potential positive returns being missed out.
It is particularly important for investors to be careful about not ditching shares before the “record” date - the point at which they will be eligible for the next dividend.
For example, Royal Dutch Shell, the UK market’s single largest dividend payer, announced its next interim dividend on May 4. This will be paid on June 26 but only to those who were still on the shareholder register as at May 19, so selling ahead of this key date could be a costly move.
Funds also have dates on which they go what they term “ex-dividend”, which might mean an investor who sells too early misses out on an income payment they would have otherwise received.
Of course true believers in the “Sell in May” mantra, often point to seven very steep market sell-offs between May and mid-September over the last three decades: 1992 (-11.6 per cent), 1998 (-12.6 per cent), 2001 (-18.4 per cent), 2002 (-21.2 per cent), 2008 (-13.0 per cent), 2011 (-10.9 per cent) and 2015 (-9.6 per cent).
Selective memory however can lead to them forgetting the soaring summers of 1987 (+13.8 per cent), 1989 (+12.0 per cent), 1995 (+12.7 per cent), 2003 (+14.2 per cent), 2005 (+14.3 per cent) and 2009 (+21.3 per cent) when the markets posted double-digit returns.
In truth, trying to predict short-term market movements with any degree of accuracy is nigh on impossible and providing your investment horizon is a long-term one, then the potential for short-term gyrations should not distract you.
So, rather than take a punt with your pension or ISA on whether markets are set to soar or tank this summer, why not just have a flutter on the horses instead?
Jason Hollands is Managing Director of Tilney Group.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here