27th April 2015
The old adage of “sell in May and go away, don’t come back till St Leger Day” is a warning often cited by investors looking to avoid the traditionally trickier summer months – and there is some truth in the cautionary saying.
Research form AXA shows that May is the third weakest month of the year for the UK stockmarket, averaging -0.2% since 1970.
In addition, the probability of a positive return over the month is less than 50%. May is also the weakest month of the year for the FTSE 100 relative to the US S&P 500, underperforming by 1.9%.
Adrian Lowcock, head of investing at AXA Self Investor said: “The Sell in May phenomenon can be traced as far back as 1694. However, today stock markets are supposed to be efficient and this sort of seasonal behaviour should not exist, but it does. The sell in May trend illustrates that human behaviour still has a huge influence on market directions.”
However, Lowcock warned that before investors rush to sell out of their investments they should dig a little deeper.
When investing in the stockmarket, even via a tracker fund investors get access to both the capital growth of their investments as well as the benefit of any dividends they may have received.
As a result when investors take dividends into account, the picture changes completely.
For example, from 1986 to 2013 the FTSE 100 has returned a total of -13.75%, excluding dividends, over the five summer months, whilst the same index has delivered a return of 185.4% during the seven winter months.
But Lowcock noted that from 1986 to 2013 the FTSE 100, with dividends reinvested, has returned a total of 33.61%. With dividends reinvested the summer months deliver a negative return 35% of the time – roughly one in three.
Lowcock added: “Although there is some truth in the Sell in May adage, however when dividends are reinvested investors who stay invested in the summer are able to make a positive return. Trying to follow a sell in May strategy could be risky – it is still time in the market, not timing the market which counts.
“There are other factors to consider including valuations, do you need an income, transaction costs and whether you use an active manager. If markets do fall in the summer investors may wish to consider adding to their ISA or SIPP investments ahead of the winter month rally.“