Does ‘Sell in May and go away’ work?

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

‘Sell in May’ - a saying from history

The exact provenance of the saying ‘Sell in May and go way, don’t come back until St Leger’s Day’ is unclear but a consensus has formed around the idea that it emerged due to stock market traders in the City of London observing a seasonal slowdown in activity during the summer months. This would reflect the habit of City folk in the past to conclude their business by the end of spring before retreating to the country for more leisurely pursuits over the summer.

‘St Leger’s Day’ refers to the St Leger stakes, a horse race run in Doncaster and the highlight of a four-day meet that takes place over a weekend in the middle of September - racing having been a favourite pastime of the financial world in times gone by.

The theory that stock market returns might slow in the summer made sense when trading was a more in-person activity that required the physical presence of traders. In a world of electronic communication and automatic trading, however, its questionable whether activity would be influenced by such seasonal effects.

Does it work?

Whatever claims could have been made for ‘Sell in May’ in the past, what matters most to investors now is whether it works in today’s world. We ran some numbers to find out.

We looked at returns from the FTSE All Share - the index covering the broad sweep of the UK market - and compared a strategy of staying invested throughout, with the strategy of selling on the first of May and returning to the market on September 15, to reflect the approximate date of the St Leger Day stakes.

We were able to get hold of data back to 1986, reflecting 37 years when it has been possible to compare the two strategies. The graphic below is a simple illustration of the years in which Sell in May worked - shown in green - and when it didn’t - shown in red.

While it might at first appear a close-run thing, a closer look reveals that Sell in May has worked in just 14 of the 37 years and failed in 23 years.

It’s logical to suppose that the strategy has a better chance of working during periods of prolonged market falls - which Sell in May night help you avoid. That’s borne out by the successful years in 2001 and 2002, when the dot com bubble was unravelling. It also worked in 2007 and 2008 during the credit crunch and financial crisis. Most recently, it has worked in both 2022 and 2023.

Nonetheless, Sell in May appears to work less often than it fails - in our chosen time period at least. Over the full 37 years the failure of Sell in May has meant the strategy has badly lagged returns from simply staying invested - as illustrated in the chart below showing the value today of £100 invested in 1986.

The headline numbers on ‘Sell in May’ seem pretty clear. By applying ‘Sell in May’ your £100 investment have grown to £1,391.68 today. That compares to £2,014.45 if you had remained invested throughout that period.  Following it, therefore, is likely to leave you significantly worse off versus staying invested.

Perhaps the real value of ‘Sell in May’ is as a reminder that stock markets have a track record of rising in the long run - albeit with periods of loss along the way. Removing yourself from the market for four-and-a-half months of the year, as ‘Sell in May’ requires you to do, reduces your chances of taking advantage of that long-term performance.

Past performance is not a reliable indicator of future returns.

Source: Refinitiv, total returns from 30.4.19 to 30.4.24. Excludes initial charge.