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.

In the Land of Might Have Been, this week would very likely have been stirring some mild rumblings of disquiet among investors. The most famous stock market adage of them all – Sell in May, go away, don’t come back ‘til St Leger’s Day – readily springs to mind this time of year.

Though now largely discredited by hard data, this “truism” seeks to steer investors away from the summer months when, historically, stock markets were supposed to be relatively quiet and unrewarding.

Two notions have long supported this guide. The first was that stockbrokers and their wealthy clients took a break from making big investment decisions in the summer, as they became preoccupied with a busy calendar of sporting and other large social events. Expectations of a general lack of market news and thin trading were a recipe for markets drifting lower.

The second idea presumes people become more optimistic when the weather improves, leading them to view investment propositions in a favourable light. The buying that ensues pushes prices to levels leaving no room for further gains.

The corollary to this is that the winter months – roughly between the St Leger horse racing festival in September and the following spring – offer the best buying opportunities, when investors are more pessimistic and have underpriced the true value of shares.

Today, these assumptions appear to be a poor basis on which to predict returns from the stock market. Fidelity has looked at returns from the FTSE All-Share Index between May and September over the past 30 years and found that the Index generated positive returns in 18 of them1.

Having said that, I am reminded that Sell in May and other arguments to call a halt on investing tend to be at their most potent when stock markets have experienced a strong spell. You might argue this year could not have been more different.

There are, however, at least a couple of inconvenient facts. The first is that US technology stocks – the very shares that helped propel markets strongly higher in 2019 – are back in vogue. In part, they’ve been responsible for a fairly sharp rebound in the US stock market since the middle of last month2.

Secondly, you could argue that market valuations – if not markets themselves – have been on a bull run regardless. While share prices have fallen back on average across the world, the earnings outlooks for companies have probably worsened faster, leaving shares looking more expensive.

With some company reports for the first quarter of the year still to come and then, presumably, even worse ones for the second quarter expected to arrive in July, there will be plenty of time this summer for bad news to gnaw away at investor confidence.

Against that, while the coronavirus lockdown will undoubtedly hit earnings hard this year, markets will soon enter a phase where profits in 2020 become overshadowed by expectations about how companies are set to perform in 2021.

Part of the rationale for this will be that profits post coronavirus will provide a fairer indication of the true long-term earnings potential of companies and provide a better basis for valuing them.

For some, this may seem a leap too far. During the dotcom boom and bust at the start of this century, alternative valuation metrics – including the number of eyeballs thought to be perusing web pages – took precedence when traditional methods of valuation came up with the “wrong” answers. To overlook the damage wrought on profits in 2020 may feel like something similar.

However, should earnings rebound in 2021 by something of the same magnitude as they are set to fall this year, valuations will then look more comfortable. Current investment industry estimates point to shares trading on around 17 times 2021 earnings in the US – about the same as the long term average3.

At the same time, the recent, rapid revival of technology stocks could be seen as entirely rational, given the way economic lockdowns have skewed our daily lives. Why shouldn’t the companies that enable us to shop online, work from home, communicate with friends and business colleagues, watch films and play videogames continue to thrive?

First quarter results from Google this week were starkly countertrend, with net income up 2.7% compared with the same period last year, to US$6.8 billion. This despite a slowdown in online ads in March due to the pandemic4.

Whatever the outcome of the battles of confidence to come, continued high levels of uncertainty suggest that tried and tested approaches of making investments in stages – as opposed to all at once – and ensuring investment portfolios are diversified are sensible strategies to stick to.

Investing stepwise via a regular savings plan is always a sensible idea. It’s all the more so when markets are volatile. Committing a set amount monthly automatically ensures that more shares or investment fund units get bought when markets are low and fewer in months when markets are high. Over time, this method helps to reduce average buying prices and maximise investment returns.

You can open a Stocks and shares ISA with Fidelity and invest 12 monthly amounts per tax year of £50 or more up to the current £20,000 annual ISA limit.

For many investors, a multi-asset fund can be a good choice too, because it will include several types of assets that behave differently from one another under a given set of economic circumstances. The Fidelity Select 50 Balanced Fund, for example, has holdings in equities and bonds via the 30 or so other funds it invests in. It also invests across a diverse range of countries, each of which can be expected to emerge from the coronavirus crisis at different times offering distinct opportunities.

More on regular investing

More on the Fidelity Select 50 Balanced Fund

Five year performance

(%) As at 30 April 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
FTSE All-Share -5.7 20.1 8.2 2.6 -16.7

Past performance is not a reliable indicator of future returns
Source: FE, as at 30.4.20, total returns in local currency

Source:

Fidelity International, September 2019. FTSE All-Share Index total return, 01.05.90 to 01.09.19
Bloomberg, 29.04.20
Bloomberg, 27.04.20
Alphabet Inc., 28.04.20

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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