Is “Sell in May” a path to better returns?

Graham Smith

Graham Smith - Market Commentator

Promises of shortcuts to investing success are often persuasive at first sight. Given the inherent unpredictability of stock markets, stumbling upon a way of predictably beating them tends to get our attention. As investors, we want to believe there is a way and are in the right frame of mind to be convinced.

Is “Sell in May” a path to better returns?

“Sell in May, go away, come back St Leger’s Day” holds such promise. The saying goes back a long way and has the added advantage of making some kind of intuitive sense.

The social calendars of investors and their brokers – which are probably still somewhat fuller in the summer due to a concentration of major sporting and entertainment events – have long been suspected as a reason for eyes being taken off the ball. 

The adage also fits with another theory – that optimism among human beings when the weather is good means share prices over the summer months tend to discount more positive outcomes. That leaves less room for prices to rise even when the news affecting shares turns out to be good.

The best returns, the argument goes, occur in the winter, when our natural propensity to pessimism is greater.

This may all be well and good, but results from the relatively recent past of missing out the summer months have been poor.

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 produced positive returns in 19 of them¹.

If it was ever the case summer social calendars got in the way of investors pinpointing and buying attractive shares, it’s hard to find compelling evidence of it today.    

The fundamental weakness of supposed seasonal patterns is that markets patently do not reliably rise or fall by the month of the year. The recent past particularly suggests that investors would not – on average – have benefited from being cashed up over the summer.

The Brexit referendum result in June 2016 surprised almost everyone. However, the FTSE All-Share Index rallied strongly over the rest of the summer, as the focus largely fell on the immediate benefits of a weaker pound on British exporters².

Equally, the UK stock market – let’s take the FTSE All-Share Index again as a proxy for that – rose between May and September in 2017 and was pretty much flat over the same period last year³.

With investors in America reportedly having been net sellers of equity mutual funds since mid February – despite a strong recovery that has driven the US stock market to new record highs – the conditions certainly don’t seem right for a pullback in 2019 just yet⁴. They generally come about when the majority of investors are most heavily committed.

Another difficulty is that, even if our moods do change with the seasons – and that affects the returns from shares – there’s no guarantee that weaker periods will produce negative returns. Returns in the summer could be lower than in the winter, yet still positive.

One further problem is that investment and divestment according to the Sell in May adage wouldn’t have protected investors from the unforeseen shocks of the past. Buying back on St Leger’s Day would have still left investors exposed to the market crash in 1987 (October); the onset of the dotcom collapse in 1999 (December); and sharp falls as the global financial crisis got underway in September 2008.

More interesting than investing with the seasons, I think, are the benefits of having a regular savings plan. This was brought home to me – not for the first time – in a recent article by Fidelity’s Emma-Lou Montgomery.

Emma-Lou’s article was mainly about the cumulative benefits of investing lump sums early rather than late in the tax year. Over the past ten years, it was clear which strategy works best.

However, there was a second takeaway for me – just how well regular saving has worked over that same time period. You might think – especially given the long bull market we have seen since 2009 – that it would have been best to invest as much as possible at the start of the period, rather than eke it out.

It was; though not by as much as you might think. Fidelity’s calculations showed that, investing the maximum amount permitted each year in a regular savings ISA would have turned a total investment of £136,360 into £192,500 over the past ten years⁵. Please remember past performance is not a reliable indicator of future returns.

The important point here is that, by investing a regular amount on the same day each month, an investor avoids being exposed to bad investment timing.

Saving regularly also has a powerful inbuilt advantage in that it automatically capitalises on periodic downward market moves by accumulating more fund units or shares. Conversely, investments made when markets are riding high add fewer, more expensive units or shares.

The long term outcome is usually an attractive average buying price per unit or share. That’s because markets tend to move higher over the long term but fluctuate both up and down over shorter periods.

Opening a stocks and shares ISA with Fidelity – and starting saving from £50 per month – is probably easier than you think. Of course you can make monthly investments much greater than that providing the total amount is within the £20,000 ISA limit for the 2019-20 year. 

Five year performance

As at 30 April
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
FTSE All-Share 7.5 -5.7 20.1 8.2 2.6

Past performance is not a reliable indicator of future returns
Source: Refinitiv, as at 30.4.19, in GBP terms with income reinvested 

¹ Fidelity International, 01.05.17
²ʼ ³ London Stock Exchange, 25.04.17
⁴ Reuters, 25.04.19 and 29.04.19
⁵ Fidelity International, April 2019. Based on a total investment of £136,360 (the full ISA allowance each year since the 2009/10 tax year) invested in the FTSE All Share Index each tax year at different times.

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. 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.