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.

According to one of the stock market’s most well known sayings – sell in May and go away, don’t come back till St Leger Day – investors who sold out of markets before the summer ought now to be reaping the rewards. The first British horse racing crowd in six months descended on Doncaster Racecourse on Wednesday – just before the remainder of the St Leger Festival and the St Leger Stakes itself went behind closed doors.

The part of the saying urging investors to re-enter markets in September is based on an old idea that stockbrokers and their wealthy clients transfer their attentions from a busy outdoor social calendar back to investments as the weather deteriorates. Markets will have supposedly drifted over the previous few months owing to a general lack of market news and thin trading.

Such thinking seems archaic in the modern world of 24-hour trading and especially after a summer this year packed with market-moving news. So it has proven to be. Markets moved quickly to discount the impact of the coronavirus pandemic back in the spring. As the pandemic spread and economic lockdowns ensued, stocks actually rose.

To gauge the long term success or otherwise of “sell in May”, this week Fidelity 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 on 18 occasions1. So the saying has hardly been a recipe for success in most of our investing lifetimes.

We can’t even assign the cause of the market rising this year – the FTSE All-Share Index added 3.7% this summer – to an extraordinary period for technology stocks2. Unlike the US, where stocks also rose, the UK stock market is light on this sector.

It may be more accurate to say that markets have, once again, looked ahead of current events – out to a brighter, post-pandemic future. Look past the events of this year to a corporate earnings recovery in 2021 and beyond and you’ll discover one of the main reasons why markets have held up so well. In the US, for instance, analysts are expecting earnings to grow by around 26% next year after an 18% fall in 20203.

Besides the UK, Fidelity also carried out a similar analysis for the world’s other main stock markets over the past 30 years and found a similar discrepancy between expectation and fact. The S&P 500 and Germany’s DAX Index stubbornly failed to validate the maxim, rising on 22 and 13 occasions respectively over the review period4.

You could say the odds are stacked against the adage working because, over the very long term, markets are on a rising trend. That raises the chances there will be more positive than negative months over time and that, even in the presence of a weak seasonal factor, will eventually predominate.

This latest data fits with what we already know to be true – the best way to ensure long term investment success is to stay invested throughout the market’s ups and downs.

The longevity of “sell in May” is testament to the persistent desire of investors to discover a reliable way of timing markets. That this particular adage is so unreliable merely highlights the difficulty of engineering a predictable response to unpredictability.

A far better approach is to accept that markets will move in unexpected fashion over short periods and to try to ameliorate that fact through diversification. Heightened volatility in the US stock market this week is a reminder of the importance of not putting all your eggs in one basket. Accepting that markets tend not to move in straight lines and that different types of assets in different countries will behave unlike one another for a given set of economic circumstances opens the real pathway to long term investing success.

For many investors, a multi-asset fund can be a good choice, because it will always include several types of asset at the same time. 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, and maintains a proportion of its assets in cash.

Investing stepwise via a regular savings plan is also 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 do in months when markets are high. Over time, this method helps to reduce average buying prices and maximise investment returns. That’s a much more sensible response to unpredictability.

Five year performance

(%) As at 10 Sept 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
FTSE All-Share 13.3 13.43 3.4 3.6 -13.3

Past performance is not a reliable indicator of future returns

Source: FE, total returns as at 10.9.20, in GBP terms

1,2,4 Fidelity International, September 2020. FTSE All-Share Index total returns in GBP; S&P 500 Index total returns in USD; DAX 30 Index total returns in EUR. Period 1.5.89 to 1.9.20
3 FactSet, 4.9.20

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. Select 50 is not a personal recommendation to buy or sell a fund. 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.

Topics covered

Funds; Global; Shares; Volatility

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