The age-old adage suggests that the summer months are prone to market upsets, with some investors selling their holdings at the start of May to dodge an equity market decline, only returning to the stock market in mid-September.
However, in reality, the ‘sell in May’ theory has little to do with the perceived risks of being invested during the summer months and is instead rooted in the social calendar of a bygone age.
It dates from the time when stockbrokers would typically sign off work to enjoy the summer sporting season and social events.
This included Royal Ascot, Wimbledon, Henley Royal Regatta, and Cowes Week, ending with the St Leger flat race in mid-September.
As such, traditionally nothing much happens over the summer months, so the theory goes that investors can reasonably sell their holdings in May and buy them back in September.
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Does it pay to ‘sell in May’?
Fidelity International analysed data over a 37-year period, looking at returns from the FTSE All Share. It compared strategies for staying invested throughout the year, versus timing the market by selling on 1 May and returning to the market on 15 September.
Since 1986, the maxim “fell short” almost two-thirds of the time, with investors missing out on market gains.
In fact, ‘sell in May’ worked in just 14 years, failing in 23. By staying invested throughout the summer months, Fidelity revealed investors would have made a positive gain.
The graph below shows the years when it worked (green), and red when it failed (click to expand):
Ed Monk, associate director of Fidelity International, said: “It’s logical to suppose that the strategy has a better chance of working during periods of prolonged market falls – which ‘sell in May’ might 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.”
Monk added that, based on a £100 investment, it would have grown to £1,391.68 today when applying the adage to investments. However, for those that remained invested throughout the period, the investment would be valued at £2,014.45.
“Following it, therefore, is likely to leave you significantly worse off versus staying invested”, he said.
Monk added: “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.”
