Why you should forget ‘Sell in May and go away’ - forever

The tired old maxim which tells investors to pull their money out of the market over the summer months is looking increasingly outdated.

“Sell in May, go away, come back on St Leger Day.” This, or similar, is one of the best-known maxims in the world of investing, and perhaps the most tired-out.

The wisdom of dumping stocks at the end of spring and buying back after the world's oldest classic horse race in mid-September, has always been somewhat questionable. Markets have delivered very mixed returns over the summer months, particularly recently.

Even in years where it has proven somewhat true, it has been easy for investors to get it wrong. It also depends heavily on which asset classes you are in.

Those that follow the edict and get their timing even slightly off can be left nursing a severely dented portfolio.

• Visit the ii Knowledge Centre for a wide range of investor education content
• Six things you must do before buying any share
• Check out our award-winning stocks and shares ISA

If you are investing for the long term, as you should be in most circumstances, you are likely to be better off just setting and forgetting your pot. Timing the market can be a fool’s errand, and even the professionals struggle to do it reliably.

Why the adage is dead and buried

The experience of the past 18 months may have killed off the idea of sitting the summer out for good.

In 2020, it would have been a mistake to sell in May and go away. Taking the FTSE All-Share as a yardstick, you would have sold with the index at around 3,200 points and bought back at around 3,365 on 12 September 2020 - St Leger Day.

While there was a lot of volatility, markets continued their recovery from the pandemic plunge through the summer.

This year ‘Sell in May’ has been further undermined. As of 9 September, the FTSE 100 is up 0.7% since the start of May. The FTSE All-Share is up 1.67%.

While this is unspectacular, it still means FTSE 100 index buyers will have lost out on gains by ducking out for the summer.

The performance of the All-Share points us to something else to consider; the rise of the FTSE 250 index of companies - typically more UK-focused businesses valued at between £500 million and £5 billion - relative to its big brother.

Over the same period, the FTSE 250 is up a stonking 5.5% as it has taken the spotlight during Britain’s emergence from the pandemic.

Only five FTSE 100 stocks are in the list of Top 40 FTSE 350 risers since the close of play on 30 April 2021. Namely, Spirax-Sarco Engineering (LSE:SPX),Croda International (LSE:CRDA), Segro (LSE:SGRO), Sainsbury (J) (LSE:SBRY) and Ashtead Group (LSE:AHT).

In fact, data collected by interactive investor shows that in the 13 summers since 2009, the FTSE All-Share index has fallen just four times. In the 24 years before that, going all the way back to 1985, the odds of the index falling over the summer were 50:50.

*For the record, we used the closing price on the final day of April as the selling point, and the closing price in the session prior to St Leger Day. Default date used was 15 September.

How overseas markets behave over the summer

‘Selling in May’ would be significantly more costly if you applied it to US stocks. The broad-based S&P 500 has returned 7.96% over this period, the Dow Jones 3.41% and the tech-heavy Nasdaq Composite 9.48%.

“The phrase harks back to the days when the City all but closed for the summer, with its grandees attending various events in those months until St Leger Day signalled the full-time return to the offices,” explains Richard Hunter, Head of Markets at interactive investor.

“Since then, of course, the phrase is in danger of becoming anachronistic with markets open around the clock around the globe.

“There is still something to be said for lighter dealing volumes resulting in higher volatility during the height of the summer season as most market participants take a well-earned break, but for the most part the phrase has little relevance of itself, especially to investors who are correctly taking a long-term view.”

• Will ‘transitory’ inflation start to be worryingly persistent soon?
• The inflation-proof shares fund managers are backing
• ii Super 60 investments: quality options for your portfolio, rigorously selected by our impartial experts

“Since the end of April, the FTSE100 has barely moved, adding just 0.7%. At the same time, it has highlighted a feature within the UK market in 2021, with the FTSE250 having risen by 5.5%, and by 15.7% in the year to date.”

“The FTSE250 is seen as a more accurate barometer for the UK economy, being rather more domestically focused than the internationally facing constituents of the premier index,” Hunter continued.

“Given that the UK’s recovery has been rather stronger than anticipated following the successful rollout of the vaccine and government assistance schemes designed to keep the wolf from the door, the index has seen additional interest from investors.”

“As evidenced by the amount of M&A activity this year, including the more recent approaches for the likes of Morrison (Wm) Supermarkets (LSE:MRW) and Meggitt (LSE:MGGT), the index is increasingly being seen as one housing a number of compelling investment opportunities for investors and acquirers alike.”