Investing overseas helped UK investors avoid Sell in May adage

Posted by Adrian Lowcock in Latest insights category on 05 Sep 19

People like to make order out of chaos, look for patterns and try to make sense out of the world. The investment community is no different and is often coming up with ways to explain market behaviour. The adage “Sell in May, go away and come back on St Leger day” is one commonly heard amongst investors. Moreover, like any good saying there is plenty of logic to it and even some truth in it.

The adage suggests investors would be better to sell their shares at the beginning of May then re-invest after St Leger race day (normally on the middle Saturday of September). This is because markets have in the past, tended to be quieter and their performance weaker over the summer. As things stand, it looks set to be true once again amid a variety of headwinds for stocks, including Brexit uncertainty and the US-China trade war.

Since the close on 1st May, UK equity markets are currently lower, with a 2.4% drop for the FTSE 100 and a similar fall for the FTSE All-Share (Source FE Analytics, 1st May 2019 to 2nd September 2019). As things stand, the leading index looks set to deliver a negative return over the summer months for the second year since the Brexit vote.

However, although ‘Sell in May’ looks set to once again be proved correct, it would have been a risky exercise to undertake as the margins are so narrow that timing would have been a critical factor. If you sold on the wrong day you could have ended up worse off.

Do not ignore dividends

The performance of the FTSE 100 on its own only looks at a part of the returns investors get when they invest in UK companies. Dividends form an important part of the overall returns investors receive. When you include dividends, the losses of the FTSE 100 for the summer months fall to -0.52% (Source FE Analytics, 1st May 2019 to 2nd September 2019) meaning that had you sold in May with the intention of buying back in September, you would barely have been any better off. Once you factor in any trading costs and the risks of getting timing wrong then it’s clear that following the Sell in May adage, whilst true this year, can be a risky strategy.

Indeed the adage is not very consistent and for the FTSE 100, it has only proven to be right 44% of the time in the last 32 years. This falls to 39% when dividends are included. Whilst the volatility in stock markets is understandably making investors nervous, the data shows it is very risky to make short-term predictions on market movements. A much better approach is to remain invested, be diversified and ensure your portfolio is regularly rebalanced.

Brexit helps UK investors overseas

Whilst investor sentiment has dropped around the world on fears of a global recession, for UK investors, if they had sold their overseas shares in May, they would potentially have missed out on some strong returns. This is due to the weakness in the pound over the summer because of the continued Brexit uncertainty. The effects of a weak domestic currency reversed some big falls – a 7% drop in the Nikkei 225 became a 3.8% gain. In the US, the S&P 500 returned 0.09% but sterling investors saw a 7.5% gain (Source: FE Analytics 1st May 2019 to 2nd September 2019, price return in pounds sterling).

What lessons can we learn from Sell in May?

There is no doubt that if you get it right timing the market can help you boost your investment returns, but what is equally clear is that getting that timing right is a huge challenge and you could well end up losing out. Very few investors are actually good enough at it to make it profitable.

Dividends continue to play a significant role in the long-term performance of investment returns. Investing for income and equity income funds are an important way to diversify and can help investors protect their wealth in volatile conditions.

The effects of currency movements on markets have been pronounced this year as the pound has slipped a long way over the summer on understandable concerns over Brexit. Nevertheless, it does help to highlight the importance and benefits of investing in markets other than the UK.

Both dividends and currency fluctuations go to show that, whilst the Sell in May adage may have worked occasionally in the past, it is a fragile trend and investors would be wise to focus more on their long-term goals and less on the short-term noise that often accompanies markets.