It's that time of year again when we are supposed to sell our shares and go away for no other reason than because it's May. According to the stock market adage, "sell in May, come back St Leger day", which this year is on 14 September.
US investors have given our well-worn saying an American twist. They call it the Hallowe'en indicator, which asserts that investors should buy shares between October and April, and switch into short-term government bonds for the rest of the year.
Whether you prefer the British or American version, the guidance is based on market timing rather than fundamental reasons as to whether you should buy or sell shares. But how accurate has it been historically?
Over the past 29 years, the FTSE 100 has fallen on 14 separate years between May and September; it has risen on 15 occasions. The strategy would have helped you to sidestep the Asian currency crisis of 1998; the bursting of the dot.com bubble in 2001; and the US recession in 2008, when the UK benchmark index fell 13 per cent, 11 per cent and 7 per cent respectively.
However, by staying away between May and September you would also have missed out on a 13 per cent gain in 1989; a 10 per cent jump in 2005; and a near 16 per cent surge in the market in 2009. On average, following the "Sell in May" strategy would have left you 1.5 per cent worse off over the 29 years, besides any trading costs such as broker's fees and dealing spreads when you sell and buy back the shares later on.
There is something else to mull over. Many companies report their year-end results in February, which means that they distribute their largest dividend of the year – the final dividend – between May and August. By excluding yourself from the share register in May you miss out on this.
It would seem that the "Sell in May" strategy has been no more accurate than flipping a coin.
That doesn't mean you should never sell shares in the summer. Each investment should be judged on its merit and we should regularly review our portfolios, getting rid of investments that are not performing and reinvesting the money, regardless of the time of year.
Summer is usually when share traders go off on long vacations. That could help to explain the lull in market activity between May and September. It may also explain why share prices may be more volatile. But provided you have some idea of the intrinsic values of the shares you own then it is possible to take advantage of volatile share prices. So instead of selling in May, the summer months may prove to be good buying opportunities, especially with the lengths that developed economies are going to print money to lift asset prices. At some point quantitative easing will have to stop, but it is unlikely to happen this summer.
Personally, I am not a fan of market timing. Nor am I swayed by some antediluvian saying that has more to do with the state of London's sewers in Victorian times than today's hi-tech Britain. Nevertheless, I will be keeping an eye on the markets for bargain shares should they present themselves. I like to buy shares when they are cheap, and if others wish to ditch their shares this summer then I will be waiting.
David Kuo is director of fool.co.ukReuse content