Summer is just around the corner, and with it comes an old saying in the world of finance: “Sell in May and don’t come back ’til St Leger’s Day.”
This advice suggests that investors should sell their investments at the start of summer and reinvest in September. But is there any truth behind this adage, or is it just an outdated myth?
What does “Sell in May” refer to?
Financial markets once worked to the rhythm of the social season. There’s no point investing when there’s cricket or racing to watch. This, in theory, led to reduced trading in summer months, which could mean that small events have a bigger effect on markets than they would normally.
Does the evidence suggest this is the case?
Academic studies have extensively analysed the “Sell in May” effect, and the results are mixed. Some research has found evidence of lower returns during the summer months, while other studies have failed to find any significant pattern.
For instance, one study[1] analysed data from 37 countries and found that stock returns were higher during the winter months (November to April) than during the summer months (May to October). Another[2] found no evidence of a “Sell in May” effect in their analysis of stock market data from various countries. Fidelity research shows that staying invested for the long term often leads to better returns than selling in May.
Is it a good strategy?
Remember, even if there’s been a trend of lower returns in summer, it doesn’t mean things will stay the same. Financial markets always change, and what happened in the past doesn’t guarantee the future. Trying to predict the market by selling and buying at specific times can be risky.
Staying invested helps you avoid missing out on potential gains and saves you from extra costs. Instead of market-timing, it’s better to keep a well-diversified portfolio and stick to a long-term investment strategy. Make your decisions based on your own investment goals, risk tolerance, and financial situation, rather than old sayings.
Remember, it’s usually better to stay invested for the long term instead of selling and buying back your investments based on an old saying like “Sell in May.” Enjoy your summer without worrying about making investment changes.
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[1] Bouman, S., & Jacobsen, B. (2002). The Halloween indicator, “Sell in May and go away”: Another puzzle. American Economic Review, 92(5), 1618-1635
[2] Dichtl, H., & Drobetz, W. (2014). Sell in May and go away: Still good advice for investors? International Review of Financial Analysis, 34, 44–56.
