Is the ‘Sell in May’ myth set to return this summer?

Adrian Lowcock, investment director at Architas, gives his view on the ‘Sell in May’ phenomenon.

Is the ‘Sell in May’ myth set to return this summer?

Between 1986 to 2015 the FTSE 100, excluding dividends and charges, has ended down 16 out of 30 times (53% of the time) between 1 May and 30 September. From 1986 to 2016 the FTSE 100 has returned a total of -29.71%, excluding dividends, over the five summer months whilst the same index has delivered a return of 194.33% during the seven winter months.

The FTSE 100, excluding dividends, had an average return of -0.99% each year between May to September since 1986. The ‘Sell in May’ adage also appears to hold true for the FTSE All Share. In the summer months the FTSE All Share fell -31.83%, whilst in the winter months the same index rose 211.43%.

Dividends destroy the Sell in May myth

When investing in the stock market, even when buying a tracker fund, investors get access to both the capital growth of their investments as well as the benefit of any dividends they may have received. If you include these dividends the picture changes completely; a negative performance in the summer months is transformed into a positive return.

From 1986 to 2015, with dividends reinvested but excluding costs, the FTSE 100 has returned a total of 20.57% during the summer months (May to September) compared to a total of -29.71%, excluding dividends. With dividends reinvested, the summer months deliver a negative return only 41% of the time for the FTSE 100 compared to 53% of the time if dividends are not reinvested.

For the FTSE All Share the figures showed a return of 26.88%, and performance was only negative 40% of the time compared to 31.83% of the time if dividends are not reinvested.

Three tips to benefit from the Sell in May adage

  • Stay invested: These trends are not guaranteed and when you include dividends being reinvested the FTSE 100 still delivers a positive return during the summer months.
  • Keep some cash aside: Have some money ready to invest in case there is a big sell-off in the summer and there are opportunities which may arise.  Famous investors such as Warren Buffett frequently keep money aside ready to take advantage of any such opportunities.
  • Make sure you have protection: It is better to plan for the worst and hope for the best. By having some exposure to defensive assets such as Targeted Absolute Return funds investors will be better positioned to protect their portfolio from any volatility and therefore be in a stronger place to reallocate on any weakness.

No guarantees

The ‘Sell in May’ phenomenon can be traced as far back as 1694. Even though stock markets are meant to be efficient, this sort of seasonal behaviour still exists. But whilst the summer months don’t tend to perform as well as the winter months, the differences are not significant enough each year to justify investors selling over the summer. Once dividends have been factored into the figures, the FTSE 100 makes a positive return on average over the summer.

Last year is a reminder the ‘Sell in May’ adage is not guaranteed as markets rallied in the summer months following a short sharp sell-off after the Brexit vote.

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