Spring clean investments but don’t rely on “Sell in May”

On the last day of April, an old stock market adage might come to mind: “Sell in May and go away, come back on St Leger day.” The phrase has its origins in the days when City professionals would abandon the City to attend the sporting events of the summer season, culminating in the St Leger flat race in September. The associated belief therefore was that the summer months were a risky time for investing.

This year, interactive investor (ii) has put the theory through its paces, analysing the performance of the FTSE 100 and FTSE All-Share indices over each summer period (30th April – 15th September) from 1986 to 2017 to see if there is any statistical evidence to back it up.

Moira O’Neill, Head of Personal Finance at interactive investor, comments on ii’s findings below:

“interactive investor’s research shows that 14 of the 32 time periods in question, May to mid-September, have been negative for both FTSE 100 and FTSE All-Share indices. This suggests investors should be wary of taking the adage too seriously. The market is a very different place compared to the days of old – now, the City never sleeps.”

“It’s clear that the ‘Sell in May’ strategy breaks down during bull markets. For the summer period under review, seven of the past nine years have been profitable for investors, as equities have enjoyed a bull market since the beginning of the post-financial crash recovery. Only 2011 and 2015 were negative, and then losses were substantial.

“Belief in the strategy’s validity may have built up/been reinforced in the 11 years leading up to the crash. Between 1998 and 2008, the FTSE 100 index fell seven times in the months between May and September.”

However, setting the Sell in May debate aside, O’Neill comments: “It’s a classic investment mistake to get too emotionally attached to the holdings in your portfolio that are doing well. No matter what season, every investor should have a spring clean once or twice a year with a view to re-balancing their portfolio, by selling some of the funds and stocks that have done well and buying some that haven’t.

“It’s an important way of keeping your level of risk the same and ensuring there is diversification across your portfolio, so you are not over-exposed to one stock. Also, although selling your ‘winners’ may sound counter-intuitive, research does show that over long periods of time, going through this re-balancing process can lead to a much better return overall.

“Another top tip to investors would be to look at any small holdings – by which I mean anything that makes up less than 1% of your overall portfolio – and seriously consider getting rid of these, as they can be a distraction.”