hold your horses before selling up

Sometimes you’re better off riding out those bouts of stock market volatility

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I usually spend the last Saturday in April at Sandown racecourse in Surrey, enjoying the finale of the jump racing season, although if it’s particularly rainy I might just give it a miss and watch it on TV instead. Every year, this is the weekend when two of my worlds collide — investing and horse racing. That’s because the saying goes that investors should “sell in May and go away, come back on St Leger’s Day”. But should they really?

The idea is that investors offload their stocks in May and stay out of the market for the summer. Traditionally the summer was the time when traders switched off and headed to the beach, so stocks weren’t likely to go up much in this period. Then you could return to the market in mid-September, specifically the Monday after the St Leger, the final flat racing classic of the season, which is run at Doncaster.

But as I’ve discussed before in this column, this absolutely does not work as an investment strategy. You are much better off just staying invested and riding out the inevitable bouts of stock market volatility.

If you had invested £100 in the FTSE all-share index in 1986 you would have £2,014 today if you had made no other trades during those 37 years, according to the fund house Fidelity International. If you had made the same investment but sold up every May and reinvested in the same index every September 15, you would have £1,391 — that’s 31 per cent less without even taking into account the trading fees you would have racked up.

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Ed Monk from Fidelity said: “Stock markets have a track record of rising in the long run, albeit with periods of loss along the way. Removing yourself from the market for four and a half months of the year, therefore, reduces your chances of taking advantage of that long-term performance.”

Analysis by the fund group Royal London Asset Management suggests that stock markets globally have produced an average annual return of 13.8 per cent since 1973. Interestingly, though, the average return between October and April was 13.3 per cent while between May and September it was 0.5 per cent. So there is evidence that the market tails off over the summer months.

Trevor Greetham from Royal London said he does take the summer lull into account. “It is by no means the biggest factor that we look at, but because there’s a logic behind it and it back-tests, we will factor it into decisions. The one year you bet the ranch on Sell in May, though, it probably won’t work.”

He said that the Sell in May theory has legs because consumer spending is seasonal. People tend to spend more from Thanksgiving in late November onwards — including Black Friday, Christmas and the New Year sales — than they do during the summer months. “The reason it is called Black Friday is because it’s the time of year when management accounts for retailers go into the black,” he said. “They’ve been losing money all year and in November they start to make money.”

In 2022 the S&P 500 index in the US slumped as interest rates soared, finally reaching a low in October. The index had then rallied about 28 per cent by July 2023, before falling more, again reaching a low in October. Since then, the S&P 500 is up about 20 per cent, but it has started to wobble recently, falling about 5 per cent since the end of March.

“Sell in May is in the back of our minds,” Greetham said. “We have seen such good returns since October and now we’re potentially entering a summer of geopolitical risk and concern about rising interest rates.”

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Still, I maintain that long-term investors who simply want a low-cost fund that tracks a global stock index should not be trading in and out of the market each summer. Set up a direct debit and invest the same amount in your fund every month, without selling until you absolutely have to.

You could still follow seasonal trends, perhaps by taking profits at the end of April, or by waiting to October to add any big chunks of cash from your stocks and shares Isa allocation. That way you may catch the market when it is at a low.

There is a danger that you will get it wrong though. I’ve recently taken some profits from the best-performing funds in my stocks and shares Isa and transferred that cash into my Lifetime Isa, but I am still going to carry on paying in the same amounts each month. I’m changing nothing in my pension portfolios, either — all new contributions will be split between global, Asian and UK stock market tracker funds, alongside some smaller companies, emerging market and Japanese active funds.

If I am lucky, though, I may help to ease any summer lull with a win by my old pal Sam Brown in the big race today over fences and Monviel in the final handicap hurdle. And who knows, maybe the sun will come out too.