Sell in May and go away

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Any seasoned investor will tell you that trying to time the market is a risky game. In the words of renowned economist J K Galbraith, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know”.  Yet every year the debate around the old saying “Sell in May and go away, come back on St Leger day” is revived. It advocates selling out of the stock market for the summer months and returning in the autumn.

It’s believed to originate from the days when City workers left their desks to attend events such as horse racing at Epsom, cricket at Lord’s and rowing at Henley, before returning to work in September. And it’s based on expectation of seasonal decline in the markets over the summer.  Each year experts debate whether it’s a valid investment technique, despite the fact the City doesn’t hang up its bowler hats en masse any more. Figures show on average that annual returns were 9.2% for those who remained invested throughout the year rather than 8.1% for summer quitters.

Predicting the best time to be in and out of the market is a risky game — even for the professionals — and trying to time the market and getting it wrong can be very costly. Missing even a handful of the best days in the market can seriously compromise your long-term returns. There is also the danger the investor misses out on valuable dividend payments during this time. Plus, there’s the cost of trading in and out of the market to consider paying stamp duty, traders’ spreads and brokers’ commissions, as well as potentially tax.  Frequent dealing is costly and will eat into your returns.

Experts are unanimous that a far more sensible strategy is to focus on your long-term saving goals and stay invested. If there is one stock market adage that investors should consider sticking to it is ‘time in the market matters more than timing the market’.  By drip-feeding money into the market, you remove the need to get the timing right. That’s because saving a monthly amount into an investment portfolio smooths out the highs and lows in share prices because when they go up, the value of stocks rise, and when they go down your next contribution buys more. It’s known as “pound-cost averaging”.

Generally speaking, long-term investors should not try to sell out of the market until they start to approach drawing on their money. A far better use of time and effort for those who want to tinker with their portfolio would be to weed out consistently poor performers, and research new funds and shares to invest in.