Should you sell your stocks in May?

Spring has sprung and, if you believe the old adage, it’s time to sell your investments and ignore the stock market until September.

But, is there any logic to the ‘sell in May’ theory?

What is ‘sell in May’?

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There is a saying that does the rounds in investment circles at this time of year: “Sell in May and go away – don’t come back till St Leger Day”.

“The idea is that you sell shares in May and don’t return to the market until the St Leger Stakes horse race in September,” says Angela Murfitt, a chartered financial planner at Fairstone Financial Management, in The Times.

The theory behind it is that the market is volatile over the summer because trading volumes are lower and more susceptible to big swings. So, by selling up in May and buying back in September, you avoid that volatility.

Is there any truth to it?

“There is some evidence that markets do indeed perform better on average during the winter months than they do in the summer,” says Tom Stevenson in The Telegraph. “Since 1970 the average gain for the S&P 500 index between November and April has been nearly nine per cent, while from May to October it has been less than three per cent.”

But, for that information to be useful, and actionable, it “would need to be predictable,” adds Stevenson. “Our research into the past 20 years shows that, for the UK market, taking the summer off would have made sense exactly half the time. Sell in May worked in ten years and failed the other ten. It’s a coin toss.”

Where would I put my money?

If you buy into the idea of ‘Sell in May’ then you would move your money into a cash savings account or gilts or bonds over the summer months. The problem with this is, while you may escape some market volatility, you’ll miss out on growth. Even a growth rate of three per cent is going to be nigh on impossible to match in lower risk assets. So, sell in May and you could stall your investment growth for four months.

You will also be going against the wisdom of an investment guru.

“Warren Buffett famously said that his first rule of investing is ‘Don’t lose money’, and selling your shares just because it happens to be May is risking exactly that. Buying and selling for irrational reasons can be a big mistake.”

Should I do it?

No. You shouldn’t sell your investments purely because it is May, any more than you should sell gold if it rains on a Monday. Investing is about rational decisions, not superstition and old wives tales.

But, you can adapt the ‘Sell in May’ theory to help you keep your portfolio in shape. All investment wisdom agrees that you should rebalance your portfolio from time to time in order to make sure investment performance hasn’t left you over exposed to a specific asset class, region or individual investment.

For example, lets say you invested £10,000 and you split it equally between a UK-focussed fund, gold, a commercial property fund and corporate bonds. You invested £2,500 into each five years ago. Since then the fund is up 35 per cent, gold 20 per cent, your commercial property fund 60 per cent and corporate bonds eight per cent. That would mean your portfolio had grown to £13,200 but your money was no longer spread equally across your four investments – you have far more exposure to commercial property now and you’ve gone from having a quarter of your money in bonds to only a fifth.

So, every so often it makes sense to sell some of your assets and buy into other assets in order to keep your portfolio balanced and to stop you accidently overinvesting in riskier assets. ‘Sell in May’ could be a good trigger to rebalance your portfolio.