The investment industry – perhaps, more specifically, the stock market – is full of sayings which are designed to help the unwary from falling into traps or to assist in the decision making process. Some are no longer in common use. “Where there’s a tip there’s a tap” might have been relevant in the lightly regulated world that existed before insider trading became illegal, but you never hear it today.
One phrase that still resonates, though, is “Sell in May and go away”. Looking back to the past at the performance of markets from May onwards, one is forced to concede that selling in May might work in some years, but for the majority it doesn’t. To understand the origins of this piece of still often-quoted investment advice, you need to know the second line of the couplet from which it comes. “Buy again St Leger day” is the most usual way of completing the rhyme. This year the St Leger classic horse race will be run at Doncaster on Saturday 14th September.
The historical perspective
The telling point is that the St Leger is an early autumn race meeting. Arguably it marks the end of the “season” – a period of high profile sporting events that starts in late May and early June and encompasses such venues as Ascot, Wimbledon, Henley and Goodwood. In the days before professional investors in pension funds, insurance companies and fund management groups dominated share activity on the stock exchange, it was wealthy private investors that called the shots. Come the start of the so-called “season”, this predominately male group would be closing their London houses and heading off to their country estates to take what they considered a well-earned rest from dealing in shares.
While it is not possible to be absolutely certain this is the origin of “Sell in May”, it does make some sense. Trading activity was likely to be affected by the absence of a number of key players. News in those days took some time to percolate through to investors and markets, so for many it made sense to close out share positions and sit on the cash until activity returned to normal in the autumn. Bear in mind that pension funds and insurance companies did not take investing in equities seriously until well after the end of the Second World War.
Evolution not revolution
There are other reasons for giving credibility to this line of thinking. Share ownership was concentrated into a very few hands until comparatively recently. While pension funds and insurance companies were playing an increasingly important role during the 1950s and 1960s, unit trusts did not start proliferating until the mid 1980s on the back of a giant leap in personal share ownership stimulated by Thatcher privatisations and the demutualisation of several building societies and insurance companies. And, of course, this also marked the beginnings of globalisation in investment, widening the choices of domestic investors and bringing many more players into our arena, not to mention the way in which major companies were diversifying internationally.
The long term perspective
So sell in May is looking an increasingly outdated concept. Indeed, there is plenty of evidence that trying to add value by jobbing in and out of the stock market is actually more likely to destroy value. I believe it was Warren Buffett who once remarked that it is time, not timing, that investors need to employ in their investment strategy. In other words, find an investment that research suggests will be an appropriate and successful home for your money and stick with it over the longer term. There will be periods when it might suffer from adverse market conditions, but endeavouring to sell and repurchase to try and iron out market fluctuations is generally a mugs game. As another investment aphorism goes, no-one rings a bell at the top of the market – or at the bottom, for that matter.
For those of us who use funds to provide investment solutions, there are some sectors that are better suited to a buy/hold strategy than others. In some measure choosing the sectors to hold through thick and thin is not unlike building a core/satellite approach to portfolio construction, with the core holdings being the ones you retain, regardless of market fluctuations. Clearly, those sectors that provide access to broad geographic sectors, such as UK All Companies, North America, Europe and Far East fit in well, while UK Equity Income also looks a natural.
I am reminded of an advertisement that M&G ran in the aftermath of the stock market crash of 1987. The sheer speed and extent of this stock market correction undermined the confidence of even seasoned and experienced investors, let alone those that had become investors through the privatisations and demutualisations of a few years before. M&G had launched its Dividend Fund in 1963. It was able to point to the fact that the income generated each year was around one and a half times the capital value invested by those who bought at launch 25 years previously. If ever a case were to be made for buying and holding, that was certainly one.
Brian Tora is a consultant to investment managers, JM Finn.