Should I sell in May and go away?
Chris Dillow wrote a thought-provoking piece in his Investor’s Chronicle column last week. The bottom line is that “equity returns are seasonal, like it or not.”
He points out that seasonal investing where one sells on May Day and buys back on Halloween, worked well in the last year. You would have avoided a 2.5% loss over the May-October period and got back in for a 26% gain from November to this April.
Looking at the longer term, figures show that since 1966 the All-Share has delivered an average total return of 7.9% per annum during the winter period v a loss of 0.6% during the summer months.
Chart showing the monthly returns on the All-Share Index since 1966. (Not sure what happened to January, but you get the picture!)
Dillow rightly points out that seasonal investing does not work every time - “in finance nothing is 100% successful – but often enough to make money over the long term.”
He posits several theories for this phenomenon, but I won’t go into that now. The question for me is, what to do about it, if anything?
I guess, if one just held an index tracking ETF, one could try and capture this by selling on 30th April and buying back on 31st October. There’s a certain appeal to spending the summer away from the markets and improving one’s golf swing...
While accepting the summer months might be more difficult, my approach is to a). focus on the longer term and b). continue to try and pick investments that will produce positive returns even if the market background is less than helpful. Dillow talks about the 1st May to 31st October 2020 period producing a 2.5% loss for the FTSE-All Share. The JIC Portfolio returned +14.4% over that period and to boot, I fitted in the Cotswolds Way and The Hebridean Way!
He also points out that the seasonal effect broke down recently. From 31st October 2019 to 30th April 2020, (the emergence of the pandemic) the All-Share lost 17.6%. The JIC Portfolio was up 2.0%, helped by good autumn and a very strong bounce-back in April.
Looking back to the inception of the JIC Portfolio in January 2012 the "seasonal" returns look like this:
The first thing that stands out is that there does appear to be a seasonal effect with the winter period averaging a return of +11.4%, (median 11.5%) and the summer period +6.6% (median 3.9%).
Also, six of the winter periods are ahead of the succeeding summer periods, with just two behind, 2018 and 2020.
So, what does this tell us about the immediate future? I think not much, although given the 30.9% rise in the most recent winter period to 30th April, if I was a betting man, I would put my money on the next six months not being as good! There is always a chance, like 2016, it might be negative. The markets are currently having a wobble, attributed to last week’s poor employment figures in the US, followed by higher-than-expected US April inflation figures yesterday. Given the recent strong run, I guess the market was ripe for some profit taking, and hopefully this will not develop into something more serious than a 10% correction in the main indices.
I will continue to focus on holding the right mix of investments and in trying to get the market to work for me rather than against. By that I mean, buy on red days when, often on very low volume, stocks are marked down, and if I want to sell, do it on a blue day. In other words, not get buffeted around by market gyrations.
The table above is only for nine years. Let’s check back in 2030!