"Sell in May and go away, don't come back until St Leger's Day."
It's one of the oldest investment maxims, but is it actually true? Should you really sell up for the summer and come back later on?
Selling in May was once a solid strategy
At least in the first few centuries of stock markets, 'Sell in May' was a genuine, recognised - and widely known - phenomenon. This was down to the wealthy and the traders leaving London during the summer months. With big market players away from London, trading was thin on the ground, and stock prices suffered.
As a result, many investors would sell out of shares in May and keep their powder dry in cash until September, before reinvesting in the autumn.
Does this 'May effect' persist today?
In this modern age, many investors regard the May effect as something of a superstition.
Nevertheless, there is some evidence to suggest that the May effect persists, even to this day. Recent research by fund manager AXA Wealth reveals that, in particular, the month of May has a poor track record for returns.
[SPOTLIGHT]AXA Wealth found that May is the third-weakest month of the year for the UK stock market, with an average monthly return of -0.2% since 1970. Indeed, the FTSE 100 has risen in price less than 50% of the time in May, while it is also the weakest month of the year for the FTSE 100 index relative to its US counterpart, with the FTSE underperforming the S&P 500 index by 1.9%.
Extending this analysis further, AXA Wealth found that the warmer months from 1st May to 30th September are not as strong performers as the colder months of 1st October to 30th April. From 1986 to 2013, and excluding dividends, the FTSE 100 has actually returned a negative return of -13.75% over the five summer months. In contrast, the blue-chip index has delivered a return of 185.4% during the seven winter months.
In 18 out of 28 periods from 1986 to 2013, the seven winter months outperformed the five summer months for the FTSE 100.
This seasonal effect seems to hold true for the wider FTSE All-Share index too. In the five summer months, the FTSE All-Share fell by 18.3%, an average loss of 0.59% for this same 28-year period. In the seven winter months, the same index rose 201.65%.
As a result, investors have lost an average of 0.46% a year by remaining invested in the FTSE 100 from May to September each year.
Dividends dramatically alter this result
As well as profiting from capital gains, shareholders also benefit from the regular cash dividends paid out to company owners.
When bringing dividends into these calculations, the picture changes completely. In fact, dividends transform a negative performance in the summer months into a positive return. AXA Wealth found that, from 1986 to 2013, the FTSE 100 with dividends reinvested returned a total of 33.61% during this five-month period.
Furthermore, with dividends reinvested, the summer months deliver a negative return only 35% of the time, or just over one year in three.
Don't sell in May!
Although 'Sell in May' appears to work on the surface, adding in dividends dramatically improves summer returns for UK investors. And when you subtract the 'breakage' costs of selling out in May and buying back in September, investors would actually lose out from selling in May, on average.
Forget the market myth of 'Sell in May' - the much smarter move is to stay fully invested all year round.