This is an old saying that arose in the past, is derived from stock brokers avoiding the heat of the summer and going on holiday from May to September. Nice job if you can get it.
The theory is that you should sell your stocks and shares in May and then repurchase again at the end of the period as brokers aren’t trading and as such stock markets underperform during this time.
This, could of course make sense, as less trading volume would impact the value of your share portfolio/pensions and investments, and of course, if the crowds sold in May, there are more sellers than buyers which would drive prices down, and the reverse becomes true in September.
Whilst it may have some truth in overall portfolios, it would not be necessarily true on individual stocks and there are also many pitfalls, some of which I will cover in a moment.
Within your portfolio, we all have an element of risk. Risk is what creates the potential for return, and some investors can be risk averse. Achieving a return without risk is a little like having your cake and eating it.
In the past, stock markets could remain flat during periods of low volume but this is less relevant today given the ability to trade at speed electronically and turn over entire portfolios at a flick of a switch.
So let’s look if there is any validity to it.
Going back to 1950 the Dow Jones index has had an average return of 7.5% from November to April but only a gain of 0.3% from May to October. (1) That is quite staggering. Looking at Asian stocks over the last 15 years tells a similar story with the MSCI Asia ex-Japan Index, Singapore’s STI, the Hang Seng, Malaysia’s KLCI and the Shanghai Composite all significantly outperforming during the winter period. (2)
Since 1966 we have also seen 11 years in which the All-Share Index dropped more than 10% during the summer period. (3)
October has also seen two of the largest falls in history and no one will need reminding of the October 1987 crash where the Dow Jones lost over 22% of its value in one day. Some might argue that poor trading volumes and poor stock market conditions also offer the market a chance to dump its bad news causing a greater downturn.
And here we are in May and we now see the ‘democratically elected’ Trump (aww come on, it was him who told you the election was rigged (4)) in trouble again spooking markets into a flight. Whilst he believes he is the CEO of the country and can fire anyone, the reasons behind it are causing turmoil and so they should, particularly if we think of the potential for impeachment.
With the S&P trading at 18 times its forward earnings rather than its norm of 15 times earnings you can easily see why investors may have taken the opportunity to take some profit and head into the summer sun until September. (5) On May 17th the Dow Jones plummeted 372 points as investors also considered whether or not Trump could deliver on his tax and banking reforms as well as infrastructure spending.
So what are the risks to this strategy? We covered last month the theory around market timing and proved how important being in the market was, but also avoiding the big loss days. The trouble is, there is no bell rung at the top or bottom, to get back in, or even knowing when to leave.
On top of this, for the most of us, there are also transaction costs to consider, tax implications on the buying and selling of assets, as well as administrative costs.
Peter McGahan is the owner of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.Last modified: June 10, 2021