“Sell in May and go away” is an old saying that has been around for an awful long time.
As I write this blog post, it is the 15th of May 2012 and I am wondering whether to sell some of my shares.
If you are thinking the same, then don’t do it without reading this blog post first!
The “Sell In May” Saying
The full saying goes something like this:
Sell in May and go away; don’t come back till St Leger Day
St Leger Day is referring to the date in early September when the St Leger Stakes horse race is run.
The St Leger Stakes is a flat horse race, run at Doncaster in northern England.
The race was established in 1776 and is the oldest of Great Britain’s five classics.
It is the last of the five races to be run each year and is also the longest.
So what’s horse racing got to do with share investing?
The saying is merely suggesting that you should sell your shares in May and not buy them back again until September.
Why Sell In May?
The logic behind the saying is that fund managers and professional institutional traders take their holidays in the summer and attend more corporate events.
They therefore spend more time away from their trading screens.
This, in turn, means two things.
Firstly, there will be a lower volume of shares being traded during the summer months because there are fewer traders present during those days/weeks.
Secondly, the traders don’t want to get caught out with any nasty stock market surprises when they are away on holiday, so they sell out of their largest or riskiest stock positions before they go.
With most of their holidays over after August, they buy back into those shares in September to build up their stock market portfolios again.
The logic sounds plausible doesn’t it?
But does it work?
The evidence for this working is strongest in the US Markets – the S&P 500 and the Dow Jones.
Since World War 2, if you had only invested your money in those markets between the months of October to April and been completely out of the market for the months of May to September, you would have made considerably more money than if you had stayed invested all year.
However, this first-cut analysis is too simplistic because it ignores the transactional costs of buying and selling your shares every year.
When costs are taken into account, the benefit of selling in May falls dramatically.
In the UK, the costs of trading shares is higher than in the US because of stamp duty.
So the case is even less convincing in the UK, than it is in the US.
Should We Sell In May?
Whilst the logic may be plausible, the evidence suggests that any benefit is marginal.
The other problem is that the saying is well-known and if professional traders really are selling stocks in May, then there would be a strong case for buying those towards the end of May or early June when they are at their cheapest.
In which case the traders would miss the cheapest time to buy.
They would lose out again when they bought their shares back in September because everyone else would be buying and the share prices would rise.
The net effect of all this is that there is no benefit in following a pattern when everyone knows that the pattern exists and is doing the same.
So, don’t sell in May just because of an old saying.
If you really want to sell some shares in May, then only do it because the time is right to sell those particular shares.
And don’t do it for any other reason!
Will you be selling or buying shares this May?
Leave me a comment at the bottom of this page with your thoughts.