'Sell in May' strategy doesn't work long-term for investors
Jeremy Stewart is head of wealth management and private banking at Danske Bank
Returning from their holidays, many brokers and traders may have expected things to settle down as, traditionally, trading volumes increase and markets tend to stabilise at this time of year. In fact, market volatility has increased and a September rally has yet to materialise.
Across many global markets, volatility has exceeded that seen in the depths of the financial crisis in 2007. Have recent market events given credence to the old investment adage 'sell in May and go away'? And is there any merit in such a strategy?
Well, this year the saying certainly held true. However, taking the long view, the evidence is stacked against this market myth. If you had sold all your investments in May and held the funds in cash in any of the past 30 years, two-thirds of the time you would have been worse off than if you had just remained in the market. Even more if you include the costs and tax implications for doing so.
A robust analysis of the data over time quickly demonstrates that the facts do not support the 'sell in May' assumption. A crystal ball would have been needed to select the 33% of periods when it would have worked and investors would often have missed key growth phases. In this age of globalised markets, automated algorithms and flash trading, any such obvious trading patterns would be arbitraged away in a fraction of a second.
So where does this leave the ordinary investor? Hopefully, focused on the longer-term benefits of investing in a diversified portfolio of productive assets generating dependable returns by way of dividend or income payments. Ignoring the daily fluctuations of asset prices can be difficult. Investors should, however, always focus on longer-term patterns, which are much less volatile, aligned to broader economic growth and better reflecting the intrinsic value of the asset. In the short term, stock markets reflect sentiment, whilst in the long term, they reflect fundamentals.
With the Chinese market closed last Thursday and Friday, markets focused on other areas, most notably data coming out of the US. And with some mixed messages from the figures, many traders took a cautious stance in advance of the long weekend in the US. There is still debate as to when the Federal Reserve will increase interest rates.
Elsewhere, Mario Draghi, European Central Bank (ECB) president, helped calm the situation. His comments have supported expectations that the ECB would extend its current Quantitative Extension (QE) programme beyond the deadline of September 2016.
In another positive development, the economic upturn in the UK is continuing, with growth expected to come in at 2.6% this year and at 2.5% in 2016, driven by domestic demand and private consumption. This should be supported by further falls in unemployment and increased real wage growth.