3 reasons NOT to sell any stocks in May

Paul Summers — Sat, 27 Apr 2019 10:15:36 +0000

If you’re new to investing, you may not have heard of the ‘sell in May’ effect. Allow me to explain.

This is the trend for (institutional) investors to reduce their activity from the beginning of next month on the belief that performance over the following six will be less stellar than from October – April.

Research conducted by author Stephen Eckett backs this up. He found that the market tends to trade fairly flat in the first two weeks of May before drifting lower in the second half of the month.

Eckett’s research also shows that, while the market doesn’t necessarily always generate negative returns over the summer months, falls can be fairly heavily when they do occur.

In light of this, it’s only natural for private investors to consider doing the same as those in the City. No one likes to see the value of their holdings dip, albeit temporarily. Here, however, are three reasons why I’ll be sitting tight.

1. No one knows what will happen next

The problem with basing any decisions on patterns in investing is the assumption that they’re reliable. Truth is, they work until they don’t.

What’s that? You’ll jump back in before activity in the market returns? But who’s to say stocks will definitely rise in October? Aren’t we due to leave the EU then?

Star fund manager Terry Smith (of Fundsmith) is a critic of those who attempt to time the market. Either these people fail, or they don’t yet know that they’ll fail, according to Smith. I very much agree.

Deciding whether to part with a particular stock should be based on what the company is doing, not other investors.

2. Loss of dividends

Unless you believe that all spare cash should be used to enable a company to grow, receiving dividends is one of life’s small pleasures. The challenge comes in not spending the cash sent your way, unless you’re using the income generated to help fund your retirement, of course.

For all long-term investors, the rule is simple. Re-invest what you receive back into the market and turbocharge your wealth over time.

Don’t take my word for it. The Barclays Equity Gilt study showed that £100 invested in the UK stock market in 1899 would have been valued at 35,000 at the end of 2017, assuming all dividends had been reinvested. Had they not, it would be worth just £203.

Returns like this are far less likely to happen if you’re consistently ditching stocks that return cash over the summer months.

3. Where else can you put your money?

Even if you were to liquidate your holdings at the beginning of next month (which, depending on the size of your portfolio, might mean not-insignificant transaction costs), you’re faced with the problem of where to put your money.

If it stays idle in your ISA or SIPP, it’s not earning you anything apart from a very, very low rate of interest.

The best cash savings account pays 1.5% but that’s lower than inflation, meaning that your money will still be losing value. That’s a lot of hassle for pretty much no reward.

In sum, I intend to ride out any volatility over the next few months, remembering investment is a long-term game. Should you do the same, your future self will surely be grateful.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

You’d Be Mad To Sell In May And Go Away!

Alan Oscroft — Wed, 20 Apr 2016 15:20:19 +0000

There’s an old investing saying that, in one of its forms, goes:

Sell in May and go away
Don’t come back till St Leger Day.

The idea is that stock markets tend to underperform during the summer months when folks have better things to occupy their time, like getting drunk at the Henley Regatta and scoffing strawberries at Wimbledon. And then when the final classic horse race of the season is over in September, get what’s left of your cash back into shares, ready for a winter rally.

With the vast bulk of share trading now being done by the big investing institutions who really aren’t the least bit affected by summer distractions, it really doesn’t sound like that makes much sense in these modern days, but are there any statistics to back it up?

A poor success rate

The broker Tilney Bestinvest has looked at the FTSE All Share between 1 May and the second week in September, since the day of the stock market Big Bang deregulation back in 1986 up until 2015. It found that 19 of the 29 summers examined would have made profits for investors who didn’t sell and go away. A strategy that only works around a third of the time really isn’t much of a strategy at all — much better, I think, to base your stock market investing on rational analysis than on rhyming couplets!

On top of that, I think there are sound reasons to think that summer 2016 would be a very bad time to choose to stay away from the stock market. I see all sorts of indications that bearish sentiment is coming to an end and plenty of bargains might not be around much longer. Last year, you’d have lost about 10.5% during the summer months if you’d invested in the FTSE 100 while the oil price slump was in full swing and fears of a meltdown in China were growing almost daily. But that shouldn’t make you hold back this year.

What should you buy?

It’s those very reasons, or at least the reversal of them, that make this summer an enticing time to stay in. Oil has picked up from $30 lows and is trading at around $43 per barrel. Everyone knows production will have to be frozen eventually as producing nations are having their pips squeezed by low prices. As a result, shares in BP are up 17% from their February low, and at Royal Dutch Shell we’ve seen a 42% recovery since January’s low — and there will surely be further gains if oil picks up some more.

I reckon there are some great bargains in the banking sector too, with Lloyds Banking Group and Barclays on forward P/E ratios of just 8.8 and 10.5 respectively. With share prices so low, Lloyds’ dividend should yield as much as 6.5% if you buy now, with Barclays’ dividend set for rebuilding over the coming few years.

Then there are dividend payers whose yields are looking solid — there’s a well covered 5.8% from Barratt Developments on the cards, 5.9% from SSE, 5.1% from Centrica… and many more. How about top-class growth shares? On a forward P/E of 28, ARM Holdings hasn’t been this cheap in years.

Roll up, roll up

No, this is not the time to be walking away from the stock market, not when the FTSE has opened the doors to its Grand Summer Sale!

The post You’d Be Mad To Sell In May And Go Away! appeared first on The Twelfth Magpie.