Something historic happened in 1776.
Nope, sorry Hamilton, not the Declaration of Independence.
In South Yorkshire, in September, a horse race took place for the first time: the St Leger Stakes.
For those of a certain class in 19th century Britain, summer began at the start of May at Newmarket racecourse, and ended at Doncaster with the St Leger. That meant doing business in the summer could be tough.
Which gave rise to an investing adage which you still hear today:
“Sell in May and go away, come back on St Leger Day” *
It suggests that investing through the quieter summer months is pointless, or damaging.
Is it true though?
Before we look at the data, just consider what the “strategy” suggests. That every year, at the same time period, it makes sense to be uninvested for four and a bit months…
Seems unlikely…
So, the stats.
If you’d sold the FTSE 100 at the end of every April, and bought it back the Monday after the St Leger race for the last 20 years… you’d be about 100% worse off.
If you break it down to the annual returns, you can see the two problems.
First, being out of the market for more than a third of the year. In bad years it looks great – like in 2008, below. But in good years, like 2009, you miss out on a huge chunk of return-earning time.
Second, the idea that summers are bad times for markets. Wasn’t really true in the 1800s, and definitely isn’t now. Sitting out of the market in summer 2020 meant missing a chunk of the bounceback – turning a bad year into a horrible one.
It can be tempting to look for rules and shortcuts in investing (and in horse-racing, if the novels of Dick Francis are any guide…).
But just because it rhymes, doesn’t mean it’s worth doing…
See you next week!
* In recent history, that’s been shortened to simply “sell in May and go away”, probably because Hamilton’s descendents over the pond don’t have much of a concept of St Leger, or indeed, South Yorkshire.
Source: Factset/7IM. Total returns, past performance is not a guide to future returns
Original content produced by 7IM – https://www.7im.co.uk/
