At this time of year, one old City saying always starts doing the rounds. This expression is: “Sell in May and go away, don’t come back until St Leger’s Day.” This warns investors to ditch UK shares before the summer months, before buying them back in the autumn. But why would I do this?
This saying is centuries old
The London Stock Exchange can trace its origins back more than 300 years, to when traders bought and sold shares in the capital’s coffee houses. But the London market as we know it really got going in 1801, becoming one of the first modern, regulated exchanges.
Until Victorian times, London suffered from an unpleasant and unhygienic phenomenon sometimes known as the ‘Big Stink’. During hot weather, an inadequate sewerage system left the River Thames polluted by foul-smelling human waste and industrial chemicals.
As a result of this occurrence, rich folk — including stock traders and investors — would abandon London for their country estates during warmer months. This reduced trading levels, lowering market liquidity and widening spreads between buy and sell prices.
Back then, it actually made sense to sell in May and go away. But what about in the 21st century?
It’s all computers nowadays
Thanks to the widespread adoption of electronic trading, traders rarely meet in person to do deals. Today, it’s all done in milliseconds over sophisticated exchanges. Also, complex algorithmic- and quantitative-trading strategies seek to exploit tiny differences in securities’ prices.
In other words, sell in May is archaic, outdated wisdom that shouldn’t work in our modern world. That said, there is some seasonality in stock returns, with colder months (1 November to 30 April) sometimes producing slightly higher returns than warmer ones (1 May to 31 October).
I don’t sell in May
Could I make money from selling in May and going away? I’m not convinced I could, for three reasons.
First, buying and selling shares involves dealing fees, plus 0.5% stamp duty on share purchases. Unless I use commission-free trading (which I don’t), these charges will eat into my returns.
Second, as a value and income investor, I love to watch my cash dividends roll in. Were I to sell in May and buy after 17 September 2023 (St Leger’s Day), I’d lose out on nearly five months of cash payouts. I really don’t want to do that.
Third, as market timing involves correctly predicting the future, it’s very, very hard to do. Also, I know that past performance isn’t always a useful guide to future returns.
Instead, as an old-school buy-and-hold investor, I just buy shares in solid companies at reasonable prices. I then reinvest my dividends into yet more shares, boosting my long-term returns. Also, by adding more cash to my portfolio at intervals, I can take advantage during periodic price weakness.
In summary, I’ll hang on to all the UK shares and US stocks I own, thank you. I won’t sell in May and go away. That said, if prices soar into bubble territory again — as they did in late 2021 — I won’t hesitate to sell vastly overpriced assets!
The post UK shares: sell in May and go away? No thanks! appeared first on The Motley Fool UK.
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