Sell in May could be a costly error

Why the statistics on the old investment adage tell a wider story

SINCE January, the FTSE 100 has risen by nearly 9 per cent. And tomorrow will be 1 May, which means just one thing. The time has come to dust down one of the oldest annual investment adages: “Sell in May, come back on St Leger Day” – the last day of the season for the British Classic horse races series, which this year falls on 14 September.

The theory suggests that investors should sell high as summer approaches and buy low in the autumn. According to Coutts, investors who sold in May and bought back in September would have outperformed the annual return of the FTSE 100 by 1.4 per cent since 1989, and from 2010 this outperformance would have increased to 1.7 per cent.

The idea of selling in May is also backed by a look at US equities in the form of the S&P 500 over the last three years:

In 2010, the high was posted at the end of April, followed by an 18 per cent correction.

In 2011, the first half high was again in April, followed by a 22 per cent correction.

And last year, US markets posted their six month high at the end of March, followed by an 11 per cent correction.

So selling may have become the seasonal thing to do. But when to re-enter the market has been more tricky. Waiting until September last year would have been costly. The FTSE made gains of nearly 7 per cent between the end of July and the 2012 St Leger, mainly due to European Central Bank president Mario Draghi announcing he would do whatever it took to save the euro, and the subsequent Outright Monetary Transactions announcement. And in 2009, selling in the first place was completely the wrong thing. From May to September of that year, the FTSE 100 rose from 4,200 to 5,000.

All of this suggests that trying to time the market from historical data is still the hardest thing to do, and for that reason Coutts suggests it’s better to stick with equities for now.

There is, however, another May trade I’ve discovered from the UK Stock Market Almanac.

The book has listed the five FTSE 350 shares that have had the best historic returns in May over the last ten years. They include Aveva, 3i, Babcock International, Pennon, and Severn Trent. The almanac suggests that a portfolio of these five stocks would have outperformed the FTSE 350 Index in every May, with an average outperformance of 6.2 per cent.

By contrast, the worst five stocks would have underperformed the FTSE 350 Index over the last ten years, with an average underperformance of 5.9 per cent. The stocks include Taylor Wimpey, RBS, Barclays, Workspace Group and Old Mutual.

On it’s own, Taylor Wimpey has an average return of minus 10.8 per cent for the month of May. Still, as history has shown, past performance should never be viewed as a guide to future returns.

Ross Westgate co-presents CNBC’s Worldwide Exchange. Follow Ross on Twitter @rosswestgate