In the stock broking fraternity there is a saying that goes “Sell in May and go away, come back on St Leger’s day”.
This follows the premise that from May to September the markets generally perform poorly (St Ledger is an English horse race that takes place in mid-September).
So it was with interest that I read an article in the Financial Times about research that has been undertaken that proves that this rhyme actually has some truth and that on average the stock market underperforms between May and September.
The research undertaken by Sven Bouman of Aegon and Ben Jacobsen of Erasmus University showed that since the FTSE 100 was created in 1984 it has fallen from the start of May to end-September half the time and only just scraped a positive average return in the period.
In both the United States and United Kingdom average summer returns on shares have been lower than on cash, confirming the theory that selling before the traders go on summer holidays makes sense.
But be warned, according to the article, this is not always a sure-fire bet and markets have been known to crash spectacularly at the end of September, as in 1987 and in 2008 St Ledger day came two days before Lehman failed which triggered one of the worst market crashes since 1929.
If you had followed the rule of the rhyme the following year in May 2009, you would have missed out on returns of 21% by September.
Our local market tends to follow the trends of the major global bourses, mostly because of the number of foreign investors trading on the JSE. So is it time to sell and go away?
The research has shown that most of the time the biggest losses were when economies were in recession. Currently the world is moving out of recession, however many risks remain with countries teetering on bankruptcy, on-going disruptions in North Africa which may see a full blown conflict in Libya, and global interest rates likely to rise which will make cash more attractive.
The JSE has had a good run recently with the FTSE/JSE All Share Index edging over 32 000. Traders who like rhymes may start to take profits, but for the long-term investor second guessing the market usually ends in tears.
So look at your portfolio, do you still like the shares you hold, do you believe you will see growth over the next three years from those companies?
If your reason for investing has not changed, then sit out any volatility. If you are going to need cash in the short-term, you may want to start liquidating sooner rather than later.
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