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A day at the races? - Where old fashioned stock market wisdom gets it wrong

| Equity Analyst | 13 September 2017 | A A A
A day at the races? - Where old fashioned stock market wisdom gets it wrong

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

"Sell in May and go away. Come back on St Leger day."

So goes the old stock market adage. The notion stems from a time when the market was dominated by the upper class. While they were busy enjoying the summer attending sporting events, stock markets were quiet, and anyone trying to sell would be met by an absence of buyers.

Better to wait until the world’s oldest classic flat race, the St Leger, had taken place at Doncaster Racecourse in mid-September and business returned to normal, before venturing into the market.

So is there anything to the adage?

Over the long term the simple answer is no.

The stock market has changed a lot in the last 100 years, and is no longer driven by wealthy individual investors. Online trading, real time market data, hedge funds, market makers and algorithm-based trading have all helped to ensure that the market operates all year round.

In recent decades, "time in the market" has consistently proven more important than "timing the market".

For example, had you invested £10,000 in the FTSE 100 on 31 December 1985 (and reinvested all dividends), your investment would be worth £155,817 today. However, had you followed the St Leger rules, selling at the beginning of May and returning at the beginning of September, it would be worth £120,811. Still a pretty good return, but £35,000 short of what you might have achieved with the same £10,000 initial investment, and with much less effort! Past performance is not a guide to future returns.

Of course, there have been times when being out of the market for the summer provided shelter against market falls, such as during the financial crisis. On average, though, the market has risen by more than it has fallen over the summer months.

Past performance is not a guide to future returns. Source: Lipper IM, 05/09/17

Come back on St Leger Day?

Our take away is that while the long-term potential of the stock market may be clear, trying to time an investment to perfection is usually doomed to fail, particularly when based on soundbites.

Having said that, over the same period September has proven a reasonable time to invest. The market has finished December ahead of where it started September in 67.7% of years and averaged a 4% gain, although the next thirty years will of course be different from the last.

However, we always advocate taking a longer-term approach to investing than this. Not only does a longer investment horizon increase the likelihood of a positive return, but it has the added advantage of allowing investors to benefit from dividend compounding. Please remember though that the value of investments will fall as well as rise, so you could get back less than you invest.

This article is not personal advice. If you are unsure of the suitability of any investment for your circumstances, please seek advice.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.