Lots of market-timing secrets' are just nonsense. But sell in May' is actually backed by some "surprisingly strong" historical evidence, says Mark Hulbert on Marketwatch.com. "Sell in May" refers to the notion that the stock market usually has a strong run between Halloween and May Day, followed by a summer lull.
Take the last two years, says Hulbert. Since 31 October 2012, the US Dow Jones index is up 11.5%. From May to October, it lost 0.9%. For the FTSE 100, the equivalent percentages are a gain of 10.8% and a loss of 0.5%. For 2011, the US numbers are even stronger a gain of 10.5% and a loss of 6.7%, and it's a similar pattern seen here.
Extend it to the last 50 years, and the Dow Jones has on average made 7.5% in the winter months, and just 0.1% in the summer. It's not just the US either. Ben Jacobsen, a finance professor at the Massey University in New Zealand, reckons he's seen a similar pattern in 108 stockmarkets (including the UK), in some cases as far back as 1694. Sounds impressive. So what's stopping you from dumping your stocks in the next few weeks, then buying them back in October?
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A few snags. Firstly, there is the cost (trading commissions, bid-to-offer spreads and stamp duty, not to mention the possibility of triggering a taxable gain on a big portfolio). You might lose a decent chunk of dividend income too.
There's the hassle factor too can you really be bothered turning over your portfolio twice a year? There's also the risk that you suffer a double whammy by picking a year when the strategy doesn't work, and there's a great summer during which you make no money, and a terrible winter during which you make a loss. Timing is another headache. Opinion is divided: some pundits suggest you sell as early as April to get ahead of those who always follow the trade, while others suggest sticking to 1 May.
However, if you really fancy experimenting with the trade, then rather than going to the effort of churning your entire portfolio, you could always put a bit of money into a FTSE 100 index tracker or exchange-traded fund on 1 October, then sell it come April or May the following year. That way at least you don't have to commit your entire portfolio to a strategy that might disappoint.
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