Should stockmarket investors sell in September?

published 8 November 2021

Does the old investment adage to “sell in May” still hold true?

There’s a famous Mark Twain quote in which the great American wit gives the following investment advice. “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

Yet historical data – as often highlighted by excitable market commentators – can seem to imply that certain months are in fact more dangerous, or more profitable, than others. A look at returns on the Dow Jones index going back to its creation in May 1896 shows that the average monthly return each July is more than 1.5%. By contrast, looking back across those 125 years, the worst month by far is September, with an average monthly loss of just over 1%. So is the easy way to stockmarket success to cash out in September then lever up in July?

Sadly not. For one thing, this is just one market. Different markets display different anomalies – for example, April and December have historically been the strongest months for the FTSE 100. More importantly, there is no logical rationale to underpin the pattern, so you have no reason to expect it to continue. It’s similar to being shown the results of 100 coin tosses then believing this gives you some insight into the next 100 – it doesn’t. With a fair coin, the odds of heads or tails are always 50/50 each time. It’s quite possible that this is just the way things have panned out in the past century; the next may be entirely different.

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The real problem with seasonality

However, the key problem, as Mark Hulbert notes on MarketWatch, is that the opportunity to bet on these monthly variations only comes around once a year. So even if you think you’ve found a statistically significant pattern, and even if you are convinced that it will endure, you can’t bet on it frequently enough to be sure of profiting in the long run.

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Some investors do make money from pattern-spotting. As Hulbert notes, the staggeringly successful Medallion Fund, which is the in-house fund open only to staff at hedge fund Renaissance Technologies, has managed to parlay what amounts to a very minor statistical edge into market-thrashing returns over 30 years or more. But these returns come from spotting extremely short-term patterns and using high-frequency trading to exploit them (not to mention having the pool of capital to do so). In other words, the sort of thing that you can only do if you’re a massive hedge fund staffed almost exclusively by people with maths PhDs.

In short, don’t waste your time worrying about seasonal patterns. If they were an easy path to market riches, they would already have been ironed out by arbitrage traders.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.