Should investors sell in May, or ride out market turbulence?

"Sell in May and go away” is a popular adage in the investment world. The logic behind it is that investors should sell their stocks in May and hold the cash until the investment season heats up again in October – supposedly because stock markets have, on average, been stronger between November and April.

But is this a wise strategy? As May comes to an end, we look into whether you should jump onto the trend and dump your stocks, or stick to strategy to hold on to your investments?

Should you sell in May?

On average markets have delivered stronger returns between November and April than between May to October, but experts argue that this is not necessarily the full picture when it comes to how investments perform.

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“But what is missing from this perspective is that, on average, stock markets have still risen between May and October each year,” says Hal Cook, senior investment analyst at Hargreaves Lansdown. “So, by going to cash you are missing out.

“It is obviously important to stress the words ‘on average’ here because there will be periods where stock markets fall in value – such as 2022, when the FTSE All World fell 1.1% from the start of May to the end of October,” continues Cook. “But looking back at the May to October period each year since the turn of the century, the average return of the FTSE All World has been 2.28%.”

That said, the adage may prove apt this year, says Lisa Shalett at Morgan Stanley.

This is because markets are being affected by a number of factors. High inflation remains persistent across the globe, particularly in the UK where high food prices have kept inflation at 8.7% – over four times the Bank of England’s target of 2%.

There’s also the issue of high interest rates to consider. The BoE has hiked rates to 4.5% – a rate not seen since 2008, and it’s indicated that it won’t stop in it’s battle to control inflation.

In the US the federal reserve has indicated it might be done with hikes. But at a range of 5 to 5.25%, they remain high.

While the UK has been predicted to avoid a recession in 2023, growth is expected to remain subdued until 2024.

So it’s likely that, considering macroeconomic headwinds, companies will underperform, especially as consumers’ budgets remain tight due to the effect inflation is having on wages.

What is the best way to secure a return on your investments?

One way to maximise your returns is to consider which regions and funds you invest in.

“Looking back at the May to October period each year since the turn of the century, the average return of the FTSE All World has been 2.28%,” says Cook.

“When you break this down further and look at specific regions, the US has provided the highest average return during these periods at 3.39%,” continues Cook. “But also, around 74% of these periods have seen positive returns since the turn of the century, which is the best of any of the sub regions analysed.”

So investing in the US throughout this period of historic underperformance might prove the way to hold on to your returns.

The simplest way to do so is by investing in passive funds. These track the performance of the wider stock market and have the advantage of lower fees. Additionally, passive funds have had better luck when it comes to outperforming the US stock market than active managers.

For instance, the S&P 500 has returned 5.6% between November and April between 2000 and 2022, but it’s still performed well between May and October in the same time period, returning 3.39%.

The FTSE All World has an average winter performance of 5.73% throughout November to April between 2000 and 2022, but it has still returned 2.28% between May and October in the same period.

The FTSE All Share has struggled a bit more, with winter performance coming in at 5.73% compared to 0.55% in the summer period.

The FTSE World Asia Pacific ex Japan has a marked difference too, returning 8.51% in the winter over the last 22 years compared to 1.92% in the summer.

So despite the subdued performance over the winter months, investments are still worth holding throughout this period, as by cashing out you could miss out on summer returns. Of course, you also benefit from the power of compounding by leaving your investments untouched.

Holding cash savings

If you are cashing out, it is worth noting that savings accounts are offering far better returns than they have in recent years. The best easy access account is offering a return of 5.12%, while the best one-year fixed deal is above 5%.

But if you have cash languishing in a savings account with a poorer rate, you might still benefit from leaving your money invested.