Why 'sell in May and go away' could be bad investing advice

A well-known saying in the sharemarket is "sell in May and go away".

That advice is based on the idea that share prices are likely to dip after May for several months before rising again in November through to April.

In the US, several researchers have studied the phenomenon and found there is some truth in it.

This may have something to do with the northern hemisphere summer falling in the middle months of the year.

When the US holidays hit, US sharemarkets typically go quieter. Some traders cut their positions over the northern summer and rebuild them later in the year.

In Australia, from May to October returns for the S&P/ASX 200 are typically lower than for November to April. One reason locally could be that the "sell in May and go away" theory is reinforced by three of the big four banks, NAB, CBA and ANZ, going ex-dividend in May and CBA in June, which leads to a drop in their share prices during those months.

But the adage doesn't hold true every year. Last year the ASX rose over May then jumped ahead in June and July, right through to the end of August.

The worst months of the year were February and December, when share prices dropped. So if you sold in May and went away, you would have missed out on some solid gains. If you bought back in November, you would have suffered in December.

However, in 2017 prices did drop in May through to September before the S&P/ASX 200 staged a solid rebound in October, which continued through to the end of the year. If you did sell at the beginning of May and went away, you would have avoided this dip.

In 2015 the S&P/ASX 200 tumbled from April through to February 2016. You would have had to sell in March to avoid the subsequent fall, which marked much of 2015.

So old adages don't always hold true. The "sell in May and go away" strategy doesn't necessarily make sense - and it certainly didn't last year or in 2015.

That's why it is important to remember that buying and selling based on macroeconomic data and trends, company announcements, valuation changes by major institutions and technical indicators is what impacts supply and demand in the short term and changes share prices.

What this means practically is that you should avoid slicing and dicing based on the "sell in May and go away" phenomenon and focus on what really affects the value of companies. Shares are, above all, growth investments.

On average they will gain over time, so holding onto them through seasonal fluctuations is the most effective way to build wealth.

The 2018 Russell Investments/ASX Long-Term Investing Report, which is used by investors to rank the best-performing asset class for the past 10 and 20 years, shows that over the 20 years to December 2017 the return on Australian shares was 8.8% a year.

For Australian-listed property, it was 7.2%. These are good numbers. And to reap such gains, investors didn't need to apply any trading tactics. They just needed to hold on.

Even in the US the adage can be misleading. Recent research by Ladd Kochman and David Bray in their paper "Sell in May and Go Away Exposed!" found that the annualised average return from S&P 500 stocks for the November-April period was nearly six times greater than its May-October counterpart over the 20 years ending in October 2015.

Between 1995 and 2015, March-April and November-December had average returns of 5.11% and 3.33% respectively.

However, in January-February returns over the 20 years averaged just -0.04%.

That dented the overall "Sell in May and go away" effect, exposing a historical weak link in the six-month chain.

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