Sell in May and go away… Or not?
We recently chatted to Jürgen Möller, our online lecturer for Investment Planning, and asked him about the peculiar saying in the investment industry: to “sell in May and go away”. He shed some light on the origins of this saying and what it means for us, here in South Africa.
Where does this saying come from?
“Sell in May and go away” is a saying that is based on the theory that stock-market performance in the northern hemisphere during the warmer months between May and October, is weaker than in the colder months between November and April. People tend to take leave during the summer, rather than the winter; so, it could be that there is less market activity during the warmer months. Some sources speculate that the phrase originates from an old English saying: “Sell in May and go away, and come on back on St. Leger's Day”. This latter phrase refers to a former custom of aristocrats, merchants and bankers who would leave London for the countryside during the warmer summer months.
Is it then equally applicable in South Africa, given that we’re in the southern hemisphere? Seeing that we have different seasons, different holidays and different stock-market returns?
A large portion of the JSE comprises companies with significant offshore exposure or offshore companies with secondary listings. South Africa is therefore not isolated from what happens in the rest of the world; so, I believe that our local market will follow any significant global market movements. As we saw in the last quarter of 2018, our local market followed suit in the global selloff of risk assets. The JSE also participated in the recovery that we witnessed during the first few months of this year.
What’s the prognosis for the next six months – is it actually a good time to “sell now and go away”?
“Sell in May” is causing some debate this year. After a recovery in markets during the first few months, global markets and our local markets were down significantly for the month of May. For the month up to 24 May 2019, the FTSE/JSE All Share Index was down just under 7% (in Rand terms), while the MSCI World Index (which represents developed markets) was down just over 3.5% (in US Dollar terms).
To sell now however may not be the best decision. There is a well-known saying stating that time in the market is more important than timing the market. Nobody knows for certain what will happen in the next six months, but at this point, monetary policy around the globe remains accommodative, which should be supportive of equity markets for the remainder of the year.
On which factors should one then rather base one’s decision to sell?
For a long-term investor, the best decision would be to invest in a well-diversified portfolio that has the appropriate level of risk assets for the investor’s risk tolerance and investment horizon. The decision to buy or sell an asset should always be based on fundamentals, and not on sentiment. If an asset is trading above its fair value, it makes sense to sell it and purchase an asset that is trading below fair value; or wait until a suitable opportunity arrives. Given that markets have pulled down, there may be opportunities opening up to acquire shares that have fallen below their fair values.
Most investors participate in the market through unit trust investments or their retirement funds. The managers of these funds invest for the long term, even if some of the investment decisions that they make may appear unpopular in the short run. Unfortunately, some investors tend to panic when markets become turbulent and then they sell, because they are afraid of losing more money. They also tend to only return once markets have recovered for some period. In most cases, they would have been better off not second-guessing the fund manager and just riding out the storm. Think of this analogy: if a buyer knocks on your door today and offers you 25% less than what you believe is a fair value of your house, you will not consider selling! Why would you then consider selling units or shares if the market offers you less than fair value on a particular day?
Well, we now know the origins of this saying, but also the pitfalls of following it blindly. Most important it illustrates that Investment decisions should be based on sound considerations, and not on the change of weather and seasons, or sayings.
© 2019 Milpark Education (Pty) Ltd. All rights reserved. The content of this article is provided for general information purposes only, and does not constitute financial, legal, planning, investment or other professional advice, or an opinion of any kind. Visitors to this article are advised to seek specific guidance on financial-planning issues from recognised CFP® professionals, who are members of the Financial Planning Institute of Southern Africa, and who are in good standing. Milpark Education does not warrant or guarantee the quality, accuracy or completeness of any information in this article. The article is current, as of the original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose. Views expressed are those of the author(s) and do not necessarily represent the views of Milpark Education.
03 Jun 2019