Sell in May and go away - buy again on St Leger's day

Is there any truth to the old adage? Over the past matter of weeks the financial markets in the UK have been on a downward trend. The FTSE 100 has lost nearly 5% and as for a FTSE 250 that was sailing full steam ahead at the beginning of the year, well that it now starting to return some of its gains as it trades around 9% lower.

Is this just sentiment, economic growth worries or indeed has the political circuit intruded into investors minds and caused a diversion of concentration? Or could it just be because we are now in May and wily investors are sticking with the option of following history and selling up.

In September 1776, just a few years after the founding of the London Stock Exchange, an Irishman, Anthony St Leger, first ran his flat race at Doncaster. Still being run today and marking the end to the flat racing season, who would have believed that this event would lend its name to one of the oldest and most common share trading strategies in existence?

Technically the timing of the saying is not exact, St Leger's day refers to the horse race that is run on the second Saturday in September, a month that is typically one of the worst of the year for stock market returns, meaning that investors would be best advised to do nothing until at least the end of September.

However once you have taken the market crashes that occurred in the Octobers of 1987, 1997, 1998 and the most famous of all back in 1929, perhaps investors should really be buying back in November. Research carried out by stock market historian David Schwartz shows that following the old adage over the past fours years would have avoided an average annual loss of around 1.6%.

The latest edition of the American stock traders Almanac seems to agree with such findings. Calculations conducted on a $10,000 investment in stocks and shares back in September 1950 and then sold in the May of every year until 2004, would have seen the initial investment of $10,000 evolved into $486,000. But by doing the opposite and selling in September and buying during May, that $10,000 investment would have actually been reduced to $9,640!

There are of course some striking exceptions to this rule. Between May and October 1980, the FTSE 100 grew by a whopping 26% after exchange controls were abandoned and even as I write this there may be a few more economists or commentators that have joined the masses describing the old adage as no more accurate than flipping a coin!

17 May 2005 © Moneyextra.com

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