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Is Now The Time To Sell Your Shares?

stockmarketdownIt is hard to believe that May is upon us already. It is also that time of year when we are supposed to, according to the old stock market adage, sell our shares and go away.

The rest of that well-trodden saying tells us not to return until St Leger Day. (For those who are not horse-racing enthusiasts, the St Leger Festival starts on 11 September at Doncaster and culminates on Saturday 14 September with the St Leger classic.)

American investors have taken this beloved British saying and given it a US twist too. They call it the Halloween indicator, which asserts that investors should invest heavily in stocks between October and April but switch into short-term government bonds for the rest of the year.

Whether you prefer the British or US version they both rely on market-timing strategies. Fans of the strategy will point out how well it worked in 1990 (Iraq invaded Kuwait), 1998 (currency crisis), 2001 (dot.com bubble), and 2008 (US recession) when the Straits Times Index (SGX: ^STI) fell 25%, 37%, 24% and 25% respectively.

However, over the last 25 years this peculiar form of market timing has worked on 12 occasions and failed on 13 others.

Year

Points   change from 1/5 to 1/9

% change

1988

+66

+6.8

1989

+109

+8.6

1990

-360

-24.7

1991

-196

-12.6

1992

-148

-9.8

1993

+225

+12.6

1994

+36

+1.6

1995

+40

+2.4

1996

-229

-9.5

1997

-50

-2.4

1998

-555

-37.1

1999

+129

+6.8

2000

-174

-8.1

2001

-416

-23.9

2002

-385

-22.2

2003

+352

+27.5

2004

+143

+7.8

2005

+159

+7.4

2006

-45

-1.7

2007

+310

+9.2

2008

-788

-25.1

2009

+752

+39.2

2010

+123

+4.1

2011

-504

-15.9

2012

+81

+2.7

Source: Yahoo Finance

In fact over the most recent ten years, it has only worked on three occasions and been abysmal on seven. If you had followed the “sell in May” strategy since 1988 you would have missed out on around 1.5% of market gain excluding dividends. You will also have incurred trading expenses, which would have further increased your costs.

So it would seem that the adage has been about as accurate as flipping a coin over the long term and been as useful as an ashtray on a motorbike.

So will I be selling my shares in May?

The answer is I might. However, I won’t be selling because some antediluvian saying tells me to do so. As investors we should be reviewing our investments regularly. That means getting rid of investments that are not performing and reinvesting the money into those that are, regardless of the time of year.

Anecdotally, summer is the period when share traders are said to go off on their long vacations. That could help explain the noticeable lull in market activity between the months of May and September.

But personally I am not a fan of the “Sell in May” theory. In fact, I am not a devotee of any kind of market-timing activity. I buy shares when they look cheap, and if others wish to ditch their shares in the summer months, I could be ready and waiting with my chequebook in hand.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.