Sell In May & Stay Away. For Good.

THE old chestnut "Sell in May and go away, come back on St Ledger day" is an empirically proven strategy to successfully time the stock market and thereby achieve long-term wealth and happiness. Or perhaps not.

Maybe you know somebody who sold all of their investments in or around October 2007 and who then re-invested fully in mid-March 2009. In so doing they would have avoided most of the dramatic falls in asset prices over that time period and would have been ideally placed to benefit from the large upward movement in prices since then.

On reflection, perhaps you don't know anybody who did this. I don't. And I don't know any financial planners who do. Because such a person - who can precisely call both the top and bottom of the market - likely does not exist.

More probable is that you know somebody who did bail out around March / April / May of this year. Perhaps they got punch drunk from the emotional distress caused by seeing their investments plummet month after month, so much so that, when their valuations showed a slight improvement, they wanted to take what was on offer and sell.

Only the market didn't stop going up in May; UK and world indices have continued to rise, right through to the writing of this blog. Yet so many would-be-investors will have missed out, having already bailed out when the markets were at near bottom. Now, after months of strong stock market performance, many people will be tempted to go back in to the market to purchase some investments.

It's a bit like watching your local supermarket and waiting for it to raise the price of wine by 30% before you buy it. Would any rational person do this?

Yet this is what many investors do, time after time, stock market-rise-and-fall after stock market-rise-and-fall. A study in the USA (and the pattern is almost surely the same here) shows that the investment performance figures used by fund groups to promote their wares are very rarely the actual returns enjoyed by investors.

Why? Because typically the investors in these funds don't last the course: they buy high and sell low, again and again.

The effect this has on returns is dramatic (in a bad, bad way). A recent Dalbar study showed that over the 20 years to 31st December 2008 the S&P 500 experienced an annual return of 8.35%. Over the same period US equity fund investors enjoyed an average annual return of just 1.87%, destroying their chances of long-term wealth creation by repeatedly dipping into and out of the market at the wrong times. Over that time US inflation was 2.89% per annum - over two full decades these market-timers couldn't even keep the real value of their money intact.

As the study concludes:

"Far too often the investor’s own behaviour is the highest risk they face. Buying high and selling low is not the way to make money in the capital markets. Market timing seldom works, and the vast majority of people that attempt it do themselves great harm. Buy and hold may require some courage at times, but, it’s the only time-tested, proven way to reach your goals. Study after study has shown that the greatest detriment to long term investment results is often the person making the investment decisions."

So if you think that, in 2010, you will sell in May, it may be the best decision you ever make. Because it means you accept that you are not prepared for the emotional investment that comes hand-in-hand with making a stock market one. It means you panic when others do; you get greedy when greed is all around you.

If you fall into this camp, sell in May and stay away, for good and for your own good (material and spiritual). Don't come back. Stick the money in the bank and try to keep pace with inflation, if you can.

Good luck with that......