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Lies, Damned Lies and Statistics

Since I last wrote in May, the FTSE has shed about 6% at the time of writing falling from about 6770 down to 6650. 

The saying goes “sell in May and go away, don’t come back until St Ledger’s Day”, it suggests that investors should sell their portfolios and not reinvest until the final horse race of the calendar.  Out of interest it’s held at Doncaster on 12 September this year. 

But more to the point, is it worthwhile heeding this advice?

By taking price returns generated by FTSE All Share over the past 20 years it is apparent you are twice as likely to have a negative return from end of May to 12 September (May period) as you are from 12 September to end of May (September period).  This backs the saying up. 


Further to this, if you compound the 40 periods under review the All Share returned 370% (remember this doesn’t include dividends), if you look at the May to September figures the compound return of these 20 periods is zero, that means that all returns generated must be from the September to May period.  This certainly backs the old adage up.


So there we have it, sell in May and go away... Well not quite.

Although twice as likely to see negative price return in May period as September period, the likelihood is still only 30% compared to 14%.  So most years simply selling will lead to relative loss compared to simply holding the portfolio.

Looking at the individual periods there is no getting away from the fact there are some very high losses through May period, the average loss being 12.7% compared to 9.3% in September periods a staggering 38% compared to 13% when annualised.

But what about the cost of not being invested in the positive years? Through the May period the average gain was 6.2% compared to 11%.  This doesn’t seem too good but when annualising we see gains in positive years for May period are 23% compared to just 16% in September periods.


Analysis on most major equity indices returns, unexpectedly given correlations, paints a similar picture.  As it does our Equity portfolios.

So, depending on which way you look at it, how you splice or dice and manipulate the figures the adage is right and should be followed or wrong and should be ignored.

Lies, damned lies and statistics.

Well, maybe not lies but not quite the full story either.  The analysis doesn’t take into consideration the transaction costs of buying and selling, the spreads, possible capital gains tax or the stamp duty.

It also completely disregards, in our belief the main driver of returns in portfolios, asset allocation.  The figures look purely at an investment into equity that is bought at the beginning of the period and held.    

In my last blog I highlighted a period from 2008 to mid-March 2009 our equity portfolio fell nearly 40%, the 12 months following the equity portfolio returned over 60%.  The below chart models what would happen to a portfolio initially made up of 50:50 cash and equity that tops up equity at each 10% increment as equity falls compared to a buy and hold strategy. 

The short term may see some pain in this but the long term benefits are clear to see. 



We always look to avoid losses on portfolios but in the short term this is nigh on impossible unless you are willing to sacrifice the potential gains, nobody can call the top or bottom of a market. We can though position portfolios and actively manage asset allocation to benefit from adverse, expected and unexpected market movements.