Evidence Based Investing: don’t ‘sell in May’

Evidence based investing is the First Wealth way of doing things, and it is widely viewed as the way to go. But financial markets once worked to the rhythm of the social season. No point investing when there’s cricket or racing to watch. Times have changed – and the evidence says you’re better off staying invested, preferably in a basket of UK and international companies.

Hell in May

A few weeks ago, blue-blooded bank Coutts withdrew some £2bn of its clients’ money from the UK stock market.

It was, in the parlance of our times, a triggering moment. The phrase ‘media hell’ is probably too strong. But some people were not happy.

The bank has attracted headline writers for the wrong reasons before. Remember the Nigel Farage sage?

This time, Coutts exited UK listed companies in favour of international companies. According to reports, this moved UK equities from 33% of its portfolio to just 3%. Its senior management talked of the benefits of a globally diversified portfolio.

Some analysts disagreed. Peel Hunt’s note didn’t hold back: “This will inevitably put further selling pressure on the UK market at a time when valuations are already depressed.”

True. We’ve written about the beleaguered UK stock market before. The UK market desperately needs good words, good deeds and good thoughts. It’s why the Government launched the UK ISA, to breathe life into the patient.

Late to the party?

We don’t criticise competitors. If you throw mud, you end up with muddy hands.

In fact, the Coutts move is a savvy one. It’s not the bank’s job to use client money to hold up domestic markets. There are better opportunities elsewhere.

We know that well. As evidence-based investors, we know that international diversification brings many benefits. It’s why, for example, many of our client portfolios have a 60% allocation to American companies.

But we are interested in the recent timing. We’ve been investing internationally for years – in line with the empirical data.

For example, the research firm Alpha Architect, says that, “Using a large sample of stocks from 48 developed and emerging markets over 1995 to 2021, we find evidence that suggests that international diversification is the best risk-reduction tool when all markets are considered.”

And this chart shows the MSCI World Price Index USD (in blue) beating the FTSE100 (in orange) over the last five years.

The former is a US-dominated basket of international companies. It includes Amazon, Microsoft, Nvidia, Siemens, Royal Bank of Canada, L’Oréal … and so on.

So perhaps the brokers, journalists and other critics of the Coutts move are all slightly late to the party?

Sell in May

This whole affair reminds me of something I heard when I first got into the financial industry: “Sell in May and don’t come back ‘til St Leger’s Day.”

The latter is a famous horse race in September. So, in other words, sell your holdings at the start of the Summer social season. Nothing would happen while market participants were at Lords, Royal Henley, the Chelsea Flower Show, and elsewhere. Then, with St Legers Day, markets would pick up again.

There’s nothing inherently wrong with chummy conversations about money over champagne and betting slips; but it’s not a replacement for evidence-based analysis.

And the facts say that you’re better off staying invested.

The chart below from investment powerhouse Fidelity shows that you’re far better off sitting out the summer periods and benefitting from those unforeseeable ups.

In fact, we’d go much further. Don’t sell at all. Don’t try and time the market. Stay invested for the long run. The power of compounding – plus the fact markets go up more often than they go down – will work its magic for you while you sleep … or go off to the races.

If you’d like to know more about how evidence can help your wealth, we’d be more than happy to talk. Please get in touch on hello@firstwealth.co.uk or call 020 7467 2700.

[1] https://www.bbc.co.uk/news/business-67729427

[2] https://consent.yahoo.com/v2/collectConsent?sessionId=3_cc-session_cc79e8ad-c077-46ab-bedc-aea062e4689f

[3] https://www.peelhunt.com/news-events/articles/selling-down-the-uk/

[4] https://www.firstwealth.co.uk/article/british-investments-havent-lost-their-lustre

[5] https://www.firstwealth.co.uk/article/use-it-or-lose-it-the-approaching-annual-isa-deadline

[6] https://alphaarchitect.com/about/

[7] https://www.doncaster-racecourse.co.uk/racing-highlights/st-leger-festival

[8] https://www.fidelity.co.uk/markets-insights/investing-ideas/investing-ideas/does-sell-in-may-and-go-away-work/

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.