The rules of thumb that actually work

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  • 16/09/2013
Could your gains be regular as clockwork 3 of 4 Introduction 1 of 4

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

For British investors, one of the best-known calendar-based investing ‘strategies’ is known by the adage, “Sell in May and go away, come back on St Leger Day.” It is not just a catchy saying. Repeated studies show that selling in that month and buying again in September (mythically, after the St Leger Stakes horse race in Doncaster ends the UK’s classic racing season), actually works, both in the London and other markets.

All sorts of reasons are offered for this trend, from crop cycles and harvests to fund managers swanning off on their summer holidays.

Perhaps the most impressive of these studies was published by Massey University in New Zealand. Researchers there analysed more than 300 years of UK stock market history and found that, no matter which 100-year or 50-period was observed, the adage remained good advice. The prospects of beating the market using this strategy would, over the long term, have been remarkably high, says the report’s author Ben Jacobson. “Over an 80 per cent chance for investment horizons over five years; and over a 90 per cent chance for horizons over 10 years, with returns on average around three times higher than the market.”

All sorts of reasons are offered for this trend, from crop cycles and harvests to fund managers swanning off on their summer holidays.

Another famous calendar anomaly is the “January Effect”, the tendency of shares around the world to outperform at the beginning of the year. Some believe this trend is caused by the US tax season, which ends in December: in many cases, investors sell out of losing positions before the end of the year so they can claim their losses against taxes due, then buy the same shares back in January, pushing up the market. But whatever the reason, it raises some interesting possibilities.

Consider, for example, the fact that the January Effect is most pronounced for smaller companies. If you analyse the performance of the S&P500 between 1926 and 1994, you’ll find that, each January, the top decile of shares (by capitalisation) grew on average by 1.10 per cent while the bottom decile grew on average by a whopping 10.28 per cent.