My table might help. It shows the record of the 10-month rule when applied on May Day since 1986. The All-Share index has been above its average on 24 of the last 30 May Days, thus giving us a buy signal. On average, the index has risen by just 0.2 per cent in the six months following those signals. This is better than we've seen on the six occasions when the rule told us to sell. But it is a paltry return.
| All-Share index in winters and summers since 1985 | ||||
| Price>10m av | Price<10m av | All summers | All winters | |
| Average change | 0.2 | -5.0 | 0.8 | 7.3 |
| % of falls | 41.7 | 66.6 | 46.7 | 16.1 |
| Number | 24 | 6 | 30 | 31 |
| Winter is from Halloween to May Day, summer from May Day to Halloween | ||||
Granted, the market rose on most (14) of those 24 occasions. But the rises were mostly small; only three were greater than 10 per cent.
In truth, this confirms what we know about the 10-month rule. It works not so much by giving us fantastic buy signals but by saving us from the occasional disaster. As Mebane Faber of Cambria Investment Management (who first proposed the rule) has said, it "can avoid lengthy and protracted bear markets". For example, the rule told us to sell in May 2008, thus saving us from a 30 per cent loss.
However, our dilemma remains. Even a tiny rise in the All-Share index, when added to six months of dividend income, would be better than returns on cash. So, does this mean we should ignore the 'sell in May' rule?
It's tempting to answer this by considering what might go right or wrong for equities: China's recovery is a bullish risk, Brexit a bearish one. This approach is dangerous. We know that we tend to be overoptimistic in the spring which means we underrate risks; this is why the sell in May rule has worked. The whole point of using rules is to avoid relying upon our fallible judgment.
Instead, we should think about our attitude to risk. Which would hurt more: suffering a 12 per cent loss, or missing out on a 12 per cent gain? (History suggests the two are equally likely.)
If you are around or above your target level of wealth, the answer is the former - which points to selling. If, however, you are looking for big returns, there might be a case for staying in.
Another consideration is dealing costs: these might tip the balance against selling, especially if doing so incurs a tax liability.
Personally, I'll be partly selling - reducing equity weighting from around 60 per cent to around 25 per cent - by shifting my pension fund into cash, something I can do at no cost.
