In investment circles, an adage that is frequently touted around this time of year is the 'Sell in May and go away, don't come back 'til St Leger's day. 'The proverb, which advocates selling stocks at the start of May and buying them again in the autumn, has a large number of followers. A recent poll by trading platform Interactive Investor found nearly half (46 per cent) of the 10,000 respondents took seasonality into account and did not like investing over the summer months.
Rebecca O'Keeffe, head of investment at Interactive Investor, said: "While many advisers argue that time in the market beats timing the market, our poll suggests that a significant percentage of investors disagree, preferring to sit out periods when markets are expected to underperform."
Chris Dillow, Investors Chronicle's economist, favours seasonal investing. He has crunched the FTSE All-Share index's numbers over the past 50 years and found that the returns recorded during the summer months are much weaker than the winter months. However, rather than looking at the period between 1 May and the St Leger's day flat horse race run in September, he extended the period to 31 October. This allows him to compare two equal parts of the year of six months each, rather than the five months the saying suggests.
He says: "Since 1966, between May Day and Halloween, the average total return on the FTSE All-Share index, including dividends and inflation, was -0.69 per cent. In comparison, the average total return for the rest of the year, between 1 November and 30 April, was 8.7 per cent. There isn't much chance that is due to random fluctuations."
Academic research has indicated that the 'Sell in May, go away til Halloween' effect isn't only a UK phenomenon but affects stock markets worldwide. A 2014 paper which studied 109 countries found the average winter return (November to April) across these countries was 6.9 per cent compared with the summer return (May to October) of 2.4 per cent.
If this isn't a random occurrence, what is driving consistently weaker summer month results? Mr Dillow says the longer daylight hours in spring and summer put everyone in a happier mood, and as we get more positive we make more risky investment decisions.
"Spring has long been associated with optimism and risk-taking, he says. "Why do all the biggest gambling sessions of the year - the Grand National, Cheltenham festival and the Derby - all take place in the spring? It's because people are more cheerful and willing to take risk."
The effect of our collective optimism is that stock prices rise too high and hit a level they are more likely to subsequently fall from, he argues. Often this fall happens in September, which his numbers show to be the worst month for returns. Again, he argues, this isn't coincidental - the darkening days drive us to overly pessimistic thinking causing stock prices to fall too low, and sowing the seeds for a rally in the winter.
But is it credible to think investors and fund managers are influenced by the sun in their investment decisions? Mr Dillow says it is: biology, emotion and culture all affect investors.
"Some research has confirmed that testosterone plays a part. Testosterone is associated with taking risks and this research has shown the level of sunlight affects men's testosterone and therefore increases risk-taking. I think that's part of the reason the so-called experts are in denial - they are swayed by testosterone," he says.
On the contrary, Adrian Lowcock, head of investing at AXA Self Investor, argues that part of the reason summer returns are weaker is because senior investment managers are often away on holiday.
He says: "In the summer months the City is a lot quieter and so there are fewer senior managers around and therefore less volume [of trading]. If you've got fewer people around making fewer transactions, you get lower volume, which basically means you get much more volatility and greater swings in share prices. And if something unexpected happens you have perhaps less experienced hands at the helm overreacting to the events."
The case against seasonal investing
Although accepting there is a seasonal trend, Mr Lowcock doesn't advocate seasonal investing as he says investors risk racking up transaction costs, potential tax liabilities and losing out on dividends, if they trade in and out of their holdings.
This is especially true for people who already hold investments and would be forgoing dividends if they sold their holdings in May, he says.
He analysed historical data, using a different period to Mr Dillow, from 1986 to 2014, defining summer months as those between 1 May and 30 September. His results confirmed weaker summer performance but found the receipt of dividends from staying in the market more than made up for this underperformance. Excluding dividends, the FTSE 100 returned a cumulative total of -16.48 per cent during summer months, over 29 years, compared with a return of 191.54 per cent during the winter. In the same period, the FTSE All-Share returned -14.82 per cent over summer, compared with 209.11 per cent across the winter. But with dividends reinvested, the effect was cancelled out with the FTSE 100 returning a total of 32.4 per cent during the summer months between 1986 and 2014.
He concludes: "While the trend is true - that markets are weaker in the summer - the issue is perhaps the 'Sell in May' element of it. It is so marginal that it is pretty pointless to sell in May."
Instead, investors should seek to build protection against the increased risk of volatility and market sell-offs during the summer months by opting for defensive assets such as targeted absolute-return funds, he says. They should also set some money aside to invest in case there are large sell-offs in the summer and opportunities arise. New investors can take advantage of the seasonal pattern and buy stocks in the market during the typically weaker summer months.
Mr Dillow agrees that increased transaction costs are legitimate concerns when following a seasonal investing approach, but he believes it's worth selling in May where you can, especially if you're concerned about capital preservation.
"I sell in May to the extent that I can switch my pension fund for free, but I leave my individual savings accounts (Isas) as they are because of the cost of shifting. Where I can switch freely, I do," he says.
"If you're worried about capital preservation there's a case for getting out of the market [over summer]. The distribution of returns since 1966 show the odds favour the markets rising slightly in the summer, but the rises tend to be quite small and the falls can be big. For example, there have been four occasions where the market fell by more than 20 per cent. But if you're chasing returns then it might be a reason to stay in."
What about Brexit?
Is the case for selling in May strengthened by the UK's European referendum vote on 23 June?
"If the UK votes to leave the European Union (Brexit) you could see a market sell-off in the UK and Europe quite easily because that could come as a surprise: certainly markets aren't fully factoring in that situation," says Mr Lowcock.
However, he doesn't think investors should sell in anticipation of the vote, and suggests people are better off staying invested and setting cash aside to invest on any market weakness that may follow an Out vote. If the UK votes to remain, he says we're likely to see the markets move on very quickly to other issues such as China, Greece or Donald Trump winning the US election.
Mr Dillow thinks the likelihood of Brexit is small, citing bookmaker Betfair's odds that there is a 70 per cent chance of a Remain vote. If that happens we could see a relief rally, with small-cap stocks and the alternative investment market (Aim) stocks likely to outperform, he says.
Nevertheless, he thinks the 'Sell in May' strategy should still be followed as the historical data demonstrates the greater likelihood of poor summer returns.
He says: "Brexit is only one of the countless things that could hit the market this summer. We pay too much attention to what's obvious and not enough to what's not so obvious."
