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Why I'm selling in May

Why I'm selling in May

I'll be following the old rule 'sell in May' next week. I know many of you are sceptical about this, so I'll explain why it's right for me even if it mightn't be right for others.

I'll not be selling because I have especial insight into what the next six months will bring: economics is not about futurology. Instead, I've three other reasons to do so.

One is that, on this point, my Bayesian priors are weak.

Many of you are sceptical of 'sell in May' because it seems to violate common sense, that risky assets should outperform safer ones. If you cleave strongly to this prior, you'll regard the fact that the All-Share index has lost 0.6 per cent on average from May Day to Halloween since 1966 as just a quirk.

Personally, though, my attachment to that prior is weaker. I find it plausible that investors become systematically over-optimistic in the spring: both biology and culture tell us this. And I've some sympathy for the idea that there might not be a risk-reward trade-off at all. I therefore weight the historical facts heavily relative to 'common sense' theory. Other Bayesians, however, might reasonably disagree.

I've a second reason to sell. It's that my wellbeing is asymmetric with regard to gains and losses: a loss of, say, £10,000 would hurt me more than a profit of £10,000 would please me. I'm loss averse.

This is because I'm on course to achieve my ambition of retiring early: with average luck I should be able to consider doing so in two years' time. A big fall in equities would jeopardise this goal, whereas an equivalent gain wouldn't give me the same mental upside.

 

Aim and All-Share indices

 

And history tells us that big losses are very possible in the summer. Since 1966 we've seen 11 years in which the All-Share index has lost more than 10 per cent in real terms between May Day and Halloween. That's more than one in five.

Yes, the most frequently observed outcome has been a small profit. But it's that significant chance of a sizeable loss that worries me. A 10 per cent loss given my current equity weighting of 60 per cent would require that I work another two years to save enough to make up the loss - assuming it to be permanent. My reward for that one-in-five chance is a good chance of a small gain, which I don't really need. That's not enough to reward me for the downside risk.

Again, though, others might differ. If you're well below your target level of wealth, you might well want the large chance of a smallish gain. And if you're younger, the need to work longer to recoup losses might not frighten you so much (whether this is for good reasons or because of hyperbolic discounting is another matter).

History tells us that big losses are very possible in the summer”

There's a third reason why I'm selling. It's because I can do so at no cost by transferring my pension from an equity tracker fund into cash. My equity holdings that are harder to sell, such as Isas and other funds, will be kept. In effect, I'll cut my equity weighting from around 60 per cent to 30 per cent.

Some of you, though, aren't in my position. If you face hefty dealing costs or a tax bill for selling, you might reasonably want to stay invested.

Although I'll be partly selling, doing so might not be right for everyone. Reasonable people can differ. Investing is about more than mere futurology.

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By Chris Dillow,
25 April 2017

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Chris Dillow

Chris spent eight years as an economist with one of Japan's largest banks. Here, he provides insightful commentary on the latest economic news and data, along with thought-provoking articles about investor behaviour.

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