Sell in May (risk-adjusted returns)

The Sell in May effect (also known as the Halloween or Six Month effects) describes the tendency of the stock market to perform strongly in the period November to April in comparison to the period May-October. This effect has been observed in markets worldwide and has existed for many decades.

The following charts analyse this effect by looking at the performance of three portfolios:

  1. All Year portfolio – this portfolio is 100% invested in the FTSE All Share Index all year round
  2. Winter portfolio – is 100% invested in the FTSE All Share Index only in the months November to April (and is out of the market for the other half of the year).
  3. Summer portfolio – is 100% invested in the FTSE All Share Index only in the months May to October (and is out of the market for the other half of the year).

Cumulative returns

The following three charts plot the performance of the three portfolios to the present day from 1984, 1994 and 2004.

 

Sell in May (1984-2014)

Sell in May (1994-2014)Sell in May (2004-2014)As can be seen the divergence in performance between the Winter and Summer portfolios is quite remarkable.

CAGR

The following chart partly summarises the performance by plotting the CAGR (compound annual growth rate) for the portfolios over the three periods.

Sell in May (CAGR) [2014]The two features to note are the CAGR for the Winter portfolio is greater than the CAGR for the All Year portfolio for all three periods, and that the CAGRs for the Summer portfolio are negative for all three periods studied.

Volatility

The following chart shows the volatility of the three portfolios over the three periods. In this case volatility is calculated as the standard deviation of the portfolio daily returns.

Sell in May (Volatility) [2014]The features to note here are that the Winter portfolio consistently has the lowest volatility in each period, while the Summer portfolio has the highest. An explanation for this might be that the most volatile period of the year for the stock market has historically been September-October.

So, beyond superior returns, a feature of the Winter portfolio is that it avoids the most volatile period of the year..

Sharpe Ratio

The following chart to some extent combines the previous two into one by plotting the Sharpe Ratio for the three portfolios over the three periods. The Sharpe Ratio is one method of measuring the risk-adjusted returns of a portfolio.

Sell in May (Sharpe Ratio) [2014]With its superior returns and lower volatility the Winter portfolio can be seen to quite easily have the highest Sharpe Ratios for all three periods studied.


 

Other articles on the Sell in May effect.

 

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