It’s not only the leaves that fall in autumn. Historically, September is when the stock market tends to perform the worst, and October has a scary reputation that has nothing to do with Halloween. “The fall’s not so great,” says Jason Brady, president and CEO of Thornburg Investment Management in Santa Fe, New Mexico. “That doesn’t mean it’s going to be terrible.”
Since the mid-1920s, what is now the Standard & Poor’s 500 index has lost an average of 1 percent in September. May is the only other month with an average loss, but it’s a mere 0.1 percent, and even though the stock market crashes of 1929 and 1987 both happened in October, the month’s average return still squeaks by with a 0.4 percent gain.
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Some think September is a laggard because traders returning from vacation or mutual funds nearing the end of their fiscal year tend to sell underperforming positions. But Aaron Anderson, senior vice president of research at Camas, Washington-based Fisher Investments, thinks the September doldrums are more of a statistical anomaly. After all, there are fewer than 100 Septembers from which to draw the S&P data. He believes big September dips in the 1930s and in 2008, when Lehman Brothers filed for bankruptcy, skew the average to the downside.
Anderson also points to some good Septembers, including the one in 2010, when an 8.8 percent return outperformed all the other months of the year. He doubts we would see such gains if seasonal selling truly swayed the market each year. Besides, if September losses happened regularly, people would take advantage of the bargain-hunting opportunity, he says. And if mutual funds were selling out of positions, they would likely be buying others rather than sitting on the cash, which would balance out their effect on the market, he adds.
Don’t be spooked easily. Still, the ghosts of truly dismal past Septembers hang over investors, potentially clouding their judgment and encouraging their worst impulses. “The key is to not panic,” says Arian Vojdani, investment strategist with asset management firm MV Financial in Bethesda, Maryland.
Buy-and-hold investors with a well-diversified portfolio especially should hold their ground. Trying to time the market by selling out of stocks just to avoid a potential downturn is counterproductive anyway. “That’s usually going to do folks more harm than good,” Anderson says. Selling stocks because you fear a September dip and then buying in again risks missing the gains if the market goes up, and there are the trading costs too, he notes. Plus, the benefit of preventing portfolio losses from what is likely to be only a small pullback is negligible compared with the gains that holding investments longer term can bring, he says.
MV Financial doesn’t adjust its positions because of a potential September downturn, Vojdani says about his firm, and neither should you. Even if September was always bad for the markets, it would still be just one month out of what should be a long-term investing strategy, he says. “If you need the money in the next six months, don’t own stocks,” Brady says.
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The best offense is a strong defense. Buy-and-hold investors will be better able to ride out any market turbulence if their portfolio holds sensible positions and is rebalanced regularly.
Say a surge in equities takes a hypothetical target allocation of 60 percent stocks and 40 percent bonds to something like 64 percent and 36 percent, then that person may want to sell some stocks and buy bonds, Brady says. “Rebalancing gets you back in line to what your risk should be relative to your risk tolerance,” he says.
Knowing your risk tolerance, says Vojdani, is crucial when it comes to diversification. For those with a medium risk profile, the standard division of 60 percent stocks and 40 percent bonds may be appropriate, he says. For the stock portion, he recommends holding about 35 percent to 40 percent in large-capitalized U.S. stocks, followed by 10 percent to 15 percent in international companies, including emerging market shares, and the rest in U.S. mid- and small-capitalized stocks. As for fixed income, Vojdani suggests short-term bonds to protect yourself from interest rate risk.
Lisa Ramirez, a partner, portfolio manager and analyst at wealth management firm Denver Investments, recommends owning a basket of high-quality, dividend-paying stocks because they outperform non-dividend-paying companies — and with less volatility. Investors should look for businesses that have strong, consistent cash flow, Ramirez says.
Mutual fund investors, she says, should look for asset managers with a long-term outlook who research and monitor stocks in order to buy shares of companies at good prices, with market pullbacks often supplying the perfect opportunity.
You may be pleasantly surprised. Of course, this September could defy historical averages and turn out to be an upbeat month. As it happens, current economic tailwinds favor a market that will keep sailing smoothly.
Money is flowing into the stock market now because corporate earnings are good, global economies are doing relatively well and fixed income remains unattractive, Vojdani says. He doesn’t see anything significantly altering these trends this September.
[See: 9 of the Market’s Best Growth Stocks.]
Meanwhile, inflation is reasonable, the Federal Reserve isn’t raising rates too aggressively, and investor sentiment is improving, Anderson says. “The backdrop for the market is very good today,” he says. Plus, he says, two areas that have roiled markets in recent years — the Chinese economy and oil prices — seem to have stabilized, giving people a growing confidence in stocks.
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A September Stock Market Is No Reason to Panic originally appeared on usnews.com
