September & October Are NOT Bad Months for Your Investments

For a strange reason I can’t explain, many investors tend to make stats of anything. Even worse, those same investors trade according to these stats without any fundamentals at all. I have in mind the “seasonality of returns” for examples. Many investors think there is a general bullish market during the holidays or that January will determine if we are going to have a bullish or bearish year. Since we are right in the middle of a great seasonality, I’d like to attack the September & October Effect.

Source: Ycharts

Unless you were living under a rock, you surely remember what happened during the fall of 2008. The worst stock market crash in the history started in August 2008 and finished in November the same year (with a perfect bottom on March 9th 2009). I guess this is enough to give nightmares to a whole generation of investors.

If I pull out the charts from the 80’s, I will find another horror story. The Black Monday occurred on October 19th 1987 when the market fell by 22% in a single day. The bulk of the disaster was attributed to a glitch in program trading orders. But whatever the reason was, investors got hit by a train during another horror story:

Source: Ycharts

If this wasn’t enough, the 1929 market crash happened… on October 1929. Those three events alone marked the imagination of millions of investors. These stories are told like legends and other boggeyman horror tales. But should we really fear those months on the stock market?

Source: Ycharts

The truth is that if you have purposely missed September and October of each year since the last crash, you missed a grand total of 36.63% in total return (including a +2.40% as at October 3rd 2017). The best part is that since 2009, there is only one year where the combination of both months leads to a negative return:

Source: Ycharts

From September 1st 2009 to October 31st 2016, the S&P 500 shows a total return of +147.70%. During this period, the “horror months” shows 34.23% or 23.17% of the total return (34.23% / 147.70%). However, 2 months out of 12 only represent 16.67% of the year. In other words, September & October brought more returns than their weight.

When you take a close look at the above mentioned chart, you can also notice that while the average return is about 4%, there are very strong and very weak periods. In other words; there are absolutely no seasonality trends over the past 8 years!

September & October could be good or bad months on the stock market like any others. It’s because a few catastrophes happened in history that it means something.

Now… what will happen this year?

Source: ycharts

We are already halfway in the “horror months” and the stock market is showing a positive return of 2.40%. Will it go up, will it go down? I don’t know. And I don’t really mind. I recently received the commuted value of my pension plan and I intend to invest it this fall. If I want to retire wealthy, I can’t really wait on the sideline hoping for a market crash. What if October is another good month as it was the last 8 times?

I’d rather focus on dividend growth stocks to build my retirement portfolio. Regardless where the market will end on Halloween, I know my dividend payments won’t end-up in a horror story!


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