After a long, hot summer, you may embrace the fall with open arms. October ushers in cooler weather, colorful leaves, fall fashion, pumpkin spice lattes, and of course, Halloween. October is less popular in the finance world, though. Some people even fear October and its potential impact on their investment portfolio. The October effect is a long-feared phenomenon.
Here's where it came from and what to expect with your investments:
What is the October effect?
While there is no way to predict what is going to happen in the stock market, some think it tends to decline in the month of October. Investment advisors call this the October effect.
Over the past 100 years, several major stock market meltdowns appear to support this theory. These events include the Panic of 1907, Black Monday, Tuesday, and Thursday in 1929, and the Stock Market Crash of 1987. Some also remember the stock market decline in October 2008—the biggest single-day drop within 20 years. This meltdown is a painful reminder of the Great Recession.
While these stock market drops were devastating for the economy, their connection to October is merely a coincidence. Over the past 100 years, there is no specific evidence that October is a bad month for the stock market overall—and some of the worst dips have actually happened in other months. In fact, there have been 53 months of positive October returns since 1928. This compares to 38 months of October declines.
Should I worry about dips in the stock market this month?
Although October has been good for the stock market on average, there is no way to know what may happen next. Many factors impact swings in the market. These may include the government’s fiscal and monetary policies—like the Fed’s increase or decrease of interest rates or Congress deciding when to spend money. It may also be linked to what is happening internationally. You may also see stock market movement based on how consumers view the economy or basic supply and demand. There are many factors at play, so it’s impossible to try and time the market.
How to plan for the October effect
It's easy to feel panicked by changes in the stock market, especially when the media reports on every single move. But you should try to avoid making any fear-based, impulsive investing decisions. Dips in the stock market are going to happen—and it's impossible to predict when.
If you look at a chart showing the history of the stock market, you will notice there is a consistent upward trajectory—even with short-term temporary dips. By keeping the big picture in mind, it may soothe your nerves when things start to go array.
Instead of reacting emotionally to stock market shifts, or the perceived October effect, stick with your original investing plan. Regardless of the current market climate, your investing strategy should focus on your individual goals, risk tolerance, and investing timeline. If you are investing for the long haul—like retirement in 20 or 30 years—this month’s stock market activity will be small blips over the course of your investing timeline.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.