When looking at stock market performance, it’s often said that one shouldn’t time the market. Simply invest as you go, one line of thinking holds, and over the long term you’ll be better off.
I don’t necessarily disagree with that. Nevertheless, it can be interesting to see what we can find in looking at historical stock trends, as this might uncover some learnings that could help us be better informed. One way to look at this, as we’ve done before here, is took at performance by month.
If you’ve been a long-time reader, perhaps you recall the post on the September Effect, where we looked at how the market has performed in the month of September. At the time, a retrospective analysis was done. It clearly showed that the numbers in the 9th month of the year are, on average, not that good. September is the worst month for stocks, based on taking monthly S&P 500 averages of the 40 years from 1971 to 2010.
It can be seen that over that time frame, there were only 2 months that showed an average market decline: February and September. February’s performance resulted in an average drop of 0.19%, while September was a much bigger decline of 0.77%. Think about it, that’s just for one month of the year, and it’s based on a sample size of 40 years.
As I presented the analysis of September stock performance in August 2011, I did note that this didn’t mean that it was a sure thing that the performance in each upcoming September would be bad. Rather, as I mentioned, that this trend was enough to at least make me take notice.
Well, in the month following that post, how did the stock market do? Looking back to last year, it’s revealed that the S&P 500 dropped 7.2% in September.
Was this a prescient post, or just a random, unexplainable occurrence?
Hard to say, as I didn’t predict that it would happen. But, as I again say, it was (and is again) enough to at least take notice.
Will this year be different? Will an election year bring on a more positive result? I’m not giving advice (see a pro for that) or making a prediction, so we’ll just have to find out. Again though, we do have this bit of knowledge of historical performance in the back of our minds.
My Questions for You
Do you like to utilize such historical data to help make decisions, or do you prefer to ingore and just invest on your own schedule?
What do you think about the September Effect?
Why do you think the market, over the last 41 years, has so clearly performed worse in this month than in any other month?
I do pay attention to some of the historical trends, but don’t necessarily use them to guide investing….
Maybe parents are pulling their money out of the market to pay for college!!!
Marie – perhaps you’re on to something on the college part! At least the way prices are these days, right? 🙂
I have read into studies like this, but I like to hold to the Buffet strategy. Invest in undervalued companies for the long haul. If you do that, a month of lower returns is just a small blip on a long term upward trend.
Eric – realistically, I’m more of a buy and hold person as it is, but with mutual funds.
I avoid timing the market and keep investing every month (dollar cost average) into the market.
I agree with krantcents. Trading based on predictions of good months and bad months isn’t a great long term strategy. Set up a sensible, diversified asset allocation and invest more every month.
In September people return from summer vacations, trading volume increases, the weather starts to cool down, and so do stock prices. It’s hard to say if those events are related.
FinanceViking – actually, I tend to be a buy/hold type of person, and am diversified. That said, historical data can be interesting to look at and surely gives us pause at the minimum. It can be great to hold to a strategy, but it can also be helpful to at least consider data trends.
krantcents – who am I to argue with success 🙂
Hmm interesting, I hadn’t heard about this before… I’m not sure it would carry much weight when making the decision to invest (which in my case is, starting now!) I agree with the other commenters, invest regularly, dca and for the long haul
Andrea – glad you’re starting now! I do agree on investing regularly
I generally don’t look to historical data on such things simply because of the fact that everything else in the world is not the same. Sure, generalities can be made over time, like things changing when schools let out or are back in session, or around the holidays, but that is looking at thinks a bit too narrowly for me. In this case, since the data is over a long-term period, it’s something to take notice of, however not something that is statistically relevant to cause me to jump in simply on the merits of this one stat alone. I’m more like you in that I prefer to use a buy and hold strategy, and choose high-yielding dividend stocks which have a history of continually increasing that dividend amount (the former Mergent Dividend Achievers lists) with automatic reinvestment. If anything, my preference would be to do a lump sum investment as early and often as possible to take advantage of time using this strategy.
Like you, I don’t imagine trying to time the market. But September has been bad for so, so long that I had to always take notice and feed that information to my clients…just so they were prepared for a down month and maybe a recommendation from me to accelerate any savings plans that month if possible.
As I commented on your last post on this, I’m a rather inept market timer, so I’d turn an intentionally deaf ear. September though is grape harvest time, and the garden really picks up after the summer’s heat!
i think a relevant question here is: is there a difference between septembers where there is a presidential election and when there is not?