Money Obedience

Stock markets usually don’t do well in September. Since 1959 stocks have declined an average of 0.9% in September, which makes it by far the worst month of the year. (In case you care, December and April are the two best months of the year, up about 1.5 and 1.4%, respectively.)

So much for the facts. I don’t think this information helps much. Why not? - Well, let me ask this question. Would it make sense to sell on the last day of August and buy back on the last day of September? – At first glance you may say yes. But when you take commission and taxes into consideration, you may decide against it. Besides, what if this September is different than other Septembers? How often would you be willing to go through this exercise year in and year out?

Moving money in and out of the stock market for relatively short periods of time is called “market-timing.” According to most studies, this strategy has not worked out very well for most investors. Instead, the way you split up your money among the various investment choices makes a real difference. This is called “asset allocation” and it impacts about 90% of your financial success. So, why would you mess with “market-timing” in the first place? It is much more important to get asset allocation right than to get market timing right.

However, I can see one big benefit for knowing that the stock markets go down 0.9% on average in September. That is, we can prepare ourselves for a little setback in prices – just in case this setback actually happens. If it does, it would not be a big shock if stocks actually declined this month. We would all avoid panic, which certainly caught some of us during the recent decline ending in March. Panic does not set in if we are mentally prepared for a decline in the stock market – which really can happen anytime, not just in September, as we all know now!