September and Stocks: How to Protect your Investments

How to Navigate the September Effect

Historically, September has seen weak stock market returns. It’s such a common occurrence that it’s even been given an official name – the September Effect. 

This phenomenon is just one example of market volatility: up or down movements in the price of a stock, bond, or other security over time.

All of this leads to one one key concept: Market volatility is an expected, normal situation. Investors are more likely to benefit from staying invested and riding out these ups and downs, as the market has historically trended upwards. 

What causes the September Effect?  

Seasonality has typically impacted the stock market throughout time, with the September Effect being one example. The theory behind specific weak returns for the month of September has roots both in statistics but also involves a lot of anecdotal evidence.

This generally involves the belief that after returning from summer vacation, investors aim to lock in gains as well as tax losses in the US before the year ends. Back-to-School season may also have an impact, as there is an additional belief that investors may sell their stocks during this period to offset school tuition costs for children. There is also a more unsatisfying theory – that stocks only fall in September because people think they will (due to previous examples or just superstition), and so they, in fact, do.

Statistically, the S&P 500 has seen negative returns in September over 25 years. Over the last 100 years, the Dow Jones Industrial Average has only seen negative returns in September.

As is typical with many other seasonal effects, the September effect is considered a historical data quirk rather than an effect with any direct relationship.

How can you manage volatility in your investments?

The September Effect, while a fun seasonal quirk, is an example of volatility in the market. Volatility is expected, unavoidable, and recurring, yet there are ways to both manage it and leverage it to your benefit.

  • Avoid making emotional decisions

It’s natural to want to “cut your losses” when the market drops by withdrawing your investments. However, this could actually have the opposite impact – it can lock in your losses as you do not give the market (and therefore your investments) time to potentially recover.

Responding to short-term market fluctuations such as the September Effect prevents you from maximizing returns over the long term, as the market has historically trended upwards.

  • Trust in a diversified investment plan

The purpose of a diversified investment plan is to mitigate risk. Therefore, even if the stock market drops for a short period of time, your investments can be balanced out by holding other asset types which perform in the opposite way. Over the long term, these ups and down may balance out to more stable returns.

  • Consider maintaining a passive investing strategy

Instead of trying to “beat the market,” passive investing involves an investor attempting to mimic the return of a stock or bond market index – for example the S&P 500 index. Investors don’t actively make decisions about which securities to buy and sell; they simply buy the same securities which make up their target index.

The goal here is to improve long-term returns by minimizing buying and selling transactions, reducing the negative impact frequent transactions can have on performance. The strategy aims to build wealth slowly over the long term, avoiding timing the market or making impulse decisions when markets dip or rise.

How can you do this?

Reduce the impact of volatility and avoid seasonal or unexpected market fluctuations by investing with a diversified, passive buy and hold investment strategy. These long-term investment plans could help manage any ups and downs over time and offer the potential for smoother returns over time.

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